Action Alert No. 03-41
October 16, 2003

NOTICE OF MEETINGS

OPEN TRIPARTITE AcSB/IASB/FASB MEETING

Canadian Institute of Chartered Accountants (CICA)
277 Wellington Street West
Toronto, Ontario, Canada

Wednesday, October 22, 2003, 8:45 a.m.

The Canadian Accounting Standards Board (AcSB), IASB, and FASB will meet to discuss the following projects:

1. Disclosure framework. The Boards will discuss the findings to date on the Canadian disclosure framework project. This portion of the meeting is informational; no decisions are expected. (Scheduled for 8:45 a.m.–9:45 a.m.)

2. Measurement. The Boards will discuss the findings of the Canadian research project on measurement, the next steps for the IASB, and the related aspects of the FASB project on fair value measurement. This portion of the meeting is informational; no decisions are expected. (Scheduled for 10:00 a.m.–12:00 p.m.)

3. Revenue recognition. The Boards will continue to discuss a conceptual model for analyzing assets and liabilities arising from contractual rights and obligations. Specifically, the Boards will discuss illustrations of the conceptual model by applying it to examples relating to existing guidance. Those examples will include software arrangements and nonrefundable upfront fees for loan originations and commitments. (Scheduled for 1:00 p.m.–3:00 p.m.)

4. Equity-based compensation/share-based payment. The Boards will discuss certain convergence issues: (a) the method of accounting for income tax effects of share-based payment transactions, (b) the classification of share-based payment arrangements as liabilities or equity, and (c) fair value measurement of equity compensation arrangements. (Scheduled for 3:15 p.m.–5:15 p.m.)

OPEN JOINT IASB/FASB MEETING

Canadian Institute of Chartered Accountants (CICA)
277 Wellington Street West
Toronto, Ontario, Canada

Thursday, October 23, 2003, 8:30 a.m.

The IASB and FASB will meet to discuss the following joint projects:

1. Reporting financial performance/comprehensive income. The Boards will discuss the direction of the FASB’s project and the decisions made to date, as well as similarities and differences with the IASB’s similar project. This portion of the meeting is informational; no decisions on technical issues are expected. (Scheduled for 8:30 a.m.–9:45 a.m.)

2. Short-term convergence. The Boards will discuss (a) progress achieved to date in this joint project and changes to the project’s original scope, (b) classification of a liability when the loan agreement has been breeched but there is a grace period in effect at the balance sheet date, and (c) decisions made to date by the IASB regarding differences in the accounting for income taxes. (Scheduled for 10:00 a.m.–12:00 p.m.)

3. Business combinations: purchase method procedures. The Boards will discuss issues for which the IASB and FASB have reached different conclusions in this joint project. The primary issues are (a) determining which assets and liabilities should be included in the business combination accounting and (b) whether risks that result from the acquired entity’s past actions constitute a stand-ready obligation that should be recognized on the acquisition date. Other issues include (a) whether the measurement period applies to components of the consideration paid, (b) whether the excess of the consideration paid over the fair value of the acquirer’s interest in the net assets acquired should be recognized in profit or loss at the acquisition date, (c) certain differences in transitional provisions for noncontrolling interest decisions, and (d) subsequent recognition of acquired deferred tax benefits. (Scheduled for 1:00 p.m.–2:30 p.m.)

4. Agenda planning. The Boards will discuss strategies for converging their future agendas. This portion of the meeting is administrative; no technical or agenda decisions are expected. (Scheduled for 2:45 p.m.–3:30 p.m.)

The AcSB is requesting that observers preregister for the October 22 and October 23 meetings. For observer registration information, please visit the AcSB website at http://www.cica.ca/index.cfm/ci_id/17126/la_id/1.htm. The information about the availability by phone for these meetings is the same as for meetings held at the FASB offices; however, if you have questions please call (416) 204-3279.

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 8, 2003 Board Meeting

Business combinations: purchase method procedures. The Board discussed issues related to the accounting for business combinations and to the accounting and reporting of noncontrolling interests in consolidated financial statements.

