FASB Projects Update Spring 2015

Transcription

1 FASB Projects Update Spring 2015 Presentation to the American Petroleum Institute March 31, 2015 Mark Pollock, Practice Fellow This presentation has been prepared to help stakeholders understand the current status of the projects discussed herein. The views expressed in this presentation are those of the presenter. Official positions of the FASB and the IASB are reached only after extensive due process and deliberations. 1

2 Agenda Financial Instruments: - Hedging - Classification & Measurement Disclosure Framework Simplification Initiative Projects on the Horizon 2

3 Financial Instruments Hedging 3

4 Project Status Timeline FASB issued exposure drafts in June 2008 and May 2010 focused on targeted improvements to current hedging model in Topic 815 (FAS 133) - No new Standard was issued FASB issued a discussion paper in 2011 to obtain views on the IASB s proposed model at the time IASB issued its final standard on the general hedge accounting model in November 2013 Project moved from research to active status in November

5 Project Direction Targeted improvements to Topic 815 rather than fundamental revisions (similar to IFRS 9): - Hedge effectiveness (quantitative vs. qualitative) - Component hedging for nonfinancial items - Application issues related to FV hedges of interest rate risk - Potential elimination of shortcut and critical terms match - Voluntary dedesignations - Recording ineffectiveness for cash flow underhedges - Potential simplifications to documentation requirements - Presentation and disclosure 5

6 Hedging Model for Nonfinancial Items At the February 25, 2015 non-decision making Board Meeting two main approaches emerged as possible changes to the hedge accounting model for nonfinancial items Alternative Description A An alternative model only for cash flow hedges of nonfinancial items Move to a reasonably effective quantitative threshold (for example 50% to 200%) Changes in fair value of derivative deferred to OCI as long as the hedged item and hedging instrument maintain a reasonably effective relationship on a total price basis When the hedged item affects earnings the amount in OCI related to the derivative would be reclassed into the income statement line item hedged (i.e. COGS) No hedge ineffectiveness would be recorded during the life of the hedge or at the end of the hedge B1 or B2 Retain the highly effective threshold in Topic 815 (80% to 125%) Allow the hedged item to be a component of the overall total price, either: o o A contractually specified component (B1) B1 above or a component which is not contractually specified but for which it is the market convention to use the component as an underlying basis for determining the price of an overall product. Essentially a sub-component of a contractually specified component (B2) 6

7 Example Alternative A (reasonably effective threshold) On Jan 1, 20X1 Airline Co. hedges a forecasted purchase of jet fuel with a crude oil futures contract. Assume the purchase and subsequent use in operations of the jet fuel occur in the year ended 20X2. Information related to the hedging relationship is as follows: Jan 1, 20X1 Jet fuel spot price = $100/barrel Jet fuel 1 year forward price = $110/barrel Dec 31, 20X1 Jet fuel spot price = $150/barrel Change in crude oil future = $50/barrel gain Change in hypothetical perfect jet fuel derivative = $40/barrel gain Current GAAP Financial Statements Financial Statements Year Ended Dec 31, 20X1 Year Ended Dec 31, 20X2 Amount Line Item Details Amount Line Item Details $ Other Income Hedge ineffectiveness $ OCI Effective portion Alternative A * $ OCI Full change in value of derivative $ (110.00) COGS $ (100.00) COGS *$50 change in value of derivative/$40 change in hypothetical = 125% offset. Derivative qualifies for hedge accounting under current GAAP and Alternative A model and all ineffectiveness deferred into OCI. A reasonably effective quantitative threshold is not yet defined but would be wider than today s 80% - 125%. $150 fuel cost less $40 derivative reclass $150 fuel cost less $50 derivative reclass 7

8 Alternative A Observations Advantages Relatively simple to apply Preparers understand and have several years experience performing quantitative tests of hedge effectiveness on total price risk basis Presents full cost of hedging in line item hedged when the hedged item affects earnings Easier for users to understand the effects of hedging Disadvantages Only works for hedging primary components since effectiveness test carried out on total price risk basis No portfolio hedging since hedged item is measured on a total price risk basis Dual threshold between financial (highly effective) and nonfinancial hedging (reasonably effective) could create complexity or uneven playing field Deliberate overhedge could lead to artificially high gross margins when the reclass of derivative gain reduces cost of goods sold Creating and valuing hypothetical derivative on a total price risk basis could be difficult (same as current GAAP) 8

