IMPLEMENTING FAS 133

Accounting for Derivative Instruments and Hedging Activities

Part 1--MOST FREQUENT DISCLOSURES

 

 

 

FINANCIAL INSTRUMENTS (FAS 107 as amended by FAS 133, FAS 115 as amended by FAS 133, and FAS 133) - Subsequent to the adoption of FAS 133.

NOTE:  This section (Item Nos. 49-65) apply to companies that have adopted FAS 133.

FASB Statement 133, Accounting for Derivative Instruments and Hedging Activities, is effective for financial statements for all fiscal quarters of fiscal years beginning after June 15, 1999.  The transition adjustments resulting from adoption must be recognized in income and other comprehensive income (stockholders' equity), as appropriate, as a cumulative effect of an accounting change.  FAS 133 supersedes FAS 80, Accounting for Futures Contracts, FAS 105, Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk, and FAS 119, Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments, and amends the hedging sections of FAS 52, Foreign Currency Translation to permit special accounting for a hedge of a foreign currency transaction with a derivative.

It amends FAS 107, Disclosure about Fair Value of Financial Instruments, to include in FAS 107 the disclosure provisions about concentrations of credit risk the previously were included in FAS 105 which was superseded by FAS 133.   Earlier application of all the provisions of FAS 133 is encouraged but is permitted only as of the beginning of any fiscal quarter that begins after June 30, 1998.   Earlier application of selected provisions of FAS 133 is not permitted.  FAS 133 shall not be applied retroactively to financial statements of prior periods.

NOTE:  In addition to the requirements for enhanced accounting policy disclosures related to derivatives as outlined in Item No. 5, Item 305 of Regulation S-K and item 9A of Form 20-F require market risk disclosures (both quantitative and qualitative) outside the financial statements (e.g., integrated with Management's Discussion and Analysis or other appropriate location in the annual report delivered to shareholders).

For all banks and thrifts, registrants that include a bank or thrift in their consolidated financial statements (e.g., a retailer that maintains a single bank subsidiary to conduct credit card activities), and for other companies with market capitalization in excess of $2.5 billion at January 28, 1997, the market risk disclosure requirements are effective for SEC filings that include annual financial statements for years ending after June 15, 1997.  For other registrants the market risk disclosure requirements are effective for years ending after June 15, 1998.  Registered investment companies and small business issuers are exempt from the SEC qualitative and quantitative disclosures.  Refer to the SEC Annual Shareholders Report Checklist (Form A150) for the market risk disclosure requirements.

 

Disclosure about Derivative Financial Instruments Held or Issued - Subsequent to the adoption of FAS 133.

  1. A company that holds or issues derivative instruments (or nonderivative instruments that are designated and qualify as hedging instruments) should distinguish between those derivative instruments (and nonderivative instruments) designated as fair value hedging instruments, derivative instruments designated as cash flow hedging instruments, derivative instruments (and nonderivative instruments) designated as hedging instruments for hedges of the foreign currency exposure of a net investment in a foreign operation and all other derivatives, and disclose the following for each type of hedging instrument (fair value, cash flow, or net investment): (FAS 133, ¶44)

    a.  The company's objectives for holding or issuing derivative instruments (and
         nonderivative hedging instruments); Comments:

    b.  The context needed to understand the company's objectives; Comments:

    c.  The company's strategies for achieving those objectives; Comments:

    d.  The company's risk management policy for each type of hedge, including
         a description of the items or transactions for which risks are hedged.
         Comments:

    NOTE:  Qualitative disclosures about a company's objectives and strategies for using derivative instruments may be more meaningful if such objectives and strategies are described in the context of a company's overall risk management profile.   If appropriate, an entity is encouraged, but not required, to provide such additional qualitative disclosures.

