Action Alert No. 04-33
August 26, 2004

NOTICE OF MEETINGS

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

Wednesday, September 1, 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 plans to address issues related to modifications and settlements, issues related to the modified grant date method and out-of-the-money options, fair value measurement, and any follow-up issues from prior Board meetings. In addition, the Board may address issues related to disclosures, transition, and effective date for public companies depending on the status of the tentative decisions to date. (Estimated 3-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 SESSIONS

Wednesday, September 1, 2004, immediately following the Board meeting
Friday, September 3, 2004, 9:00 a.m.

The Board will hold educational, non-decision-making sessions to discuss topics that are anticipated to be discussed at the September 8, 2004 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 roundtable discussions, and through other communication channels. Decisions become final only after a formal written ballot to issue a final Statement or Interpretation.

August 18, 2004 Board Meeting

Equity-based compensation. The Board continued its redeliberations of its March 2004 FASB Exposure Draft, Share-Based Payment, an amendment of FASB Statements No. 123 and 95. The Board discussed equity and liability classification, requisite service period, service inception date, graded vesting, and other related issues. The Board made the following decisions regarding those issues:

Equity and Liability Classification

  1. The Board reaffirmed that the classification scheme of the final Statement that will revise FASB Statement No. 123, Accounting for Stock-Based Compensation, is based on FASB Concepts Statement No. 6, Elements of Financial Statements, and that, consequently, it also incorporates the classification provisions of FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.

  2. The Board acknowledged that EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” does not incorporate a substantive-liability notion based on predominant cash settlement when an instrument permits the issuer a nominal choice of settlement alternatives (including net-cash settlement); therefore, Issue 00-19 and the final Statement will provide different classification treatments for similar economic arrangements. The Board decided that that difference should be addressed in its project on financial instruments—liabilities and equity, and the Board directed the staff to describe that difference in the basis for conclusions of the final Statement.

  3. The Board reaffirmed that awards containing conditions or other features relevant in measuring fair value indexed to something other than a market, performance, or service condition should be accounted for as liabilities. The Board also acknowledged that relative market and performance conditions would cause similar economic arrangements to be classified differently under the final Statement and Issue 00-19, including its interpretation of EITF Issue No. 01-6, “The Meaning of ‘Indexed to a Company’s Own Stock.’” The Board decided that that difference should be addressed in its project on financial instruments—liabilities and equity, and the Board directed the staff to describe that difference in the basis for conclusions of the final Statement. The Board also decided that an issuer of share-based payment awards would need to consider the guidance provided in paragraphs 12–32 of Issue 00-19 in determining the appropriate classification for such awards.

  4. The Board decided it will provide guidance in the final Statement similar to that in Issue 31 of EITF Issue No. 00-23, “Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44.” That guidance would create a narrow exception: awards of equity instruments with fixed exercise prices denominated in certain foreign currencies (for example, the functional currency of the employer or the currency in which the employee is paid) would not be classified as liabilities under the Board’s decision noted in item 3 above.

  5. The Board reaffirmed and further clarified its position on accounting for financial instruments originally issued under arrangements subject to the final Statement that cease to be compensatory in nature (and therefore cease to be subject to that final Statement). Such financial instruments should be accounted for in accordance with other applicable GAAP when they cease to be compensatory in nature; GAAP that may apply to such financial instruments includes FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 150, and Issue 00-19. The Board also requested the staff to clarify and modify paragraphs 40A and 40B of the final Statement as a result of its decision.

  6. The Board decided to eliminate footnote 11(c) of the March 2004 Exposure Draft in the final Statement and requested that the staff consider how the intent of footnote 11(c) might be better described in the basis for conclusions relating to the interaction of that final Statement and Statement 150. (Footnote 11(c) of the Exposure Draft briefly discussed the potential interaction between equity awards with market, performance, and service conditions and Statement 150.)

  7. The Board clarified that the guidance in paragraph 25C of the final Statement relating to a broker-assisted cashless exercise also could apply to a portion of an award and decided that (a) the definition of cashless exercise should be renamed to broker-assisted cashless exercise and (b) footnote 9(f) should be modified to state that the sale must occur in a normal settlement period.

