Current developments in financial accounting and reporting

Petroleum Accounting and Financial Management Journal, Summer 1999 by Jennings, Dennis R

FASB

Derivatives Standard Delayed

FASB Statement No. 133 (FAS 133), Accounting for Derivative Instruments and Hedging Activities, was issued in June 1998. It establishes accounting and reporting standards for derivative instruments, including certain derivative instruments that are embedded in other contracts (collectively referred to as derivatives), and for hedging activities. As issued, FAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 1999, with early application encouraged.

The Financial Accounting Standards Board (FASB or the "Board") has ben asked to delay the effective date of FAS 133. Entities and their auditors have requested more time to study, understand, and implement the provisions of FAS 133. Another reason for this request is that a delay would give entities more time to complete information-system modifications, particularly those related to the Year 2000 issue. The FASB has concluded tat, for the reasons presented in the appendix to the proposed statement, it is appropriate to defer the effective date for FAS 133 so that it will begin with all fiscal quarters of all fiscal years beginning after June 15, 2000. However, the Board continues to encourage early application. An entity that has already applied the provisions of FAS 133 and has issued interim or annual financial statements reflecting that application may not revert to a previous method of accounting for derivative instruments and hedging activities.

Comments were due by June 19, 1999.

Tentative Conclusions Reached Regarding the Future of Pooling of Interests Accounting

At its meeting of April 21, 1999, the Board reached tentative conclusions on the future of the pooling of interests method of accounting for a business combination. The tentative decisions were as follows:

* The pooling of interests method of accounting will no longer be an acceptable method to account for business combinations between independent parties.

* There should be a single method of accounting for all business combinations, and that method is the purchase method.

* Common-control mergers will continue to be accounted for at carryover historical bases.

The Board concluded that mergers of equals are extremely rare, and therefore it has been developing an approach to determining the acquirer. The Board suggests that a hierarchical approach be used in determining the acquirer. This approach would take into account voting interests, board representation, and management structure.

The Board agreed that the purchase method should be applied prospectively to business-combination transactions that are initiated (as that term is defined currently in APB 16) after the final standard is issued. The FASB expects to issue an exposure draft during the third quarter of 1999, and the FASB staff has previously indicated that it expects a final standard will be issued in the fourth quarter of 2000.

Impairment and Asset Disposal Issues

The staff has prepared this summary of Board decisions for informational purposes only. These Board decisions are tentative and do not change current accounting. Official positions of the FASB are determined only after extensive due process and deliberations.

Project Description and Objectives: The Board issued FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for LongLived Assets to Be Disposed Of, in March 1995. After Statement 121 was issued, members of the Emerging Issues Task Force (EITF) and others identified significant practice problems relating to the implementation of Statement 121 and anticipated questions relating to the effect of those provisions on previously existing accounting literature.

In August 1996, the Board added a project related to Statement 121 to its agenda. The project's objectives are to (1) resolve implementation issues and (2) develop one model to consistently account for all assets to be disposed of.

Tentative Board Decision through April 14, 1999: The Board's decision would ammend and clarify the provisions of Statement 121 as discussed below.

Scope: The scope of Statement 121 would include goodwill associated with assets to be disposed of.

Assets to Be Held and Used: An asset to be held and used would be defined as impaired when its carrying amount exceeds its fair value. However, an impairment loss would continue to be recognized only if the carrying amount of an asset is not recoverable from the future cash flows expected to result from its use and eventual disposition, undiscounted and without interest charges.

An asset would be required to be tested for recoverability if, in addition to the other events or changes in circumstances identified in Statement 121 that indicate that the carrying amount of an asset may not be recoverable, an entity expects to dispose of an asset (by sale or abandonment) before more than half of its previously estimated remaining useful life would have expired.

Estimates of future cash flows used to test an asset for recoverability would be the entity's best estimate of the future cash flows based on the manner in which the entity expects to use the asset given its existing service potential at the date it is tested for recoverability. Those estimates would be made over the remaining useful life of an asset or, if assets are tested for recoverability as a group, the remaining useful life of the tangible asset that is the primary component asset of the group (primary asset). Those estimates would include only those cash flows associated with future expenditures necessary to maintain the existing service potential of an asset over its remaining useful life, including routine repairs and maintenance and replacements of component assets of a group with the same service potential over the remaining useful life of the primary asset. If assets are tested for recoverability as a group, those estimates also would exclude future cash inflows associated with other recognized assets of the group, such as accounts receivable, and future cash outflows associated with recognized liabilities of the group, such as accounts payable.