Action Alert No. 04-17
April 29, 2004

NOTICE OF MEETINGS

OPEN BOARD MEETING
(Board meetings are available by audio webcast and telephone.)

Wednesday, May 5, 2004, 8:30 a.m.

The Board meeting will begin at 8:30 a.m. instead of 9:00 a.m.

  1. Financial instruments: liabilities and equity. The Board will listen to a staff presentation about a possible alternative method—the Reassessed Expected Outcomes (“REO”) Approach—for determining classification, unit of account, measurement, and EPS for all financial instruments involving an issuer’s own shares. The meeting will be informational, and no decisions are expected. (Estimated 2.5-hour discussion.)

  2. FASB Staff Position: Medicare Act of 2003. The Board will consider the comment letters received on the proposed FSP FAS 106-b, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003,” and whether to direct the staff to issue that proposed FSP as final. (Estimated 60-minute discussion.)

  3. Financial instruments: derivatives implementation. The Board will discuss the staff’s recommendation regarding the proposed guidance on Statement 133 Implementation Issue No. G25, “Hedging the Variable Interest Payments on a Group of Prime-Rate-Based Interest-Bearing Loans,” and its analysis of the comment letters received. Some respondents recommended that the Board undertake an amendment of Statement 133 with respect to the identification of a benchmark rate when interest rate risk is being hedged. (Estimated 45-minute discussion.)

  4. Agenda decision: request to amend Statement 133. The Board will discuss a potential project to amend FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, to permit (a) hedging entities to designate the risk of changes in only certain aspects of a nonfinancial asset’s fair value as the hedged risk in a fair value hedge, and (b) a similar bifurcation of risks for cash flow hedge accounting related to nonfinancial assets. (Estimated 15-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

Tuesday, May 4, 2004, 9:00 a.m.

The Board will hold an educational, non-decision-making session to discuss topics that are anticipated to be discussed at the May 5 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 roundtable discussions, and through other communication channels. Decisions become final only after a formal written ballot to issue a final Statement or Interpretation.

April 22–23, 2004 Joint IASB/FASB Board Meeting

Short-term convergence: income taxes. The Boards discussed the issue of accounting for the tax effects of acquisitions of assets that are not accounted for as a business combination if the amount paid is different from the tax basis of the asset acquired. At its March 2004 meeting, the IASB tentatively concluded that in those situations, an entity should allocate the consideration paid between the asset and the related deferred tax asset or liability using the simultaneous equations method; however, any tax benefit in excess of the cost of the related asset should be recognized immediately in profit or loss.

The FASB recently began deliberations on this issue and considered three additional methodologies not considered by the IASB at its March meeting. Accordingly, the FASB asked that this issue be discussed at this joint meeting so that the IASB could consider the additional methodologies.

The IASB amended its previous decision, and the Boards tentatively concluded that the asset should be recognized at fair value (assuming full deductibility for tax purposes). The corresponding deferred tax asset or liability should be recognized as the difference between the fair value of the asset and its tax basis multiplied by the tax rate. Any difference between the consideration paid and the sum of the fair value of the asset and the recognized deferred tax amount should be recognized as a purchase discount allowance on the deferred tax.

Short-term convergence: research and development. The Boards considered the scope of the research and development part of the short-term convergence project. The Boards noted that elimination of the differences between International Financial Reporting Standards (IFRSs) and US GAAP could involve consideration of fundamental issues and that the Australian Accounting Standards Board is leading a research project on intangibles for the IASB. Nonetheless, the Boards agreed that they should explore possibilities of the elimination of some IFRSs/US GAAP differences in the short-term. The Boards instructed the staff to consider:

  1. The criteria for capitalization of costs under FASB Statement No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed, to see if they could be used to make the criteria in IAS 38, Intangible Assets, more robust

  2. Whether there are any aspects of US GAAP that could be moved closer to IAS 38, for example the treatment of purchased intangibles acquired outside a business combination.

