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Action Alert No. 04-08
February 26, 2004
NOTICE OF MEETINGS
OPEN BOARD MEETING
(Board
meetings are available by audio webcast and
telephone.)
Wednesday, March 3, 2004, 9:00 a.m.
- Interpretation
of Statement 87. The Board will consider alternatives to
measuring a cash balance obligation. (Estimated 60-minute
discussion.)
- Equity-based
compensation. The Board will discuss transition issues as
well as certain other issues that may arise during the drafting of
the proposed Statement. (Estimated 60-minute discussion.)
- 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, March 3, 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 March
10, 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 hearings, and through other
communication channels. Decisions become final only after a formal
written ballot to issue a final Statement or Interpretation.
February 18, 2004 Board Meeting
Revenue
recognition. The Board discussed four topics. First, the
Board discussed the use of the term conditional rights and
obligations in the revenue recognition project. Next, the Board
discussed whether the decision in the fair value measurement project
that the estimate of fair value for financial instruments traded in
active markets where prices are quoted in terms of bid and asked
prices should be determined using bid prices for long positions
(assets) and asked prices for short positions (liabilities)
conflicts with decisions on measuring performance obligations
in this project. The Board then considered alternative approaches to
completing the general revenue recognition standard and subsequent
application guidance. Finally, the Board discussed draft recognition
and measurement principles that might be included in the general
standard.
The Board reached the following conclusions:
- The revenue recognition project should continue to use the
terms conditional and unconditional rights and
obligations within the context of contractual arrangements.
- The decisions reached in the fair value measurement project do
not conflict with decisions on measuring performance obligations
in this project.
- The general standard for revenue recognition is expected to
supersede certain existing guidance that is general in nature. For
example, APB Opinion No. 29, Accounting for Nonmonetary
Transactions, FASB Statement No. 48, Revenue Recognition
When Right of Return Exists, EITF Issue No. 00-21, "Revenue
Arrangements with Multiple Deliverables," and SEC Staff Accounting
Bulletin No. 104, Revenue Recognition in Financial
Statements, would be superseded. Other industry-specific or
transaction-specific guidance is expected to be superseded by
subsequent application standards.
- The application standards will be developed for broad
categories of arrangements (for example, rights of use, services,
and products) and would include both guidance specific to the
broad category and any additional guidance necessary for the
individual types of arrangements that are classified within each
category.
- Principles may be viewed as a "bridge" between the FASB’s
Concepts Statements and the more specific application guidance
that reporting entities need to prepare their financial
statements. As such, principles are a form of accounting guidance
that is derived from the concepts and that translates those
concepts into higher-level implementation guidance. That
implementation guidance is subject to the constraints imposed by
the current state of the art and cost-benefit considerations.
- The draft principles generally are consistent with the Board’s
decisions reached to date and adequately capture the substance of
those decisions. Those draft principles are available on the FASB
website.
- Liabilities that stem from implied contractual promises should
be identified, recognized, and measured at fair value. Implied
promises are inferred from a reporting entity’s conduct, including
its course of dealing with the counterparties, its usage of trade,
its course of performance, or evidence of consistent additional
terms.
- The effects of the time value of money and credit risk should
be reflected in the fair value of contractual assets unless those
effects are immaterial.
Financial
instruments: liabilities and equity. The Board discussed how
to express the distinction between equity and liabilities and assets
in conceptual, definitional terms and whether a hierarchy of
criteria is needed. The Board also discussed the following remaining
issues involving "simple instruments" that were introduced at
previous meetings but that were not yet resolved:
- Determining whether an obligation exists
- Mandatorily redeemable share issues
- Certain unconditional rights to receive a variable number of
shares
- "Shares" that include or are tied to unconditional rights to
receive assets.
The Board decided that:
- The definitions of liabilities and assets in
FASB Concepts Statement No. 6, Elements of Financial
Statements, will be amended to include obligations to issue
and rights to issue or redeem equity instruments if those
obligations or rights do not convey an ownership relationship. The
Board will consider other possible changes to those definitions at
a future meeting after further research by the staff for this and
other projects, about those possible changes and their
implications.
- A decision flow chart will be included in the proposed
Statement to illustrate the hierarchy of criteria for an issuer’s
classification of instruments with characteristics of equity and
of liabilities or assets.
