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Action Alert No. 04-40
October 14, 2004
NOTICE OF MEETINGS
OPEN FASB BOARD MEETING
(Board
meetings are available by audio webcast and telephone.)
Tuesday, October 19, 2004, 9:00 a.m.
- Equity-based
compensation.The Board will continue redeliberations of its
Exposure Draft, Share-Based Payment, an amendment of FASB
Statements No. 123 and 95. The Board plans to address issues related to
nonpublic companies. (Estimated 2-hour 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 JOINT IASB AND FASB BOARD MEETINGS
(The
joint Board meetings will be held in Norwalk and will be available by
audio webcast and telephone.)
Tuesday, October 19, 2004, 1:45 p.m.
A representative of the CFA Institute (formerly the Association for
Investment Management and Research) will discuss certain of the
Institute’s current efforts relating to financial reporting, particularly
the development of a comprehensive business reporting model. The joint
meeting of the FASB and IASB affords the Boards a unique opportunity to
obtain a preview of certain forthcoming proposals for financial reporting
by a major international organization of financial statement users that
the Boards may wish to consider in the course of several current agenda
projects. This meeting will be informational, and no decisions are
expected. (Estimated 1-hour discussion.)
Wednesday, October 20, 2004, 9:00 a.m.
- Short-term
convergence: income taxes. The Boards will consider the
practical and cost-benefit considerations of recording deferred tax
liabilities on the unremitted earnings of foreign subsidiaries.
(Estimated 2-hour discussion.)
- Agenda decision: conceptual framework. The Boards will
discuss whether to add a joint project to their technical agendas to
converge and improve their conceptual frameworks. If they agree to add
the project, the Boards will discuss aspects of a proposed plan for the
project that addresses matters such as how the project should be
conducted, how project priorities should be determined, what the form
and structure of the converged framework should be, and what the
project’s outputs should be. (Estimated 3-hour discussion.)
- Revenue
recognition. The Boards will discuss how guidance in the FASB
Exposure Draft, Fair Value Measurements, could be applied to
example transactions that have been discussed in the revenue recognition
project. Specifically, the Boards will consider the following issues:
(Estimated 1.5 hour discussion.)
- Using prices in actual and proposed exchange transactions to
estimate fair values of performance obligations
- Using the most advantageous prices (that reflect the effect of
volume discounts) to estimate fair values of performance obligations
- Estimating fair values of performance obligations consistent with
Level 3 of the fair value hierarchy in the absence of immediate access
to the reference market
- Selecting a point estimate from a range of fair value estimates
when no single amount appears to be a better estimate than any other
estimate
- Using significant entity inputs to estimate fair values of
performance obligations.
- Financial instruments. The IASB staff will provide the Boards
with an oral summary of the recent meeting of the IASB's financial
instruments working group. (Estimated 30-minute discussion.)
OPEN FASB EDUCATION SESSION
Thursday, October 21, 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 its October 27,
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 roundtable discussions, and
through other communication channels. Decisions become final only after a
formal written ballot to issue a final Statement or
Interpretation.
October 6, 2004 Board Meeting
Short-term
convergence: phase 1. The Board redeliberated certain provisions
of the December 2003 FASB Exposure Draft, Earnings per Share, and
made the following decisions:
- Mandatorily convertible shares should be used in the calculation of
basic earnings per share (EPS). The Board clarified that those shares
should be included in the calculation even if the effect is
antidilutive.
- A contract that may be settled in cash or shares should be subject
to the guidance in paragraph 29 of FASB Statement No. 128, Earnings
per Share, even if the contract only requires share settlement under
certain circumstances. An otherwise cash-settled instrument that
contains a provision that requires or permits share settlement under
certain circumstances is not a contingently issuable share agreement;
therefore, share settlement must be assumed for purposes of computing
diluted EPS. The Board decided to make an exception to this guidance for
an instrument that only permits share settlement in the case of
bankruptcy of the issuer.
Equity-based
compensation. The Board continued its redeliberations of the March
2004 FASB Exposure Draft, Share-Based Payment. The Board discussed
transition issues for public companies and made the following
decisions:
- Under an approach labeled modified retrospective application (MRA),
the amounts disclosed as the pro forma effects of applying the
fair-value-based provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, would be retrospectively recognized in the
financial statements for all prior periods presented. Changes to the
amounts as they were originally disclosed in prior periods would be
precluded. As of the effective date of the final Statement, both MRA and
modified prospective application (MPA) would result in the measurement
and attribution of compensation cost for awards for which the requisite
service has not been rendered as of that date based on the grant-date
fair value calculated and the attribution method applied under Statement
123 (either for recognition or pro forma purposes).
