Statement of Financial Accounting Standards No. 125

Article excerpt

The purpose of this and other SFAS articles is to make you aware of the new SFASs. Also, it is hoped that these articles will provide you with the necessary information to determine which clients, if any, must comply with the new SFASs and the date by which they must comply. Should you think of any clients that might have to comply with this or other SFASs, you should order a copy for your office library's reference section; it's worth the $10-$15 cost.

The Journal of Accountancy prints SFAS standards but not the appendixes. The appendixes are usually the "meat" of the SFAS and include the following information: implementation guidance, background information, the basis of the board's conclusions, amendments to existing pronouncements and a glossary of terms. To use SFAS No. 125 as an example, the actual standard is eight pages (21 paragraphs); the appendixes are another 90 pages (213 paragraphs).

The Financial Accounting Standards Board (FASB) has issued Statement of Financial Accounting Standard (SFAS) No. 125: Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 125 supersedes and amends a number of FASB's previously issued statements. Also, it mandates that additional disclosures will be made to the financial statements. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. Earlier or retroactive application of this Statement is not permitted. The provisions of SFAS No. 125 need not be applied to immaterial items.

The definitions listed below are very helpful in understanding SFAS No. 125 and demonstrate the type of information included in the appendixes:

Financial Asset - Cash, evidence of an ownership interest in an entity or a contract that conveys to a second entity a contractual right (a) to receive cash or another financial instrument from a first entity or (b) to exchange other financial instruments on potentially favorable terms with the first entity.

Financial Liabilities - A contract that imposes on one entity a contractual obligation (a) to deliver cash or another financial instrument to a second entity or (b) to exchange other financial instruments on potentially unfavorable terms with the second entity.

Servicing Asset - A contract to service financial assets under which the estimated future revenues from contractually specified servicing fees, late charges and other ancillary revenue are expected to more than adequately compensate the servicer for performing the service. …