Revised 10/27/03—See below

Action Alert No. 03-42
October 23, 2003

NOTICE OF MEETINGS

OPEN BOARD MEETING

Wednesday, October 29, 2003, 9:00 a.m.

  1. Modifications of Interpretation 46. The Board will discuss issues relating to the proposed modification of FASB Interpretation No. 46, Consolidation of Variable Interest Entities, including the treatment of goodwill. (Estimated 90-minute discussion.)

  2. Equity-based compensation. The Board will discuss disclosure requirements relating to equity-based compensation arrangements. The Board also will discuss issues relating to transition as well as the effective date of the proposed Statement. (Estimated 90-minute discussion.)

  3. Revised 10/27/03—Qualifying special-purpose entities and isolation of transferred assets. [This topic has been dropped from the agenda.] If necessary, the Board will discuss issues that have arisen in drafting the revised Exposure Draft. (Estimated 30-minute discussion.)

  4. FASB Staff Position. The Board will discuss comments received to date on the proposed FASB Staff Position 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," as well as issues related to mandatorily redeemable noncontrolling interests. (Estimated 30-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

Wednesday, October 29, 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 5, 2003 Board meeting. Those topics will be posted to the FASB calendar four days prior to the education session.

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 15, 2003 Board Meeting

Short-term convergence. The Board discussed several remaining issues related to the drafts of the proposed Statements on earnings per share, inventory costs, asset exchanges, and accounting changes. The Board reached the following decisions:

  1. Paragraph 4 of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, would be amended to eliminate the scope exception for exchanges of equity method investments for similar productive assets.

  2. Transactions that embody a transfer of assets to an entity in exchange for an interest in that entity would be excluded from the scope of the proposed Statement on asset exchanges. The scope of that proposed Statement also would exclude transactions involving the exchange of a part of an operating interest owned for a part of an operating interest owned by another party that are subject to paragraph 47(e) of FASB Statement No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies. Paragraph 44 of Statement 19 will be amended to indicate that a transfer of assets used in oil- and gas-producing activities (including both proved and unproved properties) in exchange for other assets also used in oil- and gas-producing activities is subject to the provisions of the proposed Statement.

  3. The scope exception for exchanges of real estate for other real estate would remain in FASB Statement No. 66, Accounting for Sales of Real Estate.

  4. A transfer of a nonmonetary asset in which the transferor has continuing involvement in the transferred asset such that all of the risks and rewards of ownership are not transferred would not be an exchange covered within the scope of the proposed Statement on asset exchanges.

  5. After-tax cash flows would be used to determine whether a transaction has commercial substance. Cautionary language would be included in the standard indicating that commercial substance must not be predicated on tax cash flows that arise solely because the tax business purpose is based on achieving a specified financial reporting result.

  6. Shares that would be issued upon conversion of a mandatorily convertible security should be included in basic earnings per share from the date the security becomes mandatorily convertible. A mandatorily convertible security is one that would be converted into a fixed number of common shares at a fixed future date.

  7. Language would be added to the proposed Statement on accounting changes to clarify what constitutes a significant management estimate for which retrospective application is not practicable.

  8. The accounting changes effected by the issuance of each of the proposed Statements on accounting changes, inventory costs, and asset exchanges would be applied prospectively. The accounting changes effected by the issuance of the proposed Statement on earnings per share would be applied retrospectively.

  9. The effective dates for each of the proposed Statements would be December 15, 2004.

  10. The comment period for the bundled Exposure Draft of the proposed Statements on earnings per share, inventory costs, asset exchanges, and accounting changes would be 90 days.

The Board expects to issue the bundled Exposure Draft of the proposed Statements in the fourth quarter of 2003.

Equity-based compensation. The Board discussed certain issues related to accounting for the income tax effects of equity-based compensation (EBC) arrangements classified as equity. In addition, the Board discussed certain fair value measurement issues, including whether such measurement should take into account issuer credit quality. The Board reached the following decisions:

  1. Valuation guidance for EBC awards that are accounted for as liabilities would include a discussion of why no adjustment for default risk (credit quality) is necessary for EBC awards that are effectively cash-settled written call options. That discussion also would include the possibility that an EBC award could be a written put option and that an adjustment to the estimated fair value using an option-pricing model may be necessary to address default risk, but no guidance would be provided on how to estimate that adjustment.

  2. In estimating model inputs when a reasonable range of expectations exists and no amount within the range is a better estimate than any other amount, the use of expected value for each input is more consistent with the objective of fair value than the approach used in FASB Statement No. 123, Accounting for Stock-Based Compensation. However, when using a lattice model approach, the expected value for a range of estimates relates to an estimate made at a particular node (or multiple nodes during a particular time period) of the distribution and not an average to be used over multiple periods or the contractual life of the option. In addition, if an entity is using the Black-Scholes-Merton formula and there is a range of reasonable expectations about model inputs, the expected value would be used as an input to the model for the expected term of the option.

  3. Income tax benefits are related to both an income statement item (compensation expense) and an equity transaction from the enterprise’s perspective. In addition, the Board rejected the argument that tax benefits should never be recognized directly in equity because the government is not an owner of the enterprise. Both decisions represent a reaffirmation of decisions made by the Board at its July 23, 2003 meeting.