- For awards with graded vesting schedules, MRA would result in
compensation cost being recognized in the financial statements for all
periods presented in a manner consistent with the attribution method
applied under Statement 123. As of the effective date of the final
Statement, both MRA and MPA would result in the attribution of
compensation cost for awards for which the requisite service has not
been rendered as of that date using the attribution method applied under
Statement 123 (either for recognition or pro forma purposes). The Board
decided not to deem as preferable for purposes of making a change in
accounting either of the two attribution methods available in the final
Statement for awards with graded vesting schedules.
- For awards that are accounted for as variable awards under APB
Opinion No. 25, Accounting for Stock Issued to Employees, MRA
would result in compensation cost being recognized in the financial
statements for all periods presented as if that award had been accounted
for under Statement 123 from its grant date, with no changes to those
amounts as they were originally disclosed in prior periods. As of the
effective date of the final Statement, both MRA and MPA result in the
recognition of compensation cost for such awards for which the requisite
service has not been rendered as of that date over the remaining
requisite service period using the grant-date fair value calculated and
attribution method applied under Statement 123.
- For awards that are classified as liabilities under the original
provisions of Statement 123 and measured at intrinsic value, MRA would
result in compensation cost being recognized in the financial statements
for all periods presented as if that award had been accounted for under
Statement 123 from its grant date. For awards outstanding as of the
effective date of the final Statement, both MRA and MPA would result in
the cumulative effect of a change in accounting principle, net of any
related tax effect that would be recognized by initially measuring the
liability at fair value as required by the final Statement as of the
effective date.
- For awards that are classified as equity awards under Statement 123
but would be classified as liabilities under the final Statement, MRA
would result in compensation cost being recognized in the financial
statements for all periods presented as if that award had been accounted
for under Statement 123 from its grant date, with no changes to those
amounts as they were originally disclosed under Statement 123 (that is,
as equity awards). For awards outstanding as of the effective date of
the final Statement, both MRA and MPA would result in the cumulative
effect of a change in accounting principle, net of any related tax
effect that would be recognized by initially measuring the liability at
fair value as required by the final Statement as of the effective date.
- With regard to changing the method for estimating forfeitures and
estimating compensation cost related to nonrefundable dividend payments,
MRA would result in compensation cost being recognized in the financial
statements for all periods presented as if that award had been accounted
for under Statement 123 from its grant date, with no changes to those
amounts as they were originally disclosed under Statement 123 (that is,
only actual forfeitures would be recognized in prior periods). As of the
effective date of the final Statement, for awards for which the
requisite service has not been rendered as of that date, both MRA and
MPA would result in an estimate of the number of equity instruments that
are not expected to vest and recognition of an amount equal to the
compensation cost that would not have been recognized in periods prior
to the effective date for those instruments that are not expected to
vest as the cumulative effect of a change in accounting principle, net
of any related tax effect, upon adoption of the final Statement.
- For deferred tax balances, MRA would result in the pro forma effects
of applying the fair-value-based provisions of Statement 123 being
recognized in the financial statements for all periods presented;
therefore, an entity would adjust its deferred tax balance as of the
beginning of the earliest period presented as if it had been accounting
for deferred taxes under Statement 123. Under either MRA or MPA, no
adjustment would be made as of the effective date of the final Statement
to any deferred tax balance associated with awards of equity instruments
that continue to be classified as equity instruments under the final
Statement. However, for purposes of calculating the excess tax benefit,
an entity would take into account all compensation cost recognized under
Opinion 25, Statement 123, and the final Statement.
The final Statement would require that the write-off of a deferred
tax asset against excess tax benefits recognized in additional paid-in
capital not be limited by the type of compensatory arrangement giving
rise to the excess tax benefit except compensatory arrangements outside
the scope of the final Statement, such as employee stock ownership
plans.
Under both MRA and MPA, an entity would determine the amount of
excess tax benefits that would have been accumulated in additional
paid-in capital had Statement 123 been adopted prospectively for all
awards granted, modified, or settled in fiscal years beginning after
December 15, 1994. No adjustment related to that amount would be made to
additional paid-in capital at the effective date; however, enterprises
would consider that amount in determining the amount of deferred tax
asset that may be written off to additional paid-in capital upon
settlement of an outstanding award.
