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Enron Mail |
fyi
---------------------- Forwarded by Ryan Siurek/Corp/Enron on 07/26/2000=20 12:22 PM --------------------------- Kimberly Scardino 07/25/2000 08:35 PM To: Ryan Siurek/Corp/Enron@ENRON cc: =20 Subject: 00-19 I assume you have the huge EITF write-up (53 paragraphs of background). He= re=20 is AA's (should we set up a time to talk about game plan on this - I know y= ou=20 guys had a flurry of activity last quarter): AA - Arthur Andersen Hot Topics EITF Action on Derivatives on a Company's Own Shares = =20 = =20 = =20 =20 EITF Action on Derivatives on a Company's Own Shares July 21, 2000 At its July 19, 2000 meeting, the Emerging Issues Task Force (EITF)=20 tentatively resolved how certain settlement features affect accounting for= =20 equity derivative contracts entered into by a company on its own stock.=20 Specifically, the EITF sketched out a model governing how such features=20 affect whether the contract should be treated as (a) an equity instrument a= nd=20 reported in stockholders=01, equity or (b) an asset or liability at fair va= lue=20 with changes in fair value reported currently in earnings. EITF Issue No. 00-19, "Determination of Whether Share Settlement is Within= =20 the Control of the Issuer for Purposes of Applying Issue No. 96-13 ," was= =20 taken up to address implementation of the EITF's March 16, 2000, consensus = on=20 EITF Issue No. 00-7, "Application of EITF Issue No. 96-13 to Equity=20 Derivative Transactions That Contain Certain Provisions That Require Cash= =20 Settlement If Certain Events Occur ." The final consensus in Issue 00-7=20 generally stated that equity derivative contracts that contained provisions= =20 that implicitly or explicitly required net cash settlement outside of the= =20 control of the company must be treated as assets and liabilities and carrie= d=20 at fair value rather than equity instruments carried at original cost and= =20 reported as part of permanent equity as provided for in EITF Issue No. 96-1= 3,=20 "Accounting for Derivative Financial Instruments Indexed to, and Potentiall= y=20 Settled in, a Company's Own Stock ." The Task Force also tentatively provided an extended transition period for= =20 existing contracts and contracts entered into before a final consensus is= =20 reached. The goal is to reach a final consensus at the September 2000 EITF= =20 meeting. The Model=20 The model=01,s governing concept is that, for a contract to be accounted as= =20 permanent equity, the contract's provisions should put the company=01,s=20 counterparty in no better position than the company=01,s common shareholder= s.=20 Specifically, the EITF tentatively concluded that contracts in a company=01= ,s=20 own stock, such as written puts or forward purchase contracts, that come=20 under the scope of Issue 96-13 and have net share settlement provisions tha= t=20 keep a contract from being classified as an asset or liability must have th= e=20 following characteristics =01* otherwise the contract must be treated as an= =20 asset or liability at fair value with changes in fair value reported=20 currently in earnings. The contract must permit the company to settle net in shares, at its option= ,=20 in either registered or unregistered shares. (It was determined that the=20 ability to deliver registered shares was outside of the control of a compan= y.) The contract must contain an explicit cap on the number of shares to be=20 delivered in a net share settlement. This cap must exist even if the contra= ct=20 terminates when the stock price reaches a stated price trigger. (The need f= or=20 a cap was determined to be critical in determining whether a company had=20 sufficient authorized and unissued shares to settle the contract.) At contract inception and on an ongoing basis, the company must have=20 sufficient authorized but unissued shares available to settle the contract= =20 considering all other claims on authorized shares for stock options,=20 convertibles, and other transactions that may require the issuance of stock= .=20 (This requirement was deemed critical as the ability to have a request for= =20 additional authorized shares approved by the shareholders was deemed outsid= e=20 of the control of the company. In this context, "the company" is defined as= =20 the company's management rather than its management and shareholders.) There is no requirement in the contract to post collateral at any point in= =20 the contract or for any reason. There are no required cash payments to the counterparty (true-ups) if the n= et=20 shares initially delivered are insufficient to provide the counterparty wit= h=20 full satisfaction of the amount due. However, true-ups may be included in t= he=20 contract if the company only, not the counterparty, can choose whether to= =20 satisfy the true-up in shares or cash and the true-up is subject to the=20 explicit cap discussed in item 2. There is no economic penalty in the contract for net share settlement that= =20 would economically compel the company to settle in net cash. (The right to= =20 increase the number of shares delivered based on the fair value differentia= l=20 between registered shares and unregistered shares was not deemed to be a=20 penalty.) There are no provisions in the contract that would indicate the counterpart= y=20 had creditor rights, or would otherwise contravene the objective of this=20 model that the counterparty=01,s rights would rank no higher than those of = a=20 common shareholder. (Subject to future EITF discussions, it may be possible= =20 to meet this criterion by having a legal letter addressing the issue or a= =20 specific statement of this concept in the contract.) Related Issues There was also discussion of the provisions relating to termination and=20 settlement in the event of a merger or change in control. There was general= =20 support for a position that, as long as the counterparty received the same= =20 choice of compensation as other shareholders (for example, stock for stock,= =20 stock and cash for stock, cash for stock), the fact that the counterparty= =20 might receive cash in such circumstances would not preclude equity treatmen= t=20 for the contract. Similarly, in the event of nationalization or liquidation, a net cash=20 settlement of the same type afforded a common shareholder would not preclud= e=20 equity treatment for the contract. In addition, counterparty rights that did not exceed rights of common=20 shareholders should be acceptable, for example, rights to sue for damages i= n=20 the event of misrepresentations or a breach of warrranties or if a company= =20 simply refused to perform under the contract, as long as a common sharehold= er=20 would also have those rights. With respect to events that would cause a contract that was compliant with= =20 the model at inception to later become noncompliant (for example, because a= n=20 acquisition consumed enough authorized shares that otherwise were needed to= =20 satisfy the contract), the EITF concluded that, at the time the contract is= =20 no longer compliant, the fair value of the contract should be transferred= =20 from equity to an asset or liability at fair value with prospective changes= =20 in fair value reported currently in earnings. There would be no immediate= =20 earnings effect at the time of this transfer. Further, if, at a later date, sufficient shares were authorized to again=20 satisfy the contract, the carrying amount of the contract (that is, its fai= r=20 value) would be transferred back to equity and the contract treated as equi= ty=20 prospectively to the extent the contract continues to comply with the model= .=20 (The company would not be permitted to reverse the gains and losses in fair= =20 value recognized in earnings during the period the contract was treated as = an=20 asset or liability.) Transition The EITF tentatively concluded that all contracts entered into after the da= te=20 of a final consensus will have to comply with the model at contract incepti= on=20 to achieve equity treatment. (The goal is to reach a final consensus at the= =20 September 2000 EITF meeting.) For contracts entered into before the date of= a=20 final consensus, a company will have until June 30, 2001, to modify the=20 contract to comply with the final consensus. For example, if a company entered into a contract before the date of the=20 final consensus, the company will have until June 30, 2001, to obtain any= =20 shareholder authorization of shares needed to satisfy the criteria or to=20 modify their contract for the other criteria or any EITF changes to the=20 tentative model. Since a variety of viewpoints are discussed at Emerging Issues Task Force= =20 (EITF) meetings and it is often difficult to characterize the conclusions,= =20 the following minutes may differ in some respects from the final minutes=20 available from the Financial Accounting Standards Board (FASB).
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