Revised 01/27/04—See below

Action Alert No. 04-03
January 22, 2004

NOTICE OF MEETINGS

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

Wednesday, January 28, 2004, 9:00 a.m. [Updated 01/27/04: This Board meeting has been canceled due to a winter weather advisory.]

  1. Business combinations: purchase method procedures. The Board will continue its discussions from the December 3, 2003 meeting about whether, and if so, how to modify the definition of a business in EITF Issue No. 98-3, "Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business." (Estimated 45-minute discussion.) [This topic has been postponed to the February 4, 2004 Board meeting.]

  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 SESSION

Wednesday, January 28, 2004, immediately following the Board meeting [The topics that were expected to be discussed at this education session will be deferred.]

The Board will hold an educational, non-decision-making session to discuss topics that are anticipated to be discussed at the February 4, 2004 Board meeting. Those topics will be posted to the FASB calendar four days prior to the education session.

OPEN MEETING WITH REPRESENTATIVES OF COOPERATIVE AND MUTUAL ENTITIES†
(This meeting will be available by telephone only.)

Tuesday, January 27, 2004, 9:30 a.m.

The Board will meet with representatives of organizations of cooperative and mutual enterprises to discuss issues relating to the Board's projects on distinguishing liabilities from equity and on combinations between mutual enterprises.

OPEN MEETING WITH REPRESENTATIVES OF THE AMERICAN BAR ASSOCIATION (Updated 01/26/04: This liaison meeting has been canceled)

Friday, January 30, 2004, 9:30 a.m.

The Board will meet with representatives of the Accounting Standards Subcommittee of the Committee on Law and Accounting of the American Bar Association 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 hearings, and through other communication channels. Decisions become final only after a formal written ballot to issue a final Statement or Interpretation.

January 14, 2004 Board Meeting

Financial instruments: liabilities and equity. The Board considered the following issues that arise in classifying previously discussed "simple" instruments (options and forward contracts) under the proposed approaches for distinguishing equity from liabilities and assets.

  1. Whether the additional criteria required in EITF Issue No. 00-19, "Accounting for Derivative Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock," should be incorporated into the liquidity and ownership relationship model. The Board decided to provide high-level guidance that an obligation indexed to and potentially settled in a company’s own stock could be classified as equity only if:

    1. The issuer has the ability to deliver the shares.
    2. The instrument does not require cash payments if a contingent event occurs.
    3. The holders’ rights are not dissimilar to those of an owner.

  2. Whether an instrument under which the amount of cash (or shares) to be received varies based on a floating interest rate or is adjusted for stock splits or dividends establishes an ownership relationship. The Board decided that it can establish an ownership relationship.

  3. Whether an option or forward contract with a fair value strike or contract price establishes an ownership relationship. The Board decided that it does not, but plans to continue to discuss at future meetings how to account for a fair value redemption feature in a host instrument.

  4. The effect of provisions for loss reimbursement, for example, cash- or share-settled "make-whole" provisions or protective provisions for stock borrowing costs that seem to result in more than one obligation or in both ownership and nonownership components on the classification of an instrument. The Board decided to address instruments that embody those provisions broadly when it discusses compound instruments at a future meeting.

The Board also discussed the application of the proposed approaches to further "simple" instruments, including shares that are not the only common class of stock, shares incorporating unconditional rights to receive assets, and unconditional rights to receive shares.

  1. The Board decided that shares that are not the only common class of stock, for example, shares with reduced or no voting rights, noncontrolling interests in consolidated subsidiaries, and tracking stock, would be equity under a liquidity and ownership relationship approach. The Board noted that such shares do raise issues under a narrower view of the equity approach (one of the alternative approaches under consideration) and directed the staff to continue to refine such an approach.

  2. The Board also directed the staff to provide more information about unconditional rights to receive assets and decided to address unconditional rights to receive shares in its deliberations addressing compound instruments and the unit of accounting.

FASB technical plan and agenda decisions. The Board approved for publication in The FASB Report its January 2004 plan for research and technical activities. As outlined in that plan, the Board plans to achieve the following goals in the first half of 2004:

  1. Business combinations—issue Exposure Drafts in the second quarter of 2004 on the purchase method procedures (including combinations between mutual enterprises) and noncontrolling interests projects.

  2. Equity-based compensation—issue an Exposure Draft in the first quarter of 2004 and hold roundtable discussions on the Exposure Draft in the second quarter of 2004.

  3. Fair value measurement—issue an Exposure Draft in the second quarter of 2004.

  4. Short-term convergence—issue an Exposure Draft on the liability classification portion of phase one of the project in the first quarter of 2004.

