|
Newsletters
The Monthly Blend
February 2006
The Meaning of Other-Than-Temporary Impairment and Its Application 
Submitted by: Jeremy Jefferys, CPA
As originally issued, EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments , provided guidance on assessing whether the impairment of a security within its scope was other than temporary and related disclosure requirements. Since the ratification of Issue No. 03-1 in April 2004, however, significant controversy has arisen about its application in practice, especially about the judgments required in the evaluation of whether an impairment is other then temporary. In September 2004, the Financial Accounting Standards Board (FASB) staff issued a FASB Staff Position (FSP) delaying the effective date of paragraphs 10-20 of Issue No. 03-1 concerning the evaluation of whether an impairment is other than temporary, the recognition of an impairment loss, and accounting considerations subsequent to the recognition of an other-than-temporary impairment.
Recently, the FASB directed its staff to issue FSP No. FAS 115-1 and FAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments , which effectively nullifies the requirements of Issue No. 03-1. This FSP provides guidance on determining when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. Additionally, the FSP provides accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. The guidance in this FSP is applicable for investments in:
- Debt and equity securities that are within the scope of FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities;
- Debt and equity securities that are within the scope of FASB Statement No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations and that are held by an investor that reports a "performance indicator" as defined in the AICPA Accounting and Audit Guide, Health Care Organizations; and
- Equity securities accounted for at cost (thus, they are not subject to Statement Nos. 115 and 124 not to APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock).
The FSP describes three steps in determining when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. In applying the first step, an investment is impaired if the fair value of the investment is less than its cost. For a cost-method investment for which a fair value has not been estimated, the FSP provides impairment indicators which should be used in evaluating whether an event or change in circumstances has occurred during the reporting period that may have a significant adverse effect on the fair value of the investment. When the cost or carrying value of an investment is impaired (that is, fair value is less than cost), then step two of the FSP is applied. Step two requires an assessment of whether the impairment is either temporary or other than temporary. The FSP provides no guidance on making this assessment (which is the most difficult and controversial aspect of this issue). Instead, an investor must apply other guidance that is pertinent to the determination of whether an impairment is other than temporary, such as paragraph 16 of Statement No. 115 (which references SEC Staff Accounting Bulletin Topic 5M, Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities ), paragraph 6 of Opinion No. 18 and EITF Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets." When an investor has decided to sell an impaired available-for-sale security and the investor does not expect the fair value of the security to fully recover prior to the expected time of sale, the security is deemed other-than-temporarily impaired in the period in which the decision to sell is made. However, an investor must recognize an impairment loss when the impairment is deemed other than temporary even if a decision to sell has not been made.
Step three provides that when it is determined that the impairment is other than temporary, then an impairment loss must be recognized in earnings equal to the entire difference between the investment's cost and its fair value at the balance sheet date of the reporting period for which the assessment is made. In periods subsequent to the recognition of an other-than-temporary impairment loss for debt securities, an investor must account for the other-than-temporary impaired debt security as if the debt security had been purchased on the measurement date of the other-than-temporary impairment. That is, the discount or reduced premium recorded for the debt security, based on the new cost basis, would be amortized over the remaining life of the debt security in a prospective manner based on the amount and timing of future estimated cash flows.
The FSP carries forward the requirements in Issue No. 03-1 regarding required disclosures in the financial statements.
The guidance in this FSP must be applied to reporting periods beginning after December 15, 2005. Earlier application is permitted. The FSP is available in full at http://www.fasb.org/fasb_staff_positions/fsp_fas115-1&fas124-1.pdf .
Alternative Accounting for the Tax Effects of Share-Based Payment Awards
The transition provisions of FASB Statement No. 123 (revised 2004), Share-Based Payment , indicate that, for purposes of calculating the pool of excess tax benefits available to absorb tax deficiencies recognized subsequent to the adoption of Statement No. 123® (referred to as the additional paid-in capital or APIC pool), an entity must include the net excess tax benefits that would have qualified as such had the entity adopted Statement No. 123, Accounting for Stock-Based Compensation , for recognition purposes. A fundamental assumption underlying this requirement was that, for public entities, implementation of the disclosure provisions of Statement No. 123 resulted in information about the amounts that would have qualified as excess tax benefits had the entities adopted Statement No. 123 for recognition purposes. However, the Financial Accounting Standards Board (FASB) has become aware that a significant number of constituents do not have that information readily available and, in some cases, they may not be able to recreate that information.
