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FASB No. 138 ... FASB No. 139 ... Code and Bylaw Revisions ... Council Resolutions

Space considerations prevent publishing here the appendices to FASB Statement nos. 138 and 139. Since the appendices often are important to understanding FASB statements, readers are advised to obtain complete copies. For additional copies of FASB statements and/or information on applicable prices and discount rates, contact the FASB order department, 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116. Telephone: [phone].

Statement of Financial Accounting Standards No. 138--Accounting for Certain Derivative Instruments and Certain Hedging Activities

(An amendment of FASB Statement No. 133)

Introduction/1-3

Standards of Financial Accounting and Reporting:

Amendments to Statement 133/4 Effective Date and Transition/5-6

Appendix A: Background Information and Basis for Conclusions/7-39

Appendix B: Amended Paragraphs of Statement 133 Marked to Show

Changes Made by This Statement/40

INTRODUCTION

1. FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. This Statement addresses a limited number of issues causing implementation difficulties for numerous entities that apply Statement 133.

2. This Statement amends the accounting and reporting standards of Statement 133 for certain derivative instruments and certain hedging activities as indicated below.

a. The normal purchases and normal sales exception in paragraph 10(b) may be applied to contracts that implicitly or explicitly permit net settlement, as discussed in paragraphs 9(a) and 57(c)(1), and contracts that have a market mechanism to facilitate net settlement, as discussed in paragraphs 9(b) and 57(c)(2).

b. The specific risks that can be identified as the hedged risk are redefined so that in a hedge of interest rate risk, the risk of changes in the benchmark interest rate(1) would be the hedged risk.

c. Recognized foreign-currency-denominated assets and liabilities for which a foreign currency transaction gain or loss is recognized in earnings under the provisions of paragraph 15 of FASB Statement No. 52, Foreign Currency Translation, may be the hedged item in fair value hedges or cash flow hedges.

d. Certain intercompany derivatives may be designated as the hedging instruments in cash flow hedges of foreign currency risk in the consolidated financial statements if those intercompany derivatives are offset by unrelated third-party contracts on a net basis.

3. This Statement also amends Statement 133 for decisions made by the Board relating to the Derivatives Implementation Group (DIG) process. Certain decisions arising from the DIG process that required specific amendments to Statement 133 are incorporated in this Statement.

STANDARDS OF FINANCIAL ACCOUNTING AND REPORTING

Amendments to Statement 133

4. Statement 133 is amended as follows:

Amendment Related to Normal Purchases and Normal Sales

a. Paragraph 10(b) is replaced by the following:

   Normal purchases and normal sales. Normal purchases and normal sales are
   contracts that provide for the purchase or sale of something other than a
   financial instrument or derivative instrument that will be delivered in
   quantities expected to be used or sold by the reporting entity over a
   reasonable period in the normal course of business. However, contracts that
   have a price based on an underlying that is not clearly and closely related
   to the asset being sold or purchased (such as a price in a contract for the
   sale of a grain commodity based in part on changes in the S&P index) or
   that are denominated in a foreign currency that meets neither of the
   criteria in paragraphs 15(a) and 15(b) shall not be considered normal
   purchases and normal sales. Contracts that contain net settlement
   provisions as described in paragraphs 9(a) and 9(b) may qualify for the
   normal purchases and normal sales exception if it is probable at inception
   and throughout the term of the individual contract that the contract will
   not settle net and will result in physical delivery. Net settlement (as
   described in paragraphs 9(a) and 9(b)) of contracts in a group of contracts
   similarly designated as normal purchases and normal sales would call into
   question the classification of all such contracts as normal purchases or
   normal sales. Contracts that require cash settlements of gains or losses or
   are otherwise settled net on a periodic basis, including individual
   contracts that are part of a series of sequential contracts intended to
   accomplish ultimate acquisition or sale of a commodity, do not qualify for
   this exception. For contracts that qualify for the normal purchases and
   normal sales exception, the entity shall document the basis for concluding
   that it is probable that the contract will result in physical delivery. The
   documentation requirements can be applied either to groups of similarly
   designated contracts or to each individual contract.

Amendments to Redefine Interest Rate Risk

b. Paragraph 21 is amended as follows:

(1) The first sentence of subparagraph (d) is replaced by the following:

   If the hedged item is all or a portion of a debt security (or a portfolio
   of similar debt securities) that is classified as held-to-maturity in
   accordance with FASB Statement No. 115, Accounting for Certain Investments
   in Debt and Equity Securities, the designated risk being hedged is the risk
   of changes in its fair value attributable to credit risk, foreign exchange
   risk, or both. If the hedged item is an option component of a
   held-to-maturity security that permits its prepayment, the designated risk
   being hedged is the risk of changes in the entire fair value of that option
   component.

(2) In the first parenthetical sentence of subparagraph (d), changes in market interest rates or foreign exchange rates is replaced by interest rate risk.

(3) In subparagraph (f)(2), market interest rates is replaced by the designated benchmark interest rate (referred to as interest rate risk).

(4) In subparagraph (f)(3), (rear to paragraphs 37 and 38) is replaced by (referred to as foreign exchange risk) (rear to paragraphs 37, 37A, and 38).

(5) In subparagraph (f)(4), both is inserted between to and changes and the obligor's creditworthiness is replaced by the obligor's creditworthiness and changes in the spread over the benchmark interest rate with respect to the hedged item's credit sector at inception of the hedge (referred to as credit risk).

(6) In the second sentence of subparagraph (f), market is deleted.

(7) In subparagraph (f), the following sentences and footnote are added after the second sentence:

   The benchmark interest rate being hedged in a hedge of interest rate risk
   must be specifically identified as part of the designation and
   documentation at the inception of the hedging relationship. Ordinarily, an
   entity should designate the same benchmark interest rate as the risk being
   hedged for similar hedges, consistent with paragraph 62; the use of
   different benchmark interest rates for similar hedges should be rare and
   must be justified. In calculating the change in the hedged item's fair
   value attributable to changes in the benchmark interest rate, the estimated
   cash flows used in calculating fair value must be based on all of the
   contractual cash flows of the entire hedged item. Excluding some of the
   hedged item's contractual cash flows (for example, the portion of the
   interest coupon in excess of the benchmark interest rate) from the
   calculation is not permitted.(*)

(8) In the fourth sentence of subparagraph (f), overall is inserted between exposure to changes in the and fair value of that.

(9) In the last sentence of subparagraph (f), market is deleted.

c. Paragraph 29 is amended as follows:

(1) In the first sentence of subparagraph (e), default or changes in the obligor's creditworthiness is replaced by credit risk, foreign exchange risk, or both.

(2) In the last sentence of subparagraph (e), changes in market interest rates is replaced by interest rate risk.

(3) In the first sentence of subparagraph (h), (or the interest payments on that financial asset or liability) is added after sale of a financial asset or liability.

(4) In subparagraph (h)(1), the risk of changes in the cash flows of the entire asset or liability is replaced by the risk of overall changes in the hedged cash flows related to the asset or liability.

(5) In subparagraph (h)(2), market interest rates is replaced by the designated benchmark interest rate (referred to as interest rate risk).

(6) In subparagraph (h)(3), (refer to paragraph 40) is replaced by (referred to as foreign exchange risk) (refer to paragraphs 40, 40A, 40B, and 40C).

(7) In subparagraph (h)(4), default or changes in the obligor's creditworthiness is replaced by default, changes in the obligor's creditworthiness, and changes in the spread over the benchmark interest rate with respect to the hedged item's credit sector at inception of the hedge (referred to as credit risk).

(8) In subparagraph (h), the following sentences are added after the second sentence:

   The benchmark interest rate being hedged in a hedge of interest rate risk
   must be specifically identified as part of the designation and
   documentation at the inception of the hedging relationship. Ordinarily, an
   entity should designate the same benchmark interest rate as the risk being
   hedged for similar hedges, consistent with paragraph 62; the use of
   different benchmark interest rates for similar hedges should be rare and
   must be justified. In a cash flow hedge of a variable-rate financial asset
   or liability, either existing or forecasted, the designated risk being
   hedged cannot be the risk of changes in its cash flows attributable to
   changes in the specifically identified benchmark interest rate if the cash
   flows of the hedged transaction are explicitly based on a different index,
   for example, based on a specific bank's prime rate, which cannot qualify as
   the benchmark rate. However, the risk designated as being hedged could
   potentially be the risk of overall changes in the hedged cash flows related
   to the asset or liability, provided that the other criteria for a cash flow
   hedge have been met.

d. Paragraph 54 is amended as follows:

(1) In the second sentence, market interest rates, changes in foreign currency exchange rates, is replaced by the designated benchmark interest rate.

(2) In the third and fourth (parenthetical) sentences, market is deleted.

(3) In the penultimate sentence of footnote 14, market interest rates is replaced by interest rate risk.

e. In the first sentence of paragraph 90, market is deleted.

Amendments Related to Hedging Recognized Foreign-Currency-Denominated Assets and Liabilities

f. In paragraph 21(c)(1), (for example, if foreign exchange risk is hedged, a foreign-currency-denominated asset for which a foreign currency transaction gain or loss is recognized in earnings) is deleted.

g. Paragraph 29(d) is amended as follows:

(1) In the first sentence, (for example, if foreign exchange risk is hedged, the forecasted acquisition of a foreign-currency-denominated asset for which a foreign currency transaction gain or loss will be recognized in earnings) is deleted.

