NO
YES
NO
YES
YES
NO
YES
NO
YES
NO
YES
NO
YES
NO
YES
NO
A
B
Accounting Flow Chart for FAS 133
Bob Jensen at Trinity
University
| Is there a contract with (1) an underlying and (2) a notional amount, a payment provision, or both? |
|
|
|
| Does the contract require no initial net investment or an initial net investment smaller than other types of contracts that have a similar response to changes in market factors? |
|
|
|
| Is the contract contingent consideration in a business combination? (The accounting for contingent consideration issued in a business combination is addressed in Accounting Principles Board (APB) Opinion No. 16, Business Combinations.) |
|
|
|
| Is the contract an insurance contract? (A contract is not subject to the requirements of SFAS 133 if it entitles the holder to be compensated only if, as a result of an identifiable insurable event (other than a change in price), the holder incurs a liability or there is an adverse change in the value of a specific asset or liability for which the holder is at risk.) |
|
|
|
| Is the contract a financial guarantee? (Financial guarantee contracts are not subject to SFAS 133 if they provide for payments to be made only to reimburse the guaranteed party for a loss incurred because the debtor fails to pay when payment is due, which is an identifiable insurable event. In contrast, financial guarantee contracts are subject to the SFAS 133 if they provide for payments to be made in response to changes in an underlying -- for example, a decrease in a specified debtor's creditworthiness.) |
|
|
|
| Does the existence of this contract serve as an impediment to recognizing a related contract as a sale? (For instance, a call option enabling a transferor to repurchase transferred assets -- an impediment to sales accounting under Statement 125 -- is not subject to SFAS 133, since the related assets are already recognized in the financial statements and to separately record the derivative would be to count the same thing twice.) |
|
|
|
| Is the contract indexed to the reporting entity's own stock and classified in stockholders' equity by the reporting entity? (For example, if an entity purchases a call option on its own stock from someone else and that contract is reported in stockholders' equity, it is excluded from SFAS 133.) |
|
|
|
| Is the contract issued by the reporting entity as part of a stock-based compensation arrangement? (The issuer's accounting is covered by SFAS 123, Accounting for Stock-Based Compensation, but the holder's accounting for a derivative instrument in a compensation arrangement addressed by Statement 123 is subject to SFAS 133.) |
|
|
|
A |
B |
A |
B |
|||
| Does the contract permit or require net settlement or is there a market mechanism to facilitate net settlement outside the contract? | ||||
|
|
|||
| Is the underlying: 1. A climatic or geological or other physical variable? 2. The price or value of a nonfinancial asset of one of the parties that is not readily convertible to cash or a nonfinancial liability of one of the parties that does not require delivery of an asset that is readily convertible to cash? 3. Specified volumes of sales or service revenues by one of the parties to the contract? (For instance, a contract requiring $1 million to be paid if there is a hurricane in Florida during a specified time period is not a derivative under SFAS 133. However, a contract that requires $1 million to be paid if hurricane damage in Florida exceeds $1 billion during a specified time period is a derivative for the purposes of SFAS 133 because the underlying is not a physical variable. Rather, the underlying is claims exceeding a dollar amount.) |
Does the contract require delivery of a derivative
instrument or an asset readily convertible to cash? |
|
||
|
YES NO |
||||
| Is the contract exchange-traded? | ||||
|
|
NO |
||
Apply SFAS 133 |
Do not apply SFAS 133 | |||
Source: Exhibit 1 in "Fair Value Accounting Gets Industry Input Through the Derivatives Implementation Group," Ira Kawaller and John J. Ensminger, Value Strategies, January/February 2000, pp. 14-15.