In a “firm offer” — sometimes called a “one-sided offer” — a company contacts a specific prospective purchaser and offers an item or items for sale at a specific price. It has long been a fundamental accounting practice that whatever liability may be generated by this promise or price guarantee is not recognized until the purchaser actually pays for one of the offered items or takes delivery.
Is that fundamental practice ripe for change? At last week’s session of the Financial Accounting Standards Board, members considered whether the liability (or asset) generated by such an offer should be recognized at the time of the offer itself — even before acceptance or payment by the other party. In discussions of the so-called Liability Extinguishment project, however, the board decided to defer the issue until next month. That’s when the Revenue Recognition project should be able to give general guidance from which FASB may “drill down,” says project manager Peter Proestakes.
“The basic thing we’re trying to do is help the board build this asset and liability [recognition] project,” says Proestakes. He notes that the board did manage to decide on the “no-brainer” question put before it last Wednesday when it agreed that simply making an offer, and guaranteeing supply and price, does not create an asset.
Another FASB action last Wednesday left many fund managers and corporate compensation specialists breathing a sigh of relief. The board essentially reaffirmed a 1994 position of the American Institute of Certified Public Accountants that stable-value investment products, which are available only in employer-sponsored defined contribution plans, should continue to be subject to contract value accounting.
Without that affirmation, Vanguard Group chairman and CEO John J. Brennan wrote to the board in January, “we feel there is a great risk that participants may no longer have access to an investment that has been a meaningful part of their defined contribution plan savings for over 15 years.” For its part, Vanguard had $19.1 billion of stable-value assets under management in more 1,000 company plans as of December 31.
According to Gina Mitchell, president of the Stable Value Investment Association, about $355 billion of employee money is currently invested in some kind of stable-value vehicle. Mitchell, whose association includes Vanguard, Fidelity and other fund managers, as well as financial institutions that provide insurance to the underlying portfolios, adds that she was pleased that stable-value investments will remain an “exception in the ‘fair value’ world.”
Looking ahead to this Wednesday, FASB will open its session by discussing whether to modify the existing disclosure requirements in FAS 109, Accounting for Income Taxes, to eliminate differences with the disclosures required under the comparable international standard, IAS 12, Income Taxes. U.S. companies such as Citigroup have worried about losing the APB 23 exemption from recording deferred U.S. taxes on indefinitely invested earnings of foreign subsidiaries.
“The deferred tax liability that would be recorded [under the proposed modifications] would provide little useful information to investors and may, in fact, be confusing and misleading,” Citigroup vice president and deputy controller Robert Traficanti wrote to FASB last September. The board expects to issue an exposure draft, which would include proposed amendments to FAS 109, in the third quarter.
Also on the agenda:
• The board will discuss proposed staff position FAS 150-e, which attempts to clarify the applicability of FAS 150 to warrants on redeemable shares.
• The board will also discuss clarifying the accounting guidance in paragraph 40(b) of FAS 140 regarding the notional amount of passive derivative instruments held by qualifying special-purpose entities.