Action Alert No. 04-42
October 28, 2004

NOTICE OF MEETINGS

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

Wednesday, November 3, 2004, 9:00 a.m.

  1. Financial instruments: liabilities and equity. The Board will continue to develop its proposed approach (ownership/settlement approach) for distinguishing liabilities and assets from equity for single component instruments. The Board expects to consider: (Estimated 90-minute discussion.)

    1. Which, if any, of the Board’s prior decisions relating to single component instruments would be included in the ownership/settlement approach

    2. How the approach would be applied in distinguishing assets from equity

    3. What form of settlement should be assumed if there are multiple settlement alternatives.

  2. Short-term convergence: inventory costs and exchanges of nonmonetary assets. The Board will discuss the effective dates of its final Statements on inventory costs (an amendment of ARB No. 43, Chapter 4) and exchanges of nonmonetary assets (an amendment of APB Opinion No. 29). (Estimated 30-minute discussion.)

  3. FASB Staff Position (FSP). The Board will discuss a draft of a proposed FSP on whether a reporting enterprise should consider whether it holds an implicit variable interest resulting from a related party relationship under FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities (revised December 2003). (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, November 3, 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 10, 2004 Board meeting. Those topics will be posted to the FASB calendar four days prior to the education session.

OPEN MEETING WITH REPRESENTATIVES OF THE INSTITUTE OF MANAGEMENT ACCOUNTANTS

Tuesday, November 2, 2004, 9:00 a.m.

The Board will meet with representatives of the Financial Reporting Committee of the Institute of Management Accountants 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 roundtable discussions, and through other communication channels. Decisions become final only after a formal written ballot to issue a final Statement or Interpretation.

October 19, 2004 FASB 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 nonpublic entities and public entities classified as small business issuers under the Securities Exchange Act of 1934. The Board made the following decisions regarding those issues:

Measurement of Equity Awards Issued by Nonpublic Entities

The Board decided that a nonpublic entity should measure equity awards using the modified grant-date method, unless:

  1. It is not practicable for a nonpublic entity to make a reasonable estimate of the expected volatility of its own stock price. In that case, a nonpublic entity would use the historical volatility of an appropriate index, rather than using the expected volatility of its own stock price, as an input to a valuation model to arrive at a calculated value. A nonpublic entity that follows this method would be required to disclose the index selected and how it selected that index.

  2. A nonpublic entity is not able to reasonably estimate fair value because the unusual features of a particular equity award prevent it from doing so. In those rare circumstances, a nonpublic entity would be required to apply the same measurement method as a public entity, that is, the intrinsic value method described in the Exposure Draft.

Measurement of Liability Awards Issued by Nonpublic Entities

The Board decided to retain the accounting treatment for liability awards in the Exposure Draft; that is, a nonpublic entity would make a policy decision of whether to measure liabilities incurred under share-based payment arrangements with employees at (1) fair value or (2) intrinsic value. Under both methods, the liability would be remeasured at the end of each reporting period until settlement based on the current share price and other pertinent factors at the reporting date or settlement date.

Effective Date and Transition for Nonpublic Entities

The Board decided that all nonpublic entities would be required to apply the final Statement for fiscal years beginning after December 15, 2005. The Board decided that nonpublic entities that had adopted the fair-value-based method of FASB Statement No. 123, Accounting for Stock-Based Compensation, for either recognition or pro forma disclosures would apply the same transition provisions as public entities. All other nonpublic entities would apply the final Statement prospectively to all awards granted, modified, or settled in fiscal years beginning after December 15, 2005.

Effective Date and Transition for Small Business Issuers

The Board decided that a small business issuer would be required to apply the final Statement for periods beginning after December 15, 2005, using the same transition provisions that apply to other public entities.

October 19, 2004 IASB/FASB Joint Board Meeting

The Boards met with representatives from the CFA Institute and listened to a presentation on a comprehensive business reporting model being developed by the CFA Institute. That model will be proposed in a white paper that is expected to be issued by the CFA Institute in 2005. The meeting was informational and no decisions were reached.