  8. The Board reaffirmed the guidance in paragraph 25C of the final Statement on minimum statutory withholding taxes and decided to expand it to include minimum statutory withholding taxes for all relevant tax authorities. The Board rejected the expansion of that guidance to include amounts in excess of the minimum statutory withholding taxes.

Recognition and Measurement of Equity-Based Compensation Liabilities

  1. The Board reaffirmed the recognition and measurement approach for share-based payment liabilities of public companies and reaffirmed that fair value is the appropriate measurement attribute for such liabilities.

Requisite Service Period

Explicit, Implicit, and Derived Service Periods

  1. The Board decided to retain the concepts of explicit, implicit, and derived service periods for determining the requisite service period of an award, to include their definitions in the glossary of the final Statement, and to include the example of a fully vested, deep out-of-the-money stock option in the definition of derived service period.

  2. The Board decided to change the guidance for determining a derived service period. The derived service period would be the median (as opposed to the mode, which was in the proposed Statement) of the distribution of paths of a path-dependent option-pricing model on which the market condition is satisfied. In addition, the Board decided to clarify the meaning of certain statistical concepts used in the final Statement.

Guidance for Determining the Requisite Service Period

  1. The Board decided that a change in the initial estimate of the requisite service period based on a performance or service condition would not result in the grant-date fair value of the award being revised using its grant-date inputs. Rather, such a change would affect the period over which compensation cost is attributed. Additionally, any unrecognized compensation cost would be attributed prospectively from the date of change based on the revised estimate of the requisite service period; that is, no cumulative-effect type adjustments affecting the recognized compensation cost would be permitted.

  2. The Board agreed to retain the definition of market condition in the proposed Statement as well as the proposed Statement’s attribution method for awards with market conditions.

  3. The Board directed the staff to add an example in the implementation guidance that addresses the accounting for an exchange in which the award’s contractual term is unaffected by an employee’s termination of service.

Minimum Equity Withholdings and Clawback Features

  1. The Board addressed the accounting for certain share-based payment awards that contain a class of condition, including certain clawback provisions relating to “noncompete” requirements and illegal behavior as well as minimum equity holding requirements, that requires an employee to transfer cash or shares earned as a result of a share-based payment award to the issuing enterprise. The Board concluded that such conditions would not cause an equity award to be classified as a liability. Those conditions would be accounted for by the issuing enterprise if and when the specified event occurs by recognizing a credit equal to the lesser of the recognized compensation cost or the fair value of the consideration transferred on the date it is received by the enterprise. Those conditions would not be considered in estimating the grant-date fair value of an award.

Service Inception Date

  1. The Board decided that no portion of compensation cost would be immediately attributable at the date of shareholder approval to a period prior to such approval even if vesting begins during that prior period.

  2. The Board decided to provide additional guidance in the final Statement to identify situations in which the service inception date occurs before the grant date. Normally, the service inception date is the grant date; however, if either of the following conditions applies, the service inception date precedes the grant date: (a) the award’s terms do not include a substantive future requisite service condition that becomes effective at the grant date or (b) the award contains a market or performance condition that if not satisfied during the service period preceding the grant date and following the arrangement’s inception results in a forfeiture of the award.

Awards with Graded Vesting

  1. With respect to awards with graded vesting, the Board decided to use the requirements in Statement 123 rather than those in the proposed Statement. That is, if the fair value of the award is determined based on different expected lives for the options that vest each year, then compensation cost for an award with a graded vesting schedule should be recognized in accordance with the method described in FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans. If the expected life or lives of the award are determined in another manner, the related compensation cost would be recognized on a straight-line basis or in accordance with the method described in Interpretation 28. However, the amount of compensation cost recognized at any date should at least equal the value of the vested portion of the award at that date.

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, September 8, 2004—FASB Board Meeting
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 (if needed)
Thursday, September 23, 2004—Financial Accounting Standards Advisory Council Meeting
Friday, September 24, 2004—FASB Education Session
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