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Action Alert No. 03-38
September 24, 2003
NOTICE OF MEETINGS
OPEN BOARD MEETING
Wednesday, October 1, 2003, 9:00 a.m.
- Permitted
activities of qualifying special-purpose entities (SPEs). The
Board will discuss issues related to two-step transfers of financial
instruments, including the distinction between undivided interests and
beneficial interests, transition and effective date, and any matters
discussed but not resolved at the September 24, 2003 Board meeting.
(Estimated 2-hour discussion.)
- Agenda decision: loan commitments. The Board will
consider adding a limited-scope project to its agenda to clarify how an
issuer should determine the fair value of a loan commitment that is
accounted for as a derivative and whether a written loan commitment can
be recorded as an asset. (Estimated 30-minute discussion.)
- Equity-based
compensation. The Board will discuss certain issues relating to
attribution and grant date. The Board also will discuss valuation
guidance related to discounts for lack of marketability (including
contractual or governmental restrictions) when estimating the grant-date
fair value of employee equity-based compensation awards. (Estimated
2-hour discussion.)
- Financial
instruments: liabilities and equity. The Board will discuss the
economic characteristics and other features of various freestanding and
compound financial instruments. The meeting will be educational, and no
Board decisions are expected. (Estimated 90-minute discussion.)
- 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
Monday, September 29, 2003, 9:30 a.m.
Wednesdary, October
1, 2003, immediately following the Board meeting
The Board will hold educational, non-decision-making sessions to
discuss topics that are anticipated to be discussed at the October 8 and
October 10 Board meetings. 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.
September 17, 2003 Board Meeting
Revenue
recognition. The Board continued its discussion of the proposed
conceptual model for analyzing assets and liabilities arising from
contracts and contractual rights and obligations. Specifically, the Board
discussed illustrations of the application of the proposed conceptual
model to a long-term construction contract, various wireless service
arrangements, and select real estate transactions. The Board generally
agreed that the proposed model is conceptually sound and workable.
However, several Board members questioned whether reliable measures of the
“wholesale” fair values of liabilities in many revenue transactions could
be obtained or estimated.
In addition, the Board supported the concept that assets and
liabilities arising from unconditional contractual rights and obligations
should be remeasured subsequent to their initial recognition at fair
value. However, the Board noted the practical difficulties in obtaining a
reliable measure for partially performed obligations.
The Board generally agreed that, in concept, certain customer
relationships might meet the definition of assets. However, the Board
tentatively agreed that accounting for internally developed intangible
assets should be outside the scope of the revenue recognition
standard.
Finally, the Board agreed that a rebuttable presumption should be made
that the unit of account for an executory contract involving subjects that
are unique (including real estate) is the contract as a whole, absent
evidence to the contrary.
Consolidation
of variable interest entities. The Board decided to modify FASB
Interpretation No. 46, Consolidation of Variable Interest Entities,
as follows:
- Clarify that the scope exception provided in paragraph 4(a) of
Interpretation 46 applies to all entities that meet the definition of
not-for-profit organizations in FASB Statement No. 117, Financial
Statements of Not-for-Profit Organizations, which includes
not-for-profit health care organizations.
- Make the last sentence of paragraph 5 more effective by (a) applying
footnote 6 only to part (ii) of that sentence and (b) changing footnote
6 to define related parties as those parties identified in
paragraph 16, except for de facto agents under item 16(d).
- Clarify that paragraph 11 provides guidance on the application of
the equity sufficiency condition in paragraph
5(a) for development
stage enterprises but does not exempt development stage enterprises from
the requirements of paragraph 5(b) relating to the characteristics of
equity.
- Require an enterprise that holds a variable interest in a variable
interest entity but is not the primary beneficiary of that entity to
reconsider whether it is the primary beneficiary whenever the enterprise
acquires additional interests in the variable interest entity.
- Exclude a decision maker’s fees from the paragraph 8(c) component of
expected residual returns if (a) the fees are fixed in amount and timing
and have no expected variability and (b) the decision maker has no other
interest that would provide subordinated financial support to that
entity or the right to receive expected residual returns of the entity.
- Provide a limited-scope exception to the application of
Interpretation 46 to a reporting entity’s interest in a variable
interest entity, or potential variable interest entity, when both of the
following conditions exist:
- The interest in the variable interest entity or potential variable
interest entity was acquired before February 1, 2003.
- The reporting entity, after making exhaustive efforts, is unable
to obtain information necessary to determine if the entity is a
variable interest entity or to determine whether the reporting entity
is the primary beneficiary of the variable interest entity.
- Clarify that a de facto agency relationship is created under
paragraph 16(d)(1) if the approval rights effectively constrain the
interest holder’s ability to control the economic risks or rewards of
its interests by the sale, transfer, or encumbrance of such interests.
If the approval cannot be unreasonably withheld, the de facto agency
relationship is not established.
- Change paragraph 17 guidance on determining which party in a related
party group is the primary beneficiary to give primacy to the objective
of identifying the party with activities that are most closely
associated with the entity as the primary beneficiary.
The proposed Interpretation to modify Interpretation 46 would be
applied retroactively as of the date Interpretation 46 was first applied
and would require restatement. The proposed Interpretation would be
exposed for a 30-day comment period.
Also, a majority of the Board directed the staff to issue a proposed
FASB Staff Position (FSP) to defer the effective date of Interpretation 46
until the end of the first interim or annual period ending after December
15, 2003, for certain interests held by a public entity. All of the
following conditions must be met to qualify for the deferral:
- The public entity acquired its interests in a variable interest
entity or potential variable interest entity before February 1, 2003.
