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On March 14, 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-06
Derivatives and Hedging (Topic 815) – Contingent Put and Call Options in Debt Instruments. The ASU seeks to eliminate the diversity in practice related to the assessment of the “clearly and closely related” criterion for put and call options embedded in debt instruments.
Under the existing US GAAP requirements, contingent put and call options in debt instruments can only meet the clearly and closely related criterion if they are indexed to interest rates and credit risk. Entities struggled with the interpretation of this requirement and, as such, the Derivatives Implementation Group (DIG) issued implementation guidance. The DIG implementation guidance describes a four-step decision process applicable to all put and call options, as follows:
Following the release of the implementation guidance, diversity in practice arose as entities were unclear on whether the four-step decision process was the only required analysis or whether it was to be completed in conjunction with an analysis based on the US GAAP requirement. The ASU clarifies that the assessment of the clearly and closely related criterion for embedded put and call options may be made solely in accordance with the four-step decision guidance.
The amendments are effective for fiscal years beginning after December 15, 2016, including interim periods therein, for public business entities. All other entities are required to apply the amendments for fiscal years beginning after December 15, 2017 and interim periods within fiscal years beginning after December 15, 2018. Early application is permitted for all entities. The modified retrospective method is used to apply the amendments to existing debt instruments as of the beginning of the fiscal year for which the amendments are effective.
To access the full script of ASU No. 2016-06,
For more information on the financial reporting library, contact a local MNP Assurance Professional, or Jody MacKenzie, Director, Assurance Professional Standards.
This communication contains a general overview of the topic and is current as of March 14, 2016. The application of the principles addressed will depend upon the particular facts and circumstances of each individual case. Accordingly, this publication is not a substitute for professional advice and we recommend that any decisions you take about the application or not of any of the information presented be made in consultation with a qualified professional, who can address any variance that may be required to reflect your circumstances. Please contact your local MNP representative for customized assistance with the application of this material. MNP LLP accepts no responsibility or liability for any loss related to any person's use of or reliance upon this material. © MNP LLP 2016. All rights reserved.
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