As such, the FASB staff has issued FASB Staff Position (FSP) No. FAS 123(R)-3, Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards , to provide a practical elective alternative transition method related to accounting for the tax effects of share-based payment awards to employees. An entity must follow either the transition guidance for the APIC pool in Statement No. 123(R) or the alternative transition method described in the FSP. The alternative method comprises a computational component that establishes a beginning balance of the APIC pool and a simplified method to determine the subsequent impact on the APIC pool of awards that are fully vested and outstanding upon the adoption of Statement No. 123(R). The impact on the APIC pool of awards partially vested upon, or granted after, the adoption of Statement No. 123(R) should be determined in accordance with the guidance in that Statement. The FSP was effective November 10, 2005. As described in the FSP, an entity will be permitted to take up to one year to determine its transition alternatives to make its one-time election.
The FSP is available at http://www.fasb.org/fasb_staff_positions/fsp_fas123r-3.pdf .
Accounting for Minimum Revenue Guarantees
In certain situations, a business may grant a minimum revenue guarantee to a business or its owners that revenue for a specified period of time will be at least a specified minimum amount. One example of such a guarantee is when a health care facility has agreed to make payments to a newly arrived non-employee physician at the end of specific period of time if the gross revenues generated by the physician's new practice during that period of time do not equal or exceed a specific dollar amount. Another example is when a corporation grants a minimum revenue guarantee to a new day-care center as an incentive for the center to locate near the corporation's manufacturing plant.
FASB Staff Position (FSP) No. FIN 45-3, Application of FASB Interpretation No. 45 to Minimum Revenue Guarantees Granted to a Business or Its Owners , states that a guarantor should apply the recognition, measurement, and disclosure provisions of FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45), to a minimum revenue guarantee granted to a business or its owner(s) that the revenue of the business (or specific portion of the business) for a specified period of time will be at least a specified amount. FIN 45 requires that the guarantor recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. This FSP applies to minimum revenue guarantees granted to physicians regardless of whether the physician's practice qualifies as a business under EITF Issue No. 97-2, "Application of FASB Statement No. 94 and APB Opinion No. 16 to Physician Practice Management Entities and Certain Other Entities with Contractual Management Arrangements."
FSP No. FIN 45-3 is effective for new minimum revenue guarantees issued or modified on or after the beginning of the first fiscal quarter after November 10, 2005. For an minimum revenue guarantees issued prior to the initial application of the FSP and not accounted for under FIN 45, the retroactive application of the initial recognition and initial measurement provisions of FIN 45 is not permitted. The FIN 45 disclosure requirements should be applied to all minimum revenue guarantees, regardless of whether those guarantees were recognized and measured under FIN 45, as amended by this FSP.
The FSP is available at http://www.fasb.org/fasb_staff_positions/fsp_fin45-3.pdf .
FSP Adds More Clarity to FASB Statement No. 140
FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments or Liabilities , provides conditions that must be met for a trust or other legal entity to be considered a qualifying special-purpose entity (QSPE). One such condition is that a QSPE may hold only passive derivative financial instruments that pertain to beneficial interests issued or sold to parties other than the transferor, its affiliates, or its agents. Per Paragraph 40 of Statement No. 140, a derivative financial instrument pertains to beneficial interests (other than another derivative financial instrument) issued only in it:
- Is entered into (1) when the beneficial interests are issued by the QSPE to parties other than the transferor, its affiliates, or its agents or sold to such other parties after being issued by the QSPE to the transferor, its affiliates, or its agents or (2) when a passive derivative financial instrument needs to be replaced upon occurrence of an event or circumstance (specified in the legal documents that established the SPE or created the beneficial interests in the transferred assets that it holds) outside the control of the transferor, it affiliates, or its agents
- Has a notional amount that does not initially exceed the amount of those beneficial interests and is not expected to exceed them subsequently
- Had characteristics that relate to, and partly or fully but not excessively counteract, some risk associated with those beneficial interests or the related transferred assets?
