EITF 1115FN 2015 11 12 January 15, 2016 TO: MEMBERS OF THE FASB EMERGING ISSUES TASK FORCE Included are the final minutes of the November 12, 2015 meeting of the FASB Emerging Issues Task Force and an inventory of open issues for future EITF meetings. There were no substantive changes to the draft minutes for Issue 15-F that were distributed on December 7, 2015. As you know by now, on December 11, 2015, the Board ratified the Task Force consensuses on Issues 15-B, 15-D, and 15-E, and the consensus-for-exposure on Issue 15-F. The Accounting Standards Updates and proposed Update for those Issues are expected to be posted to the FASB website in the first quarter of 2016. The Board also approved the EITF's decision to address restricted cash in a separate EITF Issue apart from Issue 15-F. That new Issue is Issue No. 16-A, "Restricted Cash." The next regularly scheduled EITF meeting will be held on March 3, 2016. The extra EITF meeting date reserved for January 21, 2016, will not be utilized. Please call me if you have any questions. Sincerely, Mark A. Pollock FASB Practice Fellow Financial Accounting Standards Board 401 Merritt 7, P.O. Box 5116, Norwalk, CT 06856 T: 203.956.3476 mapollock@fasb.org November 12, 2015 EITF Meeting Minutes
EITF 1115FN 2015 11 12 Emerging Issues Task Force Meeting Minutes November 12, 2015 Pages Attendees 1 2 Administrative Matters 3 Discussion of Agenda Technical Issues 4 45 1. Issue No. 15-B, "Recognition of Breakage for Certain Prepaid Stored-Value Products" 4 10 2. Issue No. 15-D, "Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships" 11 17 3. Issue No. 15-E, "Contingent Put and Call Options in Debt Instruments" 18 22 4. Issue No. 15-F, "Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments" 23 45 Status of Open Issues and Agenda Committee Items 46 November 12, 2015 EITF Meeting Minutes
EITF 1115FN 2015 11 12 MINUTES OF THE NOVEMBER 12, 2015 MEETING OF THE FASB EMERGING ISSUES TASK FORCE Location: FASB Offices 401 Merritt 7 Norwalk, Connecticut Thursday, November 12, 2015 Starting Time: 8:30 a.m. Concluding Time: 2:10 p.m. Task Force Members Present: Susan M. Cosper (Chairman) John M. Althoff Paul Beswick Bret Dooley James G. Campbell Terri Z. Campbell Carl Kampel Mark LaMonte Robert B. Malhotra Lawrence J. Salva Ashwinpaul C. (Tony) Sondhi Robert Uhl Wesley Bricker (SEC Observer) James A. Dolinar (FinREC Observer) *Diane Rubin (PCC Observer) Task Force Members Absent: Alexander M. Corl * By telephone November 12, 2015 EITF Meeting Minutes, p. 1 Attendees
EITF 1115FN 2015 11 12 Others at Meeting Table: Russell G. Golden, FASB Board Members James L. Kroeker, FASB Board Member Marc A. Siegel, FASB Board Member Thomas J. Linsmeier, FASB Board Member Daryl E. Buck, FASB Board Member * Mark F. Barton, FASB Practice Fellow * Mathew C. Esposito, FASB Assistant Director * Adam Khami, FASB Practice Fellow * Jin Koo, FASB Practice Fellow * Jane M. Rizzuto, FASB Postgraduate Technical Assistant * Jenifer J. Wyss, Supervising Project Manager * Adriana Yepes, FASB Project Mananger * For certain issues only. November 12, 2015 EITF Meeting Minutes, p. 2 Attendees
ADMINISTRATIVE MATTERS The EITF chairman introduced Mr. Paul Beswick, Ernst & Young LLP, replacing Mr. Jackson Day as a member of the Task Force effective with the November meeting. The 30-Year Review of the EITF is available from the EITF webpage of the FASB website. The EITF chairman introduced Mr. Adam Khami, FASB Practice Fellow, from PricewaterhouseCoopers LLP. The EITF chairman announced that the next regularly scheduled EITF meeting will be held on March 3, 2016. The extra EITF meeting date reserved for January 21, 2016, will not be utilized. The EITF decided to discuss restricted cash in a separate EITF Issue apart from the other eight cash flow issues under Issue No. 15-F, "Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments." The new Issue, which is Issue No. 16-A, Restricted Cash, will be discussed at a future meeting. November 12, 2015 EITF Meeting Minutes, p. 3 Administrative Matters
DISCUSSION OF AGENDA TECHNICAL ISSUES Issue No. 15-B Title: Recognition of Breakage for Certain Prepaid Stored-Value Products Dates Discussed: March 19, 2015; September 17, 2015; November 12, 2015 Introduction 1. Common examples of prepaid stored-value cards include prepaid gift and telecom cards, in both physical and digital forms. GAAP does not currently contain specific guidance for the derecognition of liabilities resulting from the sale of prepaid stored-value cards. In the absence of specific guidance, there has been diversity in how prepaid stored-value card liabilities are derecognized. The FASB received an unsolicited comment letter from a stakeholder requesting that the Task Force clarify how (and whether) a prepaid stored-value card liability should be derecognized. 2. The stakeholder questioned whether a prepaid stored-value card liability meets the definition of a financial liability. Some stakeholders stated that the determination of whether a financial liability exists depends on whether the transaction between the entity that sells the prepaid storedvalue card and the customer is viewed as a separate transaction from the transaction between the entity and the merchant. That is, the obligation the entity has to the merchant is settled in cash and would meet the definition of a financial liability, while the obligation the entity has to the customer is settled through the delivery of goods and services by the merchant and would not meet the definition of a financial liability. 3. However, other stakeholders view the substance of prepaid stored-value card sales as a single transaction between the entity and the customer that is settled in cash through the merchant. Accordingly, in their view, the liability recognized upon sale of a prepaid stored-value card meets the definition of a financial liability. 4. Some entities currently apply the views expressed in a speech given by a U.S. Securities and Exchange Commission (SEC) staff member and recognize breakage for a prepaid stored-value card liability before the card is redeemed, regardless of whether the liability is considered a financial liability. Other entities currently follow the more restrictive derecognition guidance in Subtopic 405-20, Extinguishment of Liabilities, which could result in the indefinite recognition of a prepaid stored-value card liability if a prepaid stored-value card is never redeemed, never expires, and is not subject to unclaimed property laws. Topic 606, Revenue from Contracts with Customers, which is not yet effective, establishes breakage guidance for transactions within its scope. However, financial liabilities are excluded from the scope of Topic 606. Issue 5. The issue is how (and whether) the liability that exists between a card issuer or prepaid network provider and a content provider prior to redemption of a prepaid stored-value card should be derecognized. November 12, 2015 EITF Meeting Minutes, p. 4 Issue No. 15-E
