Action Alert No. 04-41
October 21, 2004

NOTICE OF MEETINGS

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

Wednesday, October 27, 2004, 9:00 a.m.

  1. Beneficial interests. The Board will discuss the alternative of providing a fair value election for holders of hybrid instruments containing embedded derivatives requiring bifurcation. (Estimated 60-minute discussion.)

  2. Qualifying special-purpose entities and isolation of transferred assets. The Board will continue its discussion from the September 22, 2004 Board meeting of the accounting for transfers of financial assets under FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. In particular, the discussion is expected to focus on the application of the requirements of paragraph 9(b). (Estimated 60-minute discussion.)

  3. FASB Staff Position (FSP). The Board will discuss (a) comment letters received on proposed FSP FAS 140-b, “Application of EITF Issue No. 85-24, 'Distribution Fees by Distributors of Mutual Funds That Do Not Have a Front-End Sales Charge,' When Future Distribution Fees Are Sold to Unrelated Third Parties,” (b) alternative approaches, and (c) whether to proceed to drafting a final FSP. (Estimated 60-minute discussion.)

  4. 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, October 27, 2004, immediately following the Board meeting

The Board will hold an educational, non-decision-making session to discuss topics that are anticipated to be discussed at the November 3, 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 13, 2004 Board Meeting

Equity-based compensation. The Board continued its redeliberations of the March 2004 FASB Exposure Draft, Share-Based Payment. The Board discussed certain issues related to fair value measurement, equity and liability classification, cost-benefit procedures, and the effective date for public companies. The Board made the following decisions regarding those issues.

Certain Fair Value Measurement Issues

The Board unanimously affirmed its previous decisions regarding volatility and the concept of expected term in estimating the grant-date fair value of instruments granted in a share-based payment transaction. However, the Board decided to add guidance similar to that of IFRS 2, Share-based Payment (paragraphs B38–B41), relating to the consideration of certain capital structure effects when estimating the grant-date fair value of share-based awards. The Board noted, however, that it would be rare for a public company to adjust the grant-date fair value of an instrument for those effects because those effects generally are reflected in the underlying stock price.

Effect of Dividends or Dividend Equivalents on Recognition and Measurement of Equity Awards

The Board decided to incorporate into the final Statement a measurement principle stating that the estimate of an award’s grant-date fair value should take account of dividend (or dividend-equivalent) rights or the absence thereof. The Board also agreed to provide some examples illustrating the application of that principle.

The Meaning of Requisite Service Period and Certain Noncompete Agreements

The Board decided that if the terms of a noncompete agreement, represent, in substance, a service condition, the compensation cost of the related equity-based award would be recognized over the substantive service period. The Board also decided to provide an illustration in the final Statement’s implementation guidance of such a case.

Awards with Graded Vesting

The Board decided that the choice of attribution method for awards with graded vesting schedules would be a policy decision that is not dependent on an enterprise’s choice of valuation technique. The Board also clarified that the choice of attribution method pertains solely to awards with service conditions.

Equity and Liability Classification

The Board decided to:

  1. Clarify the guidance in paragraph 39A of the Exposure Draft concerning the classification of awards with repurchase features.

  2. Clarify the guidance in the final Statement concerning the classification of puttable shares by incorporating certain aspects of guidance based on APB Opinion No. 25, Accounting for Stock Issued to Employees.

  3. Require all options on shares with repurchase features to be classified consistently with the underlying shares, and provide an illustration in the final Statement.

The above decisions would result in the following:

  1. Mandatorily redeemable shares and options on mandatorily redeemable shares would be classified as liabilities unless the shares or underlying shares were subject to the 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.”

  2. Puttable shares would be classified as equity (or temporary equity) if certain APB Opinion 25-based criteria relating to the redemption feature and redemption price are met.

  3. Options on puttable shares would be classified as equity (or temporary equity) if the underlying shares would be classified in the same manner.

  4. Puttable options would be classified as liabilities.

Cost-Benefit Procedures

The Board considered this issue solely as it pertains to public entities and concluded that based on the findings of the cost-benefit procedures performed related to this project, the final Statement will sufficiently improve the financial reporting to justify the costs it will impose.

Effective Date for Public Companies

The Board discussed the effective date for public companies and decided that:

  1. The final Statement would be effective for any interim or annual period beginning after June 15, 2005, meaning that an entity would apply the final Statement to all employee awards of share-based payment granted, modified, or settled in any interim or annual period beginning after June 15, 2005. Additionally, as of the beginning of the period in which the final Statement is first applied, compensation cost would be recognized for the portion of awards outstanding for which the requisite service has not been rendered as of that date; measurement and attribution of compensation cost for those awards would be based on the same estimate of the grant-date fair value and the same attribution method used previously for either (a) recognition or (b) pro forma disclosures under the original provisions of Statement 123. Any cumulative-effect adjustment required under the final Statement (for example, for a change in the method of estimating forfeitures) would be recognized as of the beginning of the period in which the final Statement is first applied.

  2. If an entity adopts the final Statement using the modified prospective application method in other than the first interim period of its fiscal year, it may use the modified retrospective application (MRA) method for those earlier interim periods. However, any cumulative-effect adjustment required under the final Statement (for example, for a change in the method of estimating forfeitures) would be recognized as of the beginning of the interim period in which the final Statement is first applied. Under the MRA method, an entity would recognize compensation cost for periods prior to the effective date in accordance with the original provisions of Statement 123; that is, an entity would recognize employee compensation cost in the amounts reported in the pro forma disclosures provided in accordance with Statement 123.

  3. Early adoption would be encouraged provided that financial statements for periods prior to the effective date have not been issued.

Interpretation of Statement 87/amendment of Statement 35. The Board discussed how it should proceed with this project in light of the concerns raised by constituents on the Board’s tentative decisions reached to date.

The Board decided to expand the scope of the project and directed the staff to develop an amendment of FASB Statement No. 87, Employers’ Accounting for Pensions, for all defined benefit plans with lump-sum features (that is, plans that allow employees to receive an immediate walkaway amount upon separation of employment) so that the pension obligation recorded would be the greater of the undiscounted walkaway amount that employees would be entitled to if they separated employment at the measurement date or the actuarial present value of the pension obligation at the measurement date.

FASB ratification of EITF consensuses. The Board discussed the consensuses reached at the September 29–30, 2004 EITF meeting, and ratified the task force's consensuses on the following issues:

  1. Issue No. 04-1, "Accounting for Preexisting Relationships between the Parties to a Business Combination"

  2. Issue No. 04-8, "The Effect of Contingently Convertible Instruments on Diluted Earnings per Share"

  3. Issue No. 04-10, "Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds."

Also, the Board asked the staff to discuss at a future Board meeting the following issues that the task force removed from its agenda:

  1. Issue No. 03-9, "Determination of the Useful Life of Renewable Intangible Assets under FASB Statement No. 142, Goodwill and Other Intangible Assets." The issue is the application of paragraph 11(d) of Statement 142 for determining the useful life of an intangible asset.

  2. Issue No. 04-9, "Accounting for Suspended Well Costs." The issue is whether to amend the suspended well cost guidance in FASB Statement No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies.

  3. Issue No. 04-E, "The Meaning of Similar Economic Characteristics." The issue is the meaning of similar economic characteristics in the application of Statement 131.

The staff noted that the tentative consensuses reached by the task force in 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,” would be posted to the FASB website as a draft abstract for public comment for a 15-day comment period on Friday, October 15, 2004.

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.

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