Questions have been raised about whether paragraphs 40(b) and 40(c) would require a QSPE to become disqualified if the amount of beneficial interests held be outside parties is reduced to less that the total notional amount of the related derivative financial instruments because of events that were not anticipated at the inception of the QSPE. Questions have also been raised about whether purchases of beneficial interests by the transferor, its affiliates, or its agents in connection with treasury, market-making, or trading activities would disqualify a QSPE. In FASB Staff Position (FSP) No. FAS 140-2, Clarification of the Application of Paragraphs 40(b) and 40(c) of FASB Statement No. 140 , the FASB Staff has concluded that unexpected subsequent events outside the control of the transferor, its affiliates, or its agents, such as prepayment of assets of the QSPE, that were not contemplated by an analysis of the expected assets of the QSPE and the expected amount of beneficial interests held by outside parties when the beneficial interests of the QSPE were issued would not impair the qualified status of the QSPE.
The FSP observes that the requirements of paragraphs 40(b) and 40(c) must be met when beneficial interests are initially issued by the QSPE or when a passive derivative financial instrument needs to be replaced upon the occurrence of a specified event outside the control of the transferor, it affiliates, or its agents. In making this determination, an assessment must be made at that time about the expected assets of the QSPE and the expected amount of beneficial interests held by outside parties over the expected life of the QSPE. Thus, the FSP provides relief only when the subsequent events are unexpected.
The FSP also states that purchases of previously issued beneficial interests by a transferor, its affiliates, or its agents form outside parties that are held temporarily and are classified as trading securities should not be considered when determining whether the requirements of paragraphs 40(b) and 40(c) are met. Further, any remedial action taken by the QSPE to "rebalance" the derivative amount with the amount of beneficial interests held by parties other than the transferor, it affiliates, or its agents must be taken in accordance with the terms and activities specified in the governing documents of the QSPE at the time it was originally established.
The guidance in this FSP is effective as of the date of its issuance (November 9, 2005). The FSP is available in its entirety at http://www.fasb.org/fasb_staff_positions/fsp_fas140-2.pdf.
FASB to Reconsider Pension and OPEB Accounting
The Financial Accounting Standard Board has added a project to its agenda to reconsider guidance in FASB Statement No. 87, Employers' Accounting for Pensions , and Statement No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions . The Board's objective in undertaking the project is to improve the reporting of pensions and other postretirement benefit (OPEB) plans in the financial statements by making information more useful and transparent for investors, creditors, employees, retirees, and other users.
The Board will approach this project in two phases, the first of which is expected to be finalized by the end of 2006. The first phase seeks to address the fact that under current accounting standards, important information about the financial status of a company's plan is reported in the footnotes, but not in the basic financial statements. Accordingly, this phase will seek to improve transparency by requiring that the funded or unfunded status of defined benefit and other postretirement benefit plans, measured as the difference between the fair value of plan assets and the current measure of the benefit obligation incurred for past employee service, be recognized in the balance sheet.
The second broader phase is planned to comprehensively address several other issues, including:
- How to best recognize and display in earnings and other comprehensive income the various elements that affect the cost of providing postretirement benefits;
- How to best measure the obligation, in particular the obligations under plans with lump-sum settlements options;
- Whether more or different guidance should be provided regarding measurement assumptions; and
- Whether postretirement benefit trusts should be consolidated by the plan sponsor.
In agreeing to add this project to its agenda, the Board recognizes that the project will touch on many fundamental areas of accounting, including measurement of assets and liabilities, consolidation, and reporting of financial performance. The Board acknowledges the complexity of the issues involved and that views on how to address them are deeply held. Thus, this project is likely to be as controversial as the recently issued Statement on share-based payments.
Published in McGladrey & Pullen Insights which is a biweekly publication and should not be construed as accounting, auditing, consulting or legal advice on any specific facts or circumstances. The contents are intended for general information purposes only.
