Action Alert No. 04-30
August 5, 2004

NOTICE OF MEETINGS

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

Wednesday, August 11, 2004, 9:00 a.m.

  1. Short-term convergence. The Board will redeliberate the provisions of its Exposure Draft, Inventory Costs, based on the comments received from constituents. The Board also will redeliberate the remaining issues in its Exposure Draft, Earnings per Share. (Estimated 30-minute discussion.)

  2. Qualifying special-purpose entities and isolation of transferred assets. The Board will continue its discussion from the July 27, 2004 Board meeting on the consideration of setoff rights under FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The Board will consider whether to require that (a) the transferor waive its setoff rights, (b) the existence of setoff rights by either the transferor or obligor be remote, (c) the risk that setoff rights be exercised by the transferor or the obligor be remote, or (d) setoff rights be evaluated like a conditional call that does not disqualify the transfer from being accounted for as a sale until the condition is met. (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, August 11, 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 18, 2004 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.

July 27, 2004 Board Meeting

Business combinations: purchase method procedures. The Board readdressed and clarified its October 8, 2003 decision for attributing the net income or loss and other comprehensive income of a partially owned subsidiary (other than a variable interest entity) in the consolidated financial statements of its parent. The Board decided that net income or loss and each component of other comprehensive income should be attributed to the controlling and noncontrolling interests based on their relative ownership interests unless contractual arrangements between the parties holding those interests require a different method. In that case, the method of attribution should be based on the contractual terms.

The Board also discussed but did not reach a conclusion about whether and, if so, how that decision applies to subsidiaries that are variable interest entities. The Board directed the staff to perform further research about the appropriate method of attribution for those subsidiaries.

The Board also decided to amend FASB Interpretation No. 46 (revised 2003), Variable Interest Entities, to clarify that the term noncontrolling interests is used with the same meaning as in the draft of the proposed Statement on noncontrolling interests and is limited to equity interests.

The staff reported that members of the project’s resource group found the revised approach to determining what should be included in the initial accounting for a business combination, discussed in April 2004, to be an improvement over the approach discussed in October 2003. Based on that report, the Board affirmed its April 2004 decision.

Combinations of not-for-profit organizations. The Board decided to define a not-for-profit combination as any event that results in the initial inclusion of a combined set of assets and activities (as defined) in a not-for-profit organization’s consolidated financial statements. The following events would continue to be excluded from the scope of this project:

  1. The formation of a joint venture

  2. The acquisition of noncontrolling interests after consolidation

  3. A transfer of net assets or exchange of equity interests between entities under common control.

The scope of the proposed Statement would include acquisitions of net assets that are not separate entities and all initial consolidation events, but would not describe those events as transactions or other events in which an acquiring entity obtains control over one or more combined sets of assets and activities. Therefore, the scope of the project would be consistent with the proposed revision of FASB Statement No. 141, Business Combinations, but would be described in a manner that clarifies that the guidance on combinations accounting would not change existing consolidation policy for not-for-profit organizations provided by other accounting standards.

The Board decided to use a term such as combined set of assets and activities to differentiate acquisitions of a group of assets from combinations of an integrated set of assets and activities that are within the scope of this project. The Board also decided to define a combined set of assets and activities in a manner that conforms to the revised definition of a business in the proposed revision of Statement 141, except for differences applicable to not-for-profit organizations. Thus, a combined set would be defined as an integrated set of assets and activities that is capable of being conducted and managed for the purpose of providing:

  1. A return to investors

  2. Lower costs or other economic benefits directly and proportionately to owners, members, or participants, or

  3. Goods or services to beneficiaries, customers, or members that fulfill the purpose or mission for which a not-for-profit organization exists.

A combined set would consist of inputs and processes applied to those inputs, which together have the ability to create outputs that have the ability to be used for the specified purposes.

Short-term convergence: income taxes. The Board discussed whether to reconsider the existing exceptions to comprehensive recognition of deferred taxes for APB Opinion No. 23, Accounting for Income Taxes—Special Areas, and U.S. steamship enterprise temporary differences. No decision was reached. The Board directed the staff to conduct additional research on the practical and cost-benefit considerations of computing deferred taxes on unremitted earnings of foreign subsidiaries.