(2) The second sentence is deleted.

h. In paragraph 29(g)(2), (reflecting its actual location if a physical asset) is replaced by reflecting its actual location if a physical asset (regardless of whether that price and the related cash flows are stated in the entity's functional currency or a foreign currency).

i. The following subparagraph is added after subparagraph (c) of paragraph 30:

   d. In a cash flow hedge of the variability of the
   functional-currency-equivalent cash flows for a recognized
   foreign-currency-denominated asset or liability that is remeasured at spot
   exchange rates under paragraph 15 of Statement 52, an amount that will
   offset the related transaction gain or loss arising from the remeasurement
   and adjust earnings for the cost to the purchaser (income to the seller) of
   the hedging instrument shall be reclassified each period from other
   comprehensive income to earnings.

j. Paragraph 36 is amended as follows:

(1) In the first sentence, Consistent with the functional currency concept in Statement 52 is replaced by If the hedged item is denominated in a foreign currency.

(2) In subparagraph (a), an available-for-sale security is replaced by a recognized asset or liability (including an available-for-sale security).

(3) Subparagraph (b) is replaced by the following:

   A cash flow hedge of a forecasted transaction, an unrecognized firm
   commitment, the forecasted functional-currency-equivalent cash flows
   associated with a recognized asset or liability, or a forecasted
   intercompany transaction.

(4) The first two sentences following subparagraph (c) are replaced by the following:

   The recognition in earnings of the foreign currency transaction gain or
   loss on a foreign-currency-denominated asset or liability based on changes
   in the foreign currency spot rate is not considered to be the remeasurement
   of that asset or liability with changes in fair value attributable to
   foreign exchange risk recognized in earnings, which is discussed in the
   criteria in paragraphs 21(c)(1) and 29(d). Thus, those criteria are not
   impediments to either a foreign currency fair value or cash flow hedge of
   such a foreign-currency-denominated asset or liability or a foreign
   currency cash flow hedge of the forecasted acquisition or incurrence of a
   foreign-currency-denominated asset or liability whose carrying amount will
   be remeasured at spot exchange rates under paragraph 15 of Statement 52.

k. The following paragraph is added after paragraph 36:

   36A. The provisions in paragraph 36 that permit a recognized
   foreign-currency-denominated asset or liability to be the hedged item in a
   fair value or cash flow hedge of foreign currency exposure also pertain to
   a recognized foreign-currency-denominated receivable or payable that
   results from a hedged forecasted foreign-currency-denominated sale or
   purchase on credit. An entity may choose to designate a single cash flow
   hedge that encompasses the variability of functional currency cash flows
   attributable to foreign exchange risk related to the settlement of the
   foreign-currency-denominated receivable or payable resulting from a
   forecasted sale or purchase on credit. Alternatively, an entity may choose
   to designate a cash flow hedge of the variability of functional currency
   cash flows attributable to foreign exchange risk related to a forecasted
   foreign-currency-denominated sale or purchase on credit and then separately
   designate a foreign currency fair value hedge of the resulting recognized
   foreign-currency-denominated receivable or payable. In that case, the cash
   flow hedge would terminate (be dedesignated) when the hedged sale or
   purchase occurs and the foreign-currency-denominated receivable or payable
   is recognized. The use of the same foreign currency derivative instrument
   for both the cash flow hedge and the fair value hedge is not prohibited
   though some ineffectiveness may result.

I. The following paragraph is added after paragraph 37:

   37A. Recognized asset or liability. A nonderivative financial instrument
   shall not be designated as the hedging instrument in a fair value hedge of
   the foreign currency exposure of a recognized asset or liability. A
   derivative instrument can be designated as hedging the changes in the fair
   value of a recognized asset or liability (or a specific portion thereof)
   for which a foreign currency transaction gain or loss is recognized in
   earnings under the provisions of paragraph 15 of Statement 52. All
   recognized foreign-currency-denominated assets or liabilities for which a
   foreign currency transaction gain or loss is recorded in earnings may
   qualify for the accounting specified in paragraphs 22-27 if all the fair
   value hedge criteria in paragraphs 20 and 21 and the conditions in
   paragraphs 40(a) and 40(b) are met.

m. Paragraph 40 is amended as follows:

(1) The second sentence is replaced by the following:

   A derivative instrument designated as hedging the foreign currency exposure
   to variability in the functional-currency-equivalent cash flows associated
   with a forecasted transaction (for example, a forecasted export sale to an
   unafffiliated entity with the price to be denominated in a foreign
   currency), a recognized asset or liability, an unrecognized firm
   commitment, or a forecasted intercompany transaction (for example, a
   forecasted sale to a foreign subsidiary or a, forecasted royalty from a
   foreign subsidiary) qualifies for hedge accounting if all the following
   criteria are met:

(2) The following subparagraph is added:

   e. If the hedged item is a recognized foreign-currency-denominated asset or
   liability, all the variability in the hedged item's
   functional-currency-equivalent cash flows must be eliminated by the effect
   of the hedge. (For example, a Cash flow hedge cannot be used with a
   variable-rate foreign-currency-denominated asset or liability and a
   derivative based solely on changes in exchange rates because the derivative
   does not eliminate all the variability in the functional currency cash
   flows.)

Amendments Related to Intercompany Derivatives

n. In the last sentence of paragraph 36, in a fair value hedge or in a cash flow hedge of a recognized foreign-currency-denominated asset or liability or in a net investment hedge is added after can be a hedging instrument.

o. The following paragraphs are added after paragraph 40:

   40A. Internal derivative. A foreign currency derivative contract that has
   been entered into with another member of a consolidated group (such as a
   treasury center) can be a hedging instrument in a foreign currency cash
   flow hedge of a forecasted borrowing, purchase, or sale or an unrecognized
   firm commitment in the consolidated financial statements only if the
   following two conditions are satisfied. (That foreign currency derivative
   instrument is hereafter in this section referred to as an internal
   derivative.)

   a. From the perspective of the member of the consolidated group using the
   derivative as a hedging instrument (hereafter in this section referred to
   as the hedging affiliate), the criteria for foreign currency cash flow
   hedge accounting in paragraph 40 must be satisfied.

   b. The member of the consolidated group not using the derivative as a
   hedging instrument (hereafter in this section referred to as the issuing
   affiliate) must either (1) enter into a derivative contract with an
   unrelated third party to offset the exposure that results from that
   internal derivative or (2) if the conditions in paragraph 40B are met,
   enter into derivative contracts with unrelated third parties that would
   offset, on a net basis for each foreign currency, the foreign exchange risk
   arising from multiple internal derivative contracts.

40B. Offsetting net exposures. If an issuing affiliate chooses to offset exposure arising from multiple internal derivative contracts on an aggregate or net basis, the derivatives issued to hedging affiliates may qualify as cash flow hedges in the consolidated financial statements only if all of the following conditions are satisfied:

a. The issuing affiliate enters into a derivative contract with an unrelated third party to offset, on a net basis for each foreign currency, the foreign exchange risk arising from multiple internal derivative contracts, and the derivative contract with the unrelated third party generates equal or closely approximating gains and losses when compared with the aggregate or net losses and gains generated by the derivative contracts issued to affiliates.

b. Internal derivatives that are not designated as hedging instruments are excluded from the determination of the foreign currency exposure on a net basis that is offset by the third-party derivative. In addition, nonderivative contracts may not be used as hedging instruments to offset exposures arising from internal derivative contracts.

c. Foreign currency exposure that is offset by a single net third-party contract arises from internal derivative contracts that mature within the same 31-day period and that involve the same currency exposure as the net third-party derivative. The offsetting net third-party derivative related to that group of contracts must offset the aggregate or net exposure to that currency, must mature within the same 31-day period, and must be entered into within 3 business days after the designation of the internal derivatives as hedging instruments.

d. The issuing affiliate tracks the exposure that it acquires from each hedging affiliate and maintains documentation supporting linkage of each internal derivative contract and the offsetting aggregate or net derivative contract with an unrelated third party.

e. The issuing affiliate does not alter or terminate the offsetting derivative with an unrelated third party unless the hedging affiliate initiates that action. If the issuing affiliate does alter or terminate any offsetting third-party derivative (which should be rare), the hedging affiliate must prospectively cease hedge accounting for the internal derivatives that are offset by that third-party derivative.

40C. A member of a consolidated group is not permitted to offset exposures arising from multiple internal derivative contracts on a net basis for foreign currency cash flow exposures related to recognized foreign-currency-denominated assets or liabilities. That prohibition includes situations in which a recognized foreign-currency-denominated asset or liability in a fair value hedge or cash flow hedge results from the occurrence of a specifically identified forecasted transaction initially designated as a cash flow hedge.

Amendments for Certain Interpretations of Statement 133 Cleared by the Board Relating to the Derivatives Implementation Group Process

p. In the second sentence of paragraph 12, host is inserted between would be required by the and contract, whether unconditional.

