Action Alert No. 04-50
December 23, 2004

NOTICE OF MEETINGS

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

No Board meetings are planned for the week of December 27, 2004. The next scheduled Board meeting is Wednesday, January 5, 2005.

OPEN EDUCATION SESSION

No education sessions are planned for the week of December 27, 2004. The next scheduled education session is Wednesday, January 5, 2005.

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.

December 15, 2004 Board Meeting

Equity-based compensation. The Board discussed an issue identified during the course of drafting the final Statement and made the following decision regarding that issue:

Certain Transactions with Related Parties and Other Economic Interest Holders

At its November 19, 2003 meeting, the Board decided that all transactions in which related parties or other economic interest holders of an enterprise grant equity-based compensation of that enterprise to employees of that enterprise would be analyzed to determine whether the enterprise benefits from the arrangement. If the enterprise benefits from such transactions, then those transactions should be accounted for as employee compensation cost paid by the enterprise and capital contributions received from related parties or other economic interest holders.

The Board clarified that that decision applied to all share-based compensation instruments, whether classified as equity or liabilities, and directed the staff to clarify the wording of the final Statement to reflect that decision.

Fair value measurement. The Board discussed significant issues raised by respondents to its Exposure Draft, Fair Value Measurements, relating to the fair value hierarchy, reference markets within the hierarchy, and credit standing in liability measurements.

The Board clarified that the objective of the fair value hierarchy is to prioritize the inputs to valuation techniques used to estimate fair value to provide a framework for assessing the relative reliability of the estimates, giving the highest priority to quoted prices in active markets and the lowest priority to an entity’s own estimates and assumptions. To more clearly convey a continuum of inputs, the Board decided to adopt a four-level hierarchy and revise certain aspects of the guidance contained within the hierarchy. Specifically:

1. The Board revised the guidance within Level 1 to refer to the use of quoted prices in active markets for identical assets or liabilities, except in limited situations in which those prices might need to be adjusted within a lower level of the hierarchy because those prices are not readily available or representative of fair value (that is, marketplace participants would not currently transact at those prices). The Board agreed that in limited situations in which individual price quotes are readily available and representative of fair value but are not readily obtainable for all of the assets and liabilities to be measured, a pricing method commonly used in the market may be used within Level 1 as a practical expedient.

2. The Board revised the guidance within Level 2 to eliminate the objectively determinable criterion, thereby referring to the use of quoted prices in active markets for similar assets or liabilities, adjusted as appropriate for differences.

3. The Board revised the guidance within Level 3 to eliminate the undue cost and effort criterion, thereby referring to the use of other available market inputs.

4. The Board added a new Level 4 to refer to the use of entity inputs in the absence of available market inputs, affirming that within Level 4, the measurement objective is fair value.

The Board clarified the application of the reference market principle within the fair value hierarchy, as revised. Specifically:

1. For Level 1 estimates, the Board clarified that the appropriate reference market is the market for the asset or liability the entity has the ability to currently access—the principal market (as determined under ASR No. 118, Accounting for Investment Securities by Registered Investment Companies, or, otherwise, based on volume data) or, in the absence of a principal market, the most advantageous market.

2. For other estimates, the Board clarified that the appropriate reference market is the market within which inputs relevant to the asset or liability being measured can be observed even if the entity does not have the ability to currently access that market (for example, a restricted security).

The Board clarified that in situations in which the location of the asset or liability being measured is a characteristic of that asset or liability (for example, a physical commodity), the related transportation costs (the costs to access the appropriate reference market) should be considered in the estimate of fair value. Those costs are different from transaction costs (the incremental direct costs to transact in the appropriate reference market), which should not be considered in the estimate of fair value.

The Board affirmed its decision to include within the definition of fair value the credit standing concept in FASB Concepts Statement No. 7, Using Cash Flow Information and Present Value in Accounting Measurements. At a future meeting, the Board plans to discuss whether and, if so, how to amend existing pronouncements that require liability measurements at fair value but do not require that an entity consider the effect of its credit standing in those measurements.

