Action Alert No. 04-09
March 4, 2004

NOTICE OF MEETINGS

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

Wednesday, March 10, 2004, 1:00 p.m.

  1. Mortgage servicing rights at fair value. The Board will meet with representatives of PricewaterhouseCoopers to discuss the issues facing the mortgage banking industry relative to the application of the current accounting model for mortgage servicing rights. The meeting is educational and no decisions are expected. (Estimated 2.5-hour discussion.)

  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, March 10, 2004, 9:00 a.m.

The Board will hold an educational, non-decision-making session to discuss topics that are anticipated to be discussed at the March 16, 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 25, 2004 Board Meeting

Business combinations: purchase method procedures. The Board discussed certain issues that were identified in drafting the Exposure Draft of a proposed Statement on purchase method procedures (referred to as proposed Statement 141(R)). The Board decided:

  1. To require disclosure of the total amount of consideration exchanged for the business acquired and the fair value of each major component of consideration.

  2. To include an exception to the principle that would require the recognition and measurement of assets and liabilities at their fair values so that assets and liabilities for operating leases of the business acquired would continue to be classified and accounted for in accordance with existing GAAP.

  3. In relation to accounting for income taxes in a business combination:

    1. To affirm that an acquirer would be required to apply a rebuttable presumption that acquired deferred tax benefits recognized within one year following the acquisition should be reported as an adjustment to goodwill, rather than as a reduction of income tax expense. Otherwise, deferred tax benefits recognized subsequent to the acquisition (that is, by reduction of any valuation allowance for acquired deferred tax assets) would be reported as a reduction of income tax expense. That conclusion would apply to both valuation allowances recognized at the date of a business combination after application of proposed Statement 141(R), as well as those recognized in previous purchase business combinations (under FASB Statement No. 141, Business Combinations, and APB Opinion No. 16, Business Combinations).

    2. To require the tax benefit arising from tax deductible goodwill in excess of goodwill for financial reporting to be accounted for at the date of the acquisition as a deferred tax asset (similar to the accounting for other temporary differences under FASB Statement No. 109, Accounting for Income Taxes).

  4. For the purpose of measuring the implied fair value of goodwill in the second step of the impairment test required by FASB Statement No. 142, Goodwill and Other Intangible Assets:

    1. No portion of the fair value of the reporting unit would be assigned to an asset or liability that would be recognizable separate from goodwill had the business combination been accounted for under proposed Statement 141(R) if that asset or liability (1) relates to a business combination that was completed before implementation of proposed Statement 141(R) and (2) had not been recognized separately from goodwill under provisions that existed before proposed Statement 141(R). For example, in performing the second step of a goodwill impairment test, an entity would not assign any fair value to an asset for a contingent gain if the contingent gain had not been separately recognized, and arose from a business combination completed before the implementation of proposed Statement 141(R), even though that asset would be recognized separate from goodwill under the recognition requirements of proposed Statement 141(R).

    2. A portion of the fair value of the reporting unit would be assigned to an asset or liability that was not recognizable separate from goodwill had the business combination been accounted for under proposed Statement 141(R) if that asset or liability (1) relates to a business combination that was completed before implementation of proposed Statement 141(R) and (2) was recognized separately from goodwill under provisions that existed before proposed Statement 141(R).

  5. To make certain limited modifications to the application guidance for the definition of a business that the Board agreed to at the February 4, 2004 meeting. Those modifications are intended to:

    1. Clarify that the assessment of whether a set of assets and activities is a business should be made in terms of a hypothetical potential acquirer rather than only the specific acquirer.

    2. Make the definition of a business and its application guidance applicable to variable interest entities. Therefore, Appendix C to FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, which provides a definition of a business for purposes of that Interpretation, would be superseded.

The Board also:

  1. Suggested that the staff explore conforming the initial measurement guidance in paragraphs 18–21 of Interpretation 46(R) to the measurement guidance in proposed Statement 141(R).

  2. Directed the joint project staff to determine how to clarify and resolve differing interpretations of the October 2003 FASB-IASB joint decision about which assets and liabilities should be considered part of the business combination accounting.

  3. Asked the staff for further information for purposes of reconsidering the proposed effective date of proposed Statement 141(R).