Amendments to Implement Guidance in Implementation Issue No. G3, "Discontinuation of a Cash Flow Hedge"

q. Paragraph 33 is replaced by the following: The net derivative gain or loss related to a discontinued cash flow hedge shall continue to be reported in accumulated other comprehensive income unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period (as documented at the inception of the hedging relationship) or within an additional two-month period of time thereafter, except as indicated in the following sentence. In rare cases, the existence of extenuating circumstances that are related to the nature of the forecasted transaction and are outside the control or influence of the reporting entity may cause the forecasted transaction to be probable of occurring on a date that is beyond the additional two-month period of time, in which case the net derivative gain or loss related to the discontinued cash flow hedge shall continue to be reported in accumulated other comprehensive income until it is reclassified into earnings pursuant to paragraph 31. If it is probable that the hedged forecasted transaction will not occur either by the end of the originally specified time period or within the additional two-month period of time and the hedged forecasted transaction also does not qualify for the exception described in the preceding sentence, that derivative gain or loss reported in accumulated other comprehensive income shall be reclassified into earnings immediately.

r. The following is added at the end of paragraph 45(b)(4):

   by the end of the originally specified time period or within the additional
   period of time discussed in paragraph 33.

Amendments to Implement Guidance in Implementation Issue No. H1, "Hedging at the Operating Unit Level"

s. In the last sentence of paragraph 37, and the conditions in paragraphs 40(a) and 40(b) is added between paragraphs 20 and 21 and are met.

t. In the third sentence of paragraph 38, and the conditions in paragraphs 40(a) and 40(b) is added between paragraphs 20 and 21 and are met.

u. In paragraph 42, provided the conditions in paragraphs 40(a) and 40(b) are met is added to the end of the first sentence.

Amendments to Implement Guidance in Implementation Issue No. H2, "Requirement That the Unit with the Exposure Must Be a Party to the Hedge"

v. Paragraph 40 is amended as follows:

(1) Subparagraph (a) is replaced by the following: For consolidated financial statements, either (1) the operating unit that has the foreign currency exposure is a party to the hedging instrument or (2) another member of the consolidated group that has the same functional currency as that operating unit (subject to the restrictions in this subparagraph and related footnote) is a party to the hedging instrument. To qualify for applying the guidance in (2) above, there may be no intervening subsidiary with a different functional currency.(*) (Refer to paragraphs 36, 40A, and 40B for conditions for which an intercompany foreign currency derivative can be the hedging instrument in a cash flow hedge of foreign exchange risk.)

(2) In subparagraph (b), that is replaced by the hedging.

Amendments to the Transition Guidance, the Implementation Guidance in Appendix A of Statement 133, and the Examples in Appendix B of Statement 133

w. Paragraph 52(b) is replaced by the following:

   If the transition adjustment relates to a derivative instrument that had
   been designated in a hedging relationship that addressed the fair value
   exposure of an asset, a liability, or a firm commitment, the transition
   adjustment for the derivative shall be reported as a cumulative-effect-type
   adjustment of net income. Concurrently, any gain or loss on the hedged item
   shall be recognized as an adjustment of the hedged item's carrying amount
   at the date of initial application, but only to the extent of an offsetting
   transition adjustment for the derivative. Only for purposes of applying the
   preceding sentence in determining the hedged item's transition adjustment,
   the gain or loss on the hedged item may be either (1) the overall gain or
   loss on the hedged item determined as the difference between the hedged
   item's fair value and its carrying amount on the date of initial
   application (that is, not limited to the portion attributable to the hedged
   risk nor limited to the gain or loss occurring during the period of the
   preexisting hedging relationship) or (2) the gain or loss on the hedged
   item attributable to the hedged risk (limited to the hedged risks that can
   be designated under paragraph 21 of this Statement) during the period of
   the preexisting hedging relationship. That adjustment of the hedged item's
   carrying amount shall also be reported as a cumulative-effect-type
   adjustment of net income. The transition adjustment related to the gain or
   loss reported in accumulated other comprehensive income on a derivative
   instrument that hedged an available-for-sale security, together with the
   loss or gain on the related security (to the extent of an offsetting
   transition adjustment for the derivative instrument), shall be reclassified
   to earnings as a cumulative-effect-type adjustment of both net income and
   accumulated other comprehensive income.

x. Paragraph 58 is amended as follows:

(1) In the first sentence of subparagraph (b), requires is replaced by involves and that are readily convertible to cash(17) and only if there is no market mechanism to facilitate net settlement outside the contract and footnote 17 are deleted.

(2) The following sentence is added at the end of subparagraph (b):

   Also, in order for a contract that meets the net settlement provisions of
   paragraphs 9(a) and 57(c)(1) and the market mechanism provisions of
   paragraphs 9(b) and 57(c)(2) to qualify for the exception, it must be
   probable at inception and throughout the term of the individual contract
   that the contract will not settle net and will result in physical delivery.

(3) The following two sentences are added at the end of subparagraph (c) (2):

   This exception applies only to nonfinancial assets that are unique and only
   if a nonfinancial asset related to the underlying is owned by the party
   that would not benefit under the contract from an increase in the price or
   value of the nonfinancial asset. If the contract is a call option contract,
   the exception applies only if that nonfinancial asset is owned by the party
   that would not benefit under the contract from an increase in the price or
   value of the nonfinancial asset above the option's strike price.

y. Paragraph 61 is amended as follows:

(1) The last two sentences of subparagraph (d) are deleted.

(2) In the second sentence of subparagraph (e), the equity instrument is replaced by a publicly traded equity instrument.

z. Paragraph 68 is amended as follows:

(1) In the second sentence, an interest-bearing asset or liability is replaced by a recognized interest-bearing asset or liability.

(2) In subparagraph (b), its inception is replaced by the inception of the hedging relationship.

(3) In subparagraph (d), the following is added at the end of the sentence:

   (that is, able to be settled by either party prior to its scheduled
   maturity), except as indicated in the following sentences. This criterion
   does not apply to an interest-bearing asset or liability that is prepayable
   solely due to an embedded call option provided that the hedging interest
   rate swap contains an embedded mirror-image call option. The call option
   embedded in the swap is considered a mirror image of the call option
   embedded in the hedged item if (1) the terms of the two call options match
   (including matching maturities, strike price, related notional amounts,
   timing and frequency of payments, and dates on which the instruments may be
   called) and (2) the entity is the writer of one call option and the holder
   (or purchaser) of the other call option. Similarly, this criterion does not
   apply to an interest-bearing asset or liability that is prepayable solely
   due to an embedded put option provided that the hedging interest rate swap
   contains an embedded mirror-image put option.

(4) The following subparagraph and footnote are added after subparagraph (d):

   dd. The index on which the variable leg of the swap is based matches the
   benchmark interest rate designated as the interest rate risk being hedged
   for that hedging relationship.(*)

(5) Subparagraph (1) is deleted.

aa. In the third sentence of footnote 19 to paragraph 74, market is deleted.

bb. Paragraph 115 is amended as follows:

(1) In the third sentence, market interest rates is replaced by the designated benchmark interest rate.

(2) The following sentence is added after the third sentence:

   ABC designates changes in LIBOR swap rates as the benchmark interest rate
   in hedging interest rate risk.

cc. The following example is added after paragraph 120 and before Example 3:

   Example 2A: Fair Value Hedge of the LIBOR Swap Rate in a $100,000
   BBB-Quality 5-Year Fixed-Rate Noncallable Note

   120A. This example illustrates one method that could be used in determining
   the hedged item's change in fair value attributable to changes in the
   benchmark interest rate. Other methods could be used in determining the
   hedged item's change in fair value attributable to changes in the benchmark
   interest rate as long as those methods meet the criteria in paragraph
   21(f).

   120B. On January 1, 20X0, GHI Company issues at par a $100,000 BBB-quality
   5-year fixed-rate noncallable debt instrument with an annual 10 percent
   interest coupon. On that date, the issuer enters into a 5-year interest
   rate swap based on the LIBOR swap rate and designates it as the hedging
   instrument in a fair value hedge of the $100,000 liability. Under the terms
   of the swap, GHI will receive fixed interest at 7 percent and pay variable
   interest at LIBOR. The variable leg of the swap resets each year on
   December 31 for the payments due the following year. This example has been
   simplified by assuming that the interest rate applicable to a payment due
   at any future date is the same as the rate for a payment at any other date
   (that is, the yield curve is flat). During the hedge period, the gain or
   loss on the swap will be recorded in earnings. The example assumes that
   immediately before the interest rate on the variable leg resets on December
   31, 20X0, the LIBOR swap rate increased by 50 basis points to 7.50 percent,
   and the change in fair value of the swap for the period from January 1 to
   December 31, 20X0 is a loss in value of $1,675.

Changes in the Fair Value of the Hedged item Attributable to the Changes in the Benchmark Interest Rate for a Specific Period

120C. Under this method, the change in a hedged item's fair value attributable to changes in the benchmark interest rate for a specific period is determined as the difference between two present value calculations as of the end of the period that exclude or include, respectively, the effect of the changes in the benchmark interest rate during the period. The discount rates used for those present value calculations would be, respectively, (a) the discount rate equal to the market interest rate for that hedged item at the inception of the hedge adjusted (up or down) for changes in the benchmark rate (designated as the interest rate risk being hedged) from the inception of the hedge to the beginning date of the period for which the change in fair value is being calculated(*) and (b) the discount rate equal to the market interest rate for that hedged item at the inception of the hedge adjusted (up or down) for changes in the designated benchmark rate from the inception of the hedge to the ending date of the period for which the change in fair value is being calculated. Both present value calculations are computed using the estimated future cash flows for the hedged item (which typically would be its remaining contractual cash flows).

