Action Alert No. 03-47
November 26, 2003

NOTICE OF MEETINGS

OPEN BOARD MEETINGS

Wednesday, December 3, 2003, 9:00 a.m.

  1. Fair value measurement. The Board will discuss whether to include in the phase 1 scope of the project disclosures relating to how fair value estimates are determined. (Estimated 30-minute discussion.)

  2. Business combinations: purchase method procedures. The Board will discuss the following business combination issues: (Estimated 60-minute discussion.)

    1. The subsequent accounting for acquired in-process research and development (IPR&D) assets that are recognized as an intangible asset as part of a business combination. Specifically, the Board will focus on (1) whether acquired IPR&D should be classified as a finite-lived intangible or an indefinite-lived intangible under FASB Statement No. 142, Goodwill and Other Intangible Assets, and (2) the period over which acquired IPR&D should be amortized.
    2. Whether to modify the definition of a business in EITF Issue No. 98-3, “Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business.”

  3. Financial instruments: liabilities and equity. The Board will discuss approaches to distinguishing equity from liabilities and assets, beginning with options and forward contracts. (Estimated 90-minute discussion.)

Wednesday, December 3, 2003, 1:00 p.m.

  1. Loan commitments. The Board will discuss the contractual terms and other aspects of interest rate lock commitments and other loan commitments with representatives of the Mortgage Bankers Association of America. This meeting is educational and no Board decisions are expected. (Estimated 60-minute discussion.)

  2. Open discussion. If necessary, the Board will allow time to discuss minor issues with staff members on technical projects or administrative matters. Those discussions are held following regular Board meetings as topics come up.

OPEN EDUCATION SESSION

Wednesday, December 3, 2003, immediately following the 1:00 p.m. Board meeting

The Board will hold an educational, non-decision-making session to discuss topics that are anticipated to be discussed at the December 10, 2003 Board meeting. Those topics will be posted to the FASB calendar four days prior to the education session.

OPEN MEETING OF THE FINANCIAL ACCOUNTING STANDARDS ADVISORY COUNCIL

Thursday, December 4, 2003, 9:00 a.m.

The Advisory Council will meet to discuss:

  1. The current business and financial reporting environment
  2. The results of the annual FASAC survey
  3. The long-term international convergence process
  4. The Board’s project on revenue recognition
  5. The Board’s project on liability extinguishments.

The Advisory Council will hear reports from the chairman of the FASB on other Board activities and the chief accountant of the SEC on current accounting-related developments. The Advisory Council also will hear a report from the deputy chief auditor of the Public Company Accounting Oversight Board.

BOARD ACTIONS

The Board Actions are provided for the information and convenience of constituents who want to follow the Board’s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions are included in an Exposure Draft for formal comment only after a formal written ballot. Decisions in an Exposure Draft may be (and often are) changed in redeliberations based on information provided to the Board in comment letters, at public hearings, and through other communication channels. Decisions become final only after a formal written ballot to issue a final Statement or Interpretation.

November 19, 2003 Board Meeting

Fair value measurement. The Board discussed phase 1 scope and codification issues, reconsidering certain of its decisions in its former project to replace FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, which was removed from the agenda in July 2003.

  1. The Board decided to exclude from the phase 1 scope revenue recognition transactions covered under existing pronouncements that require vendor-specific objective evidence of fair value measurement. 
  2. The Board reconsidered its December 2001 decision that for financial instruments traded in active markets in which prices are quoted in terms of bid and asked prices, the fair value measurement should be determined using the midpoint of the bid-asked spread. The Board decided that the fair value measurement should be determined using bid prices for long positions (assets) and asked prices for short positions (liabilities). 
  3. The Board decided that for fair value measurements involving restricted securities, the existing SEC guidance in ASR 113 should continue to apply, as supplemented by the proposed guidance discussed by the Board in April 2003, which refers to factors that should be included among those considered in developing the measurements. 
  4. For financial instruments traded in active markets, the Board affirmed its March 2003 decision to retain the principle in Statement 107 that establishes that the unit of account is the individual trading unit and prohibits a fair value measurement using a block discount.  That decision would require conforming changes to the AICPA Industry Guides for brokers-dealers and investment companies. For assets and liabilities that are not traded in active markets, the Board decided not to reconsider the unit-of-account guidance in other existing pronouncements in this project.

Equity-based compensation (EBC). The Board discussed issues related to the accounting for income tax effects of EBC arrangements, including the method of allocating those effects to the income statement and equity. The Board also discussed certain convergence issues, related party transactions, and the definition of share-based payment.

The Board decided that temporary differences related to the tax effects of a cash-settled stock appreciation right would be based on the arrangement’s fair value and amount of compensation cost recognized in the financial statements.

The Board also made the following decisions that pertain to EBC awards classified as equity:

