Action Alert No. 03-37
September 17, 2003

NOTICE OF MEETINGS

OPEN BOARD MEETING

Wednesday, September 24, 2003, 9:00 a.m.

  1. Agenda decision: interpretation of Statement 87. The Board will consider whether to add to its agenda a limited-scope project to interpret FASB Statement No. 87, Employers’ Accounting for Pensions, with respect to the measurement of obligations under so-called cash balance pension plans. (Estimated 30-minute discussion.)

  2. Permitted activities of qualifying special-purpose entities (SPEs). The Board will discuss issues addressed by the FASB Exposure Draft, Qualifying Special-Purpose Entities and Isolation of Transferred Assets, including, but not limited to:

    1. Legal isolation of transferred assets from the transferor and its affiliates and agents, especially whether unconsolidated affiliates should be covered by the requirement
    2. Whether qualifying SPEs should be permitted to hold equity instruments and, if not, whether there should be exceptions, for example, temporary investments of collected funds in money market funds and temporary investments in equity instruments received as a result of efforts to collect permitted financial assets
    3. Limits on support commitments or derivatives provided by transferors to qualifying SPEs
    4. Limits on rights, obligations, and interests of parties involved with qualifying SPEs that reissue (roll over) beneficial interests
    5. Requirement for qualifying SPEs in two-step (or multi-step) transfers
    6. Effective date and transition. (Estimated 60-minute discussion.)

  3. 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, September 24, 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 October 1 Board meeting. Those topics will be posted to the FASB calendar four days prior to the education session.

OPEN MEETING WITH THE FINANCIAL ACCOUNTING STANDARDS ADVISORY COUNCIL

Thursday, September 25, 2003, 9:00 a.m.

The Advisory Council will meet to discuss:

  1. The SEC study of a principles-based accounting system
  2. The Board’s project on equity-based compensation (This topic will be available by telephone broadcast and is expected to begin at 10:45 a.m.)
  3. The Board’s project on disclosures about pension plans
  4. The Board’s project on purchase method procedures
  5. The Board’s project on liabilities and equity.

The Advisory Council will hear reports from the chairman of the FASB on other Board activities and the associate chief accountant of the SEC on current accounting-related developments. The Advisory Council also will hear a report from the chief auditor of the Public Company Accounting Oversight Board.

Closed to Public Observation

The Advisory Council will hold a brief closed session for FASAC members only to discuss administrative matters. The public portion of the meeting is expected to end at approximately 2:40 p.m., at which time the closed session will begin.

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.

September 10, 2003 Board Meeting

Equity-based compensation (formerly stock-based compensation). The Board discussed several issues relating to the valuation of employee equity-based compensation arrangements classified as equity. The Board decided that:

  1. Equity instruments issued to employees and the cost of the services received as consideration should be measured and recognized based on the grant-date fair value of the equity instruments issued. That requirement would apply to all entities, including nonpublic entities (nonpublic companies would no longer be permitted to use the minimum value method allowed under FASB Statement No. 123, Accounting for Stock-Based Compensation). The Board decided, however, that in those situations in which it is not possible to estimate the fair value of an equity-based compensation award at the grant date, the award would be measured at its intrinsic value on each reporting date through the exercise date.
  2. The definition of fair value would be consistent with the tentative agreed-upon definition resulting from the Board’s project on fair value measurement, which is consistent with the definition in Statement 123 and FASB Concepts Statement No. 7, Using Cash Flow Information and Present Value in Accounting Measurements. Therefore, an entity should measure the fair value of equity instruments granted based on market prices, if available, taking into account the terms and conditions upon which those equity instruments were granted, consistent with the notion of a fair value hierarchy as conveyed in Concepts Statement 7.
  3. The requirements in Statement 123 that entities estimate the grant date fair value using an option-pricing model that takes six factors into account would be retained. That requirement would be revised to indicate that entities consider, at a minimum, the six factors identified and to allow other factors to be considered when appropriate.
  4. The term expected life would be replaced with the term expected term, meaning an entity must consider the contractual life of the option and effect of employee early exercise behaviors on that contractual life. Use of expected life as an input in an option pricing model (as described in Statement 123) would not be precluded.
  5. The reference in paragraph 19 of Statement 123 to the phrase (for example, the Black-Scholes or a binomial model) would be removed. A comparative example illustrating the use of alternative valuation models would be included in an appendix.
  6. The guidance in Statement 123 regarding restrictions after the vesting period would be retained. The Board directed the staff to develop for the Board’s consideration at a subsequent meeting additional language regarding factors that should be considered when estimating the fair value of restricted shares.
  7. The grant-date fair value estimate of an equity-based compensation award should include consideration of market-based conditions (such as a target stock price or some amount of intrinsic value) and, for those types of awards, that compensation cost would not be reversed if the award does not vest or becomes exercisable because the award fails to achieve the market-based condition.
  8. Changes in expected forfeitures through the vesting date should be recognized in the period of the change (for example, as a change in accounting estimate).
  9. The guidance in paragraphs 32 and 33 of Statement 123 regarding the treatment of dividends and dividend equivalents when estimating the grant-date fair value of equity-based compensation awards would be retained. However, the election in paragraph 32 to accrue compensation expense related to nonforfeitable dividends paid on shares that do not vest as if all instruments granted are expected to vest and recognize the effects of actual forfeitures as they occur would be eliminated.
  10. Each reload award would be accounted for as a new award and would be measured at the fair value of the reload award.

