Action Alert No. 03-40
October 9, 2003

NOTICE OF MEETINGS

Beginning with this issue, Action Alert will be issued Thursday instead of Wednesday afternoon.

OPEN BOARD MEETING

Wednesday, October 15, 2003, 9:00 a.m.

  1. Short-term convergence. The Board will discuss several remaining issues related to the drafts of the proposed Statements, including transition and effective dates, comment period, and other clean-up items. (Estimated 60-minute discussion.)

  2. Equity-based compensation. The Board will discuss certain issues related to accounting for the income tax effects of equity-based compensation. In addition, the Board will discuss certain fair value measurement issues, including whether such measurement should take into account issuer credit quality. (Estimated 90-minute discussion.)

  3. Financial performance reporting by a business enterprise. The Board will discuss the definitions for and display of totals and/or subtotals on the face of the statement of comprehensive income, including whether the current net-of-tax display of certain items in a category of other comprehensive income should be retained. (Estimated 60-minute discussion.)

  4. Qualifying special-purpose entities and isolation of transferred assets. The Board will discuss a revised Exposure Draft of proposed amendments to FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, including (a) the proposed effective date and transition provisions, (b) any additional issues related to decisions made at the September 24, 2003 and October 1, 2003 Board meetings, (c) whether to reexpose all amendments or to issue a final Statement for certain amendments and a new Exposure Draft for other amendments, and (d) the comment period. (Estimated 60-minute discussion.)

  5. Modifications of Interpretation 46 (formerly consolidation of variable interest entities). The Board will discuss issues relating to the proposed modification of FASB Interpretation No. 46, Consolidation of Variable Interest Entities. (Estimated 60-minute discussion.)

  6. 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 SESSIONS

Friday, October 10, 2003, 1:00 p.m. and 3:00 p.m.
Wednesday, October 15, 2003, immediately following the Board meeting
Thursday, October 16, 2003, 9:00 a.m.

The Board will hold educational, non-decision-making sessions to discuss topics that are anticipated to be discussed at the October 15 FASB Board meeting, the October 22 tripartite FASB/IASB/AcSB Board meeting, and the October 23 joint FASB/IASB Board meeting. Those topics will be posted to the FASB calendar four days prior to the education sessions.

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 1, 2003 Board Meeting

Qualifying special-purpose entities and isolation of transferred assets. The Board discussed issues related to the distinction between undivided interests and beneficial interests and decided to amend paragraphs 80–84 and various related paragraphs of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, to require an entity that issues either beneficial interests or undivided interests to be a qualifying special-purpose entity (SPE) in order to satisfy the criteria in paragraph 9(b) of that Statement.

The Board noted that one implication of its decision would be that a qualifying SPE would be required for any transfer of a portion of a financial asset, not just for multiple-step transactions.

The Board also decided that if transferors of financial assets provide support commitments or derivatives either directly to beneficial interest holders or in connection with the beneficial interests, those obligations should be considered in the same manner as if they were provided directly to the qualifying SPE for purposes of evaluating legal isolation. That requirement would include support commitments entered into with third parties who provide “back-to-back” guarantees to beneficial interest holders.

The Board decided to reexpose some of its decisions reached in its redeliberations and deferred decisions about effective date, transition provisions, and whether to reexpose all decisions until its October 15, 2003 meeting.

Agenda decision: loan commitments. The Board added a project to its agenda that would clarify FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities (as amended). The project will address the valuation of loan commitments (including interest rate lock commitments) accounted for as derivatives under Statement 133 (as amended). Currently, there is diversity in practice in determining the fair value of loan commitments that must be accounted for as derivatives, as well as diversity among the issuers of such commitments in reporting them as assets.

The key objectives of the project will be to determine what information an issuer should use to determine the fair value of a loan commitment that is accounted for as a derivative under Statement 133 (as amended) and whether a loan commitment should be recognized as an asset by the issuer of that commitment.

The Board directed the FASB staff to prepare a proposal of the project’s scope and a timetable for the project.