Financial instruments: derivatives implementation. The Board discussed respondents’ comments and staff revisions to Implementation Issue No. G25, “Hedging the Variable Interest Payments on a Group of Prime-Rate-Based Interest-Bearing Loans.” The Board did not object to the staff’s recommended revisions to permit the use of the first-payments-received technique in a cash flow hedge of the variable prime-rate-based or other variable non-benchmark-rate-based interest payments for a rolling portfolio of prepayable interest-bearing loans (without the limits discussed at the May 12, 2004 meeting), provided the hedging relationship meets all other conditions in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, for cash flow hedge accounting, with any ineffectiveness in the hedging relationship reported in earnings consistent with paragraph 30 of Statement 133. The cleared Implementation Issue G25 is expected to be posted to the FASB website in August.

FASB Staff Positions (FSPs). The Board considered whether to direct the staff to issue the following proposed FSPs and made the following decisions:

  1. FASB Statement No. 109, Accounting for Income Taxes, to uncertain tax positions. The Board discussed several issues relating to (a) the recognition and measurement of tax benefits (including those related to uncertain tax positions), (b) the subsequent accounting for those benefits, (c) classification and disclosure of those benefits in financial statements, (d) interim reporting considerations, and (e) effective date and transition requirements.

    The Board made the following decisions:

    (1)   To require a probable level of confidence before reflecting a tax benefit in an entity’s financial statements. Probable is meant to have the same meaning as used in FASB Statement No. 5, Accounting for Contingencies.

    (2)   That the amount of liability recorded, if any, reflecting the difference between the “as filed” tax basis and the tax basis meeting the probable level of confidence should not be recorded as a deferred tax liability, but should be recorded as a current liability in the financial statements.

    (3)   That constituents should refer to paragraph 17 of Statement 5 for disclosure requirements associated with any recognized liabilities.

    (4)  That recognition of a tax benefit should occur when the probable threshold is met, and derecognition should occur when the probable threshold is no longer met.

    (5)   That the staff should discuss the accounting for interest and penalties with the IASB to determine if any convergence issues exist.

    (6)   That changes in judgment about realizability of a tax benefit should be recognized in the current interim period and not be spread over future interim periods.

    The Board considered whether to direct the staff to issue a proposed FSP concerning those issues but decided instead to add a project to its agenda and directed the staff to prepare a proposed Interpretation, which gives the Board the opportunity to include a basis for conclusions section. The Board decided that the comment period for the proposed Interpretation should be 60 days. Furthermore, the Board decided that an entity should recognize the cumulative effect of initially applying the proposed Interpretation as a change in accounting principle with a cumulative-effect adjustment in the statement of operations. The Board directed the staff to further research issues related to the effective date.

  2. EITF Issue No. 85-24, “Distribution Fees by Distributors of Mutual Funds That Do Not Have a Front-End Sales Charge,” when future distribution fees are sold to unrelated third parties. The Board directed the staff to issue proposed FSP FAS 140-b, “Application of EITF Issue No. 85-24, ‘Distribution Fees by Distributors of Mutual Funds That Do Not Have a Front-End Sales Charge,’ When Future Distribution Fees Are Sold to Unrelated Third Parties,” for a 30-day comment period, after certain revisions are made. (Proposed FSP FAS 140-b was subsequently posted to the website on August 3, 2004, and comments are requested by September 2, 2004.)

Beneficial interests. The Board affirmed that interests retained by transferors in asset transfers accounted for as a sale under FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, should be initially measured at fair value. Further, the Board decided to require that interests retained after transfers creating guaranteed mortgage securitizations (as defined in Statement 140) be initially measured at fair value even though such transfers may not qualify as sales under Statement 140. The Board also decided against separately recognizing credit enhancement or subordination embedded in beneficial interests resulting from a transfer of assets accounted for as a sale under Statement 140.

Qualifying special-purpose entities and isolation of transferred assets. The Board discussed a summary of the information about loan participations and setoff rights gathered at the public roundtables and from the letters received in response to the Staff Request for Information. The Board did not make any decisions pending further investigation of possible criteria for consideration of setoff rights. The Board requested that the staff further research whether to require any or all of the following potential alternatives:

  1. That the transferor waive its setoff rights

  2. That the existence of setoff rights by either the transferor or obligor be remote

  3. That the risk that setoff rights be exercised by the transferor or the obligor be remote

  4. That setoff rights be evaluated like a conditional call that does not disqualify the transfer from being accounted for as a sale until the condition is met.

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 18, 2004—FASB Board Meeting
Wednesday, August 18, 2004—FASB Education Session
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