  2. For derivative instruments not designated as hedging instruments, disclose the purpose of the derivative activity.  (FAS 133, ¶44) Comments:

  3. A company's disclosures for every reporting period for which a complete set of financial statements is presented also should include the following: (FAS 133, ¶45)

    Fair Value Hedges

    a.  For derivative instruments, as well as nonderivative instruments that may give rise
         to foreign currency transaction gains and losses under FAS 52, Foreign Currency
         Translation    , that have been designated and have qualified as fair value hedging
         instruments and for the related hedged items, disclose the following:

      1. The net gain or loss recognized in earnings during the reporting period representing
          (a) the amount of the hedges' ineffectiveness and (b) the component of the derivative
          instruments' gain or loss, if any, excluded from the assessment of hedge
          effectiveness, and a description of where the net gain or loss is reported in the
          statement of income or other statement of financial performance; Comments:

      2. The amount of net gain or loss recognized in earnings when a hedged firm
          commitment no longer qualifies as a fair value hedge.   Comments:

    Cash Flow Hedges

    b.   For derivative instruments that have been designated and have qualified as cash flow
          hedging instruments and for the related hedged transactions, disclose the following:

      1. The net gain or loss recognized in earnings during the reporting period
          representing (a) the amount of the hedges' ineffectiveness and (b) the component
          of the derivative instruments' gain or loss, if any, excluded from the assessment
          of hedge effectiveness, and a description of where the net gain or loss is
          reported in the statement of income or other statement of financial performance;
          Comments:

      2. A description of the transactions or other events that will result in the
          reclassification into earnings of gains and losses that are reported in
          accumulated other comprehensive income, and the estimated net amount of the
          existing gains or losses at the reporting date that is expected to be reclassified
          into earnings within the next 12 months; Comments:

      3. The maximum length of time over which the entity is hedging its exposure to the
          variability in future cash flows for forecasted transactions excluding those
          forecasted transactions related to the payment of variable interest on existing
          financial instruments; Comments:

      4. The amount of gains and losses reclassified into earnings as a result of the
          discontinuance of cash flow hedges because it is probable that the original
          forecasted transaction will not occur.  Comments:

    Hedges of the Net Investment in a Foreign Operation

    c.  For derivative instruments, as well as nonderivative instruments that may give rise
         to foreign currency transaction gains or losses under FAS 52, that have been
         designated and have qualified as hedging instruments for hedges of the foreign
         currency exposure of a net investment in a foreign operation, disclose the net
         amount of gains or losses included in the cumulative translation adjustment during
         the reporting period.  Comments:

    NOTE:  The quantitative disclosures about derivative instruments may be more useful, and less likely to be perceived to be out of context or otherwise misunderstood, if similar information is disclosed about other financial instruments or nonfinancial assets and liabilities to which the derivative instruments are related by activity.  Accordingly, in those situations, a company is encouraged, but not required, to present a more complete picture of its activities by disclosing that information.

  4. A company should display as a separate classification within other comprehensive income the net gain or loss on derivative instruments designated and qualifying as cash flow hedging instruments reported in comprehensive income.  A company may display components of other comprehensive income either: (FAS 133, ¶46; FAS 130, ¶24)

    a.  Net of related tax effects, or Comments

    b.  Before related tax effects with one amount shown for the aggregate income tax expense
         or benefit related to the total of other comprehensive income items.  Comments:

    In addition, a company should disclose the amount of income tax expense or benefit allocated to each component of other comprehensive income, including the reclassification adjustments, either on the face of the statement in which those components are displayed or in the notes to the financial statements.  (FAS 130; ¶25)

  5. A company should separately disclose on the face of a statement of financial position, in a statement of changes in equity, or in the notes to the financial statements the following: (FAS 133, ¶47; FAS 130, ¶26)

    a.  The beginning and ending accumulated derivative gain or loss, Comments:

    b.  The related net change associated with the current period hedging
         transactions, Comments:

    c.  The net amount of any reclassification into earnings.  Comments:

    d.  In the year of initial application of FAS 133 only, the amount of gains and losses
         reported in accumulated other comprehensive income and associated with the
         transition adjustment that are being reclassified into earnings during the 12 months
         following the date of initial applications.  Comments:

    NOTE:   The classifications should correspond to classifications used elsewhere in the same set of financial statements for components of other comprehensive income.

Disclosures about Concentrations of Credit Risk of All Financial Instruments - Subsequent to the adoption of FAS 133.

