Alert: FASB Accounting Standards Update No. 2016-06 - Derivatives and Hedging

Category: US GAAP

Alert: FASB Accounting Standards Update No. 2016-06 - Derivatives and Hedging

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:

  1. Does the payoff adjust based on changes in an index?
  2. Is the payoff indexed to an underlying other than interest rates or credit risk?
  3. Does the debt involve a substantial premium or discount?
  4. Is the put or call option contingently exercisable?

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, click here.

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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Michelle Balmer

Michelle Balmer CPA, CA

Vice President, Assurance

Michelle Balmer, CPA, CA, is a Senior Assurance Services Partner with MNP. With 14 years of experience in public practice, Michelle helps a broad range of public and privately held companies in a variety of industries. She also works on special projects, including costing studies, benchmarking and best-practice studies, operational analyses, litigation support and due diligence.

As a key member of MNP's Assurance team, Michelle has played an instrumental role in assurance policy development, implementing accounting and assurance standards firm-wide and educating assurance practitioners regarding methodologies and new pronouncements. She also provides technical advice and consultation on accounting and assurance issues, as well as on rules of professional conduct issues, to all MNP practitioners.

Michelle was certified a Chartered Accountant (CA) after obtaining a Bachelor of Commerce degree from the University of Alberta. She has been actively involved with the Institute of Chartered Accountants of Alberta, including the Chartered Accountants School of Business, in an instructional and marketing capacity. An avid volunteer, she has assisted numerous groups such as the Easter Seals of Alberta, Paralympic Sports Association and Junior Achievement of Northern Alberta.