Scope 6. This Issue applies only to liabilities resulting from the sale of prepaid stored-value products that meet the scoping principle discussed further below. Prior EITF Discussion Scope 7. At its March 19, 2015 meeting, the Task Force decided that the scope of the amendments resulting from this Issue should primarily be based on the characteristics of the prepaid storedvalue cards described in the original stakeholder submission. The Task Force decided that the scope also should include prepaid stored-value cards that may be redeemed for cash. Several Task Force members suggested that the scope of the amendments resulting from this Issue should be broadened further to include other liabilities that are similar to those already included in the scope of the proposed Update (for example, certain customer loyalty programs). However, the Task Force concluded that the scope should not be broadened to include those liabilities. Rather, the Task Force reached a consensus-for-exposure that the scope of the amendments resulting from this Issue should include only liabilities resulting from the sale of prepaid stored-value cards that have all of the following characteristics: a. The cards do not have an expiration date. b. The cards are not subject to unclaimed property laws. c. The cards are redeemable for any of the following: i. Cash ii. Goods or services only at third-party merchants (for example, only at a merchant that accepts prepaid stored-value cards on a specific card network) iii. Both i and ii. d. The cards are not attached to a segregated bank account like a customer depository account. Breakage Model 8. At its March 19, 2015 meeting, the Task Force reached a consensus-for-exposure that because an entity s liability for a prepaid-stored value card ultimately will be settled in cash that is paid to either the customer or a third-party, that liability is a financial liability within the scope of Subtopic 405-20. However, the Task Force agreed that it is appropriate to provide a narrow scope exception to the derecognition guidance in Subtopic 405-20 to require breakage in a manner consistent with Topic 606 for liabilities resulting from the sale of prepaid stored-value cards within the scope of the amendments resulting from this Issue. The Task Force believes that providing a means for those financial liabilities to be derecognized provides better information to users than potentially recognizing those liabilities in perpetuity. For example, if a prepaid stored-value card is lost and never used, the liability related to the card may never meet the derecognition criteria in Subtopic 405-20. The Task Force concluded that the breakage guidance for those prepaid stored-value cards should be similar to the breakage guidance in Topic 606 because the economics of those prepaid stored-value card transactions are similar to the economics of prepaid stored-value card transactions that are expected to be within the scope of Topic 606. The Task Force also considered that the guidance for recognizing breakage included in the amendments resulting from this Issue is similar to the way in which many entities with prepaid stored-value card liabilities within the scope of the amendments resulting from this Issue recognize breakage today. November 12, 2015 EITF Meeting Minutes, p. 5 Issue No. 15-B
Technical Correction 9. At its March 19, 2015 meeting, the Task Force observed that the guidance in Subtopic 405-20 applies to both financial and nonfinancial liabilities. However, the guidance in Subtopic 405-20 does not acknowledge the existence of other derecognition guidance in GAAP (for example, Topic 606 and Subtopic 924-405). Accordingly, the Task Force recommended that a technical correction to the guidance in Subtopic 405-20 be made to acknowledge the existence of other derecognition guidance in GAAP. Disclosure 10. At its March 19, 2015 meeting, the Task Force reached a consensus-for-exposure that an entity should be required to disclose the methodology used for calculating breakage and the significant judgments made in applying the breakage methodology. That disclosure would be similar to the disclosures required for entities that will apply the breakage guidance in Topic 606. The Task Force observed that a prepaid stored-value card liability also would be subject to the disclosure requirements for financial liabilities in Topic 825, Financial Instruments. Effective Date and Transition 11. At its March 19, 2015 meeting, the Task Force reached a consensus-for-exposure that the amendments resulting from this Issue would be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to retained earnings as of the beginning of the annual period in which the guidance is effective. 12. At its September 17, 2015 meeting, the Task Force considered the feedback received on the proposed Update, which was ratified by the Board and issued for public comment on April 30, 2015. The comment letter deadline was June 29, 2015, and 13 comment letters were received. Scope 13. At its September 17, 2015 meeting, based on feedback received from comment letter respondents, the Task Force considered whether it should expand the scope of this Issue to include prepaid stored-value cards with expiration dates and prepaid stored-value cards that are redeemable at both the issuer s own store and at a third-party merchant. The Task Force also considered whether it should broaden the scope of this Issue to include instruments that are similar to prepaid stored-value cards (for example, travelers checks) or broaden the scope even further to include certain other liabilities, such as nonrecourse debt and bearer bonds. 14. Many Task Force members supported expanding the scope to include prepaid stored-value cards that have an expiration date and cards that are redeemable at both an issuer s own store and at a third-party merchant. Several members observed that travelers checks have similar characteristics to the instruments included in the scope of this Issue and questioned whether the scope is limited to those instruments that are issued in the form of a card. Task Force members also questioned whether prepaid stored-value products in all forms should be included in the scope of this Issue (that is, whether the prepaid stored-value product is plastic, paper, or electronic). To address those questions, some Task Force members suggested removing prepaid stored-value cards that are redeemable for cash from the scope of this Issue while others suggested replacing all scoping characteristics with a principle addressing scope. November 12, 2015 EITF Meeting Minutes, p. 6 Issue No. 15-B