- For purposes of this project, an obligation is a liability if
enforceable at law, including enforceability construed under the
doctrine of promissory estoppel. However, nonsubstantive features
are to be disregarded in making assessments about enforceability
and the existence of an obligation.
- An obligation is unconditional if the obligating event is
certain to occur, even if the timing is uncertain.
- Shares required to be redeemed at fair value, possibly by
issuance of a variable number of the parent entity’s shares at the
issuer’s discretion, are analyzed as simple instruments embodying
an unconditional obligation that are classified as equity if they
convey an ownership interest to the counterparty and if the
discretion to settle in shares is substantive. The Board will
consider at a future meeting whether that principle applies to
other instruments under which the issuer has the discretion to
settle by issuing shares instead of transferring assets.
- Certain rights to receive a variable number of shares, such as
a right to receive a variable number of shares based on a fixed
monetary amount known at inception, are simple instruments to be
classified as assets.
- Unconditional rights to receive assets that are included in or
are tied to "shares" under a contract that is entirely unexecuted
should be netted against those shares in equity (for example,
stock subscriptions receivable for shares that have not been
issued). Whether unconditional rights to receive assets that are
included in or are tied to "shares" for which the contract has
been partially executed (for example, a note received in exchange
for shares that have been issued) should be recognized as an asset
or netted against those shares in equity will be considered by the
Board at a future meeting addressing the unit of accounting.
The Board has concluded its discussions relating to
classification of simple instruments (with the exception of the
follow-up issues identified above) and will move forward to discuss
complex instruments and the unit of accounting at its next
meeting.
Equity-based
compensation (EBC). The Board discussed various issues that
were identified as a result of an external review of a draft of the
proposed Statement. The Board decided that:
- The paragraph regarding interaction with FASB Statement No.
150, Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity, will be
clarified to indicate that the classification criteria of
Statement 150 would apply to EBC instruments subject to FASB
Statement No. 123, Accounting for Stock-Based Compensation,
and that the recognition and measurement criteria of Statement 150
would apply to EBC instruments only when they are no longer
subject to Statement 123. No amendment to Statement 150 is deemed
necessary.
- The paragraph that addresses certain equity instruments
granted by nonpublic enterprises that are not SEC registrants will
be modified to clarify its scope to be consistent with the
guidance provided in FSP FAS 150-3, "Effective Date, Disclosures,
and Transition for Mandatorily Redeemable Financial Instruments of
Certain Nonpublic Entities and Certain Mandatorily Redeemable
Noncontrolling Interests under FASB Statement No. 150,
Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity."
- If vesting of an award requires future service or satisfaction
of performance conditions, the entire cost of the award pertains
to future service or performance and should be recognized
accordingly. However, nonsubstantive vesting features would not
change the accounting otherwise required.
- The definition and concept of service inception date
will be retained.
- An entity will not be required to calculate separate
grant-date fair values of an award with a service condition and a
performance condition that only could accelerate vesting. Rather,
an entity should measure the grant-date fair value of the award
with the service condition and accelerate recognition of
compensation cost based on that fair value if earlier vesting
occurs upon satisfaction of the performance condition.
- The proposed performance condition model will be used to
account for an option with an indexed exercise price driven by a
formula based on a performance condition. That is, the share price
and other factors unrelated to the performance condition existing
at the grant date should be used in estimating the fair value of
the award rather than the share price and those factors existing
on the date the ultimate exercise price is determined by the
formula.
- Guidance will be included relating to the determination of the
risk-free rate for use by enterprises based in foreign
jurisdictions. That guidance will state that the risk-free
interest rate is the implied yield currently available on
zero-coupon government issues denominated in the same currency as
the primary market in which the stock trades.
- The final measurement date for penny options versus nonvested
stock when the intrinsic-value method is used by nonpublic
enterprises should be based on facts and circumstances.
- A nonpublic enterprise that voluntarily changes to the
fair-value-based method from the intrinsic-value method would be
required to continue to account for awards at the date of change
using the intrinsic-value method until those awards are settled,
even if they are subsequently modified.
- The recognition threshold for awards with performance
conditions is probable as defined in FASB Statement No. 5,
Accounting for Contingencies, rather than more likely
than not.
- In determining the compensation cost resulting from the
modification of a liability award to an equity award, the greater
of the grant-date fair value or the modification-date fair value
of the award should be used.
- All equity restructurings should be treated as modifications.
