EITF ABSTRACTS Issue No.

97-7 Title: Accounting for Hedges of the Foreign Currency Risk Inherent in an Availablefor-Sale Marketable Equity Security Dates Discussed: July 23-24, 1997; September 18, 1997 References: FASB Statement No. 12, Accounting for Certain Marketable Securities FASB Statement No. 52, Foreign Currency Translation FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities FASB Statement No. 130, Reporting Comprehensive Income FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities FASB Special Report, A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities: Questions and Answers Proposed FASB Statement, Accounting for Derivative and Similar Financial Instruments and for Hedging Activities, issued June 20, 1996 FASB Supplement, Derivatives and Hedging: Questions, Answers, and Illustrative Examples APB Opinion No. 2, Accounting for the Investment Credit, Addendum, Accounting Principles for Regulated Industries AICPA Issues Paper No. 86-2, Accounting for Options

ISSUE Statement 115 requires that changes in the fair value of available-for-sale (AFS) marketable equity securities be reported in a separate component of stockholders' equity until realized. For certain AFS marketable equity securities, such as those registered on a foreign stock exchange, the changes in fair value may include the effects of changes in the exchange rate between the foreign currency and the investors functional currency. The issue is whether foreign currency transaction gains or losses on a foreign currency forward exchange contract or foreign-currency-denominated liability may be reported in the Statement 115 separate component of stockholders equity to offset the portion of the change in fair value of an AFS marketable equity security attributable to foreign
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exchange rates if the forward exchange contract or the foreign-currency-denominated liability is designated as, and is effective as, a hedge of the AFS marketable equity security. EITF DISCUSSION The Task Force reached a consensus that foreign currency transaction gains or losses on a foreign currency forward exchange contract or foreign-currency-denominated liability should be reported in the Statement 115 separate component of stockholders' equity to offset the portion of the change in fair value of an AFS marketable equity security attributable to foreign currency exchange rates to the extent that it is designated as, and is effective as, a hedge of an inherent foreign currency exchange rate risk. [Note: See STATUS section.] The Task Force agreed that a foreign currency exchange rate risk is inherent in an AFS marketable equity security only if both of the following are met: 1. The AFS marketable equity security (or an instrument that represents an interest in an AFS marketable equity security, such as an American Depository Receipt) is not traded on an exchange (or other established marketplace) on which trades are denominated in the investor's functional currency. The dividends or other cash flows to be received by the owners of the AFS marketable equity security also are all denominated in the same foreign currency.

2.

[Note: This consensus has been partially nullified by Statement 133. See STATUS section.] STATUS In June 1997, the FASB issued Statement 130, which amends Statement 115 to require that unrealized gains and losses on available-for-sale securities be reported in other comprehensive income. The accumulated balance of those changes in value continues to be reported in a separate component of shareholders equity until realized.
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Statement 133 was issued in June 1998 and has been subsequently amended.

The

effective date for Statement 133, as amended, is for all fiscal quarters of all fiscal years beginning after June 15, 2000. Paragraph 38 of Statement 133 permits fair value hedging of the foreign currency risk in an AFS marketable equity security provided the criteria in paragraphs 20 and 21 and the following criteria are met: The equity security is not traded on an exchange (or other established marketplace) on which trades are denominated in the investor's functional currency. The dividends or other cash flows to the holder of the equity security are all denominated in the same foreign currency as the currency expected to be received upon the sale of the security.

Paragraph 38 prohibits a foreign-currency-denominated nonderivative financial instrument (including a liability) from hedging an AFS security. Paragraph 23 states that if a hedged item is otherwise measured at fair value with changes in fair value reported in other comprehensive income (OCI), the adjustment of the hedged items carrying amount discussed in paragraph 22 shall be recognized in earnings rather than in OCI in order to offset the gain or loss on the hedging instrument. Thus, only the changes in the AFS securitys fair value attributable to unhedged risks are reported in OCI. No further EITF discussion is planned.

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