Revised 10/31/03—See below

Action Alert No. 03-43
October 30, 2003

NOTICE OF MEETINGS

OPEN BOARD MEETING

Wednesday, November 5, 2003, 9:00 a.m.

1. [Revised 10/31/03] Financial Instruments: liabilities and equity. The Board will consider whether to allow entities that have already applied Statement 150 to certain mandatorily redeemable noncontrolling interests, for which the effective date of Statement 150 is to be deferred indefinitely under the proposed FASB Staff Position FAS 150-c, to use the cumulative-effect method, instead of restatement, to accomplish their transition to the deferral to be required by that FSP. (Estimated 15-minute discussion.)

2. Financial instruments: derivatives implementation. The Board will discuss the staff’s proposed guidance on Statement 133 Implementation Issue No. G24, "Accounting for the Discontinuance of Hedging Relationships Arising from Changes in Consolidation Practices Due to Initially Applying FASB Interpretation No. 46," and an analysis of the comment letter received. (Estimated 15-minute discussion.)

   Equity-based compensation. [Revised 10/30/03—This topic has been deferred to a future Board meeting.] The Board will discuss certain issues relating to accounting for the income tax effects of equity-based compensation (EBC) arrangements, including accounting for the income tax effects of EBC liabilities. The Board also will discuss related party transactions and EBC arrangements. The Board also intends to address other issues related to EBC arrangements, including the measurement basis of EBC liabilities for nonpublic enterprises. (Estimated 90-minute discussion.)

3. Modifications of Interpretation 46. If necessary, the Board will continue its discussion from the October 29 Board meeting on issues relating to FASB Interpretation No. 46, Consolidation of Variable Interest Entities. (Estimated 30-minute discussion.)

4. 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, November 5, 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 11, 2003 Board meeting. Those topics will be posted to the FASB calendar four days prior to the education session.

OPEN MEETING WITH REPRESENTATIVES OF THE AMERICAN GAS ASSOCIATION

Tuesday, November 4, 2003, 2:00 p.m.

The Board will meet with members of the Accounting Advisory Council of the American Gas Association to discuss matters of mutual interest.

OPEN MEETING WITH REPRESENTATIVES OF THE AMERICAN ACADEMY OF ACTUARIES

Monday, November 10, 2003, 1:00 p.m.

The Board will meet with members of the Financial Reporting Council of the American Academy of Actuaries to discuss matters of mutual interest.

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 22, 2003 Tripartite AcSB/IASB/FASB Meeting

Disclosure framework. The AcSB, IASB, and FASB discussed the benefits of having a framework dealing with presentation and disclosure issues. The Boards provided input on the objective and scope of the framework. The AcSB was encouraged to fully develop the scope of such an initiative for further discussion. This portion of the meeting was informational; no decisions were made.

Measurement. The AcSB, IASB, and FASB discussed a paper being developed by the AcSB for the IASB and its national standard-setting partners on the selection of an appropriate basis (or set of bases) for measuring assets and liabilities on initial recognition and on asset impairment. The Boards provided input on:

1. What needs to be done to the material developed to date to provide a basis for making decisions

2. What directions should be taken next in carrying out the project, and the expected timing

3. Whether the paper setting out preliminary conclusions should be published in some manner

4. The need to achieve and maintain consistent thinking about fair value in the IASB and FASB projects that address that issue.

This portion of the meeting was informational; no decisions were made.

Revenue recognition. The AcSB, IASB, and FASB discussed the conceptual model for revenue recognition with emphasis on measurement of performance obligations. Specifically, the Boards discussed the application of the fair value hierarchy described in the FASB project on fair value measurement in measuring those obligations. Board members generally agreed that fair value is the relevant measurement attribute and that decisions about which measure of fair value to use should be based on the relative reliability of those measures. However, certain IASB Board members questioned whether the fair values of performance obligations should be measured in the "retail" markets as opposed to the "wholesale" markets as previously agreed to, in concept, by the FASB Board and as a working principle for purposes of this project by the IASB Board. Wholesale fair values measure performance obligations at the amount that an entity would pay a third party to assume those obligations. Retail prices measure performance obligations at the amount at which the reporting entity sold (or could sell) identical or similar products or services to similarly situated customers.

