FASB Statement No. 161, Disclosures About Derivative Instruments and Hedging Activities (ASC Topic 815)

Transcription

1 DECEMBER 15, 2009 FASB Statement No. 161, Disclosures About Derivative Instruments and Hedging Activities (ASC Topic 815)

2 Today s Speaker Michael Mykytiw, Executive Director, J.P. Morgan Accounting Product Management 1

3 FAS 161 Objective and Overview

4 FASB Statement No. 161 Issued in March 2008 Effective for interim and annual reporting periods beginning after November 15, 2008 (early adoption permitted) Amends disclosures required by FAS 133 (applicable to companies that report according to U.S. GAAP) Expands the disclosures required by FAS 133 to provide an enhanced understanding of: An entity s use of derivatives How derivatives and related hedged items are accounted for under FAS 133 How derivatives affect an entity s financial position, financial performance and cash flows 3

5 FAS 161 In scope (derivatives described in FAS 133); based on industry practice, these include: Swaptions Swaps Futures contracts Currency forward contracts Options (written and purchased) Out of scope are nonderivatives, such as: Structured notes Convertible preferred stocks and bonds Interest-only securities Principal-only securities Investments that contain embedded derivatives (inverse floaters) 4

6 FAS 161 Disclosures

7 FAS 161 New Disclosures (Footnotes) An entity s objectives for holding or using derivative instruments and its strategies for achieving those objectives These must be discussed in the context of each instrument s primary underlying risk exposure: Interest rate risk Credit risk Foreign exchange risk Equity risk Commodity risk Other contracts 6

8 FAS 161 New Disclosures (Footnotes) The level of an entity s derivative activity The existence and nature of credit-risk-related contingent features for derivatives in a net liability position at the end of the period Disclosure of counterparty credit risk 7

9 FAS 161 New Disclosures (Tabular) New tables showing derivative instruments Location in the balance sheet and fair value at the end of the period Location in the Statement of Operations and the realized and unrealized gain/loss over the period 8

10 FAS 161 Tabular Disclosure: Balance Sheet Entities must disclose, in a table, the balance sheet location and period end market value for derivatives by primary risk exposure category Derivatives in asset positions should be presented separately from derivatives in a liability position Derivatives should be presented on a gross basis Collateral amounts associated with derivatives should be excluded in the table Balance Sheet 9

11 FAS 161 Tabular Disclosure: Income Statement Entities must disclose the amount of gains and losses for derivatives where those amounts are reported in the income statement. The disclosure requires this to be presented by primary risk exposure. The statement does not require the disclosure of gains and losses on derivatives to distinguish between those that exist at the end of the reporting period and those that are no longer held. Income Statement 10

12 FAS 161 Implementation

13 Implementation of FAS 161 Accounting Platform Functionality and development for FAS 161 includes: 1. New screen to set up two digit Risk Exposure Categories 2. Security-level assignment of Risk Exposure Category 3. Account-level override of Risk Exposure Category 4. Three new fields associated with FAS 161 available for reporting 5. Store a Mapping Table of FAS 161 Risk Exposure Categories vs. Invest One Security Categories 6. Functionality to automatically assign FAS 161 Risk Exposure Categories to new Derivative setups using the mapping table 7. Create a report for the Security team to use for new derivative setup verification Reporting Platform Request submitted to develop three ( x 2 )Views Portfolio Reporting reports: 1. FAS161 Holdings Report By Exposure Type (balance sheet disclosure) 2. FAS161 Realized Gain/Loss By Exposure Type (Statement of Operations disclosure) 3. FAS161 Change in Unrealized Gain/Loss By Exposure Type (Statement of Operations disclosure) 12

14 FAS 161 J.P. Morgan Report Samples FAS Schedule of Investments FAS Realized Gain/Loss FAS Change in Unrealized Gain/Loss

15 FAS 161 Schedule of Investments Detail Report Derivatives Include: Options Futures Swaps Swaptions Forward Currency Contracts 14

16 FAS 161 Schedule of Investments 15

17 FAS 161 Schedule of Investments Detail Report Derivatives Include: Options, Futures, Swaps, Swaptions, Forward Currency contracts Report Options: Derivatives Only or All Securities Forward Currency Contract Business Day Election Include/Exclude Swap Income 16

18 FAS 161 Schedule of Investments 17

19 FAS 161 Schedule of Investments Detail Report Derivatives Include: Options, Futures, Swaps, Swaptions, Forward Currency contracts Report Options: Derivatives Only or All Securities Forward Currency Contract Business Day Election Include/Exclude Swap Income Key Data Elements: Risk Exposure Type Shares/Notional FAS 161 Value 18

20 FAS 161 Schedule of Investments Key Data Elements: 19

21 FAS 161 Schedule of Investments Summary Report Captures only Futures, Options, Swaptions, Swaps, Currency Forward Contracts Does not include TBAs The detail report run for all securities will display TBA positions 20

22 FAS 161 Schedule of Investments Summary Report Disclosure Values Unrealized Gain-Loss Vs. Market Value 21

23 FAS 161 Schedule of Investments Summary Report Captures only Derivatives Does not include TBAs Disclosure Values Unrealized Gain Loss vs. Market Value Contains 3 levels of summary data Fair Value by Contract Type Fair Value by Contract Type and Risk Exposure Fair Value by Risk Exposure 22

24 FAS 161 Schedule of Investments 23

25 FAS 161 Schedule of Investments 24

26 FAS 161 Schedule of Investments 25

27 FAS 161 Realized Gain-Loss 26

28 FAS 161 Change in Unrealized Gain-Loss 27

29 FAS 161: Financial Reporting Considerations Portfolio reconciliations Items to reconcile in the portfolio disclosure include: Gross presentation of all numbers (Unrealized Gains vs. Losses), separately stated Total unrealized gain/loss is reported for forwards, futures and swaps; therefore: Balance sheet presentation will differ: Futures balance sheet presented at unsettled variation margin Swaps balance sheet presented at fair value Options are disclosed at market value 28

30 FAS 161: Financial Reporting Considerations Financial statement notes Notes to financial statements will require more scrutiny than in the past. New standard details about how derivatives are used and why should be immediately be reviewed for compliance. It will no longer suffice to add a generic note when a new derivative type is added to the portfolio. The client will need to monitor for details of: counterparty credit risk credit-related contingent features an appropriate volume metric 29

31 FAS 161: Financial Reporting Considerations Contingent Features Certain of the Company s derivative instruments contain provisions that require the Company s debt to maintain an investment grade credit rating from each of the major credit rating agencies. If the Company s debt were to fall below investment grade, it would be in violation of these provisions, and the counterparties to the derivative instruments could request immediate payment or demand immediate and ongoing full overnight collateralization on derivative instruments in net liability positions. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a liability position on December 31, 2009, is $XX million for which the Company has posted collateral of $X million in the normal course of business. If the credit-risk-related contingent features underlying these agreements were triggered on December 31, 2009, the Company would be required to post an additional $XX million of collateral to its counterparties. 30

32 Questions?