15. Most Task Force members agreed that the scope of this Issue should not be broadened to include nonrecourse debt and bearer bonds because that would involve a broader review of the derecognition guidance in Subtopic 405-20. 16. The Task Force reached a tentative conclusion to remove the scoping characteristics and instead develop a principle to determine the scope of this Issue. However, the Task Force stipulated that the principle would not be so broad that it would include liabilities that are further removed from the concept of a prepaid stored-value card liability (for example, nonrecourse debt and bearer bonds would not be included in the scope of this Issue). The Task Force requested that the FASB staff develop the principle for discussion at a future EITF meeting. The Task Force also requested that the FASB staff draft alternative scope guidance that excludes prepaid stored-value cards redeemable for cash. However, the scope would include cards that are redeemable by the cardholder for cash, as may be required by state law, only when there is a de minimis remaining balance on the prepaid cards. Breakage Model 17. At its September 17, 2015 meeting, the Task Force affirmed that the breakage model described in the proposed Update should be applied to prepaid stored-value card liabilities within the scope of the amendments resulting from this Issue. That is, an entity that expects to be entitled to a breakage amount for a prepaid stored-value card liability shall derecognize the amount related to the expected breakage in proportion to the pattern of rights expected to be exercised by the card holder only to the extent that it is probable that a significant reversal of the recognized breakage amount will not subsequently occur. If an entity does not expect to be entitled to a breakage amount, the entity would derecognize the amount related to the expected breakage when the likelihood of the customer exercising its rights becomes remote. Disclosures 18. At its September 17, 2015 meeting, the Task Force supported the disclosure requirements described in the proposed Update. Many noted the importance of requiring entities to disclose the methodology used to recognize breakage and the significant judgments made in applying the breakage methodology. 19. The Task Force considered whether the disclosures required by Topic 825 should be provided for prepaid stored-value cards. One Task Force member noted that several disclosures (for example, market risk disclosures) required by Topic 825 would not provide useful information in the context of prepaid stored-value cards. That Task Force member also expressed the view that entities should not be required to determine and disclose the fair value of prepaid stored-value cards, which is required under Topic 825. Another Task Force member noted that although the Task Force concluded that these cards represent financial liabilities, entities will essentially be following the breakage guidance that currently exists in Topic 606 so it would not make sense to comingle revenue and financial instruments disclosure requirements. 20. One Task Force member expressed his support for the disclosure requirements in Topic 825. He noted that due to the Task Force s tentative decision to determine the scope of this Issue by using a principle, other financial liabilities may fall into the scope and, thus, the disclosures should November 12, 2015 EITF Meeting Minutes, p. 7 Issue No. 15-B
be required. Other Task Force members suggested that this scenario should be considered by the Task Force after it has concluded on the scope of the final guidance. 21. The Task Force affirmed that entities should be required to disclose the breakage methodology used and significant judgments made in applying the methodology. The Task Force also tentatively concluded that an exception should be provided that would permit an entity to exclude the disclosures required by Topic 825 from its financial statements as they relate to prepaid storedvalue cards. Effective Date 22. At its September 17, 2015 meeting, a majority of Task Force members supported aligning the effective date with that of Topic 606. However, many expressed the view that early adoption also should be permitted in order to address the diversity that currently exists in practice. One Task Force member noted that entities with prepaid stored-value card liabilities only within the scope of this Issue would be more likely to early adopt and it would not be harmful to allow those entities to do so. 23. The Task Force tentatively concluded that the effective date should be aligned with that of Topic 606. That is, public business entities, certain not-for-profit entities, and employee benefit plans should apply the guidance to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. All other entities should apply the guidance to annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. The Task Force also tentatively concluded that early adoption should be permitted, including early adoption prior to the adoption of Topic 606. Transition and Transition Disclosures 24. At its September 17, 2015 meeting, the Task Force reached a tentative conclusion that the amendments resulting from this Issue should be applied using a modified retrospective transition method by means of a cumulative-effect adjustment to retained earnings as of the beginning of the annual period in which the guidance is effective. The Task Force also reached a tentative conclusion to permit an option for entities to apply the guidance using a full retrospective transition method, similar to the transition provisions in Topic 606, and use the relevant practical expedients provided in Topic 606 for entities electing the full retrospective transition method. 