The Boards also discussed the FASB’s fair value hierarchy, and several Board members noted that there may be difficulty in discerning differences between Level 2 and Level 3 estimates of fair value. Also, several Board members noted that less reliable estimates of fair value should not be called "default" measures because the term "default" implies an inconsistency with the measurement objective of fair value.

Equity-based compensation/share-based payment. The AcSB, IASB, and FASB discussed certain convergence issues arising from the FASB’s and IASB’s respective projects on accounting for share-based payments (equity-based compensation). Those issues included accounting for the income tax effects of share-based payment arrangements and the fair value measurement of an option award with reload features. The FASB and IASB reached the following decisions:

1. After the FASB has completed all phases of its project on equity-based compensation and the FASB and IASB have completed their projects related to the classification of liabilities and equity, the IASB and FASB plan to undertake a convergence project with the objective of eliminating any remaining differences between international and U.S. share-based payment standards.

2. Tax effects of share-based payment transactions, depending on the nature of the tax deduction, relate to both an income statement (compensation expense) and an equity transaction (the exercise of the option); therefore, in those circumstances, the income tax effects of the share-based payment award would be allocated between the income statement and equity. The FASB and IASB did not reach a decision on (a) the income-tax-effect allocation method and (b) how to account for income tax effects prior to tax realization. The IASB and FASB directed their respective staff members to prepare a joint memorandum on those issues for reconsideration at future FASB and IASB meetings.

3. The fair value of a reload feature would not be incorporated into the estimate of the award’s grant-date fair value. As a result, subsequent grants of new awards under the reload feature would be accounted for as new awards on their respective grant dates.

October 23, 2003 Joint IASB/FASB Meeting

Reporting financial performance/comprehensive income. The FASB and IASB Boards discussed their respective projects on reporting financial performance. The Boards emphasized the importance of convergence on the project and discussed the similarities and differences between both projects. More specifically, the Boards discussed the differences in and the theories behind the FASB’s and IASB’s definitions for the business and financing categories. They discussed the FASB’s decision to retain other comprehensive income as required by FASB Statement No. 130, Reporting Comprehensive Income, which the IASB had rejected. The Boards discussed issues that the FASB still needs to deliberate, including remeasurements, recycling, and earnings per share. The Boards agreed to form a joint working group to research and form recommendations to reduce areas of divergence and develop a timetable for the issuance of public documents for this project.

Short-term convergence. The FASB and the IASB discussed the state of the project on short-term convergence and possible additions to its scope. The Boards affirmed that the scope of Phase II of the project should comprise issues related to convergence on income taxes, interim reporting, and research and development. The Boards decided not to add any further convergence issues to the scope of the project at this time.

The Boards decided that a liability for which, at the balance sheet date, a loan agreement has been breached but the creditor has agreed to effect a grace period wherein the debt is not callable due to the breach for a period less than 12 months should be classified as a current liability, even if the breach is (1) expected to be rectified prior to the expiration of the grace period or (2) rectified after the balance sheet date but before the financial statements are issued. The FASB decided to change its definition of current liability to match that of the Exposure Draft of a revised IAS 1, Presentation of Financial Statements, which reads:

    A liability shall be classified as current when it:
(a)  is expected to be settled in the normal course of the entity’s operating cycle; or
(b)  is due to be settled within twelve months of the balance sheet date.

All other liabilities shall be classified as non-current.