120D. In GHI's quarterly assessments of hedge effectiveness for each of the first three quarters of year 20X0 in this example, there was zero change in the hedged item's fair value attributable to changes in the benchmark interest rate because there was no change in the LIBOR swap rate. However, in the assessment for the fourth quarter 20X0, the discount rate for the beginning of the period is 10 percent (the hedged item's original market interest rate with an adjustment of zero), and the discount rate for the end of the period is 10.50 percent (the hedged item's original market interest rate adjusted for the change during the period in the LIBOR swap rate [+ 0.50 percent]). The change in fair value of the hedged item attributable to the change in the benchmark interest rate is $100,000 - $98,432 = $1,568 (the fair value decrease in the liability is a gain on debt).

When the change in fair value of the hedged item ($1,568 gain) attributable to the risk being hedged is compared with the change in fair value of the hedging instrument ($1,675 loss), ineffectiveness of $107 results. That ineffectiveness will be reported in earnings, because both changes in fair value are recorded in earnings.

dd. Paragraph 134 is amended as follows:

(1) In the second sentence, market interest rates is replaced by the designated benchmark interest rate.

(2) The following sentence is added after the second sentence:

   XYZ designates changes in LIBOR swap rates as the benchmark interest rate
   in hedging interest rate risk.

ee. Paragraph 155 is replaced by the following:

   Because Swap 1 and the hedged forecasted interest payments are based on the
   same notional amount, have the same reset dates, and are based on the same
   benchmark interest rate designated under paragraph 29(h), MNO may conclude
   that there will be no ineffectiveness in the hedging relationship (absent a
   default by the swap counterparty).

ff. The last sentence of paragraph 161 is deleted.

gg. Paragraph 169 is amended as follows:

(1) In the third sentence, is not eligible for cash flow hedge accounting is replaced by would separately be eligible to be designated as a fair value hedge of foreign exchange risk or continue to be eligible as a cash flow hedge of foreign exchange risk.

(2) The fourth sentence and the fifth (parenthetical) sentence are deleted.

(3) The sixth sentence is replaced by the following:

   Consequently, if the variability of the functional currency cash flows
   related to the royalty receivable is not being hedged, DEF will dedesignate
   a proportion of the hedging instrument in the original hedge relationship
   with respect to the proportion of the forward contract corresponding to the
   earned royalty.

(4) In the last sentence, will substantially offset is replaced by may substantially offset.

hh. Paragraph 197 is replaced by the following:

Example 31: Certain Purchases in a Foreign Currency. A U.S. company enters into a contract to purchase corn from a local American supplier in six months for a fixed amount of Japanese yen; the yen is the functional currency of neither party to the transaction. The corn is expected to be delivered and used over a reasonable period in the normal course of business.

   Scope Application: Paragraph 10(b) excludes contracts that require future
   delivery of commodities that are readily convertible to cash from the
   accounting for derivatives if the commodities will be delivered in
   quantities expected to be used or sold by the reporting entity over a
   reasonable period in the normal course of business. However, that paragraph
   also states that contracts that are denominated in a foreign currency that
   meets neither of the criteria in paragraphs 15(a) and 15(b) shall not be
   considered normal purchases and normal sales. Because the Japanese yen is
   not the functional currency of either party to the contract and the
   purchase of corn is transacted internationally in many different
   currencies, the contract does not qualify for the normal purchases and
   normal sales exception. The contract is a compound derivative comprising a
   U.S. dollar-denominated forward contract for the purchase of corn and an
   embedded foreign currency swap from the purchaser's functional currency
   (the U.S. dollar) to yen. Consistent with the last sentence of footnote 13
   to paragraph 49, the compound derivative cannot be separated into its
   components (representing the foreign currency derivative and the forward
   commodity contract) and accounted for separately under this Statement.

ii. Paragraph 200 is amended as follows:

(1) The second bullet is amended as follows:

(a) In the first sentence, owned by the policyholder and separate is replaced by distinct.

(b) The second sentence is deleted.

(c) In the third sentence, considered is inserted between not and a derivative, and the policyholder has invested the premiums in acquiring those investments is replaced by of the unique attributes of traditional variable annuity contracts issued by insurance companies.

(d) In the penultimate sentence, traditional is inserted between rather than a and variable annuity in the parenthetical phrase, and not be viewed as a direct investment because the policyholder does not own those investments, which are assets recorded in the general account of the insurance company is replaced by contain an embedded derivative (the equity index-based derivative) that meets all the requirements of paragraph 12 of this Statement for separate accounting: (a) the economic characteristics and risks of the embedded derivative would not be clearly and closely related to the economic characteristics and risks of the host contract (that is, the host contract is a debt instrument and the embedded option is equity-indexed), (b) the hybrid instrument would not be re-measured at fair value with changes in fair value reported in earnings as they occur under GAAP, and (c) a separate instrument with the same terms as the embedded derivative instrument would be a derivative instrument pursuant to paragraphs 6-11 of this Statement.

(e) The last sentence is deleted.

(2) In the third bullet, an investment owned by the insured is replaced by a traditional variable annuity contract issued by an insurance company.

(3) The following sentences are added to the end of the paragraph after the last bullet:

   The guidance in the second and third bullets above is an exception for
   traditional variable annuity contracts issued by insurance companies. In
   determining the accounting for other seemingly similar structures, it would
   be inappropriate to analogize to the above guidance due to the unique
   attributes of traditional variable annuity contracts.

Amendments to the Glossary of Statement 133

jj. The following terms and definitions are added to paragraph 540:

   Benchmark interest rate

   A widely recognized and quoted rate in an active financial market that is
   broadly indicative of the overall level of interest rates attributable to
   high-credit-quality obligors in that market. It is a rate that is widely
   used in a given financial market as an underlying basis for determining the
   interest rates of individual financial instruments and commonly referenced
   in interest-rate-related transactions.

   In theory, the benchmark interest rate should be a risk-free rate (that is,
   has no risk of default), in some markets, government borrowing rates may
   serve as a benchmark. In other markets, the benchmark interest rate maybe
   an interbank offered rate. In the United States, currently only the
   interest rates on direct Treasury obligations of the U.S. government and,
   for practical reasons, the LIBOR Swap rate are considered to be benchmark
   interest rates. In each financial market, only the one or two most widely
   used and quoted rates that meet the above criteria may be considered
   benchmark interest rates.

   LIBOR swap rate

   The fixed rate on a single-currency, constant-notional interest rate swap
   that has its floating-rate leg referenced to the London Interbank Offered
   Rate (LIBOR) with no additional spread over LIBOR on that floating-rate
   leg. That fixed rate is the derived rate that would result in the swap
   having a zero fair value at inception because the present value of fixed
   cash flows, based on that rate, equate to the present value of the floating
   cash flows.

Effective Date and Transition

5. For an entity that has not adopted Statement 133 before June 15, 2000, this Statement shall be adopted concurrently with Statement 133 according to the provisions of paragraph 48 of Statement 133.

6. For an entity that has adopted Statement 133 prior to June 15, 2000, this Statement shall be effective for all fiscal quarters beginning after June 15, 2000, in accordance with the following transition provisions.

a. At the date of initial application, an entity may elect to derecognize in the balance sheet any derivative instrument that would qualify under this Statement as a normal purchases or normal sales contract and record a cumulative effect of a change in accounting principle as described in paragraph 20 of APB Opinion No.

20, Accounting Changes. The election to derecognize may not be applied to only some of an entity's normal purchases and normal sales contracts and must be applied on an all-or-none basis. That election to derecognize a derivative instrument may be applied retroactively to the beginning of any fiscal quarter for which interim financial information or financial statements have not been issued.

b. At the date of initial application, an entity must dedesignate the market interest rate as the hedged risk in a hedge of interest rate risk. An entity is permitted to designate anew the benchmark interest rate as the hedged risk in a hedge of interest rate risk.

c. At the date of initial application, an entity may designate a recognized foreign-currency-denominated asset or liability as the hedged item in a hedge of foreign exchange risk pursuant to paragraphs 21 and 29 of Statement 133, as amended by this Statement. An entity may also designate intercompany derivatives that meet the requirements in paragraph 4(l) of this Statement (paragraphs 40A and 40B of Statement 133) as hedging instruments in cash flow hedges of foreign exchange risk when those intercompany derivatives have been offset on only a net basis with third-party derivatives. Any designations permitted by this subparagraph shall be made on a prospective basis.

The provisions of this Statement need not be applied to immaterial items.

This Statement was adopted by the a the affirmative votes of five members of the Financial Accounting Standards Board. Messrs. Foster and Leisenring dissented.

Messrs. Foster and Leisenring dissent from the issuance of this Statement because they believe this Statement does not represent an improvement in financial reporting. The Board concluded in Statement 133, because of anomalies created by a mixed-attribute accounting model, that hedge accounting was appropriate in certain limited circumstances. At the same time, however, it concluded that hedge accounting was appropriate only to the extent that the hedging instrument was effective in offsetting changes in the fair value of the hedged item or the variability of cash flows of the hedged transaction and that any ineffectiveness in achieving that offset should be reflected in earnings. While Statement 133 gave wide latitude to management in determining the method for measuring effectiveness, it is clear that the hedged risk is limited to (a) the risk of changes in the entire hedged item, (b) the risk attributable to changes in market interest rates, (c) the risk attributable to changes in foreign currency exchange rates, and (d) the risk attributable to changes in the obligor's creditworthiness. Those limitations were designed to limit an entity's ability to define the risk being hedged in such a manner as to eliminate or minimize ineffectiveness for accounting purposes. The effect of the provisions in this amendment relating to (1) the interest rate that is permitted to be designated as the hedged risk and (2) permitting the foreign currency risk of foreign-currency-denominated assets and liabilities to be designated as hedges will be to substantially reduce or, in some circumstances, eliminate the amount of hedge ineffectiveness that would otherwise be reflected in earnings. For example, permitting an entity to designate the risk of changes in the LIBOR swap rate curve as the risk being hedged in a fair value hedge when the interest rate of the instrument being hedged is not based on the LIBOR swap rate curve ignores certain effects of basis risk, which, prior to this amendment, would have been appropriately required to be recognized in earnings. Messrs. Foster and Leisenring believe that retreat from Statement 133 is a modification to the basic model of Statement 133, which requires that ineffectiveness of hedging relationships be measured and reported in earnings.