October 20, 2004 IASB/FASB Joint Board Meeting

Short-term convergence: income taxes. The Boards discussed the complexities surrounding the calculation of a deferred tax liability for permanently reinvested unremitted earnings of foreign subsidiaries and joint ventures. Because of the practical complexities in calculating the amount of deferred taxes for such items, the Boards decided to retain the exceptions in IAS 12, Income Taxes, and FASB Statement No. 109, Accounting for Income Taxes, for the recognition of deferred tax liabilities for certain investments in foreign subsidiaries (or foreign corporate joint ventures). Additionally, in order to achieve convergence, the IASB decided to amend the language in IAS 12 so that it is similar to that in Statement 109 and APB Opinion No. 23, Accounting for Income Taxes—Special Areas, with respect to unremitted foreign earnings. The Boards also requested the staff to evaluate whether improvements could be made to the disclosure requirements surrounding unremitted earnings of foreign subsidiaries and joint ventures.

Agenda decision: conceptual framework. The Boards discussed a staff plan and decided to add to their respective agendas a joint project to develop a common conceptual framework that is based on and builds on their existing frameworks. The Boards also reached the following tentative decisions about the conduct of the project:

  1. Initially, the project would focus on concepts applicable to business entities in the private sector. Later, the Boards would consider the applicability of those concepts to other sectors, beginning with not-for-profit entities in the private sector.

  2. The project should be divided into phases, with the initial focus being on achieving the convergence of the frameworks and improving particular aspects of the frameworks dealing with objectives, qualitative characteristics, elements, recognition, and measurement. Furthermore, as the frameworks converge and are improved, priority should be given to addressing issues that are likely to yield benefits to the Boards in the short-term, that is, cross-cutting issues that affect a number of their projects for new or revised standards.

  3. The converged framework should be in the form of a single document. It should include a summary and a basis for conclusions.

The Boards also agreed with a staff proposal to publish an initial communications document. The staff proposed that the document should explain, among other things, the purpose and importance of the framework, why the Boards wish their existing frameworks to converge, and why those frameworks are in need of improvement. The Boards will consider a staff draft of the initial communications document at future meetings. The Boards also agreed with a staff proposal to publish a second communications document, in less detail and written for a “lay audience,” as part of an overall communications plan.

Revenue recognition. The Boards discussed how guidance in the FASB’s Exposure Draft, Fair Value Measurements, could be applied in the context of measuring performance obligations in contracts with customers. In applying the principles in the Exposure Draft to certain examples that have been previously discussed in the revenue recognition project, Board members expressed the following tentative views:

  1. In the absence of evidence to the contrary, actual exchange prices (in other than active markets) should be presumed to be consistent with fair value.

  2. An entity should not be required to consider multiple valuation techniques when performing the evidence to the contrary test.

  3. In estimating fair values of performance obligations, an entity should consider the credit enhancement that it provides in the transaction (when applicable).

  4. Prices in proposed exchange transactions may be used as market inputs for purposes of developing estimates of fair value.

  5. Fair value estimates of performance obligations incorporating significant entity inputs may be consistent with the fair value measurement objective.

The FASB also discussed but did not agree on whether:

  1. Fair values of performance obligations should be estimated by reference to the most advantageous prices that reflect volume discounts generally available to the reporting entity (and to other marketplace participants that have a comparable volume of transactions), without regard to whether the entity chooses to take advantage of those volume discounts.

  2. A proposed price may be used as a market input for purposes of estimating the fair value of a performance obligation if the entity does not have immediate access to the reference market from which that price is derived.

At future meetings, the FASB will continue discussing issues relating to the application of fair value measures of performance obligations in contracts with customers. Those issues will include considerations of reliability, operationality, and cost-benefit. At those meetings, the FASB also will discuss alternatives for measuring any obligations that they decide should not be measured at fair value.

Financial instruments. The Boards listened to an oral summary from the IASB staff of the recent meeting of the IASB’s financial instruments working group. This meeting was informational and no decisions were reached.

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, 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