Action Alert No. 03-44
November 6, 2003

NOTICE OF MEETINGS

OPEN BOARD MEETING

The Board meeting will be held on Tuesday instead of Wednesday.

Tuesday, November 11, 2003, 9:00 a.m.

  1. FASB Staff Position. If necessary, the Board will discuss the development of staff guidance on identification of variable interests. (Estimated 30-minute discussion.)

  2. Qualifying special-purpose entities and isolation of transferred assets. If necessary, the Board will discuss issues that have arisen in drafting the revised Exposure Draft. (Estimated 30-minute discussion.)

  3. Disclosures about pension plans. The Board will discuss comment letters received on the FASB Exposure Draft, Employers' Disclosures about Pensions and Other Postretirement Benefits, redeliberate certain issues, and finalize the disclosures to be included in the final Statement. (Estimated 90-minute discussion.)

  4. Equity-based compensation. The Board will discuss issues relating to (a) the interaction of FASB Statements No. 123, Accounting for Stock-Based Compensation, and No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, (b) the measurement attribute for equity-based compensation awards classified as liabilities granted by nonpublic enterprises, and (c) related party transactions. (Estimated 60-minute discussion.)

  5. 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

Tuesday, November 11, 2003, immediately following the Board meeting

The Board will hold an educational, non-decision-making session to discuss topics that are anticipated to be discussed at the November 19, 2003 Board meeting. Those topics will be posted to the FASB calendar four days prior to the education session.

OPEN MEETING OF THE EMERGING ISSUES TASK FORCE

Wednesday, November 12, 2003, 10:00 a.m. – 5:00 p.m.
Thursday, November 13, 2003, 8:00 a.m. – 3:00 p.m.

The task force plans to discuss all of the following issues in the order shown (the task force plans to discuss the first five issues on Wednesday and to begin discussions on Thursday with Issue 03-9):

  1. Issue No. 03-12, "Impact of FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, on EITF Issue No. 95-1, 'Revenue Recognition on Sales with a Guaranteed Minimum Resale Value'"

  2. Issue No. 03-10, "Application of EITF Issue No. 02-16, 'Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor,' by Resellers to Sales Incentives Offered to Consumers by Manufacturers"

  3. Issue No. 03-1, "The Meaning of Other-Than-Temporary and Its Application to Certain Investments"

  4. Issue No. 02-14, "Whether the Equity Method of Accounting Applies When an Investor Does Not Have an Investment in Voting Stock of an Investee but Exercises Significant Influence through Other Means"

  5. Issue No. 03-6, "Participating Securities and the Two-Class Method under FASB Statement No. 128, Earnings per Share"

  6. Issue No. 03-9, "Interaction of Paragraphs 11 and 12 of FASB Statement No. 142, Goodwill and Other Intangible Assets, Regarding Determination of the Useful Life and Amortization of an Intangible Asset"

  7. Issue No. 03-17, "Subsequent Accounting for Executory Contracts Recorded on an Entity's Balance Sheet"

  8. Issue No. 03-15, "Interpretation of Constraining Conditions of a Transferee in a CBO Structure"

  9. Issue No. 03-13, "Applying the Conditions in Paragraph 42 of FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, in Determining Whether to Report Discontinued Operations"

  10. Issue No. 03-16, "Accounting for Investments in Limited Liability Companies"

  11. Issue No. 03-14, "Participants' Accounting for Emissions Allowances under a 'Cap and Trade' Program."

In addition, as discussed at the July 31, 2003 EITF meeting, the task force will affirm a draft abstract for EITF Issue No. 03-8, "Accounting for Claims-Made Insurance and Retroactive Insurance Contracts by the Insured Entity," as final. Issue 03-8 is a codification of the consensuses reached in EITF Issues No. 03-3, "Applicability of EITF Abstracts, Topic No. D-79, 'Accounting for Retroactive Insurance Contracts Purchased by Entities Other Than Insurance Enterprises,' to Claims-Made Insurance Policies," and No. 86-12, "Accounting by Insureds for Claims-Made Insurance Policies," and Topic D-79 (and the examples discussed in each of those Issues).