9 Example Alternative B1 or B2 (Component Hedging) On Jan 1, 20X1 ABC Co. hedges a forecasted purchase of 1,000 bushels of corn with a corn based derivative. The purchase contract is structured as the CME spot price on 1/1/20X2 + transportation + taxes/fees. Assume the purchase of corn and the sale of corn as inventory occur in the year ended 20X2. Information related to the transaction is as follows: Total Price = Corn Component + Transportation/Fees Component 01/01/X1 $4, $4, $ /31/X1 $3, $3, $ Change ($975.00) ($1,035.00) $60.00 Hedging Instrument Information The change in the value of derivative was $1,040 loss as of 12/31/20X1 Effectiveness test done at component level. $5 ineffectiveness due to different settlement dates. Current GAAP Fianncial Statements Financial Statements Year Ended Dec 31, 20X1 Year Ended Dec 31, 20X2 Amount Line Item Details Amount Line Item Details $ (65.00) Other Inc./(Exp.) Hedge ineffectiveness $ OCI Effective portion of change in value of derivative Alternative B $ (5.00) Other Inc./(Exp.) Hedge ineffectiveness $ 1, OCI Effective portion of change in value of derivative $ (4,327.50) COGS $ (4,387.50) COGS Price paid $3, and relcass of OCI Price paid $3, and reclass of OCI 9

10 Alternative B Observations Advantages Component hedging better reflects risk management strategy and objectives. Constituents indicated treasurers view hedging from a components and not total price perspective Valuing hypothetical derivative on a commodity component basis easier than on a total price risk basis (don t have to consider changes in transportation, fees, taxes and other adders) Works for any contractually specified component regardless of what percentage of the total price the item is (i.e. contractually specified fuel component that is only 10% of total price) Enables portfolio hedging of the same commodity which cannot be hedged today or under Alternative A because other aspects of the total price (e.g. transportation) prevent portfolio hedging. Disadvantages Additional documentation that entity has 100% price risk to the component being hedged Potential that entities will invent pricing formulas to get hedge accounting (Board can put safeguards in place) Identifying components could create complexity or auditability issues Works well for traded commodities with liquid derivative markets earlier in the supply chain. Finished goods are less likely to have a contractually specified component linked to a traded commodity 10

11 Financial Instruments Classification & Measurement 11

12 Changes to current GAAP Investments in equity securities Measured at FV-NI, except for equity method investments An entity (other than a broker dealer or an investment company) may elect to measure equity securities without readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical investment or a similar investment of the same issuer - The entity cannot elect this option for equity securities that qualify to be measured at NAV under Topic These investments would be assessed for impairment at every reporting period using a qualitative assessment - The following disclosures would be required for these equity securities Carrying amount, as well as the amount of the adjustments made to the carrying amount due to observable price changes and impairment charges during the reporting period 12

13 Changes to current GAAP Financial liabilities measured under fair value option The portion of the total fair value change resulting from a change in entity-specific credit risk (own credit) would be presented separately in other comprehensive income. - An entity may consider the portion of the total FV change that exceeds the amount resulting from a change in a base market rate (such as a risk-free) to be the result of a change in entity-specific credit risk. Alternatively, an entity may determine the effect of entity-specific credit risk by using another method it considers to more faithfully represent that change. - Required to disclose the method used to calculate the amount recorded in other comprehensive income. 13

14 Changes to current GAAP Disclosures: FV of Financial Instruments not recognized at FV in Balance Sheet An entity other than a public business entity would not be required to provide the incremental disclosures about fair value required by Section (originally issued as FAS 107, Disclosures about Fair Value of Financial Instruments) The following disclosure requirements would be removed from Section The method(s) and significant assumptions used to estimate the fair value of financial instruments consistent with the requirements of paragraph (bbb) - A description of the changes in the method(s) and significant assumptions used to estimate the fair value of financial instruments, if any, during the period The fair values of financial instruments disclosed under the requirements of Section should be determined in accordance with the guidance in Topic 820 (originally issued as FAS 157, Fair Value Measurements) 14

15 Changes to current GAAP Disclosures: Hybrid Financial Instruments Entities would be required to disclose the carrying amount, measurement attribute, and line item within the balance sheet and income statement in which bifurcated embedded derivatives and related host contracts are presented - This decision was exposed for public comments in 1Q 2015 (comment period will end on April 30, 2015). 15

16 Changes to current GAAP Disclosures: Other disclosures Disclose in the notes all financial assets and financial liabilities grouped by measurement category - Financial assets would be further disaggregated by form of financial assets (that is, security versus loan/receivable) 16

