FEI CCR Balance Sheet Offsetting Comment Letter - Financial ...

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Specific Industry Guidance under US GAAP Amendments to ASC Subtopic 910-405 – Contractors-Construction We noted the Proposed ASU would eliminate the construction contractor industry guidance that allowed offsetting of customer advances against work in process on cost-plus contracts. However, we also noted the Proposed ASU does not include conforming amendments to the Federal Government contractor industry guidance that permits offsetting customer advances against work in process (ASC paragraph 912-405-45-6). We assume the Proposed ASU did not include these conforming amendments because the Federal Government takes title to and has an unconditional obligation to pay its contractors for work in process. We request the Boards clarify why the construction contractor industry guidance on how customer advances should be presented on the balance sheet would be eliminated while the Federal Government contractor industry guidance would be retained. Furthermore, the Proposed ASU does not eliminate the Revenue Recognition (ASU Topic 605) guidance on how customer advances on construction and production-type contracts should be presented on the balance sheet (ASC paragraphs 605-35-45-3 to 5). We assume the Proposed ASU does not eliminate this guidance because Revenue Recognition (Topic 605) is expected to be superseded in its entirety by the proposed Accounting Standards Update (Topic 605), Revenue Recognition, (“Proposed Revenue ASU”). Our interpretation of the Proposed Revenue ASU is that customer advances are required to be offset against unbilled receivables. However, offsetting customer advances against work in process would not be permitted. We believe construction contracts are intended to qualify for continuous transfer of control under the Proposed Revenue ASU and depending on the method chosen for measuring progress and recognizing revenue, the accumulated cost incurred to date would either be captured in unbilled receivables (e.g. cost-to-cost approach) or work in progress (e.g. units of delivery). Therefore, customer advances would be recorded net against unbilled receivables if the cost to cost method is chosen and gross as a liability under a unit of delivery approach. It is unclear as to why there would be differing balance sheet presentation based on the method selected to measure progress. We do not agree with what appears to be the Board’s decision to prohibit offsetting customer advances against work in process when contracts qualify for continuous transfer of control. We believe offsetting customer advances against both unbilled receivables and work in process should be allowed for contracts that meet the continuous transfer criteria. Question 2 — Unconditional Right of Offset Must Be Enforceable in All Circumstances Under the proposals, eligible assets and eligible liabilities must be offset if, and only if, they are subject to an unconditional and legally enforceable right of setoff. The proposals specify that an unconditional and legally enforceable right of setoff is enforceable in all circumstances (that is, it is enforceable in the normal course of business and on the default, insolvency, or bankruptcy of a counterparty) and its exercisability is not contingent on a future event. Do you agree with this proposed requirement? If not, why? What would you propose instead and why? We have concerns that the requirement of unconditional right of offset is too strict. We understand that the Boards did not want to reflect the offset of only certain risks on the balance sheet, such as credit risk. However, the offset of financial assets and liabilities under conditional Page | 6
netting agreements does not make a significant change to the information gathered from the face of the balance sheet. If there is an intention to settle net, contracts with the same counterparty will be offset at termination, maturity, and/or bankruptcy of the counterparty or the reporting entity. This was proven to be effective, even in the recent financial crisis. <strong>Financial</strong> assets and liabilities under master netting agreements, regardless of their unconditional or conditional rights, would be offset if the counterparty fell into bankruptcy. In some jurisdictions, the gross assets would not be available to other creditors, and therefore, reflecting gross assets and liabilities on the face of the balance sheet would not give faithful and relevant information to a user as those assets and liabilities are inextricably linked. The analysis of gross risks inherent in each of the financial instruments subject to offset can only be derived from disclosure in the notes to the financial statements. We therefore believe that a legally enforceable right of offset regardless of conditionality is sufficient for netting of financial instruments on the face of the balance sheet. Question 3 — Multilateral Setoff Arrangements The proposals would require offsetting for both bilateral and multilateral setoff arrangements that meet the offsetting criteria. Do you agree that the offsetting criteria should be applied to both bilateral and multilateral setoff arrangements? If not, why? What would you propose instead, and why? What are some of the common situations in which a multilateral right of setoff may be present? We agree that offsetting shall be permitted between multiple parties if the offsetting criteria are met. Multilateral arrangements exist in certain master netting agreements between the counterparty and various affiliates of the reporting entity. Currently, these agreements are conditional in nature, as netting is subject to default of one of the counterparties of the agreement, and would not meet the criteria under the Exposure Drafts. As mentioned in our response under Question 2, we believe that if an unconditional right of offset is not required, netting under multilateral arrangements would be more prevalent under an accounting model based on current US GAAP. Question 4 — Disclosures Do you agree with the proposed disclosure requirements in paragraphs 11–15? If not, why? How would you propose to amend those requirements and why? We agree that disclosures relating to gross amounts of financial assets and financial liabilities provide valuable information to users of financial statements to understand the inherent risks by product type. Currently, these disclosures are only required for derivative assets and liabilities under FASB ASC Topic 815, Derivatives and Hedging, but are not required for other product types or in any disclosures under IFRS. We believe that disclosures of the gross and net balances of eligible financial assets and liabilities should be consistent across all types of financial instruments, but not in the detail as prescribed in the Exposure Drafts. For the detail disclosures as proposed, the benefits for the users of financial statements do not outweigh the efforts and Page | 7
Page 1 and 2: April 28, 2011 Financial Accounting
Page 3 and 4: Appendix Question 1 — Offsetting
Page 5: contract receives semi-annually, wo
Page 9 and 10: significant portfolios of derivativ

FEI CCR Balance Sheet Offsetting Comment Letter - Financial ...

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