Business combinations: purchase method procedures. The Boards discussed the status of the following issues for which the Boards had previously reached either a different conclusion or a different interpretation of the same conclusion:

  1. Which assets and liabilities should be included as part of the business combination accounting

  2. The treatment in a business combination of contingent liabilities1 of the acquiree.

A collaborative group of FASB and IASB Board members and staff (the Group) had been formed to discuss those convergence issues and develop recommendations for both Boards. The Group reported at the joint meeting that each Board had considered the Group’s recommendations at their separate April 2004 meetings preceding the joint meeting and had reached converged decisions. Those decisions are reported in FASB Action Alert and IASB Update.

In addition, the IASB staff reported that the IASB decided at its separate April 2004 meeting to extend its decisions on "recycling" amounts recognized directly in equity when control of a subsidiary is lost to circumstances in which an investor loses significant influence or joint control of an associate or joint venture (see the IASB meeting—Business Combinations section of the IASB April 2004 Update). The FASB asked the staff to consider whether the FASB should also consider proposing similar amendments to APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock.

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1The IASB has tentatively concluded that a contingent liability should be defined as a “conditional obligation that arises from past events that may require an outflow of resources embodying economic benefits based on the occurrence or nonoccurrence of one or more uncertain future events not wholly within the control of the entity.”

Financial performance reporting by business enterprises/reporting comprehensive income. The purpose of this discussion was for the Boards to collectively agree on the path forward for this project and the type and timing of any future public discussion documents.

The Boards agreed that the goals associated with the project have different characteristics such that the work should be performed in a segmented manner. The project has been segmented as described below, and the tasks within each segment are listed in the order in which they are expected to be performed. The Boards expect to discuss the issues in each segment contemporaneously.

Segment A includes:

  1. Whether to require a single statement of comprehensive income that includes a subtotal similar to the concept of “net income from continuing operations” or “profit and loss”

  2. The required primary financial statements

  3. The number of years required to be presented in comparative financial statements and related disclosures in the notes to the financial statements

  4. Whether to require presentation of the direct method for the statement of cash flows.

Segment B includes:

  1. Whether there is value in the notion of “recycling” items between the subtotals of net income and other comprehensive income and, if so, the basis for the types of transactions and events that should be recycled and when recycling should occur

  2. Developing consistent principles for disaggregating information on each of the required financial statements

  3. Defining the totals and subtotals to be reported on each of the required financial statements (that might include categories such as business and financing).

The Boards anticipate that a public discussion document will be issued in the second quarter of 2005.

The Boards directed the staff to form an international joint advisory group to advise the Boards and staff in the course of this project.

The Boards agreed not to exclude any types of entities from the scope of this project.

Agenda planning. The Boards discussed plans for coordinating their future standard-setting activities. Among the issues discussed were (1) a staff proposal to undertake a joint project to develop a common conceptual framework for use by both Boards and (2) whether other existing and future agenda projects should be undertaken either jointly or concurrently. The meeting was administrative in nature; no changes to the technical agenda of either the FASB or the IASB were made. Both Boards noted that additional consultation would be undertaken before making any agenda decisions.

The Boards agreed with the objective of moving toward a single conceptual framework that would be used by both Boards. The Boards directed the staff to develop a plan, for discussion at a future meeting, that would have as its objective the convergence of the IASB Framework and the FASB's Statements of Accounting Concepts.

The Boards directed the staff to develop, for further consideration by both Boards, an approach to undertaking technical agenda projects referred to as the "modified" joint approach. Under that approach, the initial due process document would be a discussion paper developed primarily through the deliberations of a "lead" Board (those deliberations would be led by a single staff team that includes IASB and FASB staff, and possibly staff from other national standard-setting bodies). That discussion paper would be issued by the IASB and the FASB for public comment. Following analysis of comments received, the Boards would plan to undertake a joint project with the objective of issuing identical or substantially similar Exposure Drafts and final standards.

The Boards discussed projects on their existing active agendas and made the following decisions:

  1. The Boards agreed to consider, at a future meeting, whether the following active projects should be undertaken using the modified joint approach: the FASB project on liabilities and equity (the FASB would lead) and the IASB project on accounting for insurance contracts (the IASB would lead).

  2. The Boards discussed the active FASB project on accounting for the extinguishment of liabilities. The IASB decided it would consider, at a future meeting, whether to add a similar project to its agenda that would be undertaken jointly with the FASB.