Short-term convergence: income taxes. The Board decided to eliminate the following two of the exceptions to comprehensive recognition of deferred taxes contained in paragraph 9 of FASB Statement No. 109, Accounting for Income Taxes:

1. The exception in paragraph 9(e) of Statement 109 related to intercompany transfers. Eliminating that exception means that entities would be required to recognize deferred tax assets or liabilities for temporary differences created by intercompany transfers of nonmonetary assets between tax jurisdictions.

2. The exception in paragraph 9(f) of Statement 109 related to foreign currency. Eliminating that exception means that entities would be required to recognize deferred tax assets or liabilities for differences related to foreign nonmonetary assets and liabilities that are remeasured from the local currency into the functional currency where the functional currency is also the reporting currency and that result from changes in exchange rates or indexing for tax purposes.

FASB Staff Positions (FSPs). The Board discussed the comments received on proposed FSPs FAS 109-a, "Application of FASB Statement No. 109, Accounting for Income Taxes, for the Tax Deduction Provided to U.S. Based Manufacturers by the American Jobs Creation Act of 2004," and proposed FSP FAS 109-b, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004." The Board made the following decisions on those proposed FSPs:

Proposed FSP FAS 109-a

1. Affirmed its decision to treat the domestic production activities deduction as a special deduction

2. Decided to reduce the number of examples from four to one in the final FSP

3. Decided to revise the methodology in the examples to reflect the ordering of the net operating loss and the qualified production activities deduction under the tax law

4. Decided not to include an example in the final FSP to reflect graduated tax rates under U.S. tax law

5. Affirmed its previous conclusion on transition and that the final FSP should be effective upon issuance

Proposed FSP FAS 109-b

1. Affirmed its decision to allow enterprises additional time to assess the effect of repatriating foreign earnings under the American Jobs Creation Act of 2004 for purposes of applying Statement 109

2. Agreed to clarify in the final FSP that an enterprise is required to apply the provisions of Statement 109 in the period, or periods, it decides on its plan(s) for reinvestment or repatriation of its unremitted foreign earnings

3. For an enterprise that is unable to reasonably estimate, at the time of issuance of its financial statements, the related range of income tax effects for the potential range of foreign earnings that it may repatriate, the Board decided to include language in the final FSP to require an enterprise to disclose a statement to that effect

4. Affirmed its decision to require an enterprise to recognize income tax expense (benefit) if an enterprise decides to repatriate a portion of unremitted earnings under the repatriation provision while it is continuing to evaluate the effects of the repatriation provision for the remaining portion of the unremitted foreign earnings

5. Affirmed its previous conclusion on transition and that the final FSP should be effective upon issuance.

The Board directed the staff to post FSPs FAS 109-a and FAS 109-b to the website as final. (Refer to information on the final FSPs FAS 109-1 and FAS 109-2 below.)

Financial instruments: derivatives implementation. The Board did not object to the staff’s posting of revised Implementation Issues No. C3, Scope Exceptions: Exception Related to Share-Based Payment Arrangements, No. E19, Hedging—General: Methods of Assessing Hedge Effectiveness When Options Are Designated as the Hedging Instrument, and No. G1, Cash Flow Hedges: Hedging an SAR Obligation, on the FASB website as cleared guidance. The Issues have been revised to incorporate guidance in FASB Statement No. 123 (revised 2004), Share-Based Payment.

FASB STAFF POSITION GUIDANCE

The following FSPs are available on the FASB website:

Final FSP FAS 109-1, "Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004," was posted to the website on December 21, 2004.

Final FSP FAS 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004," was posted to the website on December 21, 2004.

Proposed FSP SOP 78-9-a, "Interaction of AICPA Statement of Position 78-9, Accounting for Investments in Real Estate Ventures, and EITF Issue No. 04-5, ‘Investor’s Accounting for an Investment in a Limited Partnership When the Investor Is the Sole General Partner and the Limited Partners Have Certain Rights,’" was posted to the website on December 22, 2004, and comments are requested by February 19, 2004.

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.

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