For more information on the above topic, please contact Jeremy Jefferys at Beason & Nalley, Inc. at 256-533-1720 or email at jjefferys@beasonnalley.com. Ways and Means for the Public Sector
Are you holding your organization accountable? Make your not-for-profit operations transparent - before it becomes mandatory
Submitted by: Melanie Clem
Accountability. To many, this term simply means holding others accountable or responsible for their actions. In the public sector accountability has probably been used more during the last several years with "what's lacking in the industry" than any other term. And for good reason. Public sector entities frequently obtain a substantial portion of their funding through nonexchange transactions dealings in which the recipient organization isn't required to give up goods or services of a value commensurate with the value of any funds, goods or services received. Providers agree to these arrangements because they expect the governmental agency or not-for-profit organization will use the resources they provide for the betterment or development of citizens, the environment or other causes.
The "non" factor
In an exchange transaction, willing buyers and sellers negotiate the terms of an assets transfer. In a nonexchange transaction, which can be voluntary on the part of the provider (e.g., a contribution) or nonvoluntary (certain taxes, fines, forfeitures), the provider transfers the assets with an expectation that the recipient organization has or will make appropriateuse of the resources. The ultimate benefit the provider gets from participation in the transaction may not be readily apparent. The provider also assumes a certain amount of risk that the recipient may not demonstrate proper accountability.
An effective internal system
In the public sector environment, different levels of accountability are frequently forced upon certain types of organizations (annual financial or compliance reporting requirements, audit requirements, required specific information reporting to oversight agencies, oversight agencies audits or reviews). However, the best way for a public sector agency to encourage constituency support is to demonstrate an effective internal system of accountability.
An effective internal accountability system begins and ends with transparency of operations. By making more information available to constituency groups on a timely basis, public sector entities can avoid challenges to the effectiveness and efficiency of their operations. In this age of information, people want to make their own informed decisions. Any organization prepared to meet the information needs of their constituents will reap benefits.
Understand information needs, then communicate
For many, the Internet provides an excellent means to access information. It appears the only limitation placed on Web site design is the imagination of the designer. However, an organization shouldn't limit its communication efforts to any one venue. It's important to consider the best options for communicating accountability to the primary members of your constituency group:
- Regular publication of stated missions, goals and objectives (for general purpose governments this could be done at the department, program or activity level).
- Timely preparation and publication of the organization's annual budget (consider soliciting your constituency group for assistance in the development).
- Timely preparation and publication of board and committee minutes.
- Timely preparation and dissemination of the entity's annual financial and compliance reports (for governmental units, consider publishing a comprehensive annual financial report).
- Timely preparation and release of certain interim financial and compliance information.
- Timely preparation and dissemination of benchmarking or performance measurement reporting.
- Regular publication of current events involving the major activities of the organization and achievement of certain milestones.
- Periodic requests for input from concerned constituents.
The list is almost limitless. But, the key is to gain an understanding of your constituents' information needs and strive to find a cost-effective way of demonstrating your accountability.
An increasing number of oversight agencies and politicians are proposing accountability alternatives in the public sector environment. The truly successful public sector organizations of the future will not wait for accountability legislation; they will implement policies and procedures to demonstrate accountability because it is the right thing to do.
Published in RSM McGladrey's quarterly publication Fundamentals.
For more information on the above topic, please contact Melanie Clem at Beason & Nalley, Inc. at 256-533-1720 or email at mclem@beasonnalley.com. Coffee Talk
Beason & Nalley is hosting the Accounting & Audit Seminar on Tuesday, February 21, 2005 and Dr. Ratcliffe is the guest speaker. Dr. Ratcliffe is Director of Accounting and Auditing at Wilson Price and Director Emeritus of the School of Accountancy at Troy University.
Congratulations to Julie Reeves on passing the CPA exam.
Darryl Walker and Scott Butler taught the Government Contract Accounting Systems Compliance Course in Las Vegas on January 18-19, 2006 which was sponsored by Federal Publications.
Beason & Nalley, Inc. hosted the GSA Seminar sponsored by NCMA on January 18th & 19th. Related Information:
BACK to The Monthly Blend Also see:
Why Choose Us? | Industries | Contact Us
|