1. At its April 22, 2003 meeting, the Board decided that assets or liabilities exchanged among the parties to the combination as a condition of the agreement that are directly related to and essential to the business combination should be included in the business combination accounting even if they were not assets or liabilities of the acquiree before the combination. However, the Board asked the staff to develop clarifying guidance. At this meeting, the Board decided to clarify that decision as follows:
   1. Emphasize that for an acquiring entity to recognize an asset acquired or a liability assumed in a business combination, that asset or liability must, on the acquisition date, meet the definition of an asset or a liability as defined by FASB Concepts Statement No. 6, Elements of Financial Statements.

   2. If an asset acquired or a liability assumed by the acquiring entity was not an asset or liability of the acquiree at the acquisition date, it should not be considered part of the business combination unless that asset or liability (i) can be identified in the acquisition agreement as a condition of the combination and (ii) is essential to the consummation of the business combination.

   3. Provide guidance in the form of examples that distinguish the types of conditions that are essential to the business combination from those that are gratuitous.

2. The Board clarified its December 12, 2001 decision about the intended application of the measurement period, the objective of which is to allow a reasonable amount of time to obtain the information necessary to measure the fair value of the net assets acquired. The Board clarified that:
   1. The measurement period also should apply to the business acquired (including items of consideration paid).

   2. The measurement period should end as soon as possible, but should not exceed one year from the acquisition date.

3. The Board discussed whether, in the event there is evidence that the consideration paid to acquire a business exceeds the fair value of that business, the amount of that excess should be expensed on the acquisition date as an overpayment. The Board observed the difficulty in identifying and measuring the amount of any such overpayments and decided to retain the decision reflected in Statement 141 to subsume in goodwill any overpayment amount.

4. The Board decided that a partially owned subsidiary’s income, losses, and components of other comprehensive income should be attributed to the controlling and noncontrolling interests or other parties with a right or obligation that affects the attribution of comprehensive income or loss, on the basis of their contractual rights or obligations, if any, otherwise, on the basis of ownership interests.

5. The Board also decided to reexpose the noncontrolling interest decisions along with the business combinations decisions in a single document.

6. The Board decided to change the expected issuance from the fourth quarter of 2003 to the first quarter of 2004 for (a) the combined Exposure Draft on business combinations and noncontrolling interests, (b) combinations of not-for-profit organizations, and (c) combinations between mutual enterprises.

Equity-based compensation. The Board discussed definitions of market condition, performance condition, and service condition as they relate to equity-based compensation (EBC) arrangements and related issues, reaching the following decisions:

1. The description of market condition in FASB Statement No. 123, Accounting for Stock-Based Compensation, would be retained. A definition incorporating that description would be incorporated into the proposed Statement. Under that definition, if an EBC award’s exercise price or vesting (or exercisability) is based on the achievement of a specified market target in terms of an index of similar equity securities or a similar equity security of another enterprise, then that condition is a market condition. Furthermore, if the exercise price or exercisability of an EBC award is based on something other than a specified service, performance, or market condition, then the EBC award would be classified as a liability.

2. For EBC arrangements that combine market and nonmarket vesting or exercisability conditions, an enterprise would be required to use judgment in estimating the service period over which benefits would be received. For EBC arrangements that vest or become exercisable based on meeting either a market condition or a nonmarket condition, an enterprise would compare the explicit service period and the implied service period associated with the market condition and would use the shorter of the two.

3. The definition of performance condition in Statement 123 would be retained but modified to clarify that the term specified performance refers to a target that is calculated or measured by reference to the issuer’s own operations.

4. A service condition would be defined as an award for which vesting depends solely on an employee’s rendering service to the employer for a specified period of time (that is, an award that does not specify a performance condition or market condition for vesting or exercisability).

5. Additionally, the total universe of vesting or exercisability conditions would be classified as service, performance, or market conditions, which are mutually exclusive categories.

6. The existing definition of public entity in Statement 123 would be retained but modified to include the following corresponding elaboration in paragraph 72 of FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation:

      A subsidiary of a public entity or a public entity with thinly traded stock shall follow the accounting prescribed for a public entity. However, an entity with publicly traded debt but no publicly traded equity securities shall follow the accounting prescribed for a nonpublic entity.

7. The grant date of an EBC arrangement could not occur prior to an enterprise obtaining shareholder approval, regardless of whether that approval is voluntarily sought for or legally required (unless shareholder approval is considered perfunctory).