25. The Task Force considered whether an entity should be required to use the same transition method for this Issue and Topic 606. The Task Force reached a tentative conclusion that an entity should not be required to use the same transition method for this Issue and for Topic 606. The Task Force pointed out that many entities are still determining the transition method that will be used for Topic 606 and should not be required to make that determination now for purposes of applying this Issue. 26. The Task Force affirmed that the transition disclosures required in paragraphs 250-10-50-1(a), 50-1(b)(3), and 50-2 should be provided in the fiscal period in which the amendments resulting from this Issue are adopted. Since the Task Force decided to permit full retrospective November 12, 2015 EITF Meeting Minutes, p. 8 Issue No. 15-B
transition, the Task Force also tentatively concluded that the transition disclosure requirement in paragraph 250-10-50-1(b)(1) should be required. Current EITF Discussion Scope 27. At its November 12, 2015 meeting, the Task Force reached a consensus that this Issue should apply only to financial liabilities resulting from the sale of prepaid stored-value products. The scope of this Issue does not apply to financial liabilities related to prepaid stored-value products (or portions of those products) for which any breakage or unused portion of the prepaid storedvalue product must be remitted in accordance with unclaimed property laws, or prepaid storedvalue products that are attached to a segregated bank account like a customer depository account. This Issue also does not apply to customer loyalty programs or transactions within the scope of other Topics (for example, Topic 606). 28. The Task Force decided that a scoping principle provides the most operable framework to identify prepaid stored-value products that are subject to this Issue. Breakage Model 29. At its November 12, 2015 meeting, the Task Force reached a consensus that because an entity s liability for a prepaid stored-value product ultimately will be settled in cash paid to either the product holder or a third-party, that liability is a financial liability within the scope of Subtopic 405-20. However, the Task Force agreed that it is appropriate to provide a narrow scope exception to the derecognition guidance in Subtopic 405-20 to require breakage to be accounted for in a manner consistent with Topic 606 for liabilities resulting from the sale of prepaid stored-value products within the scope of this Issue. Technical Correction 30. At its November 12, 2015 meeting, the Task Force reached a consensus that a technical correction to the guidance in Subtopic 405-20 should be made to acknowledge the existence of other derecognition guidance in GAAP. Disclosures 31. At its November 12, 2015 meeting, the Task Force reached a consensus that an entity should be required to disclose the methodology used for calculating breakage. That disclosure should be similar to the disclosures required for entities that will apply the breakage guidance in Topic 606. The Task Force observed that a prepaid stored-value product liability also should be subject to the disclosure requirements for financial liabilities in Topic 825, Financial Instruments. However, the Task Force concluded that an exception should be provided that permits an entity to exclude from its financial statements the disclosures required by Topic 825 as they relate to prepaid stored-value products. Transition and Transition Disclosures 32. At its November 12, 2015 meeting, the Task Force reached a consensus that an entity should apply the amendments resulting from this Issue using a modified retrospective transition method by means of a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year in which the guidance is adopted. The Task Force also reached a consensus that an entity may November 12, 2015 EITF Meeting Minutes, p. 9 Issue No. 15-B
apply the amendments using a full retrospective transition method, similar to the transition provisions in Topic 606. However, an entity is not required to use the same transition methodology used to apply Topic 606. 33. The Task Force reached a consensus that an entity should provide the transition disclosures required in paragraphs 250-10-50-1(a) and 50-1(b)(3) and 250-10-50-2, as applicable, in the period in which the amendments resulting from this Issue are adopted. An entity applying a full retrospective transition also is required to provide the transition disclosure in paragraph 250-10- 50-1(b)(1). Effective Date 34. At its November 12, 2015 meeting, the Task Force reached a consensus that the effective date of the amendments resulting from this Issue should be aligned with the effective date of the amendments in Topic 606; that is, for public business entities, certain not-for-profit entities, and certain employee benefit plans for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. All other entities should apply the amendments resulting from this Issue for financial statements issued for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Earlier application is permitted, including adoption in an interim period. Board Ratification 35. At its December 11, 2015 meeting, the Board ratified the consensus reached by the Task Force on this Issue. Status 36. No further EITF discussion is planned. November 12, 2015 EITF Meeting Minutes, p. 10 Issue No. 15-B
