Amendment to FASB Statement no. 107

FASB Makes Small Businesses Larger

I t aint over till its over. In the November issue, the Journal reported that a Financial Accounting Standards Board exposure draft would exempt businesses with less than $10 million in assets from Statement no. 107, Disclosures about Fair Value of Financial Instruments (“FASB Comes Through for Small Business,” page 4). At that time, it was expected this figure would not change during the exposure process. However, the FASB has voted unanimously to raise the small business exemption limit to $100 million.

“Along the way, some issues changed everyones minds,” John Hepp, a FASB project manager, told the Journal . According to Hepp, the FASB staff realized that a criterion for exemption based on the amount of financial instruments rather than on total assets would be more pertinent. Using total assets as the criterion works against entities such as grocers, whose asset size is determined by merchandise inventory, not financial instruments. A criterion based on financial instruments was considered but ultimately rejected because a total asset criterion is easier to apply and could accomplish much of the same effect. “We were trying to keep the exemption simpler to apply than the statement itself.”

Also, Hepp said a larger total asset criterion addresses some of the concerns of smaller banks and financial institutions. Many bankers had argued for a $150 million total asset cutoff, similar to that required by the Federal Deposit Insurance Corporation for certain disclosures. After considering the composition of assets at smaller financial institutions, the board decided that even entities approaching $100 million could be exempted.

John Hepp emphasized that the FASB was not attempting to draw a line rigidly defining what is or is not a small business. The $100 million figure may only be applicable in this particular instance.

Derivatives rule still in
Hepp emphasized that entities of any size holding derivatives (defined by Statement no. 119, Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments ) must still apply Statement no. 107. However, that definition includes loan commitments. This would have prevented even small banks and their clients from taking advantage of the exemption. Therefore, loan commitments are exempted from the definition of a derivative for the purpose of this amendment. This exclusion is consistent with the definition of a derivative in the FASB ED Accounting for Derivative and Similar Financial Instruments and for Hedging Activities .

The FASB has made it clear that the amendment is temporary and may be superseded as the board resolves fair value issues on other projects. To order the amendment, Statement no. 126, Exemption from Certain Required Disclosures about Financial Instruments from Certain Nonpublic Entities (product code no. S126; $11.50), call the FASB at 203-847-0700, ext. 555.

New Appointments at FAF

T he Financial Accounting Foundation, which oversees and appoints members of the Financial Accounting Standards Board and the Governmental Accounting Standards Board, announced FAF officers elections as well as new appointments for each boards advisory council. The advisory groups consult with the boards on agendas and other issues.

New officers. J. Michael Cook, chairman and chief executive officer of Deloitte & Touche, was reelected chairman of the board of trustees and president of the FAF for 1997. He has been a trustee since 1990. Thomas E. Jones, executive vice-president of Citicorp, was reelected vice-president. Philip N. Duff, chief financial officer of Morgan Stanley Group, was elected secretary and treasurer.

New FASAC members. Serving one-year terms on the Financial Accounting Standards Advisory Council are Lynn E. Browne, Federal Reserve Bank of Boston; John T. Ciesielski, Jr., R. G. Associates; Marc D. Hamburg, Berkshire Hathaway; Karen N. Horn, Bankers Trust Co.; L. White Matthews III, Union Pacific Corp.; Margaret D. Moore, PepsiCo; Mark W. Osterberg, Northwest Airlines; John M. Preis, YMCA of Greater New York; Ann N. Reese, ITT Corp.; and Robert Willens, Lehman Brothers.

New GASAC members. Serving one-year terms on the Governmental Accounting Standards Advisory Council are John Brosius Pennsylvania Employees Retirement System; Sam M. McCall, deputy state auditor general, Florida; Robert M. Reardon, Jr., State Farm Insurance Co.; and Robert V. Stout, city controller, Stamford, Connecticut.