In Statement 133, the Board stated its vision for all financial instruments ultimately to be measured at fair value. If all financial instruments were measured at fair value with changes in fair value recorded currently in earnings, the need for hedge accounting for the risks inherent in existing financial instruments would be eliminated because both the hedging instrument and the hedged item would be measured at fair value. Recognizing and measuring the changes in fair value of all financial instruments using the same criteria and measurement attributes would leave no anomalies related to financial instruments. Consequently, the Board has tentatively concluded in its project on measuring all financial instruments at fair value that all changes in fair value be reflected in earnings. Statement 133 is a step toward achieving the Board's vision because it requires recognizing currently in earnings the amounts for which a hedging instrument is ineffective in offsetting the changes in the fair value of the hedged item or the variability of cash flows of the hedged transaction. Messrs. Foster and Leisenring believe the amendments to Statement 133 referred to in the paragraph above represent steps backward from achieving the Board's vision of reporting all financial instruments at fair value because the result of those amendments is to report the effects of hedging instruments that are not fully effective in offsetting the changes in fair value attributable to the risk being hedged as if they were.

Messrs. Foster and Leisenring believe that even if one accepts the exception that a benchmark interest rate that clearly is not a risk-free rate can be considered to be a risk-free rate, the extension of that exception to permit the benchmark interest rate to be the hedged risk in a financial instrument for which the interest rate is less than the benchmark rate is inappropriate. There can be no risk to an entity for that portion of the credit spread of the benchmark interest rate that is in excess of the credit spread of the hedged item. Yet that exception requires the change in that portion of the credit spread to be recognized in the basis adjustment of the hedged item, so that the ineffectiveness atttributable to the portion of the derivative that hedges a nonexistent risk is not recognized. For example, if there is a change during a period in the value of the portion of the credit spread of the LIBOR swap rate (designated hedged risk) that is in excess of the credit spread of the hedged item, under no circumstances could that change affect the fair value of the hedged item. This Statement, however, mandates that in those circumstances an artificial change in fair value be recognized in the basis of the hedged item.

In this regard, Messrs. Foster and Leisenring observe that permitting the benchmark interest rate to be the hedged risk in a financial instrument that has an interest rate that is less than the benchmark rate creates an anomaly related to the shortcut method. In hedges in which a portion of the derivative is designated as hedging a nonexistent risk (the excess of the benchmark interest rate over the actual interest rate of the hedged item), no ineffectiveness will be recognized when using the shortcut method even though the hedging relationship is clearly not effective. But in certain hedges where there is likely to be little ineffectiveness because the interest rate indexes of the hedged item and the hedging instrument are the same, the shortcut method, in which no ineffectiveness is assumed, is not available.

Members of the Financial Accounting Standards Board:

Edmund L. Jenkins, Chairman Anthony T. Cope John M. Foster Gaylen N. Larson James J. Leisenring Gerhard G. Mueller Edward W. Trott

Statement of Financial Accounting Standards No. 139--Rescission of FASB Statement No. 53 and amendments to FASB Statements No. 63, 89, and 121

SUMMARY

This Statement rescinds FASB Statement No. 53, Financial Reporting by Producers and Distributors of Motion Picture Films. An entity that previously was subject to the requirements of Statement 53 shall follow the guidance in AICPA Statement of Position 00-2, Accounting by Producers or Distributors of Films. This Statement also amends FASB Statements No. 63, Financial Reporting by Broadcasters, No. 89, Financial Reporting and Changing Prices, and No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.

This Statement is effective for financial statements for fiscal years beginning after December 15, 2000. Earlier application is permitted only upon early adoption of the Statement of Position.

CONTENTS

Introduction/1-3

Standards of Financial Accounting and Reporting:

Rescission of Statement 53/4 Amendments to Existing Pronouncements/5-7

Effective Date and Transition/8 Appendix: Background Information and Basis for Conclusions/9-16

INTRODUCTION

1. FASB Statement No. 53, Financial Reporting by Producers and Distributors of Motion Picture Films, was issued in 1981. Statement 53 extracted specialized accounting and reporting principles and practices from the AICPA Industry Accounting Guide, Accounting for Motion Picture Films, and AICPA Statement of Position 79-4, Accounting for Motion Picture Films. It also established financial accounting and reporting standards for producers or distributors of motion picture films.

2. Since the issuance of Statement 53, extensive changes have occurred in the film industry. Through 1981, the majority of a film's revenue resulted from distribution to movie theaters and free television. Since that time, numerous additional forms of exploitation (such as home video, satellite and cable television, and pay-per-view television) have come into existence, and international revenue has increased in significance. Concurrent with those changes, significant variations in the application of Statement 53 arose.

3. In 1995, in response to concerns raised by constituents, the Board asked the Accounting Standards Executive Committee (AcSEC) of the AICPA to develop a Statement of Position providing guidance on the accounting and reporting requirements for producers or distributors of motion picture films. In response to that request, AcSEC developed AICPA Statement of Position 00-2, Accounting by Producers or Distributors of Films. An entity that is a producer or distributor of films and that previously applied Statement 53 is now required to follow the guidance in SOP 00-2. This Statement and SOP 00-2 are effective for fiscal years beginning after December 15, 2000.

STANDARDS Of FINANCIAL ACCOUNTING AND REPORTING

Rescission of STATEMENT 53

4. This Statement rescinds FASB Statement No. 53, Financial Reporting by Producers and Distributors of Motion Picture Films.

Ammendments to Existing Pronouncements

5. FASB Statement No. 63, Financial Reporting by Broadcasters, is amended as follows:

a. The following is inserted before the last sentence of paragraph 1:

   In June 2000, AICPA Statement of Position 00-2, Accounting by Producers or
   Distributors of Films, was issued and is applicable to all producers or
   distributors that own or hold rights to distribute or exploit films.

b. The following paragraph is added after the caption Standards of Financial Accounting and Reporting and before the caption License Agreements for Program Material:

   A broadcaster shall apply the guidance in SOP 00-2 if it owns the film
   (program material) that is shown on its cable, network, or local television
   outlets.

6. In paragraph 44 of FASB Statement No. 89, Financial Reporting and Changing Prices, the definition of motion picture films is replaced by the following:

   All types of film, including feature films, television specials, television
   series, or similar products (including animated films and television
   programming) that are sold, licensed, or exhibited, whether produced on
   film, video tape, digital, or other video recording format.

7. FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, is amended as follows:

a. Paragraph 3(b) is replaced by AICPA Statement of Position 00-2, Accounting by Producers or Distributors of Films.

b. In the table following paragraph 147, the reference to Statement 53 is deleted and the following is added to the table.

FASB Statement No. 139, Rescission of FASB Statement 53 and amendments to FASB Statements No. 63, 89, and 121(*)

EFFECTIVE DATE AND TRANSITION

8. This Statement shall be effective for financial statements for fiscal years beginning after December 15, 2000. Earlier application is permitted only upon early adoption of SOP 00-2.

The provisions of this Statement need not be applied to immaterial items.

This Statement was adopted by the unanimous vote of the seven members of the Financial Accounting Standards Board:

Edmund L. Jenkins, Chairman Anthony T. Cope John M. Foster Gaylen N. Larson James J. Leisenring Gerhard G. Mueller Edward W. Trott

Revisions to Code of Professional Conduct and Bylaws; Council Resolutions

At its October 1999 meeting, the Council of the American Institute of Certified Public Accountants authorized a referendum with respect to changes to the bylaws and Code of Professional Conduct. Council also approved revisions to implementing resolutions that would be required as a result of the bylaw changes as well as changes to resolutions to clarify, modernize and harmonize resolutions related to various bylaws. A two-thirds affirmative vote of all those voting was required to pass any proposal. All of the proposals in the referendum passed by overwhelming margins and having been approved by the membership became effective May 15, 2000.

The changes pertain to a variety of different issues. Of particular note, they include a requirement that individual members who practice in firms that are not eligible to enroll in the peer review program enroll individually in a peer review program if authorized by Council. Thus, individual AICPA members who compile financial statements are now eligible to enroll in an Institute-approved practice-monitoring program if they perform compilation services in firms or organizations that are not eligible to enroll in such a program. In addition, the members approved a proposal to allow Council to authorize non-CPAs (up to a maximum of 25%) to serve on any senior or permanent committee or board. At its May 2000 meeting, Council approved adding non-CPA members to the Professional Ethics Executive Committee and to the Board of Examiners. Other proposals included changes to modernize, clarify and harmonize provisions in the Code of Professional Conduct and bylaws. Revisions to the Code, bylaws and resolutions are set out below.