- The assets of the variable interest entity or potential variable
interest entity are predominantly nonfinancial.
- The variable interest entity or potential variable interest entity
was not specifically created by or for the public entity to undertake a
narrow well-defined objective, for example, to effect a lease or
securitization of financial assets.
- The determination of whether the entity is a variable interest
entity or whether the public entity is the variable interest entity’s
primary beneficiary has not been completed as of the issuance of the
financial statements for the interim or annual period beginning after
June 15, 2003.
A public entity that defers application of Interpretation 46 to
variable interests in one or more variable interest entities or potential
variable interest entities under the provisions of this FSP would be
required to make certain disclosures about such entities during the
deferral period. (See the link below 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.")
Equity-based
compensation (formerly stock-based compensation). The Board
continued its discussion of accounting for modifications and settlements
of employee equity-based compensation (EBC) awards, classified as equity,
and reached the following decisions:
- Certain principles would guide the accounting for modifications:
- Modifications represent a transaction between the employer and the
option holder as an employee.
- Modifications generally represent a transfer of value (incremental
value) from the employer to the employee, except when there is clear
evidence to the contrary, for example, when the modification does not
follow an adverse change related to the factors considered at the
grant date used to measure fair value.
- An employer may never recognize less than the grant-date fair
value of an equity-settled EBC award unless the employee fails to vest
under the terms of the original award. Therefore, the total cumulative
compensation cost associated with a modified award is equal to the
grant-date fair value of the original award plus the incremental value
of the modified award.
- Incremental compensation cost would be measured by comparing the
fair value of the modified award with the fair value of the original
award immediately preceding the modification. This is consistent with
the method proposed by the IASB in ED2, Share-based Payment.
- If an entity is accounting for EBC awards at intrinsic value because
it was not possible to reasonably estimate the fair value of the award
at the grant date, then incremental compensation cost would be measured
by comparing the intrinsic value of the modified award with the
intrinsic value of the original award immediately preceding the
modification date. A decrease in negative intrinsic value as a result of
a modification would not result in incremental compensation cost.
- Changes in vesting conditions of certain EBC awards (time-,
performance-, or nonservice-based, but not market-based) would be
accounted for consistently in accordance with the principles and method
above. That means that changes in vesting conditions would not result in
an entity’s recognizing less than the original award’s grant-date fair
value except if original vesting conditions are not satisfied.
- If vesting acceleration provisions included in the original terms of
the EBC award are triggered, that event would not result in a
modification; rather, the entity would be required to recognize all
unrecognized compensation cost. Modifications that do result in vesting
acceleration would be accounted for as other changes in vesting
conditions.
- Changes in the classification of EBC awards as a result of
modifications would be accounted for as modifications rather than
settlements. Modifications of EBC awards with multiple settlement
features that change the awards’ classification would be accounted for
similar to awards with one settlement feature that change their
classification as a result of a modification.
- An equity restructuring would be defined as a nonreciprocal
transaction between an entity and its shareholders, such as a stock
dividend, spinoff, stock split, rights offering, or recapitalization
through a special, large nonrecurring dividend that causes the market
value per share of the stock underlying the option or award to change.
- A cancellation of an EBC award would occur for accounting
purposes if the award was legally cancelled (when all legal and
regulatory requirements for cancellation have been met). The Board also
considered a transaction in which an equity award is replaced with an
award for a fixed monetary amount payable in the future based on meeting
the equity award’s original vesting conditions. The Board concluded that
the transaction is a settlement of the original award and issuance of a
new award because the new award’s risk profile is distinct from the
original award’s risk profile.
- In certain tax jurisdictions, an employer might be able to transfer
a tax obligation to the employee via reimbursement or legal transfer.
That tax obligation is based on a stock option’s exercise-date intrinsic
value. In those circumstances, the reimbursement or transfer would be
deemed to represent additional exercise periods.
- For long-term inducements, all facts and circumstances must be
evaluated to determine the substance of the transaction. If a long-term
inducement exists, incremental compensation would be measured for all
EBC awards subject to the inducement, regardless of whether the employee
elects to participate or not.
- The removal of transferability restrictions on EBC awards would be
evaluated as modifications.
- In the event that the terms and conditions of an EBC award cease to
be mutually understood, an EBC award would be measured at its fair value
at each reporting date through vesting or exercise date, depending on
the nature of the award. That concept would be similar to the notion of
tainting introduced in FASB Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities.
- An entity’s failure to adjust an EBC award, if that adjustment is
required in connection with an equity restructuring, would be evaluated
as a modification.
- If the terms of an entire plan are modified, the new terms would be
considered part of an EBC award’s original terms only for awards granted
after the plan modification date.
PROPOSED FASB STAFF POSITIONS AVAILABLE
A majority of the Board directed the FASB staff to release the 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 public comment. That proposed FSP was posted
to the FASB website on September 19, 2003, and comments are requested by
October 20, 2003.
Also, a majority of the Board did not object to the release of proposed
FSP
FAS 144-a, “Determination of Cost Basis for Foreclosed Assets
under FASB Statement No. 15, Accounting by Debtors and Creditors for
Troubled Debt Restructurings, and the Measurement of Cumulative Losses
Previously Recognized under Paragraph 37 of FASB Statement No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets,”
for public comment. That proposed FSP was posted to the FASB website on
September 24, 2003, and comments are requested by October 24, 2003.
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.
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
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