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Action Alert No. 04-38
September 30, 2004
NOTICE OF MEETINGS
OPEN BOARD MEETINGS
(Board
meetings are available by audio webcast and telephone.)
Wednesday, October 6, 2004, 9:00 a.m.
- Short-term
convergence: phase 1. The Board will redeliberate the remaining
issues related to its December 15, 2003 Exposure Draft, Earnings per
Share. (Estimated 30-minute discussion.)
- 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 transition issues
for public companies. (Estimated 1.5-hour discussion.)
- Financial
instruments: liabilities and equity. The Board will discuss
definitions and the settlement and ownership relationship criteria that
might be used to distinguish whether a single component financial
instrument should be reported as a liability or in equity (previously
referred to as “simple” instruments). (Estimated 60-minute
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 EDUCATION SESSION
Wednesday, October 6, 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 October 13,
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 AICPA PRIVATE COMPANIES
PRACTICE SECTION TECHNICAL ISSUES COMMITTEE
Friday, October 8, 2004, 10:00 a.m.
The Board will meet with representatives of the Private Companies
Practice Section Technical Issues Committee of the AICPA 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.
September 22, 2004 Board Meeting
Equity-based
compensation (EBC). The Board continued its redeliberations of the
March 2004 FASB Exposure Draft, Share-Based Payment. The Board
discussed issues related to the accounting and reporting for the income
tax effects of equity-based compensation and made the following
decisions:
- The Board affirmed its decision to amend the cash flow reporting
requirements of FASB Statement No. 95, Statement of Cash Flows,
as proposed in the Exposure Draft. That is, realized excess tax benefits
would be represented as financing cash inflows. The Board decided that
tax benefit deficiencies should not be accounted for in the statement of
cash flows because they are inherently different from realized excess
tax benefits—realized excess tax benefits reduce an enterprise’s
obligation to pay income taxes, whereas tax benefit deficiencies have no
such effect.
- The Board discussed how to account for the income tax consequences
of compensation cost from equity-based compensation transactions that is
capitalized as part of another asset. The Board concluded that
compensation cost based on the grant-date fair value of an at-the-money
employee stock option that is a nonqualified stock option under the tax
law establishes a deemed tax basis for income tax accounting purposes.
That is, the grant-date fair value measurement is an estimate of the tax
basis that will apply to the asset upon the option’s exercise (and thus,
forms a part of the asset’s deemed tax basis for income tax accounting
purposes). The Board also concluded that additional guidance to explain
or illustrate the application of that decision in various circumstances
was not required.
- The Board considered whether deferred tax assets generated from
recognized compensation cost of equity-based compensation transactions
should be assessed for recoverability based on subsequent changes in the
stock price from the grant date and decided not to change Statement
123’s method, which precludes such an assessment.
Qualifying
special-purpose entities with isolation of transferred assets. The
Board discussed whether to (1) amend the isolation requirement of FASB
Statement No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, and (2) add a requirement
that the transferor must agree to pay the transferee any benefits from
exercising setoff on transferred assets in order for the transaction to be
accounted for as a sale. The Board made the following decisions:
- The implementation guidance on isolation should be amended to define
isolation in a manner that is consistent with the requirements of a true
sale at law and an opinion that the transferred assets would not be
included in the estate of the transferor or any consolidated affiliate
that is not a special-purpose corporation or other entity designed to
make remote the possibility that it would enter bankruptcy or other
receivership (nonconsolidation opinion).
- Implementation guidance should be added that describes the
conditions the Board understands attorneys require to issue a
true-sale-at-law opinion and a nonconsolidation opinion under U.S.
bankruptcy and receivership law for transfers of financial assets.
- The amount of recourse (or guarantee) that can be provided by a
transferor that would prevent a transaction from meeting the
requirements of a true sale should be left to an attorney’s professional
judgment based on the facts and circumstances of the transaction.
- A requirement should be put in place that the transferor must agree
to pay the transferee any benefits from exercising setoff on transferred
assets in order for the transaction to meet the requirements of
paragraph 9(c).
Servicing
rights. The Board clarified a decision made at its August 4, 2004
meeting that the election to subsequently measure classes of servicing
rights at fair value is an irrevocable, one-time election that can be made
at any time subsequent to the adoption of the guidance.
The Board decided to retain the disclosures required in paragraph 17(e)
of Statement 140 for separately recognized servicing rights subsequently
measured at the lower of carrying amount or market (LOCOM).
The Board decided to require the following additional disclosures for
all separately recognized servicing rights, which will be separately
presented for servicing rights subsequently measured at fair value and
servicing rights subsequently measured at LOCOM:
- A description of the classes of servicing assets and servicing
liabilities subsequently measured at fair value or LOCOM, management’s
rationale for its decision to subsequently measure those classes of
servicing assets and servicing liabilities at fair value or LOCOM, a
description of the risks inherent in the servicing activity, and, if
applicable, the instruments used to manage those risks
- A roll forward of the balance of each class of servicing rights for
each period that operations are presented, including a description of
where each source of activity is reported in the statement of income
- Servicing fees earned during each period that operations are
presented
- A description of the valuation techniques used to estimate fair
value of the servicing rights
- A sensitivity analysis or stress test showing the hypothetical
effect on the fair value of each class of the servicing rights of two or
more unfavorable variations from the expected levels for each key
assumption.
The Board decided that quantitative disclosures relative to the fair
value, valuation techniques used to estimate fair value, and sensitivity
analysis for risk management activities related to separately recognized
servicing rights will be encouraged, but not required.
FUTURE OPEN MEETINGS
The following is a list of open meetings tentatively scheduled through
October. 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 13, 2004—FASB Board Meeting
Wednesday, October
13, 2004—FASB Education Session
Thursday, October 14, 2004—User
Advisory Council Meeting, New York City
Friday, October 15, 2004—FASB
Insurance Industry Forum
Tuesday, October 19, 2004—Joint FASB/IASB
Board Meeting
Wednesday, October 20, 2004—Joint FASB/IASB Board
Meeting
Thursday, October 21, 2004—FASB Education Session
Wednesday,
October 27, 2004—FASB Board Meeting
Wednesday, October 27, 2004—FASB
Education Session
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