  5. Qualifying special-purpose entities and isolation of transferred assets—issue a revised Exposure Draft in the first quarter of 2004 and a final Statement in the second quarter of 2004. The Board noted, however, that the timing of that revised Exposure Draft may be directly affected by work on its new projects related to beneficial interests in securitized financial assets and mortgage servicing rights.

  6. Interpretation of Statement 87 (cash balance pension plans)—issue an Exposure Draft in the second quarter of 2004.

The Board noted the following other changes from its October 1, 2003 technical plan timetable:

  1. Removed from its agenda its inactive major project on disclosures about intangible assets and its inactive research projects on accounting for unconsolidated entities and fresh-start (new basis) accounting. The Board acknowledged the importance of the financial reporting issues that would be addressed by those projects but agreed the nature and timing of such projects should be considered in the context of its plans for a coordinated agenda with the IASB. The FASB and IASB plan to discuss coordination of their technical agendas in a joint meeting scheduled for April 2004.

  2. Moved the issuance of Exposure Drafts for its projects on combinations of not-for-profit organizations and on financial instruments: liabilities and equity to the second half of 2004.

  3. Directed the staff to begin research on the next phase of a potential project on consolidation policy.

  4. Directed the staff to broaden the scope of the short-term convergence project as it relates to research and development. Specifically, the Board directed the staff to consider all differences between the IFRS and U.S. GAAP relating to requirements for recognition of intangible assets.

Also, in accordance with its Rules of Procedure, the Board also considered written requests received from constituents in the past six months suggesting that it reexamine certain effective Statements of Financial Accounting Standards. With respect to those requests, the Board decided:

  1. To add a project to its agenda that would address the accounting for mortgage servicing rights at fair value. The project’s scope, including whether both initial and subsequent measurements should be addressed, will be discussed at future meetings related to this topic.

  2. To add a project to its agenda to address the issues that led to the "Staff Interim Guidance" in Statement 133 Implementation Issue No. D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets." The Board directed the staff to consider the interrelationship of the two new projects (mortgage servicing rights and beneficial interests) that might amend FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and its current project on qualifying special-purpose entities (SPEs), which will result in an amendment of Statement 140. The Board noted that work on the two new projects may affect the timing of the issuance of the revised Exposure Draft on its qualifying SPE project.

  3. To direct the staff to research whether an FASB Staff Position (FSP) should be issued to address the accounting for life insurance contracts by the purchaser/holder or whether the issue should be referred to the Emerging Issues Task Force.

  4. Not to add to its agenda a project to reconsider the accounting for certain investments held by life insurance companies under FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities.

  5. To direct the staff to draft an FSP to provide guidance for assessing risk transfer in certain reinsurance arrangements.

  6. To add a project to its agenda to address the application of FASB Statement No. 143, Accounting for Asset Retirement Obligations, to legal obligations to perform asset retirement activities that are conditional on a future event.

  7. Not to add to its agenda a project on the accounting for pensions at this time. However, recognizing the need for improvement to existing guidance and the importance of this issue, the Board indicated that it would discuss with the IASB the possibility of addressing pensions jointly at their joint meeting to be held in April 2004.

Equity-based compensation (EBC). The Board considered various issues that were identified by the staff during the course of drafting the Exposure Draft as well as certain other issues. The Board made the following decisions with respect to those issues:

Scope-Related Issues

  1. The definition of employee as established in FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, would be used in the proposed Statement.

  2. Nonemployee directors meeting certain criteria would be accounted for as employees in the proposed Statement, consistent with the treatment in Interpretation 44 for such individuals.

  3. The Board reaffirmed its earlier decision that an EBC arrangement would not be deemed compensatory if the benefit provided to employees is not more favorable than the benefit provided to all holders of that same class of equity securities. The Board decided that this principle applies only to arrangements that (a) are available to substantially all full-time employees that meet limited employment criteria qualifications and (b) allow those employees to participate on an equitable basis.

Issues Related to Equity and Liability Classification of Awards

  1. The classification of certain compound financial instruments, such as puttable shares, would not be addressed in the proposed Statement because the Board is addressing that issue in phase two of the liabilities and equity project.

  2. A limited exception to liability classification for mandatorily redeemable shares that meet certain criteria issued by nonpublic enterprises (as defined in FASB Statement No. 123, Accounting for Stock-Based Compensation) that are not SEC registrants will be included in the proposed Statement. That exemption would take substantially the same form as paragraph 40 of Statement 123.

  3. Explicit guidance will be added to the proposed Statement that precludes liability classification for employee stock options on certain financial instruments subject to the indefinite deferral provisions of 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."