Issue No. 15-D Title: Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships Dates Discussed: June 18, 2015; November 12, 2015 Background 1. As it relates to derivative contracts, the term novation refers to replacing one of the parties to a derivative contract with a new party. In practice, derivative contract novations may occur for a variety of reasons, including (but not limited to) financial institution mergers, intercompany novations, an entity exiting a particular derivatives business or relationship, an entity managing against internal credit limits, and in response to laws or regulatory requirements. The derivative instrument that is the subject of a novation may be the hedging instrument in a hedge accounting relationship that has been designated under Topic 815, Derivatives and Hedging. 2. The guidance in Topic 815 is not explicitly clear about the effect on an existing hedge accounting relationship, if any, of a change in the counterparty to a derivative instrument that is designated as the hedging instrument in an existing hedge accounting relationship. Furthermore, the existing guidance, which is limited, is interpreted and applied inconsistently in practice. Issue 3. The issue is whether a change in the counterparty to a derivative instrument, in and of itself, is considered to be a termination of the original derivative instrument in the context of the hedge accounting guidance in Topic 815. Scope 4. This Issue applies to all reporting entities for which there is a change in the counterparty to a derivative instrument that has been designated as the hedging instrument in an existing hedge accounting relationship under Topic 815. Prior EITF Discussion 5. At its June 18, 2015 meeting, the Task Force decided that focusing the scope of the amendments resulting from this Issue on the effect, if any, on an existing hedge accounting relationship of a change in the counterparty to a derivative instrument would resolve the practice issue while not affecting the application of Topic 815 as it relates to the effect of other changes on existing hedge accounting relationships. 6. The Task Force reached a consensus-for-exposure that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument in an existing hedge accounting relationship does not, in and of itself, require dedesignation of that hedge accounting relationship provided that all other hedge accounting criteria (including those in paragraphs 815-20-35-14 through 35-18) continue to be met. 7. Specifically, the amendments resulting from this Issue would clarify that when applying the guidance in paragraphs 815-25-40-1 (for fair value hedges) and 815-30-40-1 (for cash flow hedges), a change in the counterparty to a derivative instrument, in and of itself, would not be November 12, 2015 EITF Meeting Minutes, p. 11 Issue No. 15-D
considered a termination of the original derivative by the entity. Similarly, the amendments resulting from this Issue would clarify that when applying the guidance in paragraph 815-20-55-56, a change in the counterparty to a derivative instrument would not, in and of itself, be considered a change in a critical term of the hedge accounting relationship. 8. In reaching its consensus-for-exposure, the Task Force noted that it believes that the analysis of whether a derivative has been terminated in the context of the hedge accounting guidance in Topic 815 was intended to go beyond a legal determination and instead focus on whether the hedging relationship itself would continue to exist. If the only change to the derivative is the counterparty (and no concerns exist with respect to collectibility of cash flows on the derivative or with the ongoing effectiveness of the hedging relationship), the hedging relationship will be largely unaffected. Therefore, termination (as that term is used in the hedge accounting guidance in Topic 815) of the derivative will not have occurred. 9. The Task Force noted that the hedge accounting guidance refers to critical terms in other contexts (for example, the critical terms match method of hedge accounting) and does not cite the counterparty, in and of itself, as a critical term. In those contexts, critical terms refer to factors that affect the amount and timing of contractual cash flows. Other terms of a hedge accounting relationship that do not affect the contractual cash flows may affect the probability of performance of the contractual terms. The Task Force expressed the view that those terms that affect the probability of performance of the contractual requirements of each instrument are addressed in paragraphs 815-20-35-14 through 35-18 (the counterparty default guidance). 10. As a result of the counterparty default guidance, the Task Force noted that a reporting entity is always required to assess the creditworthiness of the derivative counterparty in a hedge accounting relationship (both in the normal course of the hedge accounting relationship and upon a novation). Therefore, if a derivative novation involves a new counterparty with lower creditworthiness than the old counterparty, the reporting entity must consider that change in creditworthiness in determining whether the hedging relationship continues to qualify for hedge accounting, as well as the amount of hedge ineffectiveness to be recorded to the extent that it does continue to qualify for hedge accounting. 11. The Task Force also noted that it is clear in other Topics that transactions in the market between investors (counterparties) do not affect the accounting for the issuer (reporting entity). For example, paragraph 470-50-40-7 states: Transactions among debt holders do not result in a modification of the original debt s terms or an exchange of debt instruments between the debtor and the debt holders and do not impact the accounting by the debtor. Therefore, the Task Force believes that it is inconsistent to claim that changing the counterparty to the hedging instrument, in and of itself, would cause a dedesignation of the hedge accounting relationship under Topic 815, while changing the counterparty to the hedged item would not. 12. The Task Force believes that the financial reporting result of dedesignating a hedge accounting relationship upon a derivative novation (that is, the existing derivative will likely have November 12, 2015 EITF Meeting Minutes, p. 12 Issue No. 15-D