- The final Statement would not include specific transition guidance
relating to compensation cost that may have qualified for
capitalization. If an enterprise determines that the pro forma amounts
calculated pursuant to Statement 123 and reported in prior periods are
inaccurate because of mathematical mistakes, mistakes in the application
of accounting principles, or oversight or misuse of facts that existed
at the time the financial statements were prepared, it shall follow the
guidance in Opinion 20 related to such events.
- The transition guidance in paragraph 24 of the Exposure Draft that
requires pro forma disclosures only for those prior periods presented in
which awards under share-based payment arrangements with employees are
accounted for under the intrinsic value method of Opinion 25 should be
retained.
- Under MRA, companies should present the statement of cash flows in
accordance with the final Statement for all periods presented. Under
MPA, companies should present the statement of cash flows in accordance
with the final Statement on a prospective basis after adoption of the
final Statement.
- Under the final Statement, modification of a deep out-of-the-money
award with a service condition to accelerate its vesting would not be
accounted for as a modification if the modification does not result in a
change in the substantive terms of the award.
- Under both MRA and MPA, for awards outstanding as of the effective
date that are measured at intrinsic value because it is not reasonably
possible to measure their fair value in accordance with Statement 123,
an entity would measure those awards at intrinsic value through
settlement.
Financial
instruments: liabilities and equity. The Board discussed and
agreed that an issuer would use the following approach for distinguishing
whether a single component instrument would be classified as a liability
or equity (words in italics are defined as described below):
- An instrument that does not embody a settlement obligation is
equity (unless it is an asset). An example is a share (common or
preferred) that is not subject to redemption requirements.
- An instrument that establishes a direct ownership
relationship between the issuer and the holder is equity, even if it
embodies a settlement obligation. An example is a common share that is
mandatorily redeemable at fair value.
- An instrument that establishes an indirect ownership
relationship that would be settled or ultimately settled by issuing
an instrument that establishes a direct ownership relationship is equity
(such as a physically settled written call option). Otherwise, the
instrument is a liability (such as a net cash-settled written call
option).
- An instrument that embodies a settlement obligation and does not
establish either a direct or indirect ownership relationship is a
liability. An example is a written put option.
The Board also agreed on the following definitions in applying the
approach:
- A settlement obligation is a present obligation of an entity
settled prior to liquidation to:
- Transfer or provide use of assets
- Use assets to provide services
- Stand ready to use assets to provide services or transfer or
provide use of assets
- Issue shares or other instruments (fixed or variable number).
- A direct ownership relationship is established by an
instrument of an entity or consolidated subsidiary (reference
instrument) that:
- Is (or together with other instruments is) the most subordinated
interest(s) issued by the entity or consolidated subsidiary
- Shares pro rata in the earnings and losses of the entity with
other instruments meeting characteristic 2(a).
- An indirect ownership relationship is established by an
instrument of an entity in which the counterparty’s payoff at settlement
is based on and varies in the same direction as the fair value of the
reference instrument and does not contain a contingency provision that
is based on an external market or index.
FUTURE OPEN MEETINGS
The following is a list of open meetings tentatively scheduled through
November. All meetings are held in Norwalk, Connecticut, unless otherwise
noted. 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, October 27, 2004—FASB Board Meeting
Wednesday, October
27, 2004—FASB Education Session
Tuesday, November 2, 2004—Liaison
Meeting with the Institute of Management Accountants
Wednesday,
November 3, 2004—FASB Board Meeting
Wednesday, November 3, 2004—FASB
Education Session
Wednesday, November 10, 2004—FASB Board
Meeting
Wednesday, November 10, 2004—FASB Education Session
Tuesday,
November 16, 2004—FASB Education Session
Wednesday, November 17,
2004—FASB Board Meeting
Wednesday, November 17, 2004—Emerging Issues
Task Force Meeting
Thursday, November 18, 2004—Emerging Issues Task
Force Meeting
Wednesday, November 24, 2004—FASB Board
Meeting
Wednesday, November 24, 2004—FASB Education Session
Tuesday,
November 30, 2004—FASB Board Meeting
Tuesday, November 30, 2004—FASB
Education Session
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