- The accounting for cancellations will be further clarified. If
an award is settled for no valuable, immediately identified
consideration, then the event constitutes a cancellation of the
award. If that canceled award is not fully vested, all
unrecognized compensation cost must be recognized immediately. If
an award is settled and valuable consideration (including a
replacement award) is identified at that time, then the event
results in a modification of the original award.
- Reconveyance accounting will be eliminated; reconveyances of
awards should be accounted for as cancellations.
- Special accounting for awards that are serially modified (or
tainted) would be eliminated. All modifications should be
accounted for similarly.
- When an option exercise results in a tax deduction prior to
the actual realization of the related tax benefit, a tax benefit
and a credit to additional paid-in capital for the excess tax
benefit would not be recognized until that benefit reduces taxes
payable. No amendment to FASB Statement No. 109, Accounting for
Income Taxes, is deemed necessary.
FASB Staff Position: Medicare Act of 2003. The Board
discussed the staff’s proposed alternatives for accounting for the
federal plan-sponsor subsidy provided by the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 (the Act) within the
context of FASB Statement No. 106, Employers’ Accounting for
Postretirement Benefits Other Than Pensions. The Board
decided:
- The effects of the subsidy on benefits attributable to past
service should be treated as an actuarial gain under Statement
106.
- The effects of the subsidy on benefits attributable to future
service should be recognized as a reduction to future service cost
under Statement 106.
- If a plan, as constructed immediately prior to the date of
enactment, is not actuarially equivalent under the Act, and is
amended so as to become actuarially equivalent, the effect of the
plan amendment together with the consequential effect of the
subsidy taken into account in measuring the amendment should be
combined into a single measurement.
- If the combined effect is a reduction in the accumulated
postretirement benefit obligation (APBO), that amount should be
considered an actuarial gain.
- If the combined effect is an increase in the APBO, that
amount should be considered prior service cost associated with
the plan amendment.
- If a plan, as constructed immediately prior to the date of
enactment, is actuarially equivalent under the Act and is
subsequently amended so as to cease actuarial equivalency:
- The effects of the subsidy as of the date of enactment
should be accounted for as an actuarial gain measured as of the
date of enactment (or December 31, 2003, as a proxy for the date
of enactment).
- The effects of the negative plan amendment should be
accounted for as of the date the amendment is adopted based on
the reduced measure of the APBO reflecting the previously
measured effects of the subsidy.
- With respect to income tax accounting, the subsidy, when
recognized in subsequent periods via amortization of the actuarial
gain or as a component of current-period service cost, should not
affect the temporary difference otherwise attributable to accrued
postretirement benefit cost (the liability recognized in the
statement of financial position). That is, the tax-exempt nature
of the subsidy should be reflected in the income tax accounting
when the subsidy is recognized as a reduction to accrued
postretirement benefit cost. The Board directed the staff to
include in the guidance an example illustrating that decision.
The Board discussed but did not reach a decision on the
transition provisions and effective date for the proposed guidance.
The Board directed the staff to provide additional information on
the consequences of various transition and effective date provisions
for plans as to which actuarial equivalence may be unclear as of the
date of enactment and thereafter due to the lack of final
regulations or for other reasons.
FASB STAFF POSITION GUIDANCE AVAILABLE
On February 25, 2004, a majority of the Board did not object to
the release of the proposed FSP
FAS 129-a, "Disclosure Requirements under FASB Statement No.
129, Disclosure of Information about Capital Structure,
Relating to Contingently Convertible Financial Instruments." This
proposed FSP is available on the FASB website, and comments are
requested by March 26, 2004.
FUTURE OPEN MEETINGS
The following is a list of open meetings tentatively scheduled
through March. 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, March 8, 2004—FASB Education Session
Wednesday,
March 10, 2004—FASB Board Meeting
Wednesday, March 10, 2004—FASB
Education Session
Tuesday, March 16, 2004—FASB Board
Meeting
Tuesday, March 16, 2004—FASB Education
Session
Wednesday, March 17, 2004—EITF Meeting
Thursday, March
18, 2004—EITF Meeting
Tuesday, March 23, 2004—Financial
Accounting Standards Advisory Council Meeting
Wednesday, March
24, 2004—FASB Board Meeting
Wednesday, March 24, 2004—FASB
Education Session
Monday, March 29, 2004—Liaison Meeting with the
American Bankers Association
Wednesday, March 31, 2004—FASB Board
Meeting
Wednesday, March 31, 2004—FASB Education Session
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