  3. The Boards discussed their respective projects to address issues relating to consolidation policy and agreed with the objective of developing convergent accounting standards in this area. The Boards agreed to continue to deliberate issues separately but directed the staff to consider ways (including joint deliberations) to more closely coordinate the Boards' activities.

The Boards discussed potential major projects that might be added to the joint agenda. The Boards agreed that projects on accounting for leasing, employee benefits, and intangible assets should be considered for admission to the joint agenda as resources become available. The Boards did not, however, discuss the relative priorities of those important improvement projects. The Boards also directed the staff to analyze existing differences in the accounting for financial instruments and develop, for discussion at a future meeting, a proposal for one or more potential projects to (1) reduce or eliminate those differences (convergence projects) or (2) improve existing financial reporting (improvements projects).

The Boards also discussed the scope of their existing joint short-term convergence project. The Boards directed the staff to develop proposals, that would be discussed at future meetings, for short-term convergence projects that would seek to eliminate or reduce differences in the accounting for (1) property, plant, and equipment; (2) investments in real estate properties; and (3) joint ventures.

The Boards also directed the staff to undertake research efforts in the area of accounting for joint ventures, extractive industries, and the use of the equity method of accounting for investments.

Revenue recognition. The Boards discussed the following four topics: (1) the distinctions between components of comprehensive income such as revenues and gains and the merits of those distinctions; (2) whether the production of readily marketable commodities gives rise to a component of comprehensive income and whether that component is a revenue, a gain, or some other type of comprehensive income; (3) whether engaging a third party to perform on behalf of a reporting entity by means of subcontracting or outsourcing ultimately gives rise to revenue, and related matters of display in the financial statements; and (4) whether nonreciprocal transfers from other entities should be included in the definition of revenues or in a different component of comprehensive income, and the related implications of the latter conclusion for the definition of revenues.

The Boards reached the following tentative conclusions:

  1. Distinctions between different components of comprehensive income such as revenues and gains provide useful information to investors and creditors.

  2. The present distinctions between revenues and gains should be sharpened; this may require defining other components of comprehensive income.

  3. Production can give rise to a component of comprehensive income.

  4. A reporting entity should not recognize revenues for the performance by third parties of its obligations to deliver goods or render services to customers if those obligations are legally assumed by those third parties.

  5. In all other circumstances, a reporting entity should recognize revenues for the performance by third parties of its obligations to deliver goods or render services to customers.

  6. Disclosures about outsourcing and subcontracting activities should not be required to be made on the face of the income statement, either by disaggregating revenues or by means of a line item for expenses.

  7. Nonreciprocal transfers received should not be excluded from revenues and should be disclosed as a separate line item in income statements.

FASB STAFF POSITION GUIDANCE

On April 28, 2004, it was announced that a majority of the Board directed the staff to issue the following final FSPs:

  1. FSP FAS 141-1 and FAS 142-1, “Interaction of FASB Statements No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, and EITF Issue No. 04-2, ‘Whether Mineral Rights Are Tangible or Intangible Assets’”

  2. FSP FIN 46(R)-4, “Technical Correction of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, Relating to Its Effects on Question No. 12 of EITF Issue No. 96-21, ‘Implementation Issues in Accounting for Leasing Transactions involving Special-Purpose Entities.’”

Those final FSPs will be available on the FASB website by the end of business on April 30, 2004, where they will remain until they can be incorporated into printed FASB literature.

FUTURE OPEN MEETINGS

The following is a list of open meetings tentatively scheduled through May. 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.

Monday, May 10, 2004—Liaison Meeting with the American Petroleum Institute
Tuesday, May 11, 2004—Small Business Advisory Committee Meeting
Wednesday, May 12, 2004—FASB Board Meeting
Wednesday, May 12, 2004—FASB Education Session
Tuesday, May 18, 2004—Liaison Meeting with the Equipment Leasing Association
Tuesday, May 18, 2004—FASB Liabilities and Equity Resource Group Meeting
Wednesday, May 19, 2004—FASB Board Meeting
Wednesday, May 19, 2004—FASB Education Session
Tuesday, May 25, 2004—(Tentative) Qualifying Special-Purpose Entities Roundtable Discussion
Wednesday, May 26, 2004—FASB Board Meeting
Wednesday, May 26, 2004—FASB Education Session