Action Alert No. 04-47
December 2, 2004
NOTICE OF MEETINGS
OPEN BOARD MEETINGS
(Board
meetings are available by audio webcast and telephone.)
No Board meetings are planned for the week of December 6,
2004.
OPEN EDUCATION SESSION
Wednesday, December 8, 2004, 10:00 a.m.
The Board will hold an educational, non-decision-making session to
discuss topics that are anticipated to be discussed at the December 15,
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 NATIONAL INVESTOR RELATIONS
INSTITUTE
Friday, December 10, 2004, 10:00 a.m.
The Board will meet with representatives of the Senior Roundtable
Steering Committee of the National Investor Relations Institute 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.
November 24, 2004 Board Meeting
Open
discussion: equity-based compensation. The Board discussed issues
identified during the course of drafting the final Statement. The Board
made the following decisions regarding those issues:
Whether Certain Amounts Recorded in Additional Paid-In Capital
(APIC) from Illustrations 14(a) and 15 Should Instead Be Recorded in Other
Comprehensive Income
The Board decided not to address the issue but agreed to note in the
basis for conclusions that such an issue would be better addressed in a
project on comprehensive income.
Transition Guidance Related to Footnote 41 of Appendix A
Footnote 41 of the then-current draft of Appendix A notes that a
deferred tax asset for excess tax benefits would not be recognized until
those benefits are realized (that is, those benefits reduce taxes
payable). The Board decided that such guidance should be applied
prospectively. That is, such guidance applies to excess tax benefits
arising after the required effective date. The Board also decided that
entities cannot use excess tax benefits previously recorded in APIC that
were never realized to absorb tax benefit shortfalls. Therefore, an entity
would exclude such excess tax benefits in determining the amount of excess
tax benefits available to offset tax benefit shortfalls, regardless of the
transition method used.
Nonemployee Transactions
The Board discussed whether the final Statement should explicitly state
whether certain guidance developed and explained in the context of
accounting for share-based payment transactions with employees also should
be applied in accounting for nonemployee transactions. The Board decided
such explicit statements should not be made.
Financial
instruments: liabilities and equity. The Board continued to
develop the Ownership/Settlement Approach for distinguishing liabilities
and assets from equity for single component instruments by discussing (1)
characteristics of a direct ownership relationship and (2) determining the
form of settlement that should be assumed for instruments with multiple
settlement alternatives.
The Board decided that a direct ownership relationship is established
by an instrument of an entity or consolidated subsidiary (reference
instrument) if the instrument has two essential characteristics:
- A claim to a share of the net assets of the entity or
consolidated subsidiary that is not limited in amount (that is, there is
no floor or ceiling on the holder’s claim to a share of net assets).
Sharing in the net assets includes evaluating the holder’s returns over
the instrument’s lifetime and at liquidation. Instruments with fixed or
specified terms that do not share in the excess net assets upon
liquidation do not meet this condition.
- Subordination in a hypothetical liquidation; that is, if the
entity or consolidated subsidiary were to liquidate (a hypothetical
liquidation) at the assessment date, the holder of the instrument would
be last in line to receive their share of the net assets. An instrument
that must be converted to another instrument to be subordinated in a
hypothetical liquidation at the assessment date would not meet this
condition.
Those two essential characteristics of a direct ownership relationship
replace the original characteristics that the Board decided on at its
October 6, 2004 meeting.
The description of a direct ownership relationship generally
results in the following:
- Options and forward contracts would not establish a direct ownership
relationship. (However, they might establish an indirect ownership
relationship.)
- Mandatorily redeemable instruments that include a claim to a share
of the net assets of an entity would establish a direct ownership
relationship if they are, or together with other instruments are, the
most subordinated interests in a hypothetical liquidation at the
assessment date.
- Mandatorily redeemable instruments that include a claim to a share
of the net assets of a consolidated subsidiary would establish a direct
ownership relationship if they are the most subordinated interests of
the subsidiary in a hypothetical liquidation at the assessment date.
The Board also discussed single component instruments embodying
settlement obligations or rights that have multiple settlement
alternatives—those that would be settled by the issuer delivering or
receiving assets or shares—modifying the decision made at its November 3,
2004 meeting. The Board decided that if the issuer or counterparty has a
choice of settling with assets or shares, an instrument establishing an
indirect ownership relationship might not be settled with shares and,
therefore, the issuer should assume asset settlement and classify the
instrument as a liability or asset. Examples are a written call or
purchased put option that can be net cash- or share-settled at the choice
of the issuer or counterparty.