[New language is underlined; deletions are struck through.]

CODE OF PROFESSIONAL CONDUCT

Article VI, Scope and Nature of Services [ET Section 57]

.03 Assess, in their individual judgments, whether an activity is consistent with their role as professionals. <s>(for example, Is such activity a reasonable extension or variation of existing services offered by the member or others in the profession?)</s>

Rule 505--Form of Organization and Name [ET Section sos]

.01 A member may practice public accounting only in a form of organization permitted by <s>state</s> law or regulation whose characteristics conform to resolutions of Council.

A member shall not practice public accounting under a firm name that is misleading. Names of one or more past owners may be included in the firm name of a successor organization.

A firm may not designate itself as "Members of the American Institute of Certified Public Accountants" unless all of its CPA owners are members of the Institute.

Bylaws [BL Section 100]

Definitions

As used in these bylaws, implementing resolutions of Council thereunder, or the Code of Professional Conduct, masculine terms shall be understood to include the feminine; "state" shall be understood to include the District of Columbia, Puerto Rico, and the territories, or territorial possessions of the United States of America; "firm" shall be understood to mean any organization permitted by law or regulation; <s>"partner"</s> owner" shall be understood to include partners, partner equivalents, <s>and any</s> shareholders, or other equity owners of a firm; <s>a professional corporation or association; "partnership" shall be understood to include professional corporation and associations;</s> "official records of the Institute" shall be understood to mean the records of the membership department; and "committee" shall be understood to include any board (except the AICPA Board of Directors), division, task force, or any subdivision thereof.

Bylaw 2.2--Requirements for Admission to Membership [BL Section 220]

.01 <s>The following p</s>Persons may qualify for admission as members of the Institute if they satisfy the criteria listed below:

2.2.1 Those who They are in possession of a valid and unrevoked certified public accountant certificate issued by a legally constituted <s>state</s> authority,

2.2.2 <s>Who shall</s> They have passed an examination in accounting and other related subjects satisfactory to the Board of Directors, and

2.2.3 <s>Who, if</s> With respect to those persons who are engaged in the practice of public accounting as an owner <s>proprietor, partnership, or shareholder</s> or as an employee who has been licensed as a CPA for more than two years, either they are practicing in a firm that is enrolled in an Institute-approved practice-monitoring program if the services performed by such a firm are within the scope of the AICPA's practice-monitoring standards and the firm issues reports purporting to be in accordance with AICPA professional standards, or if authorized by Council, are themselves enrolled in such a program.

2.2.4 <s>Those</s> With respect to persons <s>applying for membership</s> who first become eligible to take the examination required by section 2.2.2 after the year 2000, <s>who</s> they shall have obtained 150 semester hours of education at an accredited college or university including a bachelor's degree or its equivalent.

Bylaw 2.3--Requirements for Retention of Membership [BL Section 230]

2.3.4 Engage in the practice of public accounting <s>only</s> with a firm that is enrolled in an Institute-approved practice-monitoring program if the services performed by such a firm are within the scope of the AICPA's practice-monitoring standards and the firm issues reports purporting to be in accordance with AICPA professional standards or, if authorized by Council, themselves enroll in such a program.

Bylaw 2.5--Right of Members to Describe Themselves as Such [BL Section 250]

.01 A member of the Institute shall be entitled to use the designation "Member of the American Institute of Certified Public Accountants." A firm <s>all of whose CPA partners are members</s> shall be entitled to use the designation "Members of the American Institute of Certified Public Accountants.-" only if all of its CPA owners are members.

Bylaw 2.6--International Associates [BL Section 260]

.01 International associates shall include those who were international associates on <s>the effective date of those bylaws</s> or before January 12, 1988. Thereafter, citizens of other countries who shall satisfy such requirements as the Council may prescribe may be admitted as international associates. The Council shall adopt rules governing such association and indications thereof.

Bylaw 3.1.1--Communications With Members(*) [BL Section 310]

.01 Any communication, notification or other action required by these bylaws to be provided or undertaken by mail or in writing, to or from the members, may be provided or undertaken by any means including but not limited to electronic or telephonic means, as authorized by Council, Except for determining a member's residence for voting purposes under section 3.2.3, a member's mailing address for purposes of these bylaws may be an electronic or other form of address, in lieu of a postal address.

December 31, 20X0

Calculate the present value using the beginning-of-period discount
rate of 10 percent:

$10,000pmt, 10%i, 4n, PV = $ 31,699 (interest payments)

$100,000fv, 10%i, 4n, PV =   68,301 (principal payment)

Total present value        $100,000

Calculate the present value using the end-of-period discount rate
of 10.50 percent (that is, the beginning-of-period discount rate
adjusted for the change during the period in the LIBOR swap
rate of 50 basis points):

$10,000pmt, 10.50%i, 4n, PV = $31,359 (interest payments)

$100,000fv, 10.50%i, 4n, PV =  67,073 (principal payment)

Total present value           $98,432

Bylaw 3.2.5--Certain Positions to Be Held Only by Members [BL Section 320]

<s>Only members of the Institute, as defined in section 2.1, may serve as members of the Council, the Board of Directors, or any committee or board, except the board of examiners, designated as "senior" by the Council (see section 3.6.1), or as "permanent" by these bylaws (see section 3.6.2); provided, however, that three representatives of the public, none of whom shall be members of the Institute, shall be members of the Board of Directors.</s>

With the exceptions noted below, only members of the Institute, as defined in section 2.1, may serve as members of the Council, the Board of Directors, or any committee or board designated as "senior" by the Council (see section 3.6.1) or as "permanent" by these bylaws (see section 3.6.2). Exceptions to this rule are as follows:

1. Three representatives of the public, none of whom shall be members of the Institute, shall be members of the Board of Directors and Council.

2. Council may authorize the appointment of persons who are not Institute members to any senior or permanent committee or board provided the non-Institute members do not constitute more than twenty-five percent of its membership.

Bylaw 4.2.--Committee on Audit [BL Section 420]

The chairman of the board shall appoint from among the members of the Board of Directors, other than the officers, a committee on audit to make arrangements with the auditor or auditors for their examination, <s>and</s> to review the audit report, and to perform such other duties appropriate for such a committee as directed by the Board of Directors.

Bylaw 5.2.1--Regular Meetings of Council [BL Section 520]

A <s>R</s> regular meeting<s>s</s> of the Council shall be held <s>prior</s> in conjunction with <s>to</s> the annual meeting of the Institute and on such other dates as the Council or the Board of Directors may designate.

Bylaw 6.1.6--Election [BL Section 610]

6.1.6 The nominees of the nominations committee for directly elected seats on Council shall be declared elected by the secretary if no independent nominations are filed for such seats as required by section 6.1.5.

If independent nominations are received, <s>T</s> the secretary shall mail to all members of the Institute in each state in which there is a contest for a directly elected seat on Council, at least ninety days prior to the annual meeting of the Institute, mail ballots containing the names and relevant background information of nominees from that state nominated by the nominations committee and the names and relevant background information of nominees independently nominated. Each ballot shall contain an announcement that votes will be counted only if received by the secretary at least forty-five days before the annual meeting of the Institute. Election to contested seats on Council shall be determined by a majority of the votes received from each jurisdiction by that date. Mail ballots shall be counted by the secretary, who shall certify the results for publication to the membership. Newly elected members shall be notified promptly and advised to attend the <s>initial</s> meeting of Council <s>prior to</s> held in conjunction with the annual meeting of the Institute. They shall take office as provided in section 6.6.

Bylaw 6.2--Selection of Members of Council to Represent State Societies [BL Section 620]

.01 Each recognized state society of certified public accountants shall designate, in a manner it deems appropriate, an Institute member to represent it on the Council. The term of each member of the Council so designated shall commence at the meeting of Council held in conjunction with the annual meeting of the Institute <s>upon</s> after notification <s>of</s> to the secretary by the society designating him. <s>at the meeting of Council held in conjunction with the annual meeting of the Institute and</s> The term shall run for one year or until <s>designation</s> the commencement of his successor's term, provided that no such member of the Council shall represent a state society for more than six consecutive years.

Bylaw 6.3--Election of Members-at-Large of Council, Board of Directors, Chairman of the Board, and Vice Chairman of the Board [BL Section 630]

.01 At the meeting of the Council held in conjunction with the annual meeting of the Institute, following the completion of such other business as the Council may transact, <s>S</s> seven Institute members, without regard to the states in which they reside, shall be elected annually by the Council as members-at-large of the Council, <s>at its meeting held in conjunction with the annual meeting of the Institute, and immediately</s>. This election shall occur prior to the installation of the members of the Council newly elected under section 6.1<s>, for a</s>. The at-large members shall serve a term of three years or until the election of their successors. At the same meeting, <s>but subsequent to the installation of such newly elected members of the Council, including members at large,</s> but after all newly elected and designated Council members have been installed, the Council shall elect the chairman of the board, the vice chairman of the board, and <s>five Institute members</s> one-third (or as near to one-third as mathematically possible) of the elected members of the Board of Directors. <s>Such</s> The elected <s>five</s> members of the Board of Directors shall serve for a term of three years or until election of their successors. The Council shall also elect one representative of the public, who is not a member of the Institute, to the Board of Directors for a term of three years, or until election of a successor. Nominations for all these <s>such</s> positions on the Board of Directors shall be made by the nominations committee at least six months prior to the annual meeting of the Institute<s>,. and n</s> Notice of those nominations <s>thereof</s> shall be published to the membership of the Institute at least five months prior to such annual meeting. Independent nominations may be made by any twenty members of the Council if filed with the secretary at least four months prior to the annual meeting of the Institute. No nominations from the floor will be recognized. A majority of votes shall elect. Nominees may be invited to the meeting at which the election is to be held, and those elected shall take office as prescribed in section 6.6.