  4. 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 (or tax benefit deficit), would be recognized as additional paid-in capital.

  5. For temporary differences that are generated because the measurement date of EBC awards for tax purposes is later than the measurement date of EBC awards for book purposes, excess or deficit income tax benefits would pertain to the equity transaction. For temporary differences that are generated because of 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.

  6. The method of accounting for income tax effects of EBC arrangements prior to realization in Statement 123 would be retained. The decision represents a reaffirmation of decisions made by the Board at its July 23, 2003 meeting.

Financial performance reporting by a business enterprise. The Board discussed certain provisions for a statement of comprehensive income and decided:

  1. To retain the category and display criteria for items of other comprehensive income, as defined in FASB Statement No. 130, Reporting Comprehensive Income, which would include items as currently specified by existing standards with a modification to include the cumulative effect of change in accounting principle.

  2. To require the display of a subtotal labeled net income (loss) from continuing operations that would include amounts reported in the business, financing, nonbusiness/nonfinancing, and income tax categories. That subtotal would be required to be displayed immediately preceding amounts reported as discontinued operations (net of tax) and other comprehensive income (net of tax).

  3. Not to require a subtotal within the statement of comprehensive income labeled earnings, as described in FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises.

The Board directed the staff to further research disaggregation of the line items included in the business, financing, and nonbusiness/nonfinancing categories.

Qualifying special-purpose entities and isolation of transferred assets. The Board discussed certain matters related to a revised Exposure Draft of proposed amendments to FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and reached the following decisions:

  1. The revised Exposure Draft would include all of the proposed amendments to Statement 140 and would be issued for a comment period of approximately 45 days. The Board will decide at a later date whether to hold a public hearing or roundtable discussion.

  2. The final Statement would be effective for all transfers of financial assets occurring after the end of the first fiscal quarter (first fiscal year for privately held enterprises) that begins after the issuance of that Statement.

  3. The proposed changes to paragraph 9(a) of Statement 140 would be applied to any existing arrangements immediately upon issuance of the final Statement if a transferor, its affiliates, or its agents have any remaining obligations related to the transferred assets.

  4. Qualifying special-purpose entities (SPEs) that roll over beneficial interests would continue to be considered qualifying until six months after the effective date of the final Statement, or until the qualifying SPE has rolled over a majority of the beneficial interests that were outstanding at the effective date of the final Statement, whichever is later.

  5. Transition provisions for formerly qualifying SPEs affected by the proposed amendments related to equity securities would be similar to those set forth in paragraph 25 of Statement 140. However, existing qualifying SPEs that hold equity securities and rollover (reissue) beneficial interests would apply the transition provisions related to rollovers of beneficial interests.

  6. Transition provisions for formerly qualifying SPEs affected by the proposed amendments related to the isolation of transferred assets from the transferor would be similar to those in paragraph 25 of Statement 140. Formerly qualifying SPEs that were both affected by those proposed amendments and rolling over (reissuing) beneficial interests would apply the transition provisions related to rollovers of beneficial interests.

  7. Accounting for undivided interests in financial assets sold before the proposed changes to accounting for beneficial interests become effective would not be adjusted unless the entity that sold those interests sells additional interests in the same assets.

  8. Any effect of applying the proposed Statement to transactions reported in previously issued financial statements would be reported as a cumulative effect of an accounting change as of (a) the date the final Statement becomes effective, (b) the date when a qualifying SPE becomes disqualified, or (c) the date in which an entity issues additional undivided interests, whichever is applicable. Restatement of previously issued financial statements would not be permitted.

  9. Any agreement provided in connection with a transfer of financial assets should be considered in determining whether the transfer complies with the isolation criterion set forth in paragraph 9(a) even if it is not entered into at the time of the transfer.

  10. Secondary market trading by a transferor in beneficial interests of a qualifying SPE would not be considered a rollover. Obligations of the transferor to purchase beneficial interests from holders should be considered in determining the isolation of transferred assets.

Modifications of Interpretation 46. The Board agreed to consider revisions to the guidance in proposed FASB Staff Position (FSP) FIN 46-c, "Impact of Kick-Out Rights Associated with the Decision Maker on the Computation of Expected Residual Returns under Paragraph 8(c) of FASB Interpretation No. 46, Consolidation of Variable Interest Entities." FSP FIN 46-c proposed guidance regarding the consideration of the ability of one or more parties to remove a decision maker (kick-out rights) in determining if a party is the decision maker of a variable interest entity under paragraph 8(c). The Board supported issuing guidance that states there is a presumption that kick-out rights alone do not allow an enterprise to avoid being a decision maker, provided the final FSP sufficiently clarifies the circumstances under which the presumption can be overcome.

The Board also agreed to consider expansion of the exemption from paragraph 8(c) of Interpretation 46 for certain decision-maker fees. The Board directed the staff to develop an FSP to articulate the boundaries of the exemption, taking into consideration comment letters received on FSP FIN 46-b, "Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities, for Certain Decision Makers." The final FSP would exempt certain fees from being included in paragraph 8(c), rather than deferring the implementation date as proposed in FSP FIN 46-b.

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.

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 Board Meeting
Wednesday, November 26, 2003—FASB Board Meeting
Wednesday, November 26, 2003—FASB Education Session