Action Alert No. 05-50
December 15, 2005

NOTICE OF MEETINGS

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

Tuesday, December 20, 2005, 9:00 a.m.

The Board meeting will be held on Tuesday instead of Wednesday.

1. Combinations of not-for-profit organizations (estimated 2-hour discussion). The Board will consider an alternative to its prior decisions to:
   1. Require that a not-for-profit organization measure goodwill and any inherent contribution based on the fair value of the acquired business enterprise in an acquisition of a business.

   2. Require that a not-for-profit organization (parent) initially consolidate a partially owned subsidiary at its full fair value in an acquisition of less than 100 percent of a for-profit business or another not-for-profit organization.

   The Board also will discuss the following remaining issues:

   1. Recognition and measurement. Whether to apply the decisions reached in its Exposure Draft, Business Combinations, to mergers and acquisitions in this project:

      (1) Exceptions to the recognition of assets acquired and liabilities assumed at fair value

      (2) Transaction-related costs

      (3) Measurement period

      (4) Guidance for determining what’s part of the acquisition.

   2. Donor-related intangible assets. Whether to provide further guidance for the recognition of those assets acquired in a merger or acquisition.

   3. Presentation of a contribution received in financial statements. Whether to report a contribution recognized in a merger or acquisition as part of a performance indicator, if such a measure is reported.

   4. Disclosure requirements. Whether to apply the decisions reached in the business combinations Exposure Draft to mergers and acquisitions in this project:

      (1) Disclosure objectives.

      (2) Incremental disclosures requirements that were added by the business combinations Exposure Draft that were not required by APB Opinion No. 16, Business Combinations; for example, to the extent applicable, the maximum potential amount of future payments for contingent consideration, the nature of any preexisting relationship, and a reconciliation of the beginning and ending balance of liabilities for contingent consideration and contingencies that are required to be measured at fair value.

      (3) Pro forma information about a merger or acquisition.

   5. Comment period, transition, effective date, and other matters.

2. Insurance risk transfer (estimated 60-minute discussion). The Board will consider the applicability of bifurcation in the analysis of the transfer of insurance risk and the accounting for finite (financial) insurance and reinsurance contracts.

3. Servicer discretion (estimated 30-minute discussion). The Board will discuss whether to add a limited-scope project to its agenda to provide additional guidance on the passive nature of a qualifying special-purpose entity (SPE) and its permitted activities. The project would focus on the discretion that a servicer is permitted in servicing the assets of a qualifying SPE.

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, December 21, 2005, 9:00 a.m.

The Board will hold an educational, non-decision-making session to discuss topics that are anticipated to be discussed at a future 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, Interpretation, or FSP.

December 7, 2005 Board Meeting

Transfers of financial assets. The Board discussed issues related to redeliberations of the Exposure Draft, Accounting for Transfers of Financial Assets.

The Board:

1. Decided to issue the final Statement on transfers of financial assets as a standalone document and separate Statements on servicing of financial assets and hybrid financial instruments. The Board expects to issue the final Statements on servicing of financial assets and hybrid financial instruments in the first quarter of 2006 and the final Statement on transfers of financial assets in the second quarter of 2006.

2. Decided to address the issue of initial measurement of a transferor’s beneficial interest in the final Statement on transfers of financial assets, as originally planned.

3. Agreed with the redeliberation issues identified by the staff related to the transfers document.

Financial performance reporting by business entities. The Board decided not to issue an Exposure Draft on Segment A decisions at this time.  Instead, the Board will continue work on a Preliminary Views that will incorporate decisions reached in both Segment A and Segment B.

Nontraditional loan products. The Board discussed comments received on proposed FSP SOP 94-6-a, "Nontraditional Loan Products."  The Board decided:

1. An effective date should be added to Question 1 of the proposed FSP.

2. Nontraditional loans do not represent a major category as that term is used in AICPA Statement of Position 01-6, Accounting by Certain Entities (Including Entities With Trade Receivables) That Lend to or Finance the Activities of Others.  Therefore, the reference to SOP 01-6 should be removed from the FSP.

The Board directed the staff to proceed to a draft of a final FSP for vote by written ballot subject to drafting, which will focus mainly on rewording the definition of a nontraditional loan product.

Fair value option. The Board discussed a number of issues regarding the fair value option project and decided:

1. Cash receipts and cash payments related to financial assets and financial liabilities for which the fair value option has been elected should not be required to be classified as operating activities in the statement of cash flows. In addition, FASB Statement No. 95, Statement of Cash Flows, as amended by FASB Statements No. 102, Statement of Cash Flows—Exemption of Certain Enterprises and Classification of Cash Flows from Certain Securities Acquired for Resale, and No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, should be amended to remove the requirement that cash receipts and cash payments resulting from purchases and sales of securities classified as trading securities under FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, be classified as operating activities. The cash receipts and cash payments for those financial assets and financial liabilities should be classified pursuant to Statement 95 (as amended) based on the nature and purpose for which the related financial assets and financial liabilities were acquired or incurred.