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.

October 29, 2003 Board Meeting

Modifications of Interpretation 46. The Board discussed additional proposed modifications of FASB Interpretation No. 46, Consolidation of Variable Interest Entities. The Board decided the proposed Interpretation modifying Interpretation 46 would:

  1. Expand the proposed exception to the application of Interpretation 46 to all entities created before February 1, 2003, for which an enterprise is unable to obtain the information necessary to apply that Interpretation. An enterprise that subsequently obtains the necessary information to apply Interpretation 46 to an entity subject to this exception should apply the provisions of Interpretation 46 to that entity as of the date the information was obtained. Restatement would be encouraged but not required.

  2. Provide an exception to the application of Interpretation 46 to mutual funds in the form of trusts and trusts of a bank’s trust department and similar arrangements, unless those arrangements are used by a business enterprise to circumvent the provisions of that Interpretation.

  3. Clarify that qualitative considerations may be important in determining whether an entity’s equity investment at risk is sufficient to finance its activities without additional subordinated financial support.

  4. Clarify that the basis of the variability component of an entity’s expected losses and expected residual returns in paragraphs 8(a) and 8(b) of Interpretation 46 is the expected variability in the entity’s long-term return to variable interests.

  5. Require that an enterprise involved with an entity that was previously not considered a variable interest entity to reconsider whether the entity is a variable interest entity whenever the design of the entity or ownership of interests in the entity changes in a manner that could affect the determination.

  6. Remove possible inconsistencies in the guidance on determining which variable interest holder will absorb a majority of the variable interest entity’s expected losses, receive a majority of the entity’s expected residual returns, or both.

  7. Require an enterprise to recognize goodwill if it becomes the primary beneficiary of a variable interest entity that is a business, as defined in EITF Issue No. 98-3, "Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business."

  8. Clarify that the guidance on the measurement of transferred assets and liabilities in paragraph 20 of Interpretation 46 should be applied in a manner consistent with the guidance in paragraph 18.

  9. Delete paragraphs B1–B10 of Appendix B of Interpretation 46. The Board intends to provide guidance about similar matters in another form, possibly as an FASB Staff Position (FSP), prior to the effective date of this Interpretation.

  10. Be effective for financial statements issued for the first reporting period ending after December 15, 2003, for variable interests and variable interest entities to which the provisions of Interpretation 46 have been applied, with a cumulative-effect adjustment in that period. Restatement would be encouraged but not required. For variable interests in which the provisions of Interpretation 46 have not been applied, the proposed Interpretation would be applied in accordance with the effective date provisions of Interpretation 46 and related FASB Staff Positions.

The Board instructed the staff to proceed with a draft of the proposed Interpretation for vote by written ballot.

The staff announced that they are drafting a proposed FSP that would provide guidance on the application of paragraph 5(b)(1). The staff plans to include an example based on franchise arrangements in that proposed FSP.

Equity-based compensation. The Board discussed disclosure requirements relating to equity-based compensation (EBC) arrangements and decided that entities would be required to disclose information enabling a financial statement user to understand the following:

  1. The nature and terms of the financial instruments granted and the rights and obligations embodied in those instruments

  2. The fair value of the goods or services received, or the fair value of the equity instruments granted, during the period

  3. The effect of expenses arising from EBC arrangements on the enterprise’s income statement for the period

  4. The cash flows related to EBC arrangements

  5. The potential outcomes from EBC arrangements on dilution (for example, the transfer of wealth from shareholders to option holders).

The Board discussed the effective date and method of transition for public enterprises and reached the following decisions:

  1. The proposed Statement would be effective for all employee awards granted, modified, or settled after the beginning of the first fiscal year for fiscal years beginning after December 15, 2004. Early adoption would be permitted. Enterprises would be required to disclose the effect of the change from FASB Statement No. 123, Accounting for Stock-Based Compensation, to the proposed Statement in the year of adoption.