The Boards decided on the general approach to be taken for convergence between FASB Statement No. 109, Accounting for Income Taxes, and IAS 12, Income Taxes. Under this approach, the IASB would first consider all of the differences between the standards and reach tentative conclusions as to what it believes are the highest-quality solutions. The IASB would then present for deliberation by the FASB what it believes to be the highest-quality converged standard. Any differences between the IASB’s tentative conclusions and the conclusions to be reached by the FASB in its deliberations would then be reconsidered by the IASB.

Business combinations: purchase method procedures. The FASB and IASB discussed issues related to the accounting for business combinations for which the Boards had reached different conclusions in their separate deliberations on purchase method procedures.

The staff reported that, at their separate meetings in October, the FASB and the IASB reached convergence on three issues for which they had previously reached differing decisions. Specifically, the FASB decided to converge with the IASB by agreeing that the measurement period also should apply to the components of consideration paid in addition to the assets acquired and liabilities assumed. The IASB converged with the FASB by agreeing (1) to specify that certain proposed requirements relating to the accounting for and reporting of noncontrolling interests should be applied prospectively versus retrospectively, and (2) that goodwill should not be adjusted for subsequent recognition of deferred tax benefits acquired in a business combination that did not satisfy the criteria for subsequent recognition at the acquisition date.

The Boards discussed their differences in views about which assets and liabilities should be included as part of the business combination accounting. The Boards decided that the following assets and liabilities, other than goodwill, should be included as part of the business combination accounting:

1. All identifiable assets and liabilities of the acquired business that meet the definition of an asset or a liability immediately before the combination and that would have been assets or liabilities absent the prospects of a business combination.

2. Other identifiable assets acquired and liabilities assumed by the combined entity that arise from the combination as a result of actions and requirements of external parties—parties not within the control of either the acquirer or the acquired business. For example, actions of a regulator to induce a combination, requirements of laws that impose obligations as a result of a combination, and so forth.

The Boards agreed to reconsider at a future meeting the treatment of contingent assets and liabilities of an acquired business.

The Boards also discussed two issues for which they have not yet reached convergence. Those issues are (1) whether overpayments made to acquire a business should be expensed on the acquisition date and (2) whether to require disclosure of an additional schedule that illustrates the effects of transactions with noncontrolling shareholders on the controlling interest’s equity attributable to common shareholders. For the first item, the FASB has decided that, consistent with FASB Statement No. 141, Business Combinations, overpayments should be subsumed in goodwill rather than expensed on the acquisition date; the IASB has decided that when there is evidence to suggest that the business combination transaction is not an exchange of equal values, such overpayments should be expensed. For the second item, the FASB has decided to require disclosure of the proposed additional schedule and an additional per-share metric that includes in the numerator the effects of equity transactions with noncontrolling interests; the IASB has decided not to require disclosure of the proposed additional schedule and to further discuss whether to require disclosure of the proposed additional per-share metric at its November 2003 meeting.

For those two items, the Boards decided to expose their respective decisions in their Exposure Drafts and directed the staff (1) to include in the basis for conclusions the rationale for each Board’s conclusions and (2) to solicit comments for those items of divergence for the Boards’ further considerations before their final Statements are issued. The Boards will then use the input they receive as a basis for revisiting the issue during the redeliberation phase, with the objective of ultimately achieving a converged answer.

Agenda planning. The FASB and IASB discussed strategies for converging their future agendas. This portion of the meeting was administrative; no technical or agenda decisions were made.

COST/BENEFIT PROCEDURES

In connection with its project on accounting for equity-based compensation, the FASB is soliciting information from those that provide commercial software packages or software services relating to the fair-value-based method of accounting for equity-based compensation in FASB Statement No. 123, Accounting for Stock-Based Compensation. That information will be used by the Board as part of its assessment of the costs and benefits of implementing proposed changes to the accounting requirements in Statement 123.

On November 10, 2003, a questionnaire describing the proposed changes and related questions for software and service providers will be posted to the FASB website. The FASB invites all interested software and service providers to participate in this process by responding to and submitting a completed questionnaire by December 5, 2003.

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.

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
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