FASB Eases Derivatives Reporting on Contingent Calls, Puts

By Steve Burkholder

March 14 — New derivatives-related guidance on how to account for certain put and call options embedded in a host contract will ease reporting burdens of banks and other companies and remedy diversity in practice, leading bank, derivatives and other trade groups say.

The American Bankers Association, the Clearing House Association and the International Swaps and Derivatives Association expressed support for the accounting standards update issued March 14 by the Financial Accounting Standards Board—ASU No. 2016-06.

The ASU, developed last year with the help of FASB's Emerging Issues Task Force as EITF-15E, covers situations in which call or put options—“embedded derivatives” in FASB parlance—can speed the repayment of principal on a debt instrument.

The debt instrument is the derivative's host contract.

If the put or call option at issue isn't clearly and closely related to the host contract, it must be split off from the host and accounted for separately as a derivative under long-standing generally accepted accounting principles. That can be a complicated process.

Different Accounting Developed

In addition, different accounting practices for the above scenarios grew over the years. With the new rules, FASB aims to cut that diversity by endorsing a commonly used “four-step decision sequence” devised by the board's defunct Derivatives Implementation Group, according to the new GAAP.

ABA and the Clearing House Association stated in a comment letter last year that the new guidance likely would lead to fewer instruments having to be “bifurcated”—or split off for accounting purposes—than currently is the case.

Edison Electric Institute, American Gas Association, the New York State Society of Certified Public Accountants, and accounting firms BDO USA, LLP and McGladrey LLP also support the new guidance, according to their comment letters sent to FASB last year.

The new ASU is effective for public companies in January 2017. Non-public entities have a year longer to apply the new rules.

To contact the reporter on this story: Steve Burkholder in Norwalk, Conn., at sburkholder@bna.com

To contact the editor responsible for this story: Steven Marcy at smarcy@bna.com

For More Information

The new ASU on certain contingent put and call options is available at http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176167971876.