Action Alert No. 04-24
June 17, 2004

NOTICE OF MEETINGS

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

No Board meetings will be held during the week of June 21, 2004. The next scheduled Board meeting is June 30, and topics for that Board meeting will be announced in next week’s issue of Action Alert.

OPEN EDUCATION SESSION

Monday, June 21, 2004, 1:00 p.m.

The Board will hold an educational, non-decision-making session to discuss topics that are anticipated to be discussed at the June 30 Board meeting. Those topics will be posted to the FASB calendar four days prior to the education session.

OPEN ROUNDTABLE DISCUSSION WITH RESPONDENTS TO THE FASB EXPOSURE DRAFT, SHARE-BASED PAYMENT
(This meeting is available by audio webcast and telephone.)

Thursday, June 24, 2004, 9:00 a.m. – 12:00 p.m. and 1:00 p.m. – 4:00 p.m. (Pacific Daylight Time)

Sheraton Palo Alto
625 El Camino Real
Palo Alto, CA

The Board will hold its first public roundtable discussion to listen to the views of and obtain information from respondents to the March 31, 2004 FASB Exposure Draft, Share-Based Payment.

The Board will hold an additional public roundtable discussion on that Exposure Draft on June 29, 2004, at the FASB offices in Norwalk, Connecticut. The Norwalk roundtable also will consist of a morning (9:00 a.m. – 12:00 p.m.) and afternoon (1:00 p.m. – 4:00 p.m.) session.

A wide variety of constituents—including investors, preparers of financial statements, auditors, valuation experts, and others—will be represented at each roundtable. For a list of the organizations participating in the roundtables, which are open to the public, access the Equity-Based Compensation Project Summary at the FASB website.

OPEN MEETING WITH THE FINANCIAL ACCOUNTING STANDARDS ADVISORY COUNCIL
(This meeting is available by audio webcast and telephone.)

Tuesday, June 22, 2004, 9:00 a.m.

The Advisory Council will meet to discuss:

  1. Current accounting and financial reporting issues
  2. The Board’s project on a fair value option
  3. The conceptual framework and the definition of liabilities
  4. The Board’s project on revenue recognition
  5. The Board’s project on liabilities and equity
  6. The FASB’s communications with constituents.

The Advisory Council will hear reports from the chairman of the FASB on other Board activities and the chief accountant of the SEC on current accounting-related developments.

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.

June 9, 2004 Board Meeting

Business combinations: purchase method procedures. The Board discussed several clarifying matters relating to the accounting for equity-based compensation (EBC) awards exchanged in a business combination in which it is presumed that the acquiring entity has an obligation to issue replacement awards. The Board decided that such exchanges would be accounted for as follows:

  1. Depending on the circumstances, a portion (or all) of the fair value of the acquirer-replacement award would be recognized as consideration paid in the business combination rather than compensation cost in post-combination financial statements.

  2. The fair value of EBC awards issued by the acquirer and acquiree would be determined using the fair-value-based measurement method in FASB Statement No. 123, Accounting for Stock-Based Compensation, as it would be amended by the March 31, 2004 FASB Exposure Draft of the proposed Statement, Share-Based Payment.

  3. If the fair value of the acquirer's replacement award attributable to past services exceeds the fair value of the replaced acquiree awards attributable to those services, the excess is compensation cost to be recognized immediately by the acquirer. If not, depending on the circumstances, the acquirer should recognize a portion (or all) of the replacement award as a liability or an equity instrument, as appropriate, as part of the consideration paid in the business combination.

  4. In determining the remaining fair value of the replacement award attributable to past services to be recognized as consideration paid, the total service period is the period that begins with the service inception date for the acquiree’s award and ends with the service completion date for the replacement award. The portion attributable to past services is equal to the remaining fair value of the replacement award (or settlement) multiplied by the ratio of the past service period to the total service period. The amount, if any, that represents future compensation cost is the remaining fair value of the replacement award multiplied by the ratio of the future service period to the total service period. The future service period begins on the date the business is acquired (acquisition date).

  5. The requisite service period of awards issued by the acquirer should reflect any explicit, implicit, and derived service periods (consistent with the requirements of the proposed Statement that will amend Statement 123).

The Board decided not to expand the scope of this project to consider the accounting for acquisitions of groups of assets or net assets that do not constitute a business. The Board suggested, however, that the notice for recipients in the forthcoming Exposure Draft on business combinations include questions soliciting feedback regarding that decision.

The Board provided the following clarification to the definition of a business and revisions to related application guidance:

  1. Clarified the definition of a business to emphasize that the assessment is based on the present capability of the acquired set as follows:

    A business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing:

    1. A return to investors; or

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

    A business consists of (1) inputs, (2) processes applied to those inputs, and (3) resulting outputs that are or will be used to generate revenues.

  2. Revised the description of inputs, processes applied to inputs, and outputs and clarified that the first two of those three elements are required in order for an acquired set of activities and assets to be considered a business. (The Board also affirmed that outputs are not required.)

  3. Eliminated the requirement to assess whether a missing element is minor and the related guidance and examples.

  4. Added application guidance stating that an acquired set of activities and assets would be presumed to be a business if the going-concern element of goodwill (as described in paragraph B102 of FASB Statement No. 141, Business Combinations) is present in the set.

Revenue recognition. The Board considered two issues related to the initial measurement of performance obligations at fair value. First, the Board discussed the reliability threshold for fair value estimates affecting profits through revenues. The Board agreed that the reliability threshold for those fair value estimates should be the same as for other estimates affecting profits. The Board also affirmed its previous decision that revenues can arise as a result of (1) a reporting entity’s selling activities ("selling revenues") and (2) the extinguishment of the entity’s performance obligations to its customers.

Second, the Board considered several examples of direct and indirect measures of fair value of performance obligations that might be obtained or developed in practice. The Board discussed whether those measures may be sufficiently reliable to merit inclusion in financial statements. That discussion was exploratory in nature. The Board’s decisions, which are described below, form the foundation for future meetings that will be dedicated to developing standards-level measurement guidance.

The Board concluded that:

  1. Certain Level 3 estimates of fair value might be sufficiently reliable for purposes of measuring performance obligations whose extinguishment gives rise to revenues.

  2. In certain instances, selling revenues arising at contract inception might be capable of being measured directly by reference to observable prices that marketplace participants, including the reporting entity, pay for identical contracts. (That may not be possible if those contracts incorporate an other than insignificant customer relationship component or contract management obligation.)

FASB STAFF POSITION GUIDANCE AVAILABLE

On June 16, 2004, a majority of the Board did not object to the release of final FSP FAS 97-1, "Situations in Which Paragraphs 17(b) and 20 of FASB Statement No. 97, Accounting and Reporting by Insurance Enterprises for Certain Long-Duration Contracts and for Realized Gains and Losses from the Sale of Investments, Permit or Require Accrual of an Unearned Revenue Liability."

This final FSP will be available on the FASB website by the end of business on Friday, June 18, 2004, where it will remain until it can be incorporated into printed FASB literature.

FUTURE OPEN MEETINGS

The following is a list of open meetings tentatively scheduled through July. 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.

Tuesday, June 29, 2004—Equity-Based Compensation Roundtable Discussion, Norwalk, CT
Wednesday, June 30, 2004—FASB Board Meeting
Wednesday, June 30, 2004—Emerging Issues Task Force Meeting
Thursday, July 1, 2004—Emerging Issues Task Force Meeting
Wednesday, July 14, 2004—FASB Education Session
Friday, July 16, 2004—FASB Board Meeting
Wednesday, July 21, 2004—FASB Board Meeting
Wednesday, July 21, 2004—FASB Education Session
Monday, July 26, 2004—Liaison Meeting with the Edison Electric Institute
Tuesday, July 27, 2004—FASB Board Meeting
Tuesday, July 27, 2004—FASB Education Session