a fair value other than zero upon dedesignation and, therefore, may or may not qualify to be redesignated as part of a new hedge accounting relationship) does not provide decision-useful information to users of financial statements when the reporting entity plans to continue the hedge accounting relationship. They noted that as part of the feedback received by the FASB on its previous hedge accounting exposure drafts in June 2008 and May 2010, users expressed frustration with trying to understand the financial reporting implications of reporting entities going in and out of hedge accounting. The Task Force believes that the consensus-for-exposure results in financial reporting that best captures the economic substance of derivative novation transactions. 13. In addition, the Task Force noted that assessments of hedge effectiveness and measurements of hedge ineffectiveness when off-market derivatives are involved are complex calculations. Therefore, they believe that requiring a hedge dedesignation upon a derivative novation may increase the cost and complexity of complying with Topic 815. That would be particularly true for those entities that may have been applying an abbreviated qualitative assessment of hedge effectiveness (for example, the shortcut method) before a hedge dedesignation, but who would be required to perform complex quantitative hedge effectiveness calculations under the long-haul method after redesignation. 14. The Task Force considered but rejected several other alternatives that would have resulted in more dedesignation events upon a change to the derivative counterparty. One of those alternatives would have clarified that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument in an existing hedge accounting relationship does not require dedesignation of that hedge relationship provided the creditworthiness of the new counterparty is similar to or better than the creditworthiness of the old counterparty. The Task Force ultimately rejected that alternative because it concluded that the judgment needed to determine whether the creditworthiness of the new and old counterparties would be considered similar may lead to continued diversity in practice. In addition, the Task Force concluded that the incremental safeguard in this rejected alternative was not necessary because novations generally require the consent of the remaining party to the derivative contract, and the remaining party is unlikely to agree to a novation in which the creditworthiness of the new counterparty is significantly worse than the creditworthiness of the old counterparty without receiving consideration. As a result, in practice under the amendments resulting from this Issue, novations generally are likely to occur only if the creditworthiness of the new counterparty is similar to or better than that of the old counterparty. Therefore, the Task Force concluded that the rejected alternative would be adding an additional requirement to be assessed, which adds cost, complexity, and (potentially) diversity, while not serving a functional purpose in many circumstances. In addition, as noted earlier, a change in creditworthiness of the derivative counterparty must be considered by the reporting entity in determining whether the hedging relationship continues to qualify for hedge accounting, as well as the amount of hedge ineffectiveness to be recorded to the extent that it does qualify for hedge accounting. Effective Date and Transition 15. At its June 18, 2015 meeting, the Task Force reached a consensus-for-exposure that an entity should apply the amendments resulting from this Issue prospectively to all existing and new hedge accounting relationships in which a change in the counterparty to a derivative instrument occurs after the effective date of the proposed guidance. November 12, 2015 EITF Meeting Minutes, p. 13 Issue No. 15-D
16. The Task Force will determine the effective date after it considers stakeholder feedback on the proposed Update. 17. The Task Force noted that there may be circumstances in which entities have previously dedesignated a hedge accounting relationship upon the occurrence of a novation that, under the amendments resulting from this Issue, would no longer result in a dedesignation. Those entities may have been following an abbreviated qualitative method of hedge accounting (for example, the shortcut method) before the dedesignation and either (a) redesignated the hedge under the longhaul method or (b) chose not to redesignate the hedge as a result of the complexities of applying the long-haul method when using an off-market derivative as the hedging instrument. For those entities that had been applying an abbreviated qualitative method before a dedesignation resulting from a past novation, the Task Force included a question for respondents about whether it should permit, but not require, retrospective transition. Retrospective transition would provide those entities with an option, but not a requirement, to go back and re-do hedge accounting in prior periods as if that dedesignation had not taken place. Board Ratification 18. At its July 9, 2015 meeting, the Board ratified the consensus-for-exposure reached by the Task Force on this Issue and approved the issuance of a proposed Update for a 60-day public comment period. Current EITF Discussion 19. At its November 12, 2015 meeting, the Task Force considered the feedback received, including 17 comment letters, on the proposed Update, which was issued for public comment on August 6, 2015, with a comment period that ended on October 5, 2015. 20. The Task Force reached a consensus that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument in an existing hedging relationship does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria (including those in paragraphs 815-20-35-14 through 35-18) continue to be met. 21. Specifically, the amendments resulting from this Issue clarify that when applying the guidance in paragraphs 815-25-40-1 (for fair value hedges) and 815-30-40-1 (for cash flow hedges), a change in the counterparty to a derivative instrument, in and of itself, should not be considered a termination of the original derivative instrument by the entity. Similarly, the amendments clarify that when applying the guidance in paragraph 815-20-55-56, a change in the counterparty to a derivative instrument should not, in and of itself, be considered a change in a critical term of the hedging relationship. 22. The Task Force acknowledged that certain instances of novation may lead to changes in security or cash collateral posting requirements. The Task Force decided that these changes should be incorporated into the assessments of hedge effectiveness and measurements of hedge ineffectiveness performed by an entity after the occurrence of a novation, as necessary. November 12, 2015 EITF Meeting Minutes, p. 14 Issue No. 15-D