The Board also discussed the scope of the equity-based compensation project and made the following decisions:

  1. The Board decided that this project should be conducted in phases that would result in several Exposure Drafts. The first phase would address the accounting for stock-based compensation with employees. The Board noted Statement 123 broadly applies to all entities, including incorporated entities that issue ownership interests in forms other than stock. As a result, the project was renamed “accounting for equity-based compensation.” The Board plans to discuss the definition of equity-based compensation at a future meeting.

    • Although the scope of the first phase includes equity-based compensation transactions with employees, the Board noted that there are a number of questions about how a grant-date fair-value-based method of accounting would be applied to employee stock ownership plan (ESOP) transactions. The Board decided it would address the accounting for those plans in a subsequent phase of the project that would result in a separate Exposure Draft. As a result, the scope exclusion in Statement 123 would be retained and the guidance in AICPA Statement of Position 93-6, Employers’ Accounting for Employee Stock Ownership Plans, would continue to apply.

    • The current accounting for nonemployee equity-based compensation transactions in Statement 123 will be reconsidered in a subsequent phase of the project that will result in a separate Exposure Draft. As a result, the guidance for such transactions in Statement 123 and related interpretative guidance such as EITF Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” would continue to apply.

  2. Employee stock purchase plan (ESPP) transactions will be addressed in the current phase of the equity-based compensation project. The Board also reconsidered the criteria in Statement 123 for determining whether an ESPP is not compensatory and decided to change them. The Board decided that an ESPP is not compensatory only if the terms of the employee plan are the same as those available to all shareholders of that same class of equity.
  3. FASB Technical Bulletin No. 97-1, Accounting under Statement 123 for Certain Employee Stock Purchase Plans with a Look-Back Option, which provides fair-value-based measurement guidance for ESPP transactions, would be amended for any value measurement decisions made by the Board. This guidance would be included as an appendix to the proposed Statement.
  4. The Board also began consideration of the nature and extent of application and implementation guidance that should be included as part of this proposed Statement. The Board directed the staff to review existing interpretative guidance in FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, and EITF Issue No. 00-23, “Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44,” to identify those issues that might be relevant under its proposed fair-value-based method of accounting for consideration at a future meeting.

The issuance date of the Exposure Draft is now scheduled for the first quarter of 2004. The Board set a goal of completing its redeliberations and issuing a final Statement in the second half of 2004.

FASB EXPOSURE DRAFT AVAILABLE

The Board issued FASB Exposure Draft, Employers’ Disclosures about Pensions and Other Postretirement Benefits, on September 12, 2003. Comments are requested by October 27, 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.

PROPOSED FASB STAFF POSITION

On September 17, 2003, the Board directed the staff to release 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," for comment.  That proposed FSP will be posted to the FASB website by September 23, 2003, for a 30-day comment period.

FUTURE OPEN MEETINGS

The following is a list of open meetings tentatively scheduled through October. 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 1, 2003—FASB Board Meeting
Wednesday, October 1, 2003—FASB Education Session
Thursday, October 2, 2003—Liaison Meeting with the American Gas Association
Tuesday, October 7, 2003—User Advisory Council Meeting, New York City
Wednesday, October 8, 2003—FASB Board Meeting
Wednesday, October 8, 2003—FASB Education Session
Thursday, October 9, 2003—Liaison Meeting with the National Investor Relations Institute
Friday, October 10, 2003—Liaison Meeting with the AICPA Private Companies Practice Section Technical Issues Committee
Friday, October 10, 2003—FASB Board Meeting
Wednesday, October 15, 2003—FASB Board Meeting
Wednesday, October 15, 2003—FASB Education Session
Wednesday, October 22, 2003—Joint FASB/IASB Meeting, Canada
Thursday, October 23, 2003—Joint FASB/IASB Meeting, Canada
Wednesday, October 29, 2003—FASB Board Meeting
Wednesday, October 29, 2003—FASB Education Session