.02 No member having served for two consecutive full terms as a member-at-large of the Council shall be eligible to serve another such term until at least one year after the completion of his second consecutive full term.

Bylaw 6.6--Election Meeting of Council [BL Section 660]

.01 <s>At the meeting of the Council held in conjunction with the annual meeting of the Institute, following the completion of such other business as the Council may transact, the Council shall elect new members at large of the Council pursuant to section 6.3.</s> New members-at-large of Council elected pursuant to section 6.3 shall <s>then</s> take office as soon as their election is completed, replacing those members-at-large whose terms shall have expired. Then the presiding officer shall announce the installation of members of the Council newly elected under section 6.1, at which time they shall take office, replacing those directly elected members of Council whose terms shall have expired. Election of officers who are elected by the Council, new members of the Board of Directors, and others shall then be held, and each officer or member of the Board of Directors so elected shall replace his predecessor upon such election, provided, however, that the retiring chairman of the board shall continue in office through the end of the annual meeting of the Institute.

Bylaw 7.2.1--Termination of Association of International Associate [BL Section 720]

.01 The <s>Council</s> Board of Directors may terminate the affiliation of an international associate <s>in</s> at its discretion.

Bylaw 7.4.G--Disciplining of Member by Trial Board [BL Section 740] 7.4.6 Fails to cooperate with the professional ethics division in any disciplinary investigation of the member, <s>or a partner</s> owner or employee of the firm by not making a substantive response to interrogatories or a request for documents from a committee of the professional ethics division or by not complying with the educational and remedial or corrective action determined to be necessary by the professional ethics executive committee, within thirty days after the posting of notice of such interrogatories, or a request for documents, or directive to take CPE or corrective action by registered or certified mail, postage prepaid, to the member at his or her last known address shown <s>on the books</s> in the official records of the Institute.

Bylaw 7.6--Publication of Disciplinary Action [BL Section 760]

.01 Notice of disciplinary action pursuant to section 7.3 or 7.4 or of termination of participation of a member or a member's firm in an Institute-approved practice-monitoring program, together with a statement of the reasons therefor, shall be published in such form and manner as the Council may prescribe.

Bylaw 8.4--Submission to Membership by Mail Ballot [BL Section 840] .01 Amendments proposed under section 8.3.1 and those authorized by the Council under section 8.3 shall be submitted to all of the members of the Institute for a vote by mail ballot on or after ninety days following discussion or authorization by the Council, but no later than 180 days following such discussion or authorization. If at least two-thirds of those voting approve such proposal, it shall become effective as an amendment to the bylaws or to the Code of Professional Conduct, as applicable. Mail ballots shall be considered valid and counted only if received <s>in the Institute's principal office</s> as instructed by the Institute for the return of such votes within sixty days from the date of mailing the ballots to the members.

COUNCIL RESOLUTIONS

Council Resolution Under Bylaws 2.2.3 and 2.3.4 [BL Section 220R]

RESOLVED: .01 That the Board of Directors is authorized to establish within the Institute a peer review division governed by an executive committee named me "peer review board" having senior status with authority to carry out the activities of the division. The primary activities of the division will be to establish and conduct, in cooperation with state CPA societies, <s>a</s> practice-monitoring programs for AICPA and state society members engaged in the practice of public accounting <s>who are practicing in firms enrolled in the program are required pursuant to their membership in the private companies practice section of the AICPA division for CPA firms to participate in it</s>. Such activities shall not conflict with the policies and standards of the AICPA and shall be subject to the oversight of the Board of Directors. The nominees to serve on the peer review board shall be selected by the AICPA nominations committee and <s>the members of the board shall be</s> elected by Council.

FURTHER RESOLVED: .02 A firm within the description of subparagraph A of Council Resolution Concerning Rule 505 shall be required to enroll in an Institute-approved practice-monitoring program. An individual engaged in the practice of public accounting in a firm not within the description of Subparagraph A of Council Resolution Concerning Rule 505, but who performs compilations of financial statements in accordance with the Statements on Standards for Accounting and Review Services shall be enrolled in an Institute-approved practice-monitoring program. <s>That members of the Institute engaged in the practice of public accounting shall be associated as proprietors, partners, shareholders, or employees of a firm enrolled in an approved practice monitoring program as designated in this resolution if the services performed by such a firm are within the scope of the AICPA's practice monitoring standards and the firm issues reports purporting to be in accordance with AICPA professional standards.</s> A member firm of the <s>AICPA division for CPA firms</s> SEC Practice Section or a firm or individual enrolled in <s>the</s> a practice-monitoring program established herein <s>by this resolution</s> shall be deemed to be enrolled in an approved practice-monitoring program under sections 2.2.3 and 2.3.4 of the bylaws. A firm or individual which is dropped for disciplinary reasons from enrollment in either the SEC Practice Section <s>either section of the AICPA division for CPA firms</s> or <s>from the</s> a practice-monitoring program established <s>hereunder</s> herein is ineligible to participate in another Institute-approved practice-monitoring program until the cause of the disciplinary action is removed.

<s>FURTHER RESOLVED: That a member engaged in the practice of public accounting as a proprietor, partner, or shareholder is not eligible for AICPA membership unless his or her firm is enrolled in an approved practice monitoring program if the services performed by such a firm are within the scope of the AICPA's practice monitoring standards and the firm issues reports purporting to be in accordance with AICPA professional standards and that a member engaged in the practice of public accounting as an employee shall become ineligible two years after becoming licensed as a CPA, unless his or her firm enrolls in an approved program as required by this resolution.</s>

Council Resolution Under Bylaw 3.2.5 [BL Section 320R]

BE IT RESOLVED that pursuant to bylaw section 3.2.5, persons who are not Institute members may be appointed to the following senior or permanent committees or boards:

Board of Examiners Professional Ethics Executive Committee

BE IT FURTHER RESOLVED that except as otherwise provided by Council, and except for committees of the Board of Directors, such as the Committee on Audit, no public member on a senior or permanent committee or board may serve as its chair.

Council Resolution Under Bylaw 3.6.2.1 [BL Section 360R]

RESOLVED: .03 That the nominations committee shall be chaired by the immediate past chairman of the Board and shall consist of ten additional members serving two-year terms. At the Council meeting <s>preceding</s> held in conjunction with the annual meeting, the Board of Directors, after having considered at least ten candidates, shall recommend five members for election to the nominations committee, each for a two-year term. At any one time, no more than seven members shall be members of Council, and none except the chairman shall be a member of the Board of Directors. Other nominations from the floor shall be permitted. Voting shall be by voice vote of the incoming Council, or, if requested by a majority of those present, by written ballot. A majority vote shall elect. With the exception of its chairman, no member, having served on the nominations committee, shall be eligible again to serve on the nominations committee until the passage of five years.

Council Resolution Under Bylaw 3.6.2.3 [BL Section 360R]

.10 The chairman or vice chairman, when acting as chairman, pursuant to the trial board, rules of practice and procedure, may appoint from the members of the trial board a panel consisting of not less than <s>five</s> three members, which may, but need not, include <s>himself</s> the chairman, to sit as a <s>sub-board</s> hearing panel and hear and adjudicate charges against members, or an ad hoc committee consisting of not less than three members of the trial board to consider requests for nonapplication of sections 7.2 and 7.3. Decisions of <s>sub-boards</s> hearing panels shall be reviewable by the trial board under the conditions and procedures as provided for in Council resolution under section 7.4 of the bylaws.

Council Resolution Under Article 4 [BL Section 401R]

RESOLVED: That annual budget<s>s and projections</s> of revenues and expenditures for the succeeding <s>four</s> fiscal year<s>s</s> shall be prepared by the Institute's staff, reviewed and approved by the Board of Directors, and presented to Council for approval <s>at its meeting preceding the annual meeting</s>; such budgets shall be in a form indicating the costs of the principal programs and activities of the Institute; material variations from the annual budget shall be reported to the Council <s>at its spring meeting</s> by the Board of Directors; receipt of such report without rejection shall constitute authority to continue expenditures for purposes indicated in the annual budget, as modified and presented to Council <s>at the spring meeting</s>, until a new budget for the following fiscal year is approved by the Council. However, the Board of Directors may, between meetings of Council, authorize additional expenditures in total not to exceed 5 percent of budgeted revenues from all sources.

Council Resolution Under Bylaw 7.3 [BL Section 730R]

.06 (6) That the operation of paragraph (1), (2), (3), or (4) of this resolution shall become postponed if, within thirty days after mailing the notice of suspension or termination, the secretary of the Institute receives a request from the member concerned that the pertinent provision shall not become operative. The request shall state briefly the facts and reasons relied upon. All such requests shall be referred to the trial board for action thereon by the trial board or by an ad hoc committee thereof consisting of at least <s>five</s> three members appointed by the chairman of the trial board or vice chairman, when acting as chairman. If the request is denied, the suspension or termination, as the case may be, shall become effective upon such denial, and the member concerned shall be so notified in writing by the secretary. No appeal to the trial board shall be allowable with respect to a denial of such a request by the ad hoc committee. If the request is granted, the suspension or termination, as the case may be, shall not become effective. In such event, the secretary shall transmit the matter to the professional ethics division to take whatever action it considers proper in the circumstances. A determination that paragraph (1), (2), (3), or (4) of this resolution shall not become operative shall be made only when it clearly appears that, because of exceptional or unusual circumstances, it would be inequitable to permit such automatic suspension or termination.

