Action Alert No. 04-31
August 12, 2004

NOTICE OF MEETINGS

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

Wednesday, August 18, 2004, 9:00 a.m.

  1. Equity-based compensation. The Board will continue redeliberations of its March 2004 Exposure Draft, Share-Based Payment, an amendment of FASB Statements No. 123 and 95. The Board will discuss issues related to attribution of compensation cost and liability and equity classifications. (Estimated 2-hour discussion.)

  2. 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, August 18, 2004, 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 August 25, 2004 Board meeting. Those topics will be posted to the FASB calendar four days prior to the education session.

OPEN MEETING WITH REPRESENTATIVES OF THE NEW YORK SOCIETY OF SECURITY ANALYSTS

Monday, August 16, 2004, 1:00 p.m.

The Board will meet with representatives of the Committee for Improved Corporate Reporting of the New York Society of Security Analysts 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 roundtable discussions, and through other communication channels. Decisions become final only after a formal written ballot to issue a final Statement or Interpretation.

August 4, 2004 Board Meeting

Revenue recognition. The Board discussed (1) whether a reporting entity’s contractual rights and obligations should be viewed from a customer perspective versus a reporting entity perspective and (2) how "selling revenue" that is measured as a residual should be recognized at contract generation when there are uncertainties surrounding its measurement.

The Board affirmed its previous decision that a reporting entity’s contractual rights and obligations vis-à-vis its customers should be accounted for on a basis that reflects the reporting entity perspective. Under the reporting entity perspective, the fair value of an entity’s performance obligations should reflect the price that the reporting entity would have to pay an unrelated party of equal credit standing to assume legal responsibility for performing all of its remaining obligations (that is, the layoff price).

The Board did not reach a decision on the accounting treatment of selling revenue that is measured as a residual when there are uncertainties surrounding its measurement. However, the Board agreed that the residual should not be recognized as a component of other comprehensive income. The Board will continue discussing the accounting treatment of the residual at a future meeting.

Short-term convergence. The Board redeliberated several issues related to its Exposure Draft, Earnings per Share, and reached the following decisions:

  1. The Board affirmed its decision to amend paragraph 46 of FASB Statement No. 128, Earnings per Share, to require that the number of incremental shares included in quarterly and year-to-date diluted earnings per share (EPS) be computed using the average market price of common shares for the quarterly and year-to-date periods, respectively.

  2. The Board decided to amend the requirements for contingently issuable shares to be consistent with the amended requirements for the treasury stock method and with IAS 33, Earnings per Share. Contingently issuable shares should be included in diluted EPS from the beginning of the period during which the contingency has been satisfied, or from the date of the contingent share agreement, if later.

  3. The Board considered but rejected a constituent suggestion that it require footnote disclosure of the difference between the sum of the quarterly EPS amounts and the year-end EPS amount and an explanation of the impact of share transactions on the weighting of shares entering into the computation.

  4. The Board affirmed its earlier decision to delete the last sentence of paragraph 29 of Statement 128, which allows issuing entities to overcome the presumption that contracts that may be settled in cash or shares will be settled in shares. Therefore, issuing entities should assume that all such contracts would be settled in shares if dilutive, and those shares should be included in the calculation of diluted EPS.

  5. The Board decided to modify the transition requirements of the proposed Statement. Retrospective application, which is required for all other proposed changes to Statement 128, will not be permitted for contracts for which the option to settle in cash or shares no longer exists at the date of adoption because the contract has been either settled in cash or amended to remove the share settlement option prior to the date of adoption.

  6. The Board decided to include the following definition of a mandatorily convertible instrument in the final Statement:

      A mandatorily convertible instrument is one that requires the holder to exchange the instrument for a fixed number of common shares at a specified or determinable future date (or dates) or upon an event that is certain to occur, with little or no cash consideration upon the exchange.

  7. The Board decided that the proposed Statement would be effective for interim and annual periods ending after December 15, 2004.

