Action Alert No. 05-05
February 3, 2005

Wednesday, February 9, 2005, 9:00 a.m.

1. FASB Staff Positions (FSPs). The Board will discuss the following proposed and potential FSPs:
   1. FSP EITF 85-24-a. The Board will discuss issues raised in comment letters received on proposed FSP EITF 85-24-a, "Application of EITF Issue No. 85-24, 'Distribution Fees by Distributors of Mutual Funds That Do Not Have a Front-End Sales Charge,' When Cash for the Right to Future Distribution Fees for Shares Previously Sold Is Received from Third Parties." (Estimated 60-minute discussion.)

   2. Financial instruments: stable value investment funds. The Board will discuss a potential FSP on the accounting for certain fully benefit-responsive investment contracts held by investment companies. (Estimated 60-minute discussion.)

   3. Accounting for the loss of significant influence in an investee. The Board will consider whether to direct the staff to post to the website a proposed FSP that would provide guidance on the accounting by an investor for its proportionate share of other comprehensive income of an investee, accounted for under the equity method, upon a loss of significant influence. Additionally, the Board will discuss transitions provisions for the proposed FSP. (Estimated 30-minute discussion.)

2. 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 SESSIONS

Tuesday, February 8, 2005, 9:00 a.m.
Wednesday, February 9, 2005, immediately following the Board meeting

The Board will hold educational, non-decision-making sessions to discuss topics that are anticipated to be discussed at the February 16, 2005 Board meeting. Those topics will be posted to the FASB calendar four days prior to the education sessions.

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.

January 26, 2005 Board Meeting

Combinations of not-for-profit (NFP) organizations. The Board continued to develop guidance for combinations of not-for-profit organizations by discussing (1) partially owned subsidiaries and noncontrolling interests and (2) goodwill accounting issues.

Partially Owned Subsidiaries

The Board decided that its decisions on the accounting for the initial consolidation of a partially owned subsidiary that were developed in its project on business combinations should also apply to NFP organizations, with certain modifications. That is:

1. If an NFP organization (the NFP parent) acquires less than 100 percent of a for-profit business or NFP organization in a reciprocal transaction:
   1. In the consolidated financial statements of the NFP parent, the partially owned subsidiary would initially be consolidated at its full fair value. If the NFP parent owned a noncontrolling equity investment in the subsidiary owned immediately before the combination transaction, that investment would be remeasured to its fair value at the acquisition date and the change in fair value recognized in the statement of activities.

   2. The amount of any acquired goodwill allocated to the controlling ownership interest would be measured as the difference between the fair value of the controlling ownership interest and the controlling interest's share in the fair value of the identifiable net assets acquired. The fair value of the controlling ownership interest would be defined as the acquisition date fair values of (1) the consideration exchanged by the acquirer and (2) the acquiring entity's previous noncontrolling investment in the acquired entity.

2. If the NFP parent acquires less than 100 percent of a for-profit business or NFP organization in a nonreciprocal (or partially nonreciprocal) transaction:
   1. In the consolidated financial statements of the NFP parent, the partially owned subsidiary would initially be consolidated at the fair value of the identifiable net assets acquired (that is, those assets and liabilities that meet the recognition requirements of the proposed Statement) plus the amount of goodwill purchased by the NFP parent. If the NFP parent owned a noncontrolling equity investment in the subsidiary owned immediately before the combination transaction, that investment would be remeasured to an amount equal to the interests' ownership share of the acquisition date fair value of the net identifiable assets acquired with a gain or loss recognized in the statement of activities.

   2. Any purchased goodwill would be allocated to the controlling interest, except in those cases in which the fair value of the liabilities assumed in the combination exceeds the fair value of the recognized assets acquired (a net deficit combination). The goodwill recognized in a net deficit combination would be allocated between the controlling and the noncontrolling interests based on their ownership percentage.

The Board decided to include NFP organizations in the scope of the proposed Statement that will replace Accounting Research Bulletin No. 51, Consolidated Financial Statements. However, the application of the noncontrolling interest provisions of that proposed Statement by NFP organizations will be deferred until the Board finalizes supplemental guidance clarifying its application by NFP organizations. The Board expects to issue an Exposure Draft of that supplemental guidance at the same time that it issues an Exposure Draft on the accounting for combinations by NFP organizations. The Board reached the following decisions on the nature and extent of that supplemental guidance:

1. Consolidated financial statements of an NFP parent would present the donor-imposed restrictions on a partially owned subsidiary's net assets in accordance with FASB Statements No. 117, Financial Statements of Not-for-Profit Organizations, and No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations. Noncontrolling ownership interests in consolidated subsidiaries would be presented as a separate component of the appropriate class of equity or net assets in the consolidated financial statements.