Effective Date and Transition 23. At its November 12, 2015 meeting, the Task Force reached a consensus that an entity should apply the amendments resulting from this Issue prospectively to all existing hedging relationships in which a change in the counterparty to a derivative instrument occurs after the effective date of this guidance. This is consistent with the transition framework established by the Derivative Implementation Group (DIG) in Statement 133 Implementation Issue K5, "Miscellaneous: Transition Provisions for Applying the Guidance in Statement 133 Implementation Issues." 24. The proposed Update requested feedback on allowing retrospective transition for hedging relationships dedesignated due to a derivative instrument novation if hedge effectiveness was originally assessed using an abbreviated method. The Task Force initially thought that the most significant benefit of retrospective transition would be for hedging relationships originally assessed using an abbreviated method because of the increased costs incurred by entities when those hedging relationships were redesignated as hedges under a long-haul method or were not redesignated as hedging relationships. Retrospective transition allows those entities to revert back to the less costly abbreviated method of assessing effectiveness and measuring ineffectiveness. 25. Based on feedback received from comment letter respondents, the Task Force decided to permit a modified retrospective application. Under that approach, retrospective application applies to hedging relationships dedesignated as a result of a derivative instrument novation where the derivative instrument was outstanding during the current period or comparative periods presented in the financial statements, regardless of whether the hedging relationship was redesignated or whether assessments of effectiveness, before the dedesignation, were performed using an abbreviated method or a long-haul method. 26. The Task Force decided that the intent of the amendments resulting from this Issue is to allow preparers to revise prior-period financial statements for dedesignations that occurred as a result of a derivative instrument being novated. The Task Force preferred to provide an opportunity to revise prior-period financial statements for all hedging relationships, not just those for which hedge effectiveness was originally assessed using an abbreviated method. The Task Force did not see the benefit of providing this benefit to a subset of hedging relationships. 27. The Task Force decided that a modified retrospective application could be beneficial to both preparers and users of financial statements. For preparers, modified retrospective transition will remove income statement volatility generated by (a) incremental ineffectiveness from redesignated hedging relationships, relative to the ineffectiveness generated from the original hedging relationship, and (b) the periodic change in fair value of derivative instruments not redesignated in hedging relationships, after a dedesignation due solely to a novation of the derivative instrument. For users, modified retrospective transition will facilitate users analysis of trend information in financial statements for entities that present comparative periods. 28. The Task Force concluded that if an entity elects the modified retrospective approach, an entity must apply the amendments to all hedging relationships that meet all of the following criteria: November 12, 2015 EITF Meeting Minutes, p. 15 Issue No. 15-D
a. The derivative instrument was outstanding during all or a portion of the periods presented in the financial statements. b. The derivative instrument was previously designated as a hedging instrument in a hedging relationship. c. The hedging relationship was dedesignated solely due to a novation of the derivative instrument, and all other hedge accounting criteria (including those in paragraphs 815-20-35-14 through 35-18) would have otherwise continued to be met. 29. Under the modified retrospective approach, the modified retrospective accounting provisions apply to all derivative instruments that meet the above criteria because the Task Force was concerned that some entities may apply the modified retrospective approach to only a subset of hedging relationships that would improve specific aspects of the financial statements. 30. Permitting retrospective transition is within the transition framework established by Statement 133 Implementation Issue K5. That transition framework allowed the Board to specify retroactive application of any implementation guidance if warranted by the circumstances. 31. Under the modified retrospective approach, an entity should not revise its financial statements for derivative instruments that were not outstanding as of the beginning of the earliest period presented in the financial statements. 32. The Task Force acknowledges that full retrospective application would be a more precise form of retrospective transition but concluded that the additional time and cost associated with full retrospective application will not provide incremental benefit relative to the modified retrospective application described herein. 33. The time and cost needed to apply the modified retrospective application described in this Issue was considered by the Task Force when deciding to permit rather than require a modified retrospective application. Effective Date 34. At its November 12, 2015 meeting, the Task Force reached a consensus that the amendments resulting from this Issue should be effective for public business entities for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. 35. Based on the Private Company Decision Making Framework, the Task Force concluded that for entities other than public business entities, the amendments resulting from this Issue should be effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within fiscal years beginning after December 15, 2018. 36. Furthermore, the Task Force decided that earlier application should be permitted to allow entities to apply the amendments resulting from this Issue at their convenience. Board Ratification 37. At its December 11, 2015 meeting, the Board ratified the consensus reached by the Task Force on this Issue. November 12, 2015 EITF Meeting Minutes, p. 16 Issue No. 15-D
Status 38. No further EITF discussion is planned. November 12, 2015 EITF Meeting Minutes, p. 17 Issue No. 15-D
