The Financial Accounting Standards Board (FASB) issued Statement No. 150 Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity in May 2003. This Statement requires that issuers of specified types of financial instruments with characteristics of both liabilities and equity classify these instruments as liabilities (or, in some cases, as assets). Previously, these instruments may have been classified as equity. This statement applies to three types of financial instruments:
For public companies, FAS 150 is effective for the first interim period beginning after June 15, 2003. For nonpublic companies, the effective date is December 15, 2003.
Trust preferred securities (TPS) are one of the financial instruments affected by the new reporting requirements. Since 1996, TPS have been a particularly attractive form of funding for bank holding companies because, subject to certain terms and conditions, TPS are considered Tier 1 capital for regulatory purposes and as debt for tax purposes. As a result, many institutions in the Third District and across the nation have issued trust preferred securities.
The Implications for Regulatory
So, how does FAS 150 impact bank holding company reporting and capital treatment? As announced on July 2, 2003 in SR Letter 03-13, Instructions for Reporting Trust Preferred Securities on Schedule HC-R of the FR Y-9C, one new regulatory reporting requirement became effective for the June 30, 2003 reporting period. Bank holding companies are now required to disclose the amount of trust preferred securities reported as liabilities in their financial statements prepared according to GAAP requirements in the Notes to the Balance Sheet - Other section of FR Y-9C filings.
At present, there are no other changes to the line items on the FR Y- 9C reports or to the regulatory capital treatment, and financial institutions should continue to follow the current instructions for the reporting of trust preferred securities. For bank holding company reporting, upon consolidation in the financial statements, the parent bank holding company's interest in the trust subsidiary will continue to be reported as "minority interest in consolidated subsidiaries" on the balance sheet. This amount then qualifies for inclusion in Tier 1 capital, up to 25 percent of core capital elements.
Although a number of conceptual issues involving other financial instruments have not yet been resolved, FASB issued this limited scope statement to provide guidance on the issues that have been decided. Some provisions of FAS 150 are consistent with Concepts Statement No. 6, Elements of Financial Statements, which currently defines liabilities as " probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events." However, other provisions will not necessarily appear consistent until FASB revises the definition of liabilities in Concepts Statement No. 6, which is planned for the next phase of the project. This next phase will also include deliberations on complex financial instruments, including puttable shares, convertible bonds, dual-indexed financial instruments, and the possible separation of certain instruments. The Board of Governors will be monitoring these accounting developments as they occur and will provide updated reporting guidance as necessary.
If you have any questions on the reporting of TPS or the implications of FAS 150 on TPS, please contact your primary banking regulator. If you are supervised by the Federal Reserve Bank of Philadelphia, please contact your institution's central point of contact or assigned manager at the Reserve Bank.
The views expressed in this article are those of the author and are not necessarily those of this Reserve Bank or the Federal Reserve System.