FASB Technical Bulletin No. 81-1 Note: This Technical Bulletin has been completely superseded FTB 81-1 Status Page Disclosure of Interest Rate Futures Contracts and Forward and Standby Contracts February 1981 Financial Accounting Standards Board of the Financial Accounting Foundation 401 MERRITT 7, P.O. BOX 5116, NORWALK, CONNECTICUT 06856-5116
Copyright 1981 by Financial Accounting Standards Board. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the Financial Accounting Standards Board. Page 2
FTB 81-1: Disclosure of Interest Rate Futures Contracts and Forward and Standby Contracts Reference: APB Opinion No. 22, Disclosure of Accounting Policies Question 1. Do the disclosure requirements of Opinion 22 apply to interest rate futures contracts, forward contracts, and standby contracts? Background 2. In October 1980, the SEC identified a need for disclosure standards for interest rate futures contracts, forward contracts, and standby contracts until the accounting issues related to those transactions are addressed. The FASB issued an Exposure Draft of a proposed Statement, Disclosure of Interest Rate Futures Contracts and Forward and Standby Contracts, for public comment on November 14, 1980. The Board received 51 letters of comment in response to the Exposure Draft, many of which pointed out significant implementation problems for some of the disclosures proposed. In addition, in late December 1980, the FASB received an AICPA Issues Paper titled "Accounting for Forward Placement and Standby Commitments and Interest Rate Futures Contracts." At the January 7, 1981 Board meeting, the Board decided not to issue a final FASB Statement on disclosure of those contracts because of the implementation problems identified. 3. Interest rate futures contracts are standardized contracts or agreements to make or take delivery of a standardized amount of a financial instrument of deliverable grade at a specified price during a specific month under conditions established by the commodity exchange on which the contracts are traded. Those contracts are traded on a commodity futures exchange that is regulated by the Commodity Futures Trading Commission, an independent agency of the federal government. Page 3
4. Forward contracts are similar to futures. However, forwards are not traded in regulated contract markets; rather, they are transactions between two parties. The buyer agrees to purchase and the seller agrees to deliver a financial instrument at a future time under such conditions as the two agree. In contrast with futures, the terms of forward contracts are not standardized and generally can be terminated only with the consent of both parties. Forwards, as used in this Bulletin, do not include commitments to lend funds in the future at some specified rate (i.e., loan commitments). 5. Standby contracts are optional delivery forward contracts. The buyer of a standby (put option) pays a fee for the right or option to sell (deliver) to the issuer at a specified future date a financial instrument either at a fixed price or specified yield. The seller of a standby (the issuer) receives the fee and must stand ready to buy the financial instrument at the other party's option. Standbys, as used in this Bulletin, do not include commitments to lend funds in the future at some specified rate (i.e., loan commitments). 6. The term financial instrument, as used in this Bulletin, refers to debt instruments of the U.S. government (Treasury bills, notes, and bonds), obligations of the Federal National Mortgage Association, obligations of U.S. governmental agencies (e.g., Federal Home Loan Mortgage Corporation and Government National Mortgage Association), general obligations of states and political subdivisions, and money market instruments including bankers acceptances, certificates of deposit, and commercial paper. Response 7. Opinion 22 requires disclosure of all significant accounting policies where alternative accounting principles or practices exist, including the methods of applying those accounting principles that materially affect the determination of financial position, changes in financial position, and results of operations. Because alternative accounting practices exist for interest rate futures contracts, forward contracts, and standby contracts, the accounting policies or practices followed for those contracts should be disclosed in accordance with that Opinion. Such disclosure should include the method(s) of accounting for contracts and related commitment fees and the method(s) of recognizing gains and losses on the contracts. Disclosures in addition to those required by Opinion 22 also may be appropriate in specific circumstances. 8. This Bulletin does not address the accounting for interest rate futures contracts, forward contracts, and standby contracts. Page 4
The Financial Accounting Standards Board has authorized its staff to issue FASB Technical Bulletins to provide guidance on certain financial accounting and reporting problems on a timely basis. Although Board Members are provided with copies of proposed Bulletins prior to issuance, the Board does not approve them. Page 5