Additionally, the Board confirmed its prior decision that the issuer
should assume delivery of assets if the form of settlement is determined
by conditions outside the control of the issuer and the counterparty. The
Board also decided that subsequent reassessment is required for those
instruments to determine whether the condition is present or has been
resolved such that the instrument would be settled with shares and could
be reclassified as equity.
The Board directed the staff to prepare a milestone draft of its
decisions to date relating to single component instruments under the
Ownership/Settlement Approach. The Board requested that the staff obtain
input on the approach from the liabilities and equity resource group
members.
Business
combinations: purchase method procedures. The Board discussed
certain drafting issues identified by the staff in developing the joint
FASB-IASB business combinations Exposure Draft. The Board decided to:
- Retain the definition of a business combination that it agreed to
earlier in this project. The IASB also indicated that it would be
willing to adopt that definition. Therefore, a business combination will
be defined in the joint Exposure Draft as a transaction or event in
which an acquirer obtains control over one or more businesses.
- Adopt the IASB’s approach in IFRS 3, Business Combinations,
and define goodwill by its nature rather than by its measurement.
- Converge the guidance for identifying the acquirer in FASB Statement
No. 141, Business Combinations, and IFRS 3.
- Adopt the IASB’s approach in IFRS 3 and require that any adjustments
made to the initial accounting for a business combination be accounted
for by restating prior periods. Therefore, if an acquirer obtains new
information during the measurement period about the fair value of an
asset or liability as of the acquisition date, the acquirer would
account for that adjustment retroactively rather than prospectively.
- Retain its existing criteria for recognizing intangible assets
separately from goodwill. The Board decided not to include an additional
requirement that the fair value of an intangible asset must be reliably
measurable to be separately recognized, which differs from the IASB’s
decision to include such a requirement.
The Board agreed to a change in timing for issuing the joint Exposure
Draft. The joint Exposure Draft is scheduled to be issued in the first
quarter of 2005 rather than the fourth quarter of 2004.
The Board listened to a brief staff report on the eight field visits
that were held with U.S.-based enterprises that had recent business
combinations. It noted that the field visits provided useful suggestions
for clarifying the guidance in the joint Exposure Draft. The staff also
reported to the Board that they observed that the benefits of the proposed
Statement are justified in relation to the incremental costs identified
and that there was no need for fundamental changes in the tentative
decisions to accommodate cost-benefit considerations.
Short-term
international convergence: earnings per share. The Board discussed
issues related to the proposed Statement on earnings per share (EPS). The
Board decided that when applying the treasury stock method to an
instrument classified as a liability but potentially settled in shares,
the extinguishment of the liability upon issuance of the shares should be
included as proceeds in the computation of incremental shares. This
decision does not affect the EPS computation for instruments that are
currently accounted for using the if-converted method under FASB Statement
No. 128, Earnings per Share. The Board also decided that any
potential broader impact of this decision will be considered within the
context of the liabilities and equity project. The Board directed the
staff to maintain communication with other project teams dealing with EPS
issues.
Liability
extinguishment. The Board discussed the application of the
liability derecognition criteria in paragraph 16 of FASB Statement No.
140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, to performance obligations.
Specifically, the Board considered (1) whether to continue exploring a
derecognition model based on legal principles and (2) the next steps that
should be taken in the project.
The Board decided that the staff should not pursue a derecognition
model based solely on legal principles because of the perceived
representational faithfulness and operationality issues. Instead, the
Board directed the staff to identify and describe indicators of
performance that subsequently could be used to develop models for
derecognition or measurement of performance obligations.
GAAP
hierarchy. Consistent with the Board’s initiatives aimed at
improving the quality and transparency of accounting and financial
reporting standards and the standard-setting process, the Board decided to
undertake a project to move the generally accepted accounting principles
(GAAP) hierarchy from Statement on Auditing Standards No. 69, The
Meaning of Present Fairly in Conformity with Generally Accepted
Accounting Principles in the Independent Auditor’s Report, to an
FASB standard. The Board’s decisions will be released for public comment
in an Exposure Draft of a proposed Statement of Financial Accounting
Standards.
The Board previously stated in its FASB Response to SEC Study on the
Adoption of a Principles-Based Accounting System that creating two
levels of literature (authoritative and nonauthoritative) and elevating
the conceptual framework within the GAAP hierarchy are key elements of the
Board’s goal of improving the quality of the GAAP hierarchy and,
therefore, the quality and transparency of standards and the
standard-setting process. The Board, however, observed that some of its
other projects (such as the conceptual framework project and the
codification project) address issues that are related to the GAAP
hierarchy and decided to limit the scope of this project.
