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Accounting for environmental liabilities, individual credit card acquisitions and income tax uncertainties in acquisitions.

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

This month's column lists 1993 EITF consensuses adopted from March 16 through July 22, 1993 (see the sidebar on page 99). In addition, three consensuses are summarized: accounting for environmental liabilities, individual credit card acquisitions and income tax uncertainties in business combinations. The summaries are presented in the order of importance from broad to narrow applicability.

EITF Abstracts, copyrighted by the FASB, is available in soft-cover and loose-leaf versions and may be obtained by contacting the FASB order department at 401 Merritt 7, P.O. Box 5116, Norwalk, Connecticut 06856-5116. Phone: (203) 847-0700.

ISSUE NO. 93-5

Issue no. 93-5, Accounting for Environmental Liabilities, addresses the effect of potential recoveries on environmental losses and the acceptability of discounting environmental liabilities. The issue assumes enterprises must report a liability at the balance sheet date for environmental losses under FASB Statement no. 5, Accounting for Contingencies, because a loss is both probable of occurrence and estimable. Such enterprises also have potential recoveries from insurance companies or other third parties.

The EITF reached a consensus that an environmental liability should be evaluated independently of any potential claim for recovery (a two-event approach) and that the reported loss should be reduced only when a recovery claim is probable of realization.

The EITF discussed, but was not asked to reach a consensus on, the acceptability of netting receivables that are probable of recovery against reported liabilities to third parties. However, Securities and Exchange Commission registrants must follow Staff Accounting Bulletin (SAB) no. 92, issued June 8, 1993, which says such netting will not be appropriate after FASB Interpretation no. 39, Offsetting of Amounts Relating to Certain Contracts, becomes effective for periods beginning after December 15, 1993. In the interim, registrants must provide certain disclosures in the footnotes, including the gross amount of any claims for recovery that are netted against the liability.

The EITF also reached a consensus that discounting environmental liabilities for a specific cleanup site to reflect the time value of money is allowed but not required only if the aggregate amount of the obligation and the amount and timing of the cash payments for that site are fixed or reliably determinable. The consensus abstract clarifies the meaning of "fixed or reliably determinable" and the requirements surrounding the estimation of undiscounted future cash flows for this purpose.

If an environmental liability is discounted under this consensus, any recoveries recognized as assets also must be discounted. If the effect of discounting is material, the financial statements should disclose the undiscounted amounts of the liability and any related recovery as well as the discount rate used.

The EITF was not asked to reach a consensus on appropriate discount rates. The task force observed that the FASB present-value-based measurements and the AICPA accounting standards executive committee environmental liability projects may address appropriate discount rates ever, this and other loss contingency accounting and disclosure issues are addressed in SAB no. 92, which must be followed by SEC registrants.

ISSUE NO. 93-1

Issue no. 93-1, Accounting for Individual Credit Card Acquisitions, addresses credit card issuers that purchase individual credit card accounts from third parties (direct marketing specialists; professional, cultural or other organizations' affinity groups; or cobranders--for example, airlines, automobile manufacturers, hotels or other commercial or retailing companies). Under a cobranding arrangement, the third party's name is included on the credit card and the third party has a continuing obligation to provide goods or services (for example, product discounts) to cardholders for an extended period that directly or indirectly benefits the credit card issuer.

The issue is whether the credit card issuer should account for these transactions using

1. Accounting Principles Board Opinion no. 17, Intangible Assets, and EITF Issue no. 88-20, Difference between Initial Investment and Principal Amount of Loans in a Purchased Credit Card Porfolio, collectively address the purchase of a credit card portfolio and the related credit card relationships.

2. FASB Statement no. 91, Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases, and EITF Issue no. 92-5, Amortization Period for Net Deferred Credit Card Origination Costs, collectively address self-originations and the related accounting for loan origination costs.

The EITF reached a consensus that credit card accounts acquired individually should be accounted for as originations under Statement no. 91 and Issue no. 92-5. Amounts paid to a third party to acquire individual credit card accounts should be deferred and netted against the related credit card fee, if any, and the net amount should be amortized on a straight-line basis over the privilege period. If the cardholder is charged a significant fee, the privilege period is the period the fee entitles the cardholder to use the credit card. If there is no significant fee, the privilege period should be one year. Significance for this purpose should be evaluated based on the amount of the fee relative to the acquisition cost of the card.

ISSUE NO. 93-7

Issue no. 93-7, Uncertainties Related to Income Taxes in a Purchase Business Combination, addresses a number of income tax uncertainties that may exist at the time of or arise in connection with a purchase business combination. Examples include uncertainties about the allocation of the purchase price to individual assets and liabilities for income tax purposes in a taxable business combination; uncertainties about the carry-over bases of assets, liabilities and carry-forwards at the date of acquisition in a non-taxable combination; or uncertainties about tax returns of the acquired company for periods before the acquisition date.

The issues are whether FASB Statement no. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises, is applicable to any income tax uncertainties and, if not, how they should be accounted for under FASB Statement no. 109, Accounting for Income Taxes.

The EITF reached a consensus that Statement no. 38 was not applicable to these uncertainties. Further, the task force decided question 17 of the FASB's Special Report, A Guide to Implementation of Statement 109 on Accounting for Income Taxes; Questions and Answers, should be applied to changes in estimates and final settlements of all income tax uncertainties that predate or result from a purchase business combination with the exception of uncertainties related to the valuation allowance of a deferred tax asset. That exception is addressed by paragraphs 26 and 30 of Statement no. 109.

The abstract contains further guidance on uncertainties that arise in connection with management's best estimate of various matters that are subject to adjustment by taxing authorities.

The EITF also reached a consensus that the guidance in question 17 is applicable to all purchase business combinations regardless of whether the combination occurred before the adoption of Statement no. 109 and regardless of the transition method used to adopt that Statement.

The SEC observer said Statement no. 38 continues to apply to all other preacquisition contingencies and that this consensus's application should be limited solely to income tax uncertainties relating to purchase business combinations.


* EITF Issue no. 93-5 Accounting problem: (1) Should accrued environmental liabilities be reduced by recoveries that are probable of realization? (2) Is discounting an environmental liability permitted for specific cleanup sites if the aggregate amount of the obligation and the amount and timing of cash payments for that site are fixed or reliably determinable? Consensus: (1) Yes. (2) Yes. * EITF Issue no. 93-1 Accounting problem: (1) Should credit card accounts that are acquired individually, be accounted for as originations! (2) Should such payments be deferred and netted against the related credit card fee, if any, and the net amount amortized on a straight-line basis over the privilege period? Consensus: (1) Yes. (2) Yes. * EITF Issue no. 93-7 Accounting problem: Does FASB Statement no. 38 apply to uncertainties related to income taxes in a purchase combination? Consensus: No.

Issue no. Title
93-1 Accounting for Individual Credit Card
93-5 Accounting for Environmental Liabilities
93-6 Accounting for Multiple-Year Retrospectively
 Rated Contracts by Ceding and Assuming
93-7 Uncertainties Related to Income Taxes
 In a Purchase Business Combination
93-8 Accounting for the Sale and Leaseback of
 an Asset That Is Leased to Another Party

The application of EITF consensuses (category c of the GAAP hierarchy) effective after March 15, 1992, is mandatory under SAS no. 69. EITF consensuses issued before March 16, 1992, become effective in the hierarchy for initial application of an accounting principle after March 15, 1993. See the JofA, May92, pages 103-110, for a complete discussion of the new GAAP hierarchy and EITF consensuses.
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Publication:Journal of Accountancy
Date:Sep 1, 1993
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