2009-01-28 Draft AcSB Commentary, Non-Bank Sponsored ABCP: Implementing the Restructuring Plan

The staff of the Accounting Standards Board issued a draft Financial Reporting Commentary which provides their views on how certain aspects of GAAP apply to restructuring of non-bank sponsored Asset-Backed Commercial Paper ("ABCP"). This newsletter summarizes the conclusions and contains a copy of the draft.

On January 28, 2009, the Accounting Standards Board ("AcSB") issued a draft Financial Reporting Commentary, Non-Bank Sponsored ABCP: Implementing the Restructuring Plan. This is a "fatal flaw review" draft with comments expected by January 29, 2009.

Conclusions in the draft include:

• Measurements of the existing ABCP must be reconsidered immediately before the restructuring. Accumulated cash in the conduit trusts payable on the exchange of notes is included in determining the fair value of the ABCP and is not reported as interest income.
• The exchange of ABCP for new notes should be measured at fair value, which could result in a recognition of a gain or loss.
• Investors must classify the new notes at the initial recognition as held-to-maturity, available-for-sale or held-for-trading.
• The new notes are not derivatives in their entirety, but include an embedded credit default swap ("CDS") that is not closely related to the host contract. Unless the new notes are classified as held-for-trading, Section 3855 will require this embedded derivative to be separated and accounted for at fair value with changes in fair value recognized in net income as they occur.
• It is necessary to consider whether other embedded derivatives exist in the notes.
• In practice, the overall effect of the requirements concerning embedded derivatives may cause the holders of some of the series of new notes to choose to account for the notes as held-for-trading.
• An investor should use reasonable judgment in determining whether the criteria in Section 3855 for classifying the new notes (or the host debt instrument when embedded derivatives are separated) as held-to-maturity.
• When the restructuring occurs after the end of the investor's most recent reporting period and before it completes its financial statements for that period, the investor must provide a description of the nature of the event and an estimate of its financial effect.

A copy of the draft Commentary is attached below.

AcSB Commentary — January 28, 2009 (65 KB) Download the full PDF Financial Reporting Release.