  1. Except as noted in FAS 107, ¶15B, disclose all significant concentrations of credit risk arising from all financial instruments, whether from an individual counterparty or groups of counterparties, including: (FAS 107, ¶15A)

    a.  Information about the (shared) activity, region, or economic characteristic that
         identifies the concentration; Comments:

    b.  The maximum amount of loss due to credit risk that, based on the gross fair value
         of the financial instrument, the entity would incur if parties to the financial
         instruments that make up the concentration failed completely to perform according
         to the terms of the contracts and the collateral or other security, if any, for the
         amount due proved to be of no value to the entity; Comments:

    c.  The company's policy of requiring collateral or other security to support the
         financial instruments subject to credit risk, information about the company's
         access to that collateral or other security, and the nature and a brief
         description of the collateral or other security supporting those financial
         instruments; Comments:

    d.  The company's policy of entering into master netting arrangements to mitigate
         the credit risk of financial instruments, information about the arrangements for
         which the company is a party, and a brief description of the terms of those
         arrangements, including the extent to which they would reduce the company's
         maximum amount of loss due to credit risk.  Comments:

  2. A company is encouraged, but not required, to disclose quantitative information about the market risks of financial instruments that is consistent with the way it manages or adjusts those risks: (FAS 107, ¶15C) Comments:

    NOTE:  Appropriate ways of reporting this quantitative information will differ for different entities and will likely evolve over time as management approaches and measurement techniques evolve.  Possibilities include disclosing (a) more details about current positions and perhaps activity during the period, (b) the hypothetical effects on comprehensive income (or net assets), or annual income, of several possible changes in market prices, (c) a gap analysis of interest rate repricing or maturity dates, (d) the duration of the financial instruments, or (e) the entity's value at risk from derivatives and from other positions at the end of the reporting period and the average value at risk during the year.  SEC registrants are already required to provide similar information outside the financial statements.

  3. Except for those financial instruments specifically exempted (F25.105H) (FAS 107, ¶8), disclose, either in the body of the financial statements or in the accompanying notes: (F25.11C) (FAS 107, ¶10, as amended by FAS 133, ¶531B and ¶532B)2

    a.  The fair value of financial instruments and related carrying amount for which it is
         practicable (F25.115K) (FAS 107, ¶15) to estimate that value.  These disclosures
         should be presented together with the related carrying amount and clearly identify
         whether the fair value and carrying amount represent assets or liabilities and how the
         carrying amounts relate to what is reported in the statement of financial position.
         Comments:

    b.  The method(s) and significant assumptions used to estimate the fair value of
         financial instruments.  Comments:

(2)  In disclosing the fair value of a financial instrument, an entity shall not net that fair value with the fair value of other financial instruments -- even if those financial instruments are of the same class or are otherwise considered to be related -- except to the extent that the offsetting of carrying amounts in the statement of financial position is permitted under the general principle in paragraphs 5 and 6 of FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts, or the exceptions for master netting arrangements in paragraph 10 of Interpretation 39 and for amounts related to certain repurchase and reverse repurchase agreements in paragraphs 3 and 4 of FASB Interpretation 41, Offsetting of Amounts Related to Certain Repurchase and Reverse Repurchase Agreements.  (FAS 107, ¶13, ad amended by FAS 133, ¶531C)

NOTE:  Disclosures about the fair value of financial instruments prescribed by FAS 107 are optional for an entity that meets all of the following criteria (FAS 126, ¶2 as amended by FAS 133, ¶537) (F25.105J):

The criteria should be applied to the most recent year presented in comparative financial statements.  If the disclosures are not required in the current period, disclosures for previous years may be omitted if financial statements for those years are presented for comparative purposes.  If disclosures are required for the current period, disclosures about the fair value of financial instruments that have not been reported previously need not be included in financial statements that are presented for comparative purposes.

 

  1. If the disclosures required by No. 56 are presented in more than a single footnote, one footnote must contain a summary table that includes the fair values and related carrying amounts and cross-references to the remaining required disclosures in other notes.  (F25.115C, footnote 16a) (FAS 107, ¶10 as amended by FAS 133, ¶532a)   Comments:

  2. If it is not practicable (F25.115K) (FAS 107, ¶15) to estimate the fair value of a financial instrument or a class of financial instruments, disclose the following: (F25.115J) (FAS 107, ¶14)

    a.  Information pertinent to estimating the fair value of that financial instrument or class
         of financial instruments, such as the carrying amount, effective interest rate, and
         maturity.  Comments:

    b.  The reasons why it is not practicable to estimate fair value.   Comments:

Disclosure about Investments - Subsequent to the adoption of FAS 133.

NOTE:  In complying with Item Nos. 59 and 60 below, financial institutions should include in their disclosure the following major security types, though additional types also may be included as appropriate: equity securities, debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies, debt securities issued by states of the United States and political subdivisions of the states, debt securities issued by foreign governments, corporate debt securities, mortgage-backed securities, and other debt securities.