Modifications of Interpretation 46. The Board discussed additional proposed modifications of FASB Interpretation No. 46, Consolidation of Variable Interest Entities. The Board decided the following with respect to those issues:

1. Expand the proposed scope exception for a reporting entity’s inability to obtain information about its interests acquired before February 1, 2003, to include circumstances in which the reporting entity is unable to obtain financial information necessary to consolidate a variable interest entity.

2. Make the first sentence of paragraph 5(a) more effective by removing the phrase "from other parties" after "additional subordinated financial support."

3. Clarify that investors should consider only rights and obligations embodied in the equity investment for purposes of applying paragraph 5(b).

4. Clarify that an investor should consider rights and obligations obtained through all of its interests in the entity for purposes of applying the last sentence in paragraph 5.

5. Modify paragraph 15 to indicate that a variable interest holder should reconsider whether it is the primary beneficiary of a variable interest entity whenever an event occurs that could change its status.

6. Clarify that the amount attributable to the primary beneficiary under the last sentence of paragraph 22 is the effect of intercompany eliminations of fees or other sources of income or expense on net income of the variable interest entity.

Open discussion: Board-directed FASB Staff Positions (FSPs). A majority of the Board directed the FASB staff to release the final FSP FIN 46-6, "Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities." This FSP finalizes two proposed FSPs: FIN 46-a, "Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities, for Nonregistered Investment Companies," and FIN 46-e, "Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities, for Certain Interests Held by a Public Entity." FSP FIN 46-6 differs from proposed FSP FIN 46-e in that it defers the implementation date of Interpretation 46 for public companies for arrangements existing prior to February 1, 2003, to fiscal periods ending after December 15, 2003. Based on comments received from constituents, the Board decided additional time is needed for companies to complete the evaluation of existing variable interest entities to determine which of those entities are required to be included in their consolidated financial statements. This final FSP is effective as of October 9, 2003, and is available on the FASB website.

The Board also discussed whether it should direct the staff to release an FSP to delay the effective date for measurement of certain mandatorily redeemable financial instruments under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. Specifically, the Board considered delaying the effective date for finite-lived entities that under Statement 150 are reported in the parent’s consolidated financial statements as mandatorily redeemable noncontrolling interest liabilities. A majority of the Board decided not to direct the staff to release an FSP on this matter.

AcSEC CLEARANCE

October 10, 2003 Board Meeting

AcSEC document. The Board met with representatives of the AICPA's Accounting Standards Executive Committee (AcSEC) and discussed clearance of a revised final Statement of Position (SOP), Accounting for Loans or Certain Debt Securities Acquired in a Transfer. The Board did not object to issuance of the final SOP subject to certain changes.

FASB STAFF POSITION GUIDANCE AVAILABLE

On October 15, 2003, a majority of the Board did not object to the release of the following final FSPs:

FSP FAS 150-1, "Issuer’s Accounting for Freestanding Financial Instruments Composed of More Than One Option or Forward Contract Embodying Obligations under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity"

FSP FAS 150-2, "Accounting for Mandatorily Redeemable Shares Requiring Redemption by Payment of an Amount That Differs from the Book Value of Those Shares, under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity."

Those final FSPs are effective as of October 16, 2003. They will be available on the FASB website by the end of business on October 16, where they will remain until they can be incorporated into printed FASB literature.

FUTURE OPEN MEETINGS

The following is a list of open meetings tentatively scheduled through November. 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, October 29, 2003—FASB Board Meeting
Wednesday, October 29, 2003—FASB Education Session
Tuesday, November 4, 2003—Liaison Meeting with the American Gas Association
Wednesday, November 5, 2003—FASB Board Meeting
Wednesday, November 5, 2003—FASB Education Session
Monday, November 10, 2003—Liaison Meeting with the American Academy of Actuaries
Tuesday, November 11, 2003—FASB Board Meeting
Tuesday, November 11, 2003—FASB Education Session
Wednesday, November 12, 2003—EITF Meeting
Thursday, November 13, 2003—EITF Meeting
Wednesday, November 19, 2003—FASB Board Meeting
Wednesday, November 19, 2003—FASB Education Session
Tuesday, November 25, 2003—FASB Education Session
Wednesday, November 26, 2003—FASB Board Meeting
Wednesday, November 26, 2003—FASB Education Session