Barter transactions and multiple-year retrospectively rated insurance contracts by nonreinsurance enterprises.

Statement on Auditing Standards no. 69, The Meaning of "Present Fairly in Conformity With Generally Accepted Accounting Principles" in the Independent Auditor's Report, identifies Financial Accounting Standards Board emerging issues task force (EITF) consensuses as sources of established generally accepted accounting principles.

This month's column lists new EITF consensuses adopted March 24, 1994 (see the sidebar on page 102). In addition, two earlier consensuses on accounting for barter transactions involving barter credits and multiple-year retrospectively rated insurance contracts by insurance and other enterprises are summarized. The summaries are presented in the order of importance from broad to narrow applicability.

EITF Abstracts, copyrighted by the FASB, is available in soft-cover and loose-leaf versions and may be obtained by contacting the FASB order department at 401 Merritt 7, P.0. Box 5116, Norwalk, Connecticut 06856-5116. Phone: [phone].

ISSUE NO. 93-11

EITF Issue no. 93-11, Accounting for Barter Transactions Involving Barter Credits, addresses a common accounting question affecting entities in many industries. Some transactions ("direct trades") swap one asset for another. Often, however, enterprises exchange goods or services (for example, inventory) for barter credits that allow one entity to receive goods or services in the future ("nondirect bartering"). Transactions involving barter credits often involve a third-party intermediary (for example, a barter company). Specific arrangements vary and can require cash payments in addition to barter credits or involve barter credits that expire after a stated period of time.

The issue is whether Accounting Principles Board Opinion no. 29, Accounting for Nonmonetary Transactions, applies to exchanges of nonmonetary assets for barter credits and, if so, the profit or loss amounts, if any, that should be recognized.

The EITF reached a consensus that Opinion no. 29 applied to such transactions. Paragraph 18 of Opinion no. 29 says: "...Accounting for nonmonetary transactions should be based on the fair values of the assets (or services) involved .... Thus, the cost of a nonmonetary asset acquired in exchange for another nonmonetary asset is the fair value of the asset surrendered to obtain it, and a gain or loss should be recognized on the exchange. The fair value of the asset received should be used to measure the cost if it is more clearly evident than the fair value of the asset surrendered."

The consensus sets forth the presumption that the fair value of a nonmonetary asset given up is more clearly evident than the fair value of the barter credits received and therefore should be the basis for recording a transaction. The fair value of the asset surrendered should not be higher than its carrying value unless persuasive evidence exists to the contrary. In addition, the consensus requires any impairment in the carrying amount of the asset surrendered to be recognized prior to the exchange if the asset's fair value is less than its carrying amount. The impairment loss should be recognized in the income statement and a new cost basis should be established for the asset as a result of the writedown.

The consensus also provides guidance on how to determine the nonmonetary asset's fair value. The EITF suggested that paragraph 13 of FASB Statement no. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings, might be useful in defining the nonmonetary asset's fair value and added that an estimate of the value of the barter credits to be received could not be used to determine fair value.

The EITF noted, however, that the presumption might be overcome (and the transaction recorded at the fair value of the asset received) if an entity could convert barter credits into cash in the near future (based on previous experience in doing so) or if independently quoted market prices existed for items to be received on the exchange of the barter credits.

An impairment loss on the barter credits should be recognized if it subsequently becomes apparent that (1) the fair value of any remaining barter credits is less than the carrying amount or (2) it is probable the enterprise will not use all of the remaining barter credits.

The consensus also provides guidance on exchanges involving the transfer of assets or contractual rights not recorded on the balance sheet, including operating leases. See EITF Abstracts for details.

ISSUE NO. 93-14

EITF Issue no. 93-14, Accounting for Multiple-year Retrospectively Rated Insurance Contracts by Insurance Enterprises and Other Enterprises, arose from Issue no. 93-6, Accounting for Multiple-Year Retrospectively Rated Contracts by Ceding and Assuming Enterprises, because similar contracts are used by companies other than property-casualty insurers and reinsurers. Manufacturers, retailers, service organizations and others often enter into such contracts with insurance companies to cover various types of risks, including product and environmental liability risks. Typical pro such contracts parallel those in the reinsurance industry. (See EITF Update, JofA, Nov.93, page 95, for details.) This EITF issue also covers "pooled risk" contracts, as discussed in paragraph 45 of Statement no. 5, Accounting for Contingencies, and reinsurance contract entered into by a captive insurer.

The issue is how to account for such insurance contracts.

The EITF reached a consensus that to qualify as insurance, an insurance contract must indemnify the insured as required by paragraph 44 of Statement no. 5. Without indemnification, no transfer of risk occurs and the premium paid, less the premium amount to be retained by the insurer, should be accounted for as a deposit by the insured.

The other consensuses reached on this issue parallel closely those reached in Issue no. 93-6. (See JofA, Nov.93, pages 95-98.)

The EITF noted the FASB staff views on Issue 93-6 that appear as topic no. D-35 in appendix D of EITF Abstracts also could be applied to this consensus.

OTHER MATTERS

The SEC observer discussed the following SEC staff positions at the January 20,1994, EITF meeting:

* Adjustments in assets and liabilities (for example, minority interests, certain life insurance policyholder liabilities, deferred acquisition costs and the present value of future profits) for unrealized holding gains and losses on related available-for-sale securities in the implementation of FASB Statement no. 115, Accounting for Certain Investments in Debt and Equity Securities.

* Effect on the calculation of earnings per share for the redemption or induced conversion of preferred stock.

See topics D-41 and D-42 of appendix D of EITF Abstracts for further details. There were no SEC staff announcements at the November 18, 1993, EITF meeting. (See JofA, Nov.93, page 99, for the first SEC staff announcements discussed at the September 23, 1993, meeting and published in topics D-36 through D-38 of appendix D.)

EXECUTIVE SUMMARY

* EITF Issue no. 93-11 Accounting problem: Does APB Opinion no. 29, Accounting for Non-monetary Transactions, apply to an exchange of nonmonetary assets for barter credits?

Consensus: Yes.

* EITF Issue no. 93-14 Accounting problem: Does the accounting for multiple-year retrospectively rated insurance contracts by insurance and other enterprises parallel that for similar contracts between property-casualty insurers and their reinsurers?

Consensus: Yes.

NEW EITF CONSENSUSES ADOPTED MARCH 24,1994

Listed below are the EITF issues for which consensuses have been reached since the January 20, 1994, meeting (see EITF Update, JofA, Jan.94, page 111):

Issue no.   Title                               Status
93-18       Recognition of Impairment for       Consensuses
            an Investment in a Collateralized   reached 3/24/94
            Mortgage Obligation Instrument
            or in a Mortgage-backed
            Interest-Only Certificate

The application of EITF consensuses (category of the GAAP hierarchy) effective after March 15, 1992, is mandatory under SAS no. 69. EITF consensuses issued before March 16, 1992, become effective in the hierarchy for initial application of an accounting principle after March 15, 1993. See JofA, May92, pages 103-110, for a complete discussion of the new GAAP hierarchy and EITF consensuses.

By LINDA A. VOLKERT, CPA, senior technical manager of the AICPA technical information division.