fyi
---------------------- Forwarded by Ryan Siurek/Corp/Enron on 07/26/2000 
12:22 PM ---------------------------


Kimberly Scardino
07/25/2000 08:35 PM
To: Ryan Siurek/Corp/Enron@ENRON
cc:  

Subject: 00-19

I assume you have the huge EITF write-up (53 paragraphs of background).  Here 
is AA's (should we set up a time to talk about game plan on this - I know you 
guys had a flurry of activity last quarter):


AA - Arthur Andersen
     Hot Topics
       EITF Action on Derivatives on a Company's Own Shares
                                                                              
                                                                              
                                                                              
         

EITF Action on Derivatives on a Company's Own Shares

July 21, 2000

At its July 19, 2000 meeting, the Emerging Issues Task Force (EITF) 
tentatively resolved how certain settlement features affect accounting for 
equity derivative contracts entered into by a company on its own stock. 
Specifically, the EITF sketched out a model governing how such features 
affect whether the contract should be treated as (a) an equity instrument and 
reported in stockholders, equity or (b) an asset or liability at fair value 
with changes in fair value reported currently in earnings.

EITF Issue No. 00-19, "Determination of Whether Share Settlement is Within 
the Control of the Issuer for Purposes of Applying Issue No. 96-13 ," was 
taken up to address implementation of the EITF's March 16, 2000, consensus on 
EITF Issue No. 00-7, "Application of EITF Issue No. 96-13 to Equity 
Derivative Transactions That Contain Certain Provisions That Require Cash 
Settlement If Certain Events Occur ." The final consensus in Issue 00-7 
generally stated that equity derivative contracts that contained provisions 
that implicitly or explicitly required net cash settlement outside of the 
control of the company must be treated as assets and liabilities and carried 
at fair value rather than equity instruments carried at original cost and 
reported as part of permanent equity as provided for in EITF Issue No. 96-13, 
"Accounting for Derivative Financial Instruments Indexed to, and Potentially 
Settled in, a Company's Own Stock ."

The Task Force also tentatively provided an extended transition period for 
existing contracts and contracts entered into before a final consensus is 
reached. The goal is to reach a final consensus at the September 2000 EITF 
meeting.

The Model 

The model,s governing concept is that, for a contract to be accounted as 
permanent equity, the contract's provisions should put the company,s 
counterparty in no better position than the company,s common shareholders. 
Specifically, the EITF tentatively concluded that contracts in a company,s 
own stock, such as written puts or forward purchase contracts, that come 
under the scope of Issue 96-13 and have net share settlement provisions that 
keep a contract from being classified as an asset or liability must have the 
following characteristics * otherwise the contract must be treated as an 
asset or liability at fair value with changes in fair value reported 
currently in earnings.

The contract must permit the company to settle net in shares, at its option, 
in either registered or unregistered shares. (It was determined that the 
ability to deliver registered shares was outside of the control of a company.)
The contract must contain an explicit cap on the number of shares to be 
delivered in a net share settlement. This cap must exist even if the contract 
terminates when the stock price reaches a stated price trigger. (The need for 
a cap was determined to be critical in determining whether a company had 
sufficient authorized and unissued shares to settle the contract.)
At contract inception and on an ongoing basis, the company must have 
sufficient authorized but unissued shares available to settle the contract 
considering all other claims on authorized shares for stock options, 
convertibles, and other transactions that may require the issuance of stock. 
(This requirement was deemed critical as the ability to have a request for 
additional authorized shares approved by the shareholders was deemed outside 
of the control of the company. In this context, "the company" is defined as 
the company's management rather than its management and shareholders.)
There is no requirement in the contract to post collateral at any point in 
the contract or for any reason.
There are no required cash payments to the counterparty (true-ups) if the net 
shares initially delivered are insufficient to provide the counterparty with 
full satisfaction of the amount due. However, true-ups may be included in the 
contract if the company only, not the counterparty, can choose whether to 
satisfy the true-up in shares or cash and the true-up is subject to the 
explicit cap discussed in item 2.
There is no economic penalty in the contract for net share settlement that 
would economically compel the company to settle in net cash. (The right to 
increase the number of shares delivered based on the fair value differential 
between registered shares and unregistered shares was not deemed to be a 
penalty.)
There are no provisions in the contract that would indicate the counterparty 
had creditor rights, or would otherwise contravene the objective of this 
model that the counterparty,s rights would rank no higher than those of a 
common shareholder. (Subject to future EITF discussions, it may be possible 
to meet this criterion by having a legal letter addressing the issue or a 
specific statement of this concept in the contract.)

Related Issues

There was also discussion of the provisions relating to termination and 
settlement in the event of a merger or change in control. There was general 
support for a position that, as long as the counterparty received the same 
choice of compensation as other shareholders (for example, stock for stock, 
stock and cash for stock, cash for stock), the fact that the counterparty 
might receive cash in such circumstances would not preclude equity treatment 
for the contract.

Similarly, in the event of nationalization or liquidation, a net cash 
settlement of the same type afforded a common shareholder would not preclude 
equity treatment for the contract.

In addition, counterparty rights that did not exceed rights of common 
shareholders should be acceptable, for example, rights to sue for damages in 
the event of misrepresentations or a breach of warrranties or if a company 
simply refused to perform under the contract, as long as a common shareholder 
would also have those rights.

With respect to events that would cause a contract that was compliant with 
the model at inception to later become noncompliant (for example, because an 
acquisition consumed enough authorized shares that otherwise were needed to 
satisfy the contract), the EITF concluded that, at the time the contract is 
no longer compliant, the fair value of the contract should be transferred 
from equity to an asset or liability at fair value with prospective changes 
in fair value reported currently in earnings. There would be no immediate 
earnings effect at the time of this transfer.

Further, if, at a later date, sufficient shares were authorized to again 
satisfy the contract, the carrying amount of the contract (that is, its fair 
value) would be transferred back to equity and the contract treated as equity 
prospectively to the extent the contract continues to comply with the model. 
(The company would not be permitted to reverse the gains and losses in fair 
value recognized in earnings during the period the contract was treated as an 
asset or liability.)

Transition

The EITF tentatively concluded that all contracts entered into after the date 
of a final consensus will have to comply with the model at contract inception 
to achieve equity treatment. (The goal is to reach a final consensus at the 
September 2000 EITF meeting.) For contracts entered into before the date of a 
final consensus, a company will have until June 30, 2001, to modify the 
contract to comply with the final consensus.

For example, if a company entered into a contract before the date of the 
final consensus, the company will have until June 30, 2001, to obtain any 
shareholder authorization of shares needed to satisfy the criteria or to 
modify their contract for the other criteria or any EITF changes to the 
tentative model.

Since a variety of viewpoints are discussed at Emerging Issues Task Force 
(EITF) meetings and it is often difficult to characterize the conclusions, 
the following minutes may differ in some respects from the final minutes 
available from the Financial Accounting Standards Board (FASB).