The Board considered whether to create two levels of literature
(authoritative and nonauthoritative) and decided not to create two levels
of literature at this time; the Board expects that this issue will be
addressed under its codification project. Instead, the Board decided to
maintain the qualitative characteristics of literature and practices that
constitute the GAAP hierarchy that are presented in paragraph .05 of SAS
69.
While the Board agreed not to create two levels of literature at this
time, it discussed the need to describe in the proposed Statement its
long-range plans to reduce the multiple levels of literature to just two
levels, authoritative and nonauthoritative. In connection with this
discussion, the Board agreed that authoritative literature will
include literature that is subject to (1) deliberation by the Board or its
designee, (2) public exposure, and (3) final clearance by the Board. The
Board acknowledges that the foregoing definition of authoritative
literature is consistent with the qualitative characteristics of category
(a) GAAP in SAS 69.
The Board also acknowledges that while the SEC and the Sarbanes-Oxley
Act identify the FASB’s role as the preeminent accounting standard setter
in the private sector, the SEC retains the authority to establish
accounting and financial reporting standards as it sees fit. Therefore,
authoritative literature for public companies includes official SEC staff
views. The Board has instructed the FASB staff to consult with the SEC
staff to determine the specific SEC literature to be included as
authoritative.
The Board considered whether its Statements of Financial Accounting
Concepts should be designated as authoritative literature, since they meet
the definition of authoritative literature, but decided not to address
that issue at this time; the Board expects to address that issue under its
conceptual framework project.
Finally, the Board observed that Rule 203 of the AICPA’s Code of
Professional Conduct prohibits an auditor from expressing an opinion or
stating affirmatively that the financial statements are presented in
conformity with GAAP if such statements contain any departure from GAAP
that have a material effect on the statements taken as a whole, unless the
auditor can demonstrate that due to unusual circumstances the financial
statements would otherwise have been misleading. This raises the issue of
whether management should have the ability to represent that its financial
statements are presented in accordance with GAAP in the unusual instances
in which application of GAAP results in financial statements that are, in
management’s judgment, misleading. The Board believes that application of
GAAP should result in relevant and reliable financial information and,
therefore, management cannot represent that its financial statements are
presented in accordance with GAAP if such financial statements contain a
departure from GAAP.
In summary, the Board will issue an Exposure Draft of a proposed
Statement of Financial Accounting Standards, which will reflect the
following decisions:
- The qualitative characteristics presented in paragraph .05 of SAS 69
will be presented in the Board’s proposed Statement.
- The new definition of authoritative literature will supplement the
qualitative definition currently included in category (a) of the
GAAP hierarchy.
- Statements of Financial Accounting Concepts will continue to be
ranked below category (d) of the GAAP hierarchy.
- Management cannot represent that its financial statements are
presented in accordance with GAAP if such financial statements contain a
departure from GAAP.
The Board’s decisions do not result in a change in the SAS 69 GAAP
hierarchy.
FASB DOCUMENT AVAILABLE
In November 2004, the Board issued FASB Statement No. 151, Inventory
Costs, an amendment of ARB No. 43, Chapter 4. This document is
available on the FASB website. Copies also are available from the FASB
Order Department by calling 1-800-748-0659.
FUTURE OPEN MEETINGS
The following is a list of open meetings tentatively scheduled through
January. All meetings are held in Norwalk, Connecticut, unless otherwise
noted. 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, December 13, 2004—FASB Education Session
Wednesday, December
15, 2004—FASB Board Meeting
Wednesday, December 15, 2004—FASB Education
Session
Wednesday, December 22, 2004—FASB Board Meeting
Wednesday,
December 22, 2004—FASB Education Session
Wednesday, January 5,
2005—FASB Board Meeting
Wednesday, January 5, 2005—FASB Education
Session
Wednesday, January 12, 2005—FASB Board Meeting
Wednesday,
January 12, 2005—FASB Education Session
Thursday, January 13,
2005—International Joint Advisory Group Meeting, London,
England
Thursday, January 13, 2005—Liaison meeting with National
Association of College and University Business Officers
Friday, January
14, 2005—International Joint Advisory Group Meeting, London,
England
Wednesday, January 19, 2005—FASB Board Meeting
Wednesday,
January 19, 2005—FASB Education Session
Wednesday, January 26,
2005—FASB Board Meeting
Wednesday, January 26, 2005—FASB Education
Session
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