FASB Set to Clarify Guidance on Embedded Credit Derivative Scope Exception in ASC 815

Published on: 22 Dec 2009

Today, the FASB met to deliberate comments received on its proposed ASU, Scope Exception Related to Embedded Credit Derivatives (formerly, proposed DIG Issue C22). The Board unanimously agreed to issue a final ASU early next year, which will be effective for the first reporting quarter beginning after June 15, 2010. See below for Deloitte observer notes from the meeting:

  • Final ASU will retain the limited bifurcation scope exception for the subordination related transfer of credit between tranche holders (consistent with the proposed ASU).
  • Final ASU will clarify (consistent with the proposed ASU) that an embedded credit derivative feature in a beneficial interest that exposes the holder of the beneficial interest to the possibility (however remote) of being required to make future payments are not clearly and closely related under paragraph 12(a) of Statement 133 (ASC 815-15-25-1(a)) even if related to subordination.
  • Bifurcation guidance (including how to identify the host contract) will be removed from the examples included in the proposed ASU. The Board will consider addressing this issue as part of the Accounting for Financial Instruments project.
  • Guidance in the proposed ASU about disclosures for credit derivatives and reference to Statement 140 (ASC 860) will be removed.
  • Final ASU will be issued early next year, with an effective date for the first reporting quarter beginning after June 15, 2010. Early application will be permitted for the first fiscal quarter beginning after issuance.
  • Fair Value Option (FVO) will be allowed at the beginning of the reporting period of adoption of the final ASU with contemporaneous documentation. The entity will not have to do a “seek and destroy mission” to determine if an embedded derivative exists under the new guidance. It can simply elect the FVO as long as it has documented as of the beginning of the reporting quarter, i.e., concurrent with adoption of the final ASU.
  • Additional disclosure upon adoption of the final ASU.

Additional information can be obtained from FASB’s Action Alerts, which are available on the FASB’s website

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