Fair value measurement. The Board discussed the timing, comment period, and transition and effective date of an Exposure Draft of a proposed Statement, Fair Value Measurements. The Board decided:

  1. To allow at least a 75-day comment period to overlap with the comment period for an Exposure Draft of a proposed Statement on purchase method procedures. The Board expects to issue both documents in the second quarter 2004.

  2. For changes in methods of measuring the fair value of certain financial instruments (blocks and bid-asked spread estimates), to require a cumulative-effect transition approach, requiring disclosure in the period of change of the effect of applying the proposed Statement on income before extraordinary items and net income (and related per-share amounts). Restatement of previously issued annual financial statements would not be permitted. Pro forma disclosures (of the effect of applying the proposed Statement to those items during all periods presented prior to initial application of the proposed Statement) would be encouraged but not required.

  3. For other changes in methods of measuring fair value and for disclosures about fair value measurements (amounts and methods used), to require a prospective transition approach.

  4. To require that the proposed Statement be effective for interim and annual periods beginning after December 15, 2004, with early application encouraged.

FASB Staff Position: Medicare Act of 2003. The Board discussed the disclosure, transition, and effective date provisions of the proposed guidance on the accounting for the federal subsidy provided by the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The Board decided:

  1. The option to defer any accounting for the effects of the Act expires upon the issuance of the proposed guidance as a final FASB Staff Position.

  2. Plan sponsors should evaluate, as of the date of enactment, a plan’s actuarial equivalency status (excluding nonpublic companies that sponsor no plan with more than 100 participants). The Board noted that that determination may be inconclusive until regulations clarifying actuarial equivalence are issued.

  3. If a plan is determined to be actuarially equivalent as of December 8, 2003, remeasurement of the plan’s assets and obligations, including the effects of the subsidy, is required as of the earlier of (a) the plan’s first scheduled measurement date following the date of enactment or (b) the end of first interim or annual period of the plan ending after the date of enactment. The effects of that remeasurement, based on the proposed guidance, should be reflected in financial statements for interim or annual periods beginning after June 15, 2004, with early application permitted. To the extent that financial statements for an interim period(s) subsequent to the date of remeasurement have been issued, the procedures in paragraph 10 of FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, should be followed.

  4. Nonpublic companies that sponsor no plan with more than 100 participants are required to remeasure plan assets and obligations at the next scheduled measurement date for years ending on or after September 15, 2004. Amortization in periods following the date of the remeasurement upon adoption of this guidance should be adjusted accordingly.

  5. If an entity is unable to determine whether a plan is actuarially equivalent as of December 8, 2003, it should not account for the effects of the federal subsidy until a determination of actuarial equivalence can be made. Once a determination of actuarial equivalence is made, that determination would constitute a significant event warranting remeasurement of plan assets and obligations as of that date. The effect of the subsidy should be treated as an actuarial gain and amortized prospectively from the remeasurement date.

  6. If an entity did not elect the deferral option provided by FSP FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, and that entity’s accounting for the subsidy is inconsistent with the proposed guidance, the cumulative effect of adoption of this guidance should be recorded in financial statements for periods beginning after June 15, 2004, pursuant to the guidance in APB Opinion No. 20, Accounting Changes, and Statement 3.

  7. For an entity that elected deferral but the deferral expired due to its own actions (for example, due to a plan amendment) and the accounting for the subsidy is inconsistent with the proposed guidance, the transition provisions for an entity that did not elect deferral would apply.

  8. For plans with significant prescription drug costs for which the status as to actuarial equivalency is uncertain, the following should be disclosed in each period following the issuance of the guidance until a definitive determination of actuarial equivalency is established:

    1. The existence of the Act

    2. The fact that the accumulated postretirement benefit obligation (APBO) and net periodic postretirement benefit cost do not reflect any reduction arising from the federal subsidy because the sponsor is unable to conclude that the plan is actuarially equivalent.

  9. For financial statements for the first interim and annual period in which the effects of the subsidy are reflected in the APBO and net periodic pension cost, the following should be disclosed:

    1. The amount of subsidy related to benefits attributed to past service (gross actuarial gain)

    2. The effect on net periodic postretirement benefit cost arising from amortization of the actuarial gain arising from the subsidy and the subsidy-related reduction in current-period service cost

    3. Any other relevant disclosures pursuant to the requirements of paragraph 5(r) of FASB Statement No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits.

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.

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