  1. The tax effects of an EBC award classified as equity for which a tax deduction is received for the exercise-date fair value of the award would be calculated using the arrangement’s grant-date fair value and the amount of compensation cost recognized in the financial statements.
  2. If a deduction reported on a tax return for a stock-based award exceeds the cumulative compensation cost for that award recognized for financial reporting, the tax benefit for that excess deduction would be recognized as additional paid-in capital. If the deduction reported on a tax return is less than the cumulative compensation cost recognized for financial reporting, the write-off of a related deferred tax asset in excess of the benefits of the tax deduction, net of the related valuation allowance, if any, would be recognized in the income statement.
  3. If a temporary difference is due to the measurement of compensation cost for financial reporting purposes occurring prior to the measurement of compensation cost for tax purposes, tax benefits related to the excess deduction would pertain to the equity transaction. If a temporary difference is due to any other circumstance, for instance, different measurement bases, different valuation methodologies, or tax incentives (but in no case due to different measurement dates), the income tax effects from those differences relate to the compensation transaction and would be accounted for in the income statement.
  4. A deferred tax asset would be evaluated for future realization and would be reduced by a valuation allowance if, based on the weight of the available evidence, it is more likely than not that some portion or all of the deferred tax asset would not be realized. Differences between (a) the deductible temporary difference computed and (b) the tax deduction inherent in the current fair value of the enterprise's stock would not be considered in measuring either the gross deferred tax asset or the need for a valuation allowance for a deferred tax asset recognized under the proposed Statement.
  5. The imputed cash flow effects of excess tax benefits would be accounted for in the financing section of the cash flow statement. Consequently, FASB Statement No. 95, Statement of Cash Flows, would be amended to allow for such treatment.

In addition to the decisions pertaining to the accounting for income tax effects of EBC arrangements, the Board made decisions relating to (a) convergence issues relating to modifications and (b) certain EBC transactions involving related parties:

  1. For situations in which an enterprise modifies a vesting condition of an EBC award classified as equity from a condition that was improbable of being achieved to a condition that is probable of being achieved (a Type III modification), an enterprise would compare the fair value of the old award immediately before the modification multiplied by the probability switch with the fair value of the new award multiplied by the probability switch and would recognize the incremental value. This decision reaffirms a previous Board decision made on September 17, 2003.
  2. For an EBC award originally classified as equity that has been modified in such a way that the award meets the definition of a liability, an enterprise would not recognize less than the grant-date fair value of the original award unless the original vesting provisions would not have been met at the date of modification. That means that an enterprise would recognize compensation cost equal to the greater of the cash-settlement value of the liability award or the grant-date fair value of the original award. This decision reaffirms a previous Board decision made on September 17, 2003.
  3. The reconveyance of an award from the employee to the employer would be recognized by the issuing enterprise as a credit in the income statement equal to the lesser of (a) the fair value of the award on the reconveyance date or (b) the recognized cumulative compensation cost associated with the award. Such reconveyances are nonreciprocal in nature. If an unvested award is reconveyed, then an enterprise would recognize all unrecognized compensation cost associated with the award on the date of reconveyance.
  4. All transactions in which related parties or other economic interest holders of an enterprise grant EBC of that enterprise to employees of that enterprise would be analyzed to determine whether the enterprise benefits from the arrangement. If the enterprise benefits from such transactions, then such transactions would be accounted for as employee compensation cost paid by the enterprise and capital contributions received from related parties or other economic interest holders.

The Board also expressed support for the revised definition of share-based payment transaction, as well as language that would clarify the scope section of FASB Statement No. 123, Accounting for Stock-Based Compensation. Those revisions incorporate the suggestions of the Board made at its October 8, 2003 meeting.

FASB Staff Positions (FSPs) on Interpretation 46. The Board deferred discussion of an FSP on the exclusion of certain decision-maker fees from paragraph 8(c) of FASB Interpretation No. 46, Consolidation of Variable Interest Entities, until the November 26, 2003 Board meeting. The Board decided not to finalize that FSP until the staff and Board have had time to consider comments received on this matter.

AcSEC CLEARANCE

November 19, 2003 Board Meeting

AcSEC documents. The Board met with representatives of the AICPA's Accounting Standards Executive Committee (AcSEC) and discussed clearance of two AICPA Statements of Position (SOP):

  1. Financial Highlights of Separate Accounts: An Amendment to the Audit and Accounting Guide Audits of Investment Companies
  2. Reporting Financial Highlights and Schedule of Investments by Nonregistered Investment Partnerships: An Amendment to the Audit and Accounting Guide Audits of Investment Companies and AICPA Statement of Position 95-2, Financial Reporting by Nonpublic Investment Partnerships.

The Board did not object to issuance of either SOP subject to staff review of any editorial changes being made by AcSEC.

FASB STAFF POSITION GUIDANCE AVAILABLE

On November 26, 2003, a majority of the Board did not object to the release of the final FSP FIN 46-7, “Exclusion of Certain Decision Maker Fees from Paragraph 8(c) of FASB Interpretation No. 46, Consolidation of Variable Interest Entities.” This final FSP will be available on the FASB website by the end of business on November 26, 2003, where it will remain until it can be incorporated into printed FASB literature.

FUTURE OPEN MEETINGS

The following is a list of open meetings tentatively scheduled through January. Because schedules may change, please check the FASB calendar before finalizing your plans. Revisions to this list since the last issue of Action Alert are highlighted in bold.

Wednesday, December 10, 2003—FASB Board Meeting
Wednesday, December 10, 2003—FASB Education Session
Wednesday, December 17, 2003—FASB Board Meeting
Wednesday, December 17, 2003—FASB Education Session
Thursday, December 18, 2003—Liaison Meeting with the American Insurance Association
Tuesday, January 6, 2004—Liaison Meeting with the AICPA Audit Issues Task Force
Wednesday, January 7, 2004—FASB Board Meeting
Wednesday, January 7, 2004—FASB Education Session
Wednesday, January 14, 2004—FASB Board Meeting
Wednesday, January 14, 2004—FASB Education Session
Thursday, January 15, 2004—EITF Meeting
Wednesday, January 21, 2004—FASB Board Meeting
Wednesday, January 21, 2004—FASB Education Session
Wednesday, January 28, 2004—FASB Board Meeting
Wednesday, January 28, 2004—FASB Education Session