  1. For securities classified as available-for-sale, disclose the following, by major security type, as of each date for which a statement of financial position is presented: (I80.118) (FAS 115, ¶19 as amended by FAS 133, ¶534e)

    a.  Aggregate fair value.  Comments:

    b.  Total gains for securities with net gains in accumulated other comprehensive income, and
         the total losses for securities with net losses in accumulated other comprehensive
         income.  Comments:

  2. For securities classified as held-to-maturity, disclose the following, by major security type, as of each date for which a statement of financial position is presented: (I80.118) (FAS 115, ¶19 as amended by FAS 133, ¶534e)

    a.  Aggregate fair value; Comments:

    b.  Gross unrecognized holding gains and gross unrecognized holding losses; Comments:

    c.  Net carrying amount; Comments:

    d.  Gross gains and losses in accumulated other comprehensive income for any
         derivatives that hedged the forecasted acquisition of the held-to-maturity
         securities.  Comments:

  3. For investments in debt securities classified as available-for-sale and separately for securities classified as held-to-maturity, disclose the following: (I80.119) (FAS 115, ¶20 as amended by FAS 133, ¶534f)

    a.  Information about the contractual maturities of those securities as of the date of the
         most recent statement of financial position presented.   (Note: Maturity information
         may be combined in appropriate groupings for companies other than financial
         institutions.  In complying with this requirement financial institutions should disclose
         the fair value and the net carrying amount (if different from fair value) of debt
         securities based on at least 4 maturity groupings: (a) within 1 year, (b) after 1 year
         through 5 years, (c) after 5 years through 10 years, and (d) after 10 years.)  Comments:

    b.  Securities not due at a single maturity date (e.g., mortgage-backed securities) may be
         disclosed separately rather than allocated over several maturity groupings.  If
         allocated, disclose the basis for allocation.   Comments:

  4. For each period for which the results of operations are presented, disclose: (I80.120) (FAS 115 ¶21 as amended by FAS 133, ¶534g)

    a.  The proceeds from sales of available-for-sale securities and the gross realized gains
         and gross realized losses that have been included in earnings as a result of those
         sales.  Comments:

    b.  The basis on which the cost of a security sold or the amount reclassified out of
         accumulated other comprehensive income into earnings was determined (that is,
         specific identifications, average cost, or other method used).  Comments:

    c.  The gross gains and gross losses included in earnings from transfers of securities
         from the available-for-sale category into the trading category.  (Note: Such sales or
         transfers should be rare.)  Comments:

    d.  The amount of the net unrealized holding gain or loss on available-for-sale securities
         for the period that has been included in accumulated other comprehensive income
         and the amount of gains and losses reclassified out of accumulated other
         comprehensive income into earnings for the period.   Comments:

    e.  The portion of trading gains and losses for the period that relates to trading
         securities still held at the reporting date.  Comments:

  5. For any sales of or transfers from securities classified as held-to-maturity (including any transfers made between November 15, 1995, and December 31, 1995, pursuant to the transition provisions of the FASB staff's Special Report on FAS 115, as well as any transfers made upon the adoption of FAS 133), disclose the following for each period for which the results of operations are presented: (I80.121) (FAS 115, ¶22 as amended by FAS 133, ¶534h)

    a.  Net carrying amount of the sold or transferred security, Comments:

    b.  The net gain or loss in accumulated other comprehensive income for any derivative
         that hedged the forecasted acquisition of the held-to-maturity security, Comments:

    c.  The related realized or unrealized gain or loss at the date of sale or transfer; Comments:

    d.  The circumstances leading to the decision to sell or transfer the security.   (Note: Such
         sales or transfers not made pursuant to the guidance included in the Special
         Report on FAS 115 or pursuant to the adoption of FAS 133 should be rare.)  Comments:

Other Disclosures - Subsequent to the adoption of FAS 133.

  1. For forward sale contracts, forward purchase contracts, purchased put options, and purchased call options that are indexed to, and potentially settled in, a company's own stock, disclose the gains and losses that are included in earnings.   (EITF 94-7 (codified by EITF 96-13))

  2. Disclose any gains or losses on written put options that require net cash settlement or give the counterparty a choice of net cash settlement or settlement in the company's stock.  (EITF 96-1 (codified by EITF 96-13)) Comments: