Action Alert No. 04-12
March 25, 2004

NOTICE OF MEETINGS

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

Wednesday, March 31, 2004, 9:00 a.m.

  1. Financial performance reporting by business enterprises. The Board will discuss a proposed plan for the project that was developed by a joint working group made up of staff from the International Accounting Standards Board, the UK Accounting Standards Board, and the FASB. (Estimated 60-minute discussion.)

  2. Interpretation of Statement 87 (cash balance plans). The Board will consider the treatment of nonvested participants, disclosures, transition guidance, and effective date. (Estimated 45-minute discussion.)

  3. Beneficial interests in securitized financial assets. The Board will discuss alternative approaches to accounting for beneficial interests in securitized financial assets. (Estimated 60-minute discussion.)

  4. Mortgage servicing rights. The Board will discuss whether fair value is the appropriate measurement attribute for servicing rights. (Estimated 90-minute discussion.)

  5. Loan commitments. The Board will discuss the urgency in undertaking this project in view of the expected reduction in diversity in practice as a result of the SEC staff issuing Staff Accounting Bulletin No. 105, Application of Accounting Principles to Loan Commitments. (Estimated 30-minute discussion.)

  6. FASB ratification of EITF consensuses. The Board will consider the ratification of the consensuses reached at the March 17–18, 2004 EITF meeting. See discussion under EITF ACTIONS. (Estimated 15-minute discussion.)

  7. FASB Staff Position: mineral rights. The consensus reached in EITF Issue No. 04-2, “Whether Mineral Rights Are Tangible or Intangible Assets and Related Issues,” characterizes mineral rights as tangible assets. That consensus creates a perceived inconsistency between the characterization of mineral rights as intangible assets in FASB Statements No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets. The Board will consider whether to direct the staff to prepare a proposed FASB Staff Position to amend Statements 141 and 142 to resolve the perceived inconsistency. (Estimated 15-minute discussion.)

  8. 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 SESSIONS

Monday, March 29, 2004, 9:30 a.m.
Thursday, April 1, 2004, 9:00 a.m.

The Board will hold educational, non-decision-making sessions to discuss topics that are anticipated to be discussed at the March 31 and April 7, 2004 Board meetings. Those topics will be posted to the FASB calendar four days prior to the education sessions.

OPEN MEETING WITH REPRESENTATIVES OF THE AMERICAN BANKERS ASSOCIATION

Monday, March 29, 2004, 2:00 p.m.

The Board will meet with representatives of the American Bankers Association Accounting Committee 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.

March 16, 2004 Board Meeting

Revenue recognition. The Board discussed three topics: (1) clarifications of certain revenue recognition principles considered at the last Board meeting and implementation guidance related to those principles (2) issues related to the initial fair value measurement of performance obligations and (3) the nature of obligations to be included in the scope of the standard on revenue recognition.

The Board reached the following tentative conclusions:

  1. The general standard on revenue recognition should include implementation guidance to clarify the term customary business practice as it is used in one of the standard’s recognition principles.

  2. Explanatory guidance, including the definition of a contract, should be included in the standard to emphasize that enforceability is a necessary characteristic of a contract. However, the Board decided that it would not provide guidance on enforceability of contractual rights and obligations across legal jurisdictions.

  3. The general standard should include implementation guidance to clarify that a contract does not have to be worthy of enforcement in order to give rise to assets and liabilities.

  4. Recognition Principle #7 should be withdrawn from the model and reconsidered once further progress has been made on the application of the recognition and measurement principles.

  5. Only legally enforceable obligations (contractual and noncontractual) should be included in the scope of the revenue recognition standard.

The Board also confirmed its previous decision that performance obligations should be measured based on the price that the reporting entity would have to pay a third party to assume responsibility for performing all of its remaining obligations (that is, the “layoff price”).

Short-term convergence: income taxes. The Board discussed the scope and initial activities for the short-term income tax convergence project.

The Board decided that items that were scope exceptions to FASB Statement No. 109, Accounting for Income Taxes, should be outside the scope of this project. Those items are:

  1. The basic methods of accounting for the U.S. federal investment tax credit and for foreign, state, and local investment tax credits or grants

  2. Discounting of deferred taxes

  3. Accounting for income taxes.

The Board also decided that certain other differences between Statement 109 and International Accounting Standard 12, Income Taxes (revised 2000), should not be considered in this project; rather, those items should be considered in projects that are more closely associated with those differences. Those items are:

  1. Goodwill (Statement 109, paragraphs 9 and 30)

  2. Leveraged leases (Statement 109, paragraphs 9 and 256–258)

  3. Share-based payments.

The Board decided that the following exceptions to the comprehensive deferred tax asset and liability recognition principle of Statement 109 are to be included in the scope of this project:

  1. Certain bad debt reserves of savings and loan associations (Statement 109, paragraphs 9 and 31–34)

  2. Policyholders’ surplus (Statement 109, paragraphs 9 and 31–34)

  3. Steamship enterprise exception (Statement 109, paragraphs 9 and 32)

  4. Foreign subsidiaries and undistributed earnings (Statement 109, paragraphs 9 and 31–34)

  5. Intercompany transfers (Statement 109, paragraph 9)

  6. Foreign currency translation (Statement 109, paragraph 9).

The Board decided that the following structural differences between Statement 109 and IAS 12 and other application and implementation issues are to be included in the scope of this project:

  1. Interperiod tax allocation (backwards tracing) (Statement 109, paragraphs 26–28 and 35)

  2. Deferred tax effects arising in asset acquisitions (EITF Issue No. 98-11, “Accounting for Acquired Temporary Differences in Certain Purchase Transactions That Are Not Accounted for as Business Combinations”)

  3. Tax rate—enacted rate issue and distributed rate issue (Statement 109, paragraphs 18–19)

  4. Deferred tax asset recognition and valuation allowance issues (Statement 109, paragraphs 17 and 20–25)

  5. Balance sheet classification (Statement 109, paragraph 41).

Equity-based compensation. The Board discussed additional drafting issues related to the method of attribution, the amendment to FASB Statement No. 95, Statement of Cash Flows, distinguishing between liabilities and equity, and the transition method for nonpublic enterprises. The Board’s decisions with respect to those issues are as follows:

  1. The Board affirmed that the implementation guidance in Appendix B of the proposed Statement properly reflects the attribution principles established in the proposed Statement, particularly, the principle specifying that compensation cost for a share-based payment award should be recognized over the requisite employee service period.

  2. The Board decided that the amendment of Statement 95 also should include share-based payment transactions with parties other than employees. Thus, the imputed cash flow effects of excess tax benefits, as defined by the proposed Statement, from those transactions would be accounted for as financing cash inflows in the statement of cash flows.

  3. The Board decided that certain provisions of the proposed Statement should be clarified to ensure their consistency with the deferral provisions of FASB Staff Position 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.” Additionally, the Board discussed book value share purchase plans established by nonpublic entities whose equity shares are subject to the deferral provisions of FSP 150-3 and decided that such plans are compensatory if their terms are more favorable than those available to all other shareholders of the same class of shares (which is consistent with the Board’s prior decision with respect to employee share purchase plans). The Board also discussed plans whose shares are designed for and exclusively held by employees and decided that such plans may be compensatory depending upon the relevant facts and circumstances. For instance, the amount of cash an employee is required to pay for each share at the grant date and each share’s measurement basis for both purchase and resale would be important factors to consider in deciding whether a transaction is compensatory.

  4. The Board reaffirmed its previous decision that nonpublic entities that do not use the fair-value-based method of accounting for either recognition or pro forma disclosures under the original provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, would apply the proposed Statement prospectively to all awards that are granted, modified, or settled in fiscal years beginning after December 15, 2005.

EITF ACTIONS

March 17—18, 2004 EITF Meeting

The task force discussed the following issues:

  1. Issue No. 02-14, "Whether the Equity Method of Accounting Applies When an Investor Does Not Have an Investment in Voting Stock of an Investee but Exercises Significant Influence through Other Means." This Issue will be discussed further at a future meeting.

  2. Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." A consensus was reached. The Board will consider the ratification of that consensus at its March 31, 2004 meeting.

  3. Issue No. 03-6, "Participating Securities and the Two-Class Method under FASB Statement No. 128, Earnings per Share." A consensus was reached. The Board will consider the ratification of that consensus at its March 31, 2004 meeting.

  4. Issue No. 03-9, "Interaction of Paragraphs 11 and 12 of FASB Statement No. 142, Goodwill and Other Intangible Assets, Regarding Determination of the Useful Life and Amortization of an Intangible Asset." This Issue will be discussed further at a future meeting.

  5. Issue No. 03-13, "Applying the Conditions in Paragraph 42 of FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, in Determining Whether to Report Discontinued Operations." This Issue will be discussed further at a future meeting.

  6. Issue No. 03-16, "Accounting for Investments in Limited Liability Companies." A consensus was reached. The Board will consider the ratification of that consensus at its March 31, 2004 meeting.

  7. Issue No. 04-1, "Accounting for Preexisting Relationships between the Parties to a Purchase Business Combination." This Issue will be discussed further at a future meeting.

  8. Issue No. 04-2, "Whether Mineral Rights Are Tangible or Intangible Assets and Related Issues." A consensus was reached. Ratification by the Board of that consensus, however, is subject to resolution of a perceived inconsistency between the characterization of mineral rights as tangible assets in this consensus and the characterization of mineral rights as intangible assets in FASB Statements No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets.

  9. Issue No. 04-3, "Mining Assets: Impairment and Business Combinations." A consensus was reached. The Board will consider the ratification of that consensus at its March 31, 2004 meeting.

  10. Issue No. 04-4, "Allocation of Goodwill to Reporting Units for a Mining Enterprise." The task force decided to drop this Issue from the EITF agenda.

The SEC Observer made an announcement regarding EITF Abstracts, Topic No. D-98, "Classification and Measurement of Redeemable Securities," to update the Subsequent Developments section to reflect the issuance of FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, and its related implementation and transition guidance.

FUTURE OPEN MEETINGS

The following is a list of open meetings tentatively scheduled through April. 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, April 7, 2004—FASB Board Meeting
Wednesday, April 7, 2004—FASB Education Session
Monday, April 12, 2004—User Advisory Council Meeting, New York City
Tuesday, April 13, 2004—FASB Education Session
Wednesday, April 14, 2004—FASB Board Meeting
Wednesday, April 14, 2004—FASB Education Session
Thursday, April 22, 2004—IASB/FASB Joint Board Meeting, London
Friday, April 23, 2004—IASB/FASB Joint Board Meeting, London
Wednesday, April 28, 2004—FASB Board Meeting
Wednesday, April 28, 2004—FASB Education Session