2. Cash receipts and cash payments related to investments in life settlement contracts (both those reported at fair value and under the investment method) should not be required to be reported as investing activities in the statement of cash flows. Rather, those cash receipts and cash payments should be classified pursuant to Statement 95 (as amended) based on the nature and purpose for which the related financial assets and financial liabilities were acquired or incurred. (This decision will be reflected in the forthcoming FSP on life settlement contracts, not in the fair value option Exposure Draft.)

3. Both written loan commitments that would otherwise not be recognized at inception under existing GAAP and financial liabilities for demand deposit accounts should be excluded from the scope of the fair value option election in phase 1 of the project. Rather, those items should be included for consideration in phase 2 of the project.

4. Entities should be required to disclose how interest and dividends are reported and measured with respect to financial assets and financial liabilities for which the fair value option has been elected.

5. For only those financial assets and financial liabilities that are reported at fair value pursuant to the fair value option election, fair value carrying amounts should not be aggregated with non-fair-value carrying amounts of similar financial assets or similar financial liabilities in the balance sheet.

6. The following disclosures should be required to compensate for the lack of comparability created by the fair value option election:
   1. For an entity that is reporting any financial liabilities at fair value due to electing the fair value option, the qualitative reasons for significant changes in those liabilities’ fair values included in current period earnings.

   2. Where gains and losses are reported in the income statement arising from the changes in the fair value of financial assets and financial liabilities for which the fair value option has been elected. This requirement for quantitative information by line item would apply for each period for which an income statement is presented.

   3. The difference between the carrying amount of any financial liabilities reported at fair value due to election of the fair value option and the aggregate principal amount the entity would be contractually required to pay at maturity to the holders of the obligations (or through the maturity date for any debts whose principal amounts are payable in installments).

7. The following disclosures should not be required by the Exposure Draft:
   1. Additional disclosures with respect to the amount of the fair value changes that are unrealized at the reporting date

   2. A roll-forward presentation of the debt balances from period to period that would incorporate the effect of fair value changes and currency changes

   3. For entities that have elected the fair value option for its liabilities, circumstances that have contributed to the deterioration of the reporting entity’s creditworthiness but have not yet caused loss recognition in the financial statements.

8. For entities that elect the fair value option for some of its current available-for-sale securities in conjunction with the initial adoption of the fair value option Statement, the amount of the effect of that reclassification into the trading category should be disclosed and reported consistent with the transition provisions of the fair value option Statement (and not under Statement 115’s reporting provisions for transfers between categories).

9. Adoption of the Statement should be required as of the beginning of each reporting entity’s first fiscal year that begins after December 15, 2006, with earlier adoption permitted as of the beginning of an entity’s earlier fiscal year that begins after issuance of the Statement (provided the entity has not yet issued financial statements for any interim period of that fiscal year).

10. Retrospective application of the Statement should not be required or permitted.

11. The impact of the initial adoption of the Statement should be accounted for as a cumulative-effect adjustment for retained earnings.

12. The comment period for the fair value option phase 1 Exposure Draft should be 75 days.

The Board directed the staff to prepare a draft of the Exposure Draft for vote by written ballot for phase 1 of this project.

FUTURE OPEN MEETINGS

The following is a list of open meetings tentatively scheduled through February. 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, December 28, 2005—No FASB Board Meeting or Education Session scheduled
Wednesday, January 4, 2006—FASB Board Meeting
Wednesday, January 4, 2006—FASB Education Session
Wednesday, January 11, 2006—FASB Board Meeting
Wednesday, January 11, 2006—FASB Education Session
Wednesday, January 18, 2006—FASB Board Meeting
Wednesday, January 18, 2006—FASB Education Session
Wednesday, January 25, 2006—FASB Board Meeting
Wednesday, January 25, 2006—FASB Education Session
Wednesday, February 1, 2006—FASB Board Meeting
Wednesday, February 1, 2006—FASB Education Session
Wednesday, February 8, 2006—FASB Board Meeting
Wednesday, February 8, 2006—FASB Education Session
Wednesday, February 15, 2006—FASB Board Meeting
Wednesday, February 15, 2006—FASB Education Session
Wednesday, February 22, 2006—FASB Board Meeting
Wednesday, February 22, 2006—FASB Education Session