17 Disclosure Framework 17

18 Disclosure Framework: Two Components Improving the effectiveness of notes requires both: Consistent considerations by the Board in each standard-setting activity Appropriate exercise of discretion by reporting entities when assessing disclosure requirements Phase I: Board s Decision Process Phase II: Entity s Decision Process 18

19 Promoting Discretion Provide to the extent material Changes to Codification Eliminate language that limits discretion Add guidance on applying materiality 19

20 Promoting Discretion (cont d) Guidance on Applying Materiality Applied individually and in the aggregate US Supreme Court s description Quantitative and qualitative Omission not an accounting error 20

21 Fair Value Measurement Objectives based on proposed framework Disclosures provide information about: Ways an entity arrives at fair value The effects on financial statements Uncertainty in measurement Measurement change period to period 21

22 Disclosure Updates Possible Changes to FVM Forward-looking Information Process and Policies Rollforwards Sensitivity Information Gains and Losses 22

23 Next Steps Planned Exposure Drafts Q2 - Entity s Decision Process - Defined Benefit Plans - Fair Value Measurement Redeliberate Proposed Concepts in the Disclosure Framework Interim Considerations Defined Benefit Plans Fair Value Measurement Income Taxes Inventory 23

24 Simplification Initiative 24

25 Simplification Initiative Objective Objective is to reduce cost and complexity while maintaining or improving the usefulness of the information Projects would include narrow-scope items that the Board can complete in the short term Welcome input on ideas 25

26 Simplifying Income Taxes Balance Sheet Classification of Deferred Taxes Current GAAP Solution Presentation in a classified balance sheet: - Current deferred tax asset and liability - Noncurrent deferred tax asset and liability Classify all deferred tax assets and liabilities as noncurrent Classification: - Based on classification of related asset or liability - Generally not classified based on when the temporary differences will reverse 26

27 Simplifying Income Taxes Intra-Entity Asset Transfers Current GAAP Solution Buyer and seller defer the recognition of income tax consequences of an intraentity asset transfer until the assets have been sold to an outside third party Exception to the accounting model for comprehensive recognition of income taxes Eliminate the exception Require recognition of the income tax consequences of an intra-entity asset transfer when the transfer occurs 27

28 Simplifying Presentation of Debt Issue Costs Current GAAP Solution - Debt issue costs presented as deferred charge - Discounts or premiums presented as an adjustment to debt balance Debt issue costs presented as an adjustment to debt balance, consistent with premiums or discounts 28

29 Simplifying Balance Sheet Classification of Debt Current GAAP Solution - Classification considers: Debt covenants Subjective acceleration clauses Revolving credit and lockbox arrangements Increasing rate debt Debt due on demand Callable debt ST obligations expected to be refinanced Classify as noncurrent if one or both of the following are met at the balance sheet date: Debt is contractually due more than 12 months after the balance sheet date Entity has a contractual right to defer settlement for at least 12 months after the balance sheet date 29

30 Simplifying the Measurement of Inventory Current GAAP Solution Lower of cost or market Measures for market value include: Replacement cost Net realizable value Net realizable value less a normal profit margin Inventory will be measured at the lower of cost or net realizable value Reduce cost and complexity of the subsequent measurement Maintain or improve the usefulness of the information required to be reported by an entity 30

31 Projects on the Horizon 31

32 On the horizon Recently added to agenda: - Simplifying equity method accounting - Simplifying measurement period adjustments in business combinations - Accounting for put / calls in debt (EITF) - Effect of derivative novations on hedge accounting (EITF) - Definition of a business Potential: - Simplifying asset retirement obligations measurement 32

33 Questions or Comments? 33

34 Mark Pollock, FASB Practice Fellow Mark Pollock Practice Fellow Financial Accounting Standards Board 401 Merritt 7, P.O. Box 5116, Norwalk, CT T: / mapollock@fasb.org Mark is a Practice Fellow at the Financial Accounting Standards Board (FASB) with 15 years of combined experience, heavily focused on technical accounting and reporting matters. Prior to joining the FASB staff, Mark was a Senior Manager in PwC s Assurance practice where he provided accounting and auditing services to clients in the energy industry, including the exploration and production, transportation and drilling services sectors. Mark is also an alumni of PwC s National Office where he specialized in the accounting for financial instruments, such as leases, derivatives, and debt / equity transactions.