2. Losses that exceed the noncontrolling ownership interests in a subsidiary's unrestricted equity or net assets, as defined by Statement 117, would be attributed to those interests, reducing the carrying amount of those interests below zero.

3. A change in the ownership interest in a consolidated subsidiary that does not result in deconsolidation is an equity transaction that would be reported as a separate line item in the consolidated statement of activities. After such a change in ownership interests, goodwill would be reallocated between controlling and noncontrolling interests based on relative carrying amounts.

4. If there is a change in the ownership interest in a consolidated subsidiary that results in deconsolidation of that subsidiary, but the NFP parent retains an ownership interest in that subsidiary, the retained interest would be remeasured to fair value upon deconsolidation, except as follows:
   1. If the subsidiary is a not-for-profit organization, any retained ownership interests would be remeasured to an amount that equals the sum of (1) the interests' ownership share in the deconsolidation date fair value of the subsidiary's net identifiable, recognizable assets and (2) the carrying amount of any goodwill allocated to the retained interests in accordance with the guidance for allocating goodwill upon the disposal of a portion of a reporting unit.

The Board also agreed to require the following disclosures:

1. A schedule of changes in consolidated net assets attributable to the controlling interest and noncontrolling ownership interest in subsidiaries, either as a separate financial statement or in the notes to the consolidated financial statements. The schedule would reconcile beginning and ending balances of the controlling interest and noncontrolling ownership interest in subsidiaries for each class of net assets for which a noncontrolling ownership interest exists at any time during the reporting period. At a minimum, such a schedule would include:
   1. A performance indicator, if the organization is required to report a performance indicator by GAAP

   2. Discontinued operations

   3. Extraordinary items

   4. A cumulative effect of a change in accounting principle

   5. Changes in ownership interests in a subsidiary, including investments by and distributions to noncontrolling interests acting in their capacity as owners

   6. All other changes in unrestricted net assets for the period.

2. Upon loss of control of a subsidiary, the NFP parent would disclose the amount of any gain or loss recognized on deconsolidation and the caption in the statement of activities that includes that gain or loss. If an entity loses control of a subsidiary but retains a noncontrolling equity investment in that entity, the NFP parent also would separately disclose the amount of any gain or loss recognized at the date of deconsolidation.

Goodwill Accounting Issues

Clarification of the reporting unit support criterion—The Board previously decided to provide NFP organizations an exception to the fair-value-based impairment test in FASB Statement No. 142, Goodwill and Other Intangible Assets, for any goodwill assigned to a reporting unit that is not supported primarily by fees or other charges to third parties for goods and services. The Board decided that such goodwill would be tested for impairment using a trigger-based write-off method. In response to feedback received from working group members, the Board agreed to clarify the scope of this exception by revising the wording of the criterion. Accordingly, the two-path goodwill impairment testing model would be applied as follows:

1. The fair-value-based impairment method in Statement 142 applies to goodwill assigned to a reporting unit that is not supported primarily by contributions and returns on investments.

2. The trigger-based impairment method applies to goodwill assigned to a reporting unit that is supported primarily by contributions and returns on investments.

The Board clarified that an NFP organization should consider all relevant qualitative and quantitative factors in determining whether a reporting unit is primarily supported by contributions and returns on investment. In addition, all forms of contributed support, including contributions that are not recognized in the financial statements (such as contributed services), should be considered in the application of the support criterion.

Change in the nature of a reporting unit's primary support—The Board decided that an NFP organization should account for changes in the nature of a reporting unit's primary support as follows:

1. If a reporting unit becomes supported primarily by contributions and returns on investments, the NFP organization would consider whether the change in the nature of support indicates that the goodwill has been significantly impaired, based on the facts and circumstances existing at the date of change. If, in the organization's judgment, the goodwill has been significantly impaired, it would be written off at that date. Otherwise, as of the date of the change, the organization would identify impairment events for the prospective application of the trigger-based write-off impairment test.

2. If the nature of a reporting unit's support changes such that it is no longer primarily supported by contributions and returns on investments, the goodwill assigned to that reporting unit would be tested for impairment using the Statement 142-type test as of the date of change.

3. Determining the date of change—An NFP parent would evaluate the continued appropriateness of the goodwill impairment testing method each reporting period. If the reporting unit experienced a change in the nature of its support as a result of an identifiable event, the date of the event is the date the method of impairment testing would be changed. If the change in support happened gradually over time rather than upon an identifiable event, then the method of impairment testing would be changed as of the date the change is determined to be of a continuing nature. In evaluating whether the source of primary support has changed, all relevant facts and circumstances should be considered, including (but not limited to):
   1. Duration and amount of decline or increase in percentage of contribution and investment return support

   2. Underlying reasons for the change in support

   3. Management's plans, reactions to the change, and expectations for the future operation of the reporting unit.

Disclosures—The Board decided that for each period for which a statement of financial position is presented, NFP organizations should disclose separately the changes in carrying amounts of goodwill for goodwill subject to the Statement 142-type fair value impairment test and for goodwill subject to the trigger-based write-off impairment test. The disclosure of changes in the carrying amount of goodwill by the impairment testing method would include disclosure of any amounts that changed from one method to the other as a result of changes in the nature of the reporting units to which the goodwill is assigned. Goodwill impairment loss disclosures required by paragraph 47 of Statement 142 made by an NFP organization also would include which method of impairment testing was used to determine the loss.