  2. The method of transition required would be characterized as the modified prospective method. Under that method, an enterprise would recognize equity-based employee compensation cost from the beginning of the fiscal year in which the recognition provisions are first applied as if the fair-value-based accounting method in the proposed Statement had been used to account for all employee awards granted, modified, or settled in fiscal years beginning after December 15, 1994. As of the effective date, compensation cost related to the nonvested portion of awards outstanding as of that date would be based on the grant-date fair value of those awards as calculated under the original provisions of Statement 123.

  3. For EBC awards that would have been classified as equity under Statement 123, but now would be classified as liabilities under the proposed Statement, a cumulative effect of a change in an accounting principle would be recognized by initially measuring the liability at fair value as required by the proposed Statement, which is consistent with the transition provisions of FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.

  4. For EBC awards of public enterprises that would be classified as liabilities under the original provisions of Statement 123 and measured at intrinsic value, a cumulative effect of a change in an accounting principle would be recognized by initially measuring the liability at fair value as required by the proposed Statement as of the effective date.

  5. No alternative transition methods would be permitted for public enterprises that previously adopted Statement 123 under FASB Statement No. 148, Accounting for Stock-Based Compensation—Transition and Disclosure.

The Board also expressed support for the revised definitions of market, performance, and service conditions. Those revised definitions incorporate the suggestions of the Board made at its October 8, 2003 meeting.

Financial instruments: liabilities and equity. The Board directed the staff to defer indefinitely application of the classification and measurement requirements in Statement 150 to certain mandatorily redeemable noncontrolling interests. The deferral applies to interests that would be classified as equity by the subsidiary, under the exception in paragraph 9 of Statement 150, but would be classified as liabilities in the consolidated financial statements of the parent. During the deferral period, the Board will reconsider implementation issues and, perhaps, classification or measurement guidance for those noncontrolling interests, in conjunction with the Board’s ongoing projects on liabilities and equity and business combinations—purchase methods procedures. The Board directed the staff to effect the deferral in the forthcoming final version of FSP FAS 150-c, "Effective Date and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities of FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." The Board also tentatively decided that early adoption will be precluded during the deferral period and to require transition by retroactive restatement for entities that have already adopted Statement 150 to such instruments. (However, the Board will consider an alternate method of transition at its November 5, 2003 meeting.)

PROPOSED FASB INTERPRETATION AVAILABLE

The Board issued the proposed FASB Interpretation, Consolidation of Variable Interest Entities, on October 31, 2003. Comments are requested by December 1, 2003. If you do not have access to the Internet, you can receive a printed copy by calling the FASB Order Department at 1-800-748-0659.

FASB STAFF POSITION GUIDANCE AVAILABLE

On November 5, 2003, a majority of the Board directed the FASB staff to release final FSP FAS 150-3, "Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity."

Also, a majority of the Board did not object to the release of final FSP FAS 150-4, "Issuers’ Accounting for Employee Stock Ownership Plans under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity."

Those final FSPs will be available on the FASB website by the end of business on Friday, November 7, 2003, where they will remain until they can be incorporated into printed FASB literature.

OTHER FASB STAFF POSITION GUIDANCE INFORMATION

The FASB staff has evaluated the comment letters received on proposed FSP, "Applicability of FASB Statement No. 143, Accounting for Asset Retirement Obligations, to Legislative Requirements on Property Owners to Remove and Dispose of Asbestos or Asbestos-Containing Materials." Because of the diverse views in those comment letters, the staff is considering a proposal for a Board agenda project. That proposal will be presented to the Board when there are available resources to address this issue.

FUTURE OPEN MEETINGS

The following is a list of open meetings tentatively scheduled through December. 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, November 19, 2003—FASB Board Meeting
Wednesday, November 19, 2003—FASB Education Session
Tuesday, November 25, 2003—FASB Board Meeting
Wednesday, November 26, 2003—FASB Board Meeting
Wednesday, November 26, 2003—FASB Education Session
Wednesday, December 3, 2003—FASB Board Meeting
Wednesday, December 3, 2003—FASB Education Session
Thursday, December 4, 2003—Financial Accounting Standards Advisory Council
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