  4. EBC awards with relative performance conditions would be classified as equity provided that the relative performance condition is based on the same performance measure. A relative performance condition is based on a specific performance target that references the same performance target of another entity or group of entities.

  5. Vesting acceleration conditions based on disability, death, or termination without cause pertain to employee service and would be characterized as service conditions. Vesting conditions based on an initial public offering (IPO), other financing event, change in control, or selling of a subsidiary of the enterprise pertain to employer operations and would be characterized as performance conditions.

  6. Awards that meet the definition of equity and that are marked-to-fair-value (that is, tainted awards) or marked-to-intrinsic-value (that is, awards for which it is not possible to reasonably estimate fair value or awards subject to nonpublic enterprise election) would be classified as equity.

Measurement and Attribution Issues

  1. All unrecognized compensation cost would be recognized immediately if a vesting acceleration condition is satisfied, regardless of (a) how the service period is estimated or (b) the form of the vesting acceleration provision.

  2. The allocation of an award’s fair value to different vesting conditions within such an award would be prohibited for purposes of attributing compensation cost.

  3. Certain performance conditions that affect an award’s fair value subsequent to vesting would be accounted for in the same manner as other performance conditions, (that is, the award’s fair value would be trued up based on the ultimate outcome of the performance condition).

  4. Arrangement provisions, including certain clawback provisions, that require an employee to transfer cash or shares earned as a result of an EBC award to the issuing enterprise would not be included in the grant-date estimate of fair value. Those events would be accounted for by the issuing enterprise if and when they occur 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.

  5. Vesting conditions based on future performance or service create a nonrebuttable presumption that all or a significant portion of an award’s fair value relates to the value of future services. Additionally, an enterprise that concludes that a portion of a nonvested award’s fair value relates to prior services would be precluded from reversing compensation cost for that portion if the award ultimately fails to vest.

  6. Recognized compensation cost related to EBC awards that become tainted subsequent to the original grant date would not be less than the fair value of that award on the original grant date (unless the award fails to vest).

  7. Enterprises using the intrinsic-value method would base accruals of compensation cost on the number of instruments expected to vest; once vested, accruals of compensation cost would be based on the number of instruments outstanding.

  8. An EBC award would be accounted for as a settlement when the enterprise no longer has an obligation to the employee contingent upon future service, similar to the notion in FASB Statement No. 88, Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits.

  9. No specific guidance would be provided for EBC awards that were issued in fiscal periods beginning before December 15, 1994.

  10. No specific guidance on the meaning of short term in relation to short-term inducements would be provided.

Other Issues

  1. In accounting for a nonpublic enterprise’s voluntary change to the fair value based method of accounting, the fair value provisions of the proposed Statement would be applied prospectively only to awards granted, modified, or settled after the date of change. Awards granted prior to that date would continue to be accounted for using the intrinsic-value method.

  2. Deferred compensation balances in equity generated under APB Opinion No. 25, Accounting for Stock Issued to Employees, would be eliminated against the appropriate equity accounts on the effective date of the proposed Statement.

AcSEC CLEARANCE

January 14, 2004 Board Meeting

AcSEC document. The Board met with representatives of the AICPA's Accounting Standards Executive Committee (AcSEC) and discussed clearance of the AICPA Statement of Position (SOP), Accounting for Real Estate Time-Sharing Transactions, which, if cleared by the Board would have been issued concurrently with an FASB Statement to amend Statements 66 and 67 for real estate time-sharing transactions. The Board indicated that AcSEC should not include any revenue recognition guidance in the SOP. The Board considered a number of factors in arriving at its conclusion including (1) changes in revenue recognition practices that have occurred since AcSEC originally added the project to its agenda, (2) the Board’s revenue recognition project and the potential for requiring preparers to change its revenue recognition practices twice in a short time frame, and (3) the "rules-based" nature of the revenue recognition requirements in the SOP. The Board requested that the AcSEC task force work with the FASB staff to identify those topics to be retained and addressed in the SOP, which the Board will consider at a future meeting. The Board suggested that AcSEC consider publishing the proposed revenue recognition guidance in a nonauthoritative source.

FUTURE OPEN MEETINGS

The following is a list of open meetings tentatively scheduled through February. 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, February 4, 2004—FASB Board Meeting
Wednesday, February 4, 2004—FASB Education Session
Thursday, February 5, 2004—FASB Education Session (if needed)
Wednesday, February 11, 2004—FASB Board Meeting
Wednesday, February 11, 2004—FASB Education Session
Wednesday, February 18, 2004—FASB Board Meeting
Wednesday, February 18, 2004—FASB Education Session
Wednesday, February 25, 2004—FASB Board Meeting
Wednesday, February 25, 2004—FASB Education Session