Transition—The Board decided that for previously acquired goodwill assigned to an NFP organization's reporting units that are supported primarily by contributions and investment returns, there should be no transitional impairment test as of the beginning of the fiscal year in which the new standard is initially applied in its entirety. The impairment events that would trigger the write-off of goodwill after the adoption of the final Statement would be identified based on the facts and circumstances existing at the initial application date, with consideration given to factors that led to the original recognition of the goodwill.

Assigning assets and liabilities to reporting units—The Board clarified that the criteria in paragraph 32 of Statement 142 for assigning assets and liabilities to reporting units is not intended to require an NFP organization to determine the fair value of a reporting unit if it is supported primarily by contributions and returns on investments.

Assigning goodwill to reporting units—The Board agreed to clarify that any guidance in paragraphs 34 and 35 of Statement 142 that requires the determination of the fair value of a reporting unit would not apply to an NFP organization's assignment of goodwill to a reporting unit that is primarily supported by contributions and returns on investments.

Disposal of a part of a reporting unit—The Board decided that for the disposal of a part (that is a combined set) of a reporting unit that is supported primarily by contributions and returns on investments, the carrying amount of goodwill should be allocated based on specific identification of goodwill with the parts disposed of and retained, if possible. If (1) specific identification is not possible and (2) either the disposed of or retained parts of the reporting unit, or both, are primarily contribution supported on the disposal date, then the carrying amount of goodwill should be allocated to the part of the reporting unit disposed of and the part retained based on the relative carrying amounts of the identifiable recognizable net assets of each part, instead of using the relative fair value method described in paragraph 39 of Statement 142.

If the retained portion of the reporting unit is supported primarily by contributions and returns on investments and the partial disposal had been identified as an impairment event when the goodwill was initially acquired, then the remaining goodwill should be written off when the disposal occurs. However, if a previously identified triggering event does not occur upon disposal, the NFP organization should review and update, based on current facts and circumstances, the events identified that would indicate significant impairment of the retained goodwill. There should be no other impairment test on the retained goodwill immediately after the disposal for this type of reporting unit.

Reorganization of reporting structure—The Board decided that when all or part of a reporting unit that is supported primarily by contributions and returns on investments is to be integrated into one or more other reporting units, at least one of which is supported primarily by contributions and returns on investments, the goodwill should be reassigned based on specific identification, if possible. Otherwise, the goodwill reassignment in the circumstances described should be based on the relative carrying amounts of the identifiable recognizable net assets reassigned.

Interpretation of Statement 143. The Board decided to not add a project to its agenda to reconsider the guidance in FASB Statement No. 143, Accounting for Asset Retirement Obligations. However, the Board decided to provide additional guidance in the final Interpretation for evaluating whether sufficient information is available to make a reasonable estimate of the fair value of an asset retirement obligation as it relates to the timing of settlement. The Board directed the staff to proceed to a revised draft of a final Interpretation for vote by written ballot.

FUTURE OPEN MEETINGS

The following is a list of open meetings tentatively scheduled through March. 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, February 16, 2005—FASB Board Meeting
Wednesday, February 16, 2005—FASB Education Session
Wednesday, February 23, 2005—FASB Board Meeting
Wednesday, February 23, 2005—FASB Education Session
Wednesday, March 2, 2005—FASB Board Meeting
Wednesday, March 2, 2005—FASB Education Session
Tuesday, March 8, 2005—User Advisory Council Meeting, New York City
Wednesday, March 9, 2005—FASB Board Meeting
Wednesday, March 9, 2005—FASB Education Session
Wednesday, March 16, 2005—FASB Board Meeting
Wednesday, March 16, 2005—FASB Education Session
Wednesday, March 16, 2005—Emerging Issues Task Force Meeting
Thursday, March 17, 2005—Emerging Issues Task Force Meeting
Tuesday, March 22, 2005—Financial Accounting Standards Advisory Council
Wednesday, March 23, 2005—FASB Board Meeting
Wednesday, March 23, 2005—FASB Education Session
Wednesday, March 30, 2005—FASB Board Meeting
Wednesday, March 30, 2005—FASB Education Session