Issue No. 15-E Title: Contingent Put and Call Options in Debt Instruments Dates Discussed: June 18, 2015; November 12, 2015 Background 1. Topic 815, Derivatives and Hedging, requires that embedded derivatives be separated from the host contract and accounted for as derivatives only if all three criteria in paragraph 815-15-25-1 are met. One of those criteria is that the economic characteristics and risks of the embedded derivative are not clearly and closely related to the economic characteristics and risks of the host contract. There is specific guidance in paragraphs 815-15-25-40 through 25-43 for assessing whether call (put) options that can accelerate the repayment of principal on a debt instrument meet that criterion. 2. The guidance in paragraph 815-15-25-40 states that call (put) options are considered to be clearly and closely related to a debt instrument, provided the call (put) option has met other requirements for interest rate related underlyings, in accordance with paragraph 815-15-25-26, unless the debt involves a substantial premium or discount and the call (put) option is only contingently exercisable. For contingently exercisable call (put) options to be considered clearly and closely related, paragraph 815-15-25-41 states that they can be indexed only to interest rates or credit risk, not some extraneous event or factor. That guidance raised interpretative questions that the DIG tried to clarify through implementation guidance in a four-step-decision sequence applicable to all call (put) options. The four-step-decision sequence requires an entity to consider whether (a) the payoff is adjusted based on changes in an index, (b) the payoff is indexed to an underlying other than interest rates or credit risk, (c) the debt involves a substantial premium or discount, and (d) the call (put) option is contingently exercisable. Issue 3. The issue is whether the assessment of whether contingent call (put) options are clearly and closely related to the debt host only requires an analysis of the four-step-decision sequence or if an assessment of whether the event that triggers the ability to exercise the call (put) option is indexed only to interest rates or credit risk, not some extraneous event or factor, is required in addition to the four-step-decision sequence. Scope 4. This Issue applies to all reporting entities that are issuers of or investors in debt instruments (or hybrid financial instruments that are determined to have a debt host) with embedded call (put) options. Prior EITF Discussion 5. At the June 18, 2015 EITF meeting, the Task Force reached a consensus-for-exposure that clarifies that the determination of whether the economic characteristics and risks of call (put) options are clearly and closely related to their debt hosts only requires an assessment of the fourstep-decision sequence. Consequently, for contingently exercisable call (put) options, an November 12, 2015 EITF Meeting Minutes, p. 18 Issue No. 15-E
assessment of whether the event that triggers the ability to exercise a call (put) option is related to interest rates or credit risk is not required. 6. Some Task Force members expressed a preference for an alternative approach currently applied by some in practice that requires an additional assessment of whether the event that triggers the ability to exercise the call (put) option is indexed to interest rates or credit risk and not some extraneous event. Those Task Force members believe that this alternative better reflects the conceptual basis underlying the guidance that an entity should not be able to avoid the recognition and measurement requirements of derivatives guidance by simply embedding a derivative instrument in a nonderivative financial instrument or other contract. 7. The Task Force acknowledged that the amendments resulting from this Issue could result in situations in which the accounting for embedded call (put) options in debt instruments may be different from what would be required if there was a separate instrument with the same terms as the call (put) option. However, the Task Force believes that the consensus-for-exposure adequately limits the circumstances in which those differences could arise and is consistent with the DIG s intent when it interpreted the original guidance on embedded derivatives with the four-stepdecision sequence. Because the four-step decision sequence requires an entity to evaluate whether a substantial discount or premium is involved, any significant change to the payoff would result in the call (put) option not being clearly and closely related to its debt host irrespective of whether the contingent event is related to interest rates or credit risk. The Task Force believes that this requirement adequately limits the opportunity for an entity to be able to avoid applying the recognition and measurement requirements of derivatives guidance to circumstances in which the instrument s payoff is not significantly adjusted. 8. As a result, the Task Force also believes that an assessment of the contingent event itself may create complexity in financial reporting with limited benefit to financial statement users because it may require an entity to value an embedded derivative whose value typically is small or zero at inception and continues that complexity going forward for events that may have a low likelihood of occurring. 9. Some Task Force members suggested an approach that would consider an assessment of whether the contingency trigger is indexed to an external observable index or price, rather than an assessment of whether the contingency trigger is indexed to interest rates or credit risk and not some extraneous event or factor. Those Task Force members believe that external contingency triggers that are linked to extraneous factors (for example, commodity or stock price indices) indicate that the call (put) option is not clearly and closely related to its debt host. The Task Force rejected that approach because it believes that the approach would create additional complexity. Transition 10. At the June 18, 2015 EITF meeting, the Task Force reached a consensus-for-exposure that an entity should apply the amendments resulting from this Issue on a modified retrospective basis to existing debt instruments as of the beginning of the fiscal year, and interim periods within that fiscal year, for which the amendments resulting from this Issue are effective. If an entity had bifurcated an embedded derivative but is no longer required to do so as a result of applying the amendments resulting from this Issue, the carrying amount of the debt host contract and the fair November 12, 2015 EITF Meeting Minutes, p. 19 Issue No. 15-E