Council Resolution Under Bylaw 7.4 [BL Section 740R]

.02 (2) (c) Prior to causing the investigation referred to in paragraph (b), the chairman of the trial board shall designate six members of the trial board who shall not be involved in such investigation in order that <s>five</s> not less than three of them may be appointed to an independent hearing panel if necessary. <s>He</s> The chairman shall report the names of such members to the secretary of the trial board prior to any action under paragraph (b).

.03 (3) (c) In a case decided by a panel, the member concerned may request a review by the trial board of the decision of the panel, provided such a request for review is filed with the secretary of the trial board <s>at the principal office of the Institute</s> within thirty days after the decision of the panel, and that such information as may be required by the rules of the trial board shall be filed with such request. Such a review shall not be a matter of right. Each such request for a review shall be considered by an ad hoc Committee to be appointed by the chairman of the trial board, or its vice chairman in the event of <s>his</s> the chairman's unavailability, and <s>composed</s> to consist of not less than three members of the trial board who did not participate in the prior proceedings in the case. The ad hoc committee shall have power to decide whether such request for review by the trial board shall be granted, and such committee's decision that such request shall not be granted shall be final and subject to no further review. A quorum of such ad hoc committee shall consist of a majority of the appointed. If such request for review is granted, the trial board shall review the decision of the panel in accordance with its rules of practice and procedure. On review of such decision, the trial board may affirm, modify, or reverse all or any part of such decision or make such other disposition of the case as it deems appropriate. The trial board may, by general rule, indicate the character of reasons that may be considered to be of sufficient importance to warrant an ad hoc committee granting a request for review of a decision of a panel.

Council Resolution Under Bylaw 7.5 [BL Section 750R]

RESOLVED: .01 That at any time after the publication <s>in a membership periodical of</s> by the Institute of a statement of a case and decision, including cases in which a guilty plea was entered without a hearing, on application of the member concerned to the secretary of the trial board, the appropriate panel of the trial board that last heard the case and whose decision provided the basis for the publication or where the original panel cannot be reappointed or, in the case of a guilty plea, a newly formed panel, may, by a two-thirds vote of the members present and voting, <s>recall,</s> rescind<s>,</s> or modify such decision<s>,. which</s> Any such action shall be published <s>in the membership periodical of</s> by the Institute. The denial of an application under this section shall not be published and shall not prevent the member concerned from applying for reinstatement under section (2) hereof.

Council Resolution Under Bylaw 7.6 [BL Section 760R]

RESOLVED: .01 That notice of disciplinary action taken under section 7.3 or 7.4 of the bylaws or of termination of participation of a member or a member's firm in an Institute-approved practice monitoring program, and the basis therefore shall be published <s>in a membership periodical of</s> by the Institute and the professional ethics division shall maintain a record of such information and disclose that information upon request. In the case of a suspension or termination pursuant to section 7.3 of the bylaws, such notice shall be in a form approved by the chairman of the trial board, and shall disclose the name of the member concerned. In any action pursuant to section 7.4 of the bylaws in which the member is found guilty or has entered into a settlement agreement with the professional ethics executive committee <s>that involves suspension or termination of membership</s>, the trial board or panel hearing the case shall decide on the form of the notice of the case and the decision to be published, which notice shall disclose the name of the member involved and the terms and conditions of any settlement agreement and the nature of the violation. The statement and decision, as released by the chairman, trial board, or hearing panel, shall be published <s>in a membership periodical</s> by <s>of</s> the Institute. No such publication shall be made until such decision has become effective.

Council Resolution Under Code of Conduct Rule 505 [ET Appendix B]

A. RESOLVED: That with respect to a member engaged in the practice of public accounting in a firm or organization which performs (1) any audit or other engagement performed in accordance with the Statements on Auditing Standards, (2) any review of a financial statement <s>or compilation of a financial statement</s> performed in accordance with the Statements on Standards for Accounting and Review Services, or (3) any examination of prospective financial information performed in accordance with the Statements on Standards for Attestation Engagements, or which holds itself out as a firm of certified public accountants or uses the term "certified public accountant(s)" or the designation "CPA" in connection with its name, the characteristics of such a firm or organization under Rule 505 are as set forth below. <s>The characteristics of all other firms or organizations are deemed to be whatever is legally permissible under applicable law or regulation.</s>

1. A majority of the ownership of the firm in terms of financial interests and voting rights must belong to CPAs. The non-CPA owner would have to be actively engaged as a firm member in providing services to the firm's clients as his or her principal occupation. Ownership by investors or commercial enterprises not actively engaged as firm members in providing services to the firm's clients as their principal occupation is against the public interest and continues to be prohibited.

2. There must be a CPA who has ultimate responsibility for all the services provided by the firm and by each business unit(1) performing the services described in A above, <s>financial statement attest and</s> compilation services and other engagements governed by Statements on Auditing Standards or Statements on Standards for Accounting and Review Services and non-CPA owners could not assume ultimate responsibility for any such services or engagements.

<s>3. Non CPA owners could not assume ultimate responsibility for any financial statement attest or compilation engagement.</s>

<s>4.</s> 3. Non-CPAs becoming owners after adoption of Council's resolution would have to possess a baccalaureate degree and, beginning in the year 2010, have obtained 150 semester hours of education at an accredited college or university.

<s>5.</s> 4. Non-CPA owners would be permitted to use the title "principal," "owner," "officer" "member" or "shareholder," or any other title permitted by state law, but not hold themselves out to be CPAs.

<s>6.</s> 5. Non-CPA owners would have to abide by the AICPA Code of Professional Conduct. AICPA members may be held responsible under the Code for acts of co-owners.

<s>7.</s> 6. Non-CPA owners would have to complete the same work-related CPE requirements as set forth under AICPA bylaw section 2.3 for AICPA members.

<s>8.</s> 7. Owners shall at all times own their equity in their own right and shall be the beneficial owners of the equity capital ascribed to them. Provision would have to be made for the ownership to be transferred, within a reasonable period of time, to the firm or to other qualified owners if the <s>non-CPA</s> owner ceases to be actively engaged in the firm.

<s>9.</s> 8. Non-CPA owners would not be eligible for membership in the AICPA.

B. RESOLVED: The characteristics of all other firms or organizations are deemed to be whatever is legally permissible under applicable law or regulation except as otherwise provided in paragraph C below.

C. RESOLVED: That with respect to a member engaged in the practice of public accounting in a firm or organization which is not within the description of a firm or organization set forth in paragraph A above, but who performs compilations of financial statements performed in accordance with the Statements on Standards for Accounting and Review Services, the characteristics of such a firm or organization under Rule 505 [ET section 505.01] are as set forth below.

1. There must be a CPA who has ultimate responsibility for any financial statement compilation services provided by the firm and by each business unit performing such compilation services and non-CPA owners could not assume ultimate responsibility for any such services.

2. Any compilation report must be signed individually by a CPA, and may not be signed in the name of the firm or organization.

Copyright [C] 2000 by Financial Accounting Standards Board. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the Financial Accounting Standards Board.

(1) "Business unit" is meant to indicate geographic (such as offices) and functional arrangements (such as tax and management consulting services).

(*) The first sentence of paragraph 21 (a) that specifically permits the hedged item to be identified as either all or a specific portion of a recognized asset or liability or of an unrecognized firm commitment is not affected by the provisions in this subparagraph.

(*) For example, if a dollar-functional, second-tier subsidiary has a Euro exposure, the dollar-functional consolidated parent company could designate its U.S. dollar-Euro derivative as a hedge of the second-tier subsidiary's exposure provided that the functional currency of the intervening first-tier subsidiary (that is, the parent of the second-tier subsidiary) is also the U.S. dollar. In contrast, if the functional currency of the intervening first-tier subsidiary was the Japanese yen (thus requiring the financial statements of the second-tier subsidiary to be translated into yen before the yen-denominated financial statements of the firsttier subsidiary are translated into U.S. dollars for consolidation), the consolidated parent company could not designate its U.S. dollar-Euro derivative as a hedge of the second-tier subsidiary's exposure.

(*) For cash flow hedge situations in which the cash flows of the hedged item and the hedging instrument are based on the same index but that index is not the benchmark interest rate, the shortcut method is not permitted. However, the entity may obtain results similar to results obtained if the shortcut method was permitted.

(*) This Statement does not provide specific guidance on the discount rate that must be used in the calculation. However, the method chosen by GHI and described in this illustration requires that the discount rate be based on the market interest rate for the hedged item at the inception of the hedging relationship.

(*) In June 2000, AICPA Statement of Position 00-2, Accounting by Producers or Distributors of Films, was issued. Motion picture films are subject to the impairment guidance in paragraphs 43-47 of SOP 00-2.

(*) Note: District of Columbia law does not currently permit electronic notice. If the law is changed, AICPA Council will consider the issue of when electronic notice might be appropriate.

(1) Benchmark interest rate is defined in paragraph 4(jj) of this Statement.