Equity-based compensation. The Board began its redeliberations of its Exposure Draft, Share-Based Payment, an amendment of FASB Statements No. 123 and 95. The Board discussed and affirmed its tentative conclusions on the following issues:

  1. Goods or services received (from any party) in exchange for share-based payment result in a cost that is recognizable in the financial statements; that cost should be recognized in the income statement as an expense when the goods or services are consumed by the enterprise. In making that decision, the Board noted that employee services received in exchange for share-based payment meet the definition of an asset (at least momentarily) in FASB Concepts Statement No. 6, Elements of Financial Statements. The consumption of that employee-service asset in an enterprise’s operations is the event that gives rise to a recognizable expense in the income statement.

  2. The cost of employee services received in exchange for equity instruments issued by public enterprises should be measured based on the grant-date fair value of those instruments.

  3. The cost of employee services received in exchange for equity instruments should be recognized over the requisite service period.

  4. The key concepts underlying the definition of grant date in the Exposure Draft should be retained.

The Board discussed and decided to modify the requirements for recognition of compensation cost when the service inception date, as defined in the Exposure Draft, precedes the grant date. If the service inception date precedes the grant date because nonperfunctory shareholder approval has not been obtained, no compensation cost would be recognized in periods before such approvals are obtained. If the service inception date precedes the grant date because key terms and conditions of the award are not mutually understood, compensation cost would be recognized over the requisite service period beginning as of the service inception date.

Servicing rights. The Board decided that enterprises will be allowed an irrevocable one-time election, upon the initial application of the guidance to be included in an amendment to FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, to subsequently measure each class of servicing rights held at the time of application that is separately reported as assets under Statement 140 at fair value (through earnings) or the lower of carrying amount or market. For this purpose, each of the different classes of servicing rights for which fair value could be elected should include all of an entity’s rights to service one major loan type (for example, mortgage loans, credit card receivables, or automobile loans). The Board also requested that further research be performed on disclosure requirements for servicing rights.

SUMMARIES OF FASB TENTATIVE DECISIONS ON BUSINESS COMBINATIONS AND NONCONTROLLING INTERESTS AVAILABLE

On August 5, 2004, a "Summary of FASB Tentative Decisions on Business Combinations," was posted to the FASB website. That summary reflects Board decisions on its business combinations project through July 27, 2004. Those decisions are provided in a format that is similar to a proposed Statement (in this case, FASB Statement No. 141, Business Combinations, as it would be amended by the decisions reached in the current business combinations project). A "Summary of FASB Tentative Decisions on Noncontrolling Interests," a separate phase of the Board’s business combinations project, was posted to the website on August 9, 2005.

FUTURE OPEN MEETINGS

The following is a list of open meetings tentatively scheduled through September. 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, August 25, 2004—FASB Board Meeting
Wednesday, August 25, 2004—FASB Education Session
Friday, August 27, 2004—Liaison Meeting with the Financial Managers Society
Wednesday, September 1, 2004—FASB Board Meeting
Wednesday, September 1, 2004—FASB Education Session
Wednesday, September 8, 2004—FASB Education Session
Tuesday, September 14, 2004—Liaison Meeting with the Institute of Management Accountants
Wednesday, September 15, 2004—FASB Board Meeting
Wednesday, September 15, 2004—FASB Education Session
Monday, September 20, 2004—Liaison Meeting with the American Gas Association
Tuesday, September 21, 2004—Fair Value Measurement Roundtable Discussion
Wednesday, September 22, 2004—FASB Board Meeting
Wednesday, September 22, 2004—FASB Education Session
Thursday, September 23, 2004—Financial Accounting Standards Advisory Council Meeting
Wednesday, September 29, 2004—FASB Board Meeting
Wednesday, September 29, 2004—Emerging Issues Task Force Meeting
Thursday, September 30, 2004—Emerging Issues Task Force Meeting