Equity-based compensation. The Board discussed certain issues related to the attribution of equity-based compensation (EBC) and reached the following decisions:

  1. The example in paragraph A17 of FASB Invitation to Comment, Accounting for Stock-Based Compensation: A Comparison of FASB Statement No. 123, Accounting for Stock-Based Compensation, and Its Related Interpretations, and IASB Proposed IFRS, Share-based Payment, should be accounted for as multiple grant dates.

  2. Valuation and attribution treatment alternatives described in paragraph 30 of FASB Statement No. 123, Accounting for Stock-Based Compensation, as they relate to option awards with graded vesting, would be eliminated. This means that enterprises issuing awards with graded vesting would have to use tranche-specific expected lives for valuation purposes and the method of attribution set forth in FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans.

  3. The method of attribution in Interpretation 28 would not be reconsidered.

  4. The guidance in paragraph 27 of Statement 123 related to awards that have performance conditions that affect either the exercise price or the date of exercisability of an award would be extended to awards with market conditions. In addition, an illustration of how that guidance would be applied would be included in the appendix of the proposed Statement.

  5. The method of accounting for modifications of fully vested EBC awards would be consistent with the method set forth in IASB ED 2, Share-based Payment. In other words, incremental compensation cost would be calculated by comparing the fair value of the modified award to the fair value of the original award immediately prior to the modification.

  6. An EBC arrangement that is classified as equity could be modified to add a cash settlement feature, which might cause the modified EBC arrangement to be classified as a liability. If such a modification results in the modified EBC arrangement being classified as a liability, the Board decided that the liability created at the date of modification would be recognized in an amount equal to the liability that would be recognized under Interpretation 28 (except the measurement basis for public companies would be fair value, not intrinsic value).

  7. The guidance in Statement 123 that requires that recognized compensation cost related to vested, unexercised awards that expire not be reversed would be retained.

The Board also addressed the valuation of employee EBC arrangements that contain post-vesting restrictions. The Board decided:

  1. The term restriction, as it pertains to EBC, would be defined as a limitation that is contractually or governmentally imposed that prohibits the transfer of fully vested and outstanding shares. The Board clarified that if the holder of such shares can synthetically transfer the risks and rewards from holding the shares by the use of derivatives or otherwise, such shares would not be considered restricted.

  2. The proposed Statement would provide additional discussion in the basis of conclusions of why restrictions that will be lifted as of the vesting date are not considered in the grant-date estimate of fair value.

  3. The proposed Statement would require an entity to document its methodology for valuing restricted shares and clarify that arbitrary restriction discounts are not acceptable.

Financial instruments: liabilities and equity. The Board discussed examples of freestanding and compound financial instruments to gain a common understanding of those instruments. The Board focused on:

  1. The counterparty’s relationship with the issuer, including the payoff to the counterparty at settlement, the boundaries of the relationship, and how the payoff changes as the issuer’s share price changes

  2. Graphs illustrating the counterparty’s payoff compared to the share price.

The meeting was educational, and no decisions were reached. The examples were presented to assist the Board as it considers possible changes to the definitions of liabilities, equity, and assets. During the Board’s discussions of the issues in this project, those examples will be used as test cases.

Copies of the examples and graphs presented at the meeting are available on the FASB website.

Open discussion: Board-directed FSPs. In response to comments received, the Board directed the staff to shorten the comment period for proposed FSP FIN 46-e, “Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities, for Certain Interests Held by a Public Entity.” That proposed FSP originally was posted to the FASB website on September 19, 2003, for a 30-day comment period ending October 20, 2003. The Board directed the staff to make its best efforts to finalize that proposed FSP on October 8, 2003, and to change the comment deadline to October 7, 2003.

Also, a majority of the Board directed the FASB staff to release proposed 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," for public comment. Comments are requested by October 31, 2003.

FASB STAFF POSITION GUIDANCE AVAILABLE

On October 8, 2003, 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 Interpretation 46 for Nonregistered Investment Companies," and FIN 46-e, "Effective Date of Interpretation 46 for Certain Interests Held by a Public Entity." FIN 46-6 differs from FIN 46-e in that it defers the implementation date of FIN 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 will be available on the FASB website on Friday, October 10, 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 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 22, 2003—Tripartite FASB/IASB/AcSB Meeting, Toronto, Canada
Thursday, October 23, 2003—Joint FASB/IASB Meeting, Toronto, Canada
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