Foreign currency translation, EPS and ESOPs and alternative revenue programs of rate-regulated utilities.

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 1992 EITF consensuses adopted from March 19, 1992, through November 19, 1992 (see the sidebar on page 92). In addition, four of the consensuses are summarized: accounting and income tax issues in accounting for changes in functional currency when an economy ceases to be considered highly inflationary, earniugs-per-share treatment of tax benefits for dividends on unallocated common stock held by an employee stock ownership plan (ESOP) and accounting by rate-regulated utilities for the effects of certain alternative revenue programs. The summaries are presented in 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.O. Box 5116, Norwalk, Connecticut 06856- 5116. Phone: [phone].

ISSUE NO. 92-4

This issue affects companies having operations in countries no longer considered highly inflationary (for example, Mexico). (A country is considered highly inflationary for accounting purposes if it has cumulative inflation of approximately 100% or more over a three-year period. )

A foreign subsidiary in such a hyperinflationary country must use the parent's reporting currency--usually the U.S. dollar--as its functional currency. This EITF issue assumed the local currency would have been the functional currency if the country's economy had not been highly inflationary. When a country becomes highly inflationary, the accounting is as follows: Nonmonetary assets and liabilities (for example, fixed assets and the related accumulated depreciation) are remeasured from the local currency to the reporting currency (the new functional currency) at historical exchange rates. Monetary accounts are remeasured at current exchange rates, with related exchange gains and losses recorded in the income statement.

Change in Functional Currency When an Economy Ceases to Be

Considered Highly Inflationary, addresses the functional currency accounting change for such countries whose inflation levels have declined significantly in recent years.

Paragraph 46 of FASB Statement no. 52, Foreign Currency Translation, prescribes the required accounting when an entity's functional currency changes from the reporting currency to the local currency. The old local currency basis (that is, the basis as of the end of the fiscal year preceding the change) becomes the new functional currency amount as of the date of the change. The adjustment resulting from translating nonmonetary items denominated in the local currency at the rate in effect at the date of the change is classified as a cumulative translation adjustment component of stockholders' equity. Thus, under this method, the local currency basis remains the same, and the reporting currency basis changes as of the remeasurement date.

The EITF reached a consensus that paragraph 46 of Statement no. 52 does not apply when a foreign economy ceases to be highly inflationary. The consensus requires the entity to restate the functional currency accounting bases of nonmonetary items as follows: The old reporting currency basis is translated into the new functional (local) currency basis at the exchange rates in effect at the date of the change. In consolidation, that new functional currency basis is then translated back to the reporting currency at current exchange rates at the date of the change. In contrast to paragraph 46 of Statement no. 52, there is no translation adjustment, the local currency basis changes and the reporting currency basis as of the date of the change remains the same as before. The new functional currency will be used as the basis for subsequent translation adjustments.

The EITF abstract for this issue includes an example illustrating the application of this consensus.

ISSUE NO. 92-8

After the consensus in issue no. 92-4 has been implemented, the new functional currency accounting bases generally will exceed the local currency tax bases of nonmonetary items. A deferred tax liability must be recognized for this temporary difference under FASB Statement no. 109, Accounting for Income Taxes.

For entities that have adopted Statement no. 109, the EITF reached a consensus in issue no. 92-8, Accounting for the Income Tax Effects Under FASB Statement No. 109 of a Change in Functional Currency When an Economy Ceases to Be Considered Highly Inflationary, that the debit associated with this deferred tax liability should be reflected as an adjustment to the cumulative translation adjustment component of shareholders' equity.

If the change in functional currency is made before adoption of Statement no. 109, the deferred tax effect of this change should be included in the cumulative effect of adopting Statement no. 109.

ISSUE NO. 92-3

Issue no. 92-3, Earnings-per-Share Treatment of Tax Benefits for Dividends on Unallocated Stock Held by an Employee Stock Ownership Plan, potentially affects all public companies (and those nonpublic companies voluntarily displaying earnings-per-share information) that have ESOPs. It reexamines how certain tax benefits calculated under Statement no. 109 affect the earnings*per- share computation. This issue arose under FASB Statement no. 96, Accounting for Income Taxes, and was addressed but not resolved by Issue no. 90-4, Earningsper-Share Treatment of Tax Benefits for Dividends on Stock Held by an Employee Stock Ownership Plan. (See J of A, Jan. 91, page 95. )

Cash dividends paid on shares held by an ESOP are tax deductible by the sponsor. Paragraph 12 of American Institute of CPAs Statement of Position no. 76-3, Accounting Practices for Certain Employee Stock Ownership Plans, requires that such dividends be charged to retained earnings for financial reporting purposes. (A pending revision of this SOP may change the requirement. )

Paragraph 36(f) of Statement no. 109, however, requires the sponsor to report the tax benefits on dividends paid on unallocated shares as a direct credit to retained earnings if the original dividend payment had been debited to retained earnings.

The EITF reached a consensus that, under Statement no. 109, the tax benefits related to dividends paid on unallocated common stock held by an ESOP and charged to retained earnings should not be an adjustment to net income when computing earnings per share. This consensus also applies to convertible preferredstock ESOPs when computing earn ings per share under the if-converted method.

ISSUE NO. 92-7

Issue no. 92-7, Accounting by RateRegulated Utilities for the Effects of Certain Alternative Revenue Programs, is a specialized industry issue addressing the accounting for two major alternative revenue programs that allow a utility to adjust future rates based on past events.

Type A programs adjust billings for the effects of weather abnormalities, other broad external factors or for management's demand-control initiatives (for example, no-growth plans and similar conservation efforts). Type B programs allow for additional billings if the utility has achieved specified objectives (for example, reducing costs or demonstrably improving customer service).

Under either program, billing adjustments could result in refunds, not additional billings. Since refunds due have not been a reporting problem, this consensus is limited to additional revenue adjustments.

The EITF reached a consensus that once the specific events permitting additional billings under each program type have been completed, the regulated utility could recognize the additional revenues if all of the following conditions have been met:

1. The rate regulator has authorized the automatic adjustments under the program via a rate order (that is, there is up-front approval).

2. The amount of additional revenues for the period is objectively determinable and probable of recovery.

3. The utility will collect the additional revenues within 24 months following the end of the annual period in which they are recognized.

The full text of issue no. 92-7 discusses an exception to the application of this consensus if the utility is operating under an approved program not meeting the above conditions.

EITF Issue no. 92-4

Accounting problem: When a foreign economy ceases to be highly inflationary, should an entity's foreign subsidiary restate its functional currency (reporting currency) accounting bases of nonmonetary assets and liabilities to the local currency (the new functional currency) at current rates at the date of the change? Consensus: Yes.

EITF Issue no. 92-8

Accounting problem: Should the deferred taxes on the temporary differences arising from a change in functional currency when an economy ceases to be considered highly inflationary be reflected as an adjustment to the cumulative translation adjustment component of stockholders' equity? Consensus: Yes.

EITF Issue NO. 92-3

Accounting problem: (1) Under FASB Statement no. 109, Accounting for Income Taxes, should the tax benefits related to dividends paid on unallocated common stock held by an ESOP and charged to retained earnings be an adjustment to net income in computing earnings per share? (2) Is this consensus applicable to convertible preferred-stock ESOPs when computing earnings per share under the if-converted method?

Consensus: (1) No. (2) Yes.

EITF Issue no. 92-7

Accounting problem: Should a rate-regulated utility recognize revenue under an alternative revenue program?

Consensus: Yes, if specified conditions are met.