Action Alert No. 05-27
July 7, 2005

NOTICE OF MEETINGS

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

No Board meetings are planned for the week of July 11, 2005. The next scheduled Board meeting is Wednesday, July 20, 2005 and topics for that meeting will be announced in next week’s issue of Action Alert.

OPEN EDUCATION SESSION

Wednesday, July 13, 2005, 1:00 p.m.

The Board will hold an educational, non-decision-making session to discuss topics that are anticipated to be discussed at the July 27, 2005 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.

June 29, 2005 Board Meeting

Fair value measurements. The Board clarified aspects of the definition of fair value and the related guidance for applying that definition included in the FASB Exposure Draft, Fair Value Measurements.

The Board revised the definition of fair value to refer to an estimate of the price that could be received for an asset or paid to settle a liability in a current transaction between marketplace participants in the reference market for the asset or liability. In its earlier discussions, the Board clarified that the reference market is the most advantageous market for the asset or liability considered from the perspective of the reporting entity. The Board further clarified that at initial recognition, the transaction price might not provide presumptive evidence of the fair value of an asset or liability if the market in which the transaction occurs is not the most advantageous market for the asset or liability considered from the perspective of the reporting entity.

The Board expanded the levels within the fair value hierarchy to segregate quoted prices for identical assets or liabilities in active markets (Level 1), quoted prices for similar assets or liabilities (Level 2), direct market inputs other than quoted prices (Level 3), indirect market inputs (Level 4), and entity inputs (Level 5). The five-level hierarchy should be used to estimate fair value. A three-level hierarchy should be used for related disclosures to segregate those estimates that fall within Level 1, Levels 2 and 3, and Levels 4 and 5.

Measuring fair value of certain derivative contracts under Statement 133. The Board reconsidered the guidance in EITF Issue No. 02-3, "Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities," in the context of the guidance developed to date in the fair value measurement project.

The Board decided that at initial recognition and in all subsequent periods, the fair value of a derivative instrument that arises in an Issue 02-3 transaction should reflect the entity’s best estimate of the price (layoff amount) in the most advantageous market for the derivative instrument. A difference between the transaction price and the initial fair value estimate should be recognized in earnings when the estimate is derived principally from market-based inputs, whether such inputs are directly observable or otherwise derived. Until that time, the difference should be deferred (for example, as a deferred credit). At initial recognition, an entity should disclose (1) the fair value estimate, (2) the data used to derive the estimate, for example, whether the estimate is based on a transaction price or is estimated using a model, indicating whether the model inputs are directly observable or otherwise derived, and (3) unrealized gains (or losses) recognized in earnings. In all periods, an entity should disclose deferred amounts (in the period and cumulative) and a description of where those amounts are reported in the statement of financial position.

Financial instruments: liabilities and equity. The Board made the following decisions related to multiple-component instruments:

  1. Multiple-component instruments are financial instruments with two or more equity or nonequity components. Equity and nonequity components can be identified under the classification decisions reached in Milestone 1 of this project based on (a) the existence or nonexistence of settlement requirements, (b) the characteristics of the settlement requirements, and (c) the counterparty’s payoff.

  2. The following multiple-component instruments will be considered for possible separation:

    1. Instruments that have both equity and nonequity components involving (1) two or more settlement alternatives with differing counterparty payoffs at the settlement date or (2) at least one settlement alternative and at least one perpetual alternative with differing counterparty payoffs at the settlement or outcome date. Examples are debt convertible into a fixed number of shares and stock puttable at a fixed price.

    2. Instruments that have more than one nonequity component involving two or more settlement alternatives with differing counterparty payoffs at the settlement date. An example is a prepaid written put option.

    3. Instruments that have one settlement requirement with a counterparty payoff at settlement that is based on more than one market factor (dual-indexed at settlement). An example is a written call option indexed to both shares and gold.

  3. Instruments that do not meet the separation criteria would be classified in their entirety as equity, liabilities, or assets under the classification decisions reached in the first milestone. For example, instruments with two equity components (perpetual shares convertible into a fixed number of common shares) would be classified as equity. Other instruments would be classified as liabilities or assets.

Financial instruments: derivative implementation. The Board considered the comments received from constituents and approved the following guidance for final issuance: (1) Statement 133 Implementation Issue No. B38, "Evaluation of Net Settlement with Respect to the Settlement of a Debt Instrument through Exercise of an Embedded Put Option or Call Option," (2) Statement 133 Implementation Issue No. B39, "Application of Paragraph 13(b) to Call Options That Are Exercisable Only by the Debtor," and (3) technical revisions to Statement 133 Implementation Issue No. B16, "Calls and Puts in Debt Instruments." The final guidance was posted to the FASB website on June 30, 2005.

Other-than-temporary impairment. The Board decided not to provide additional guidance on the meaning of other-than-temporary impairment, but directed the staff to issue proposed FSP EITF 03-1-a, "Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1," as final. The final FSP will supersede EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," and EITF Topic No. D-44, "Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value." The final FSP (retitled FSP FAS 115-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments") will replace the guidance set forth in paragraphs 10–18 of Issue 03-1 with references to existing other-than-temporary impairment guidance, such as FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, SEC Staff Accounting Bulletin No. 59, Accounting for Noncurrent Marketable Equity Securities, and APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock. FSP FAS 115-1 will codify the guidance set forth in EITF Topic D-44 and clarify that an investor should recognize an impairment loss no later than when the impairment is deemed other than temporary, even if a decision to sell has not been made.

The Board decided that FSP FAS 115-1 would be effective for other-than-temporary impairment analysis conducted in periods beginning after September 15, 2005. The Board directed the staff to proceed to a draft of a final FSP for vote by written ballot.

Accounting for rental costs incurred during the construction period. The Board decided to add a project to its agenda to address the accounting for rental costs incurred during the construction period. Additionally, the Board decided that:

  1. A lessee may not capitalize rental costs associated with either ground or building operating leases that are incurred during the construction period.

  2. A lessee should cease capitalizing rental costs as of the effective date of the guidance for operating lease arrangements entered into prior to the effective date of the guidance. Retrospective application is permitted but not required.

  3. The guidance should be applied to the first reporting period beginning after September 15, 2005.

The Board directed the staff to proceed to a draft of a proposed FSP for vote by written ballot, with a comment period of 30 days.

FASB ratification of EITF consensuses. The Board considered and ratified the consensuses on the following four Issues reached at the June 15–16, 2005 EITF meeting:

  1. Issue No. 04-5, "Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights"

  2. Issue No. 05-2, "The Meaning of 'Conventional Convertible Debt Instrument' in EITF Issue No. 00-19, 'Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock'"

  3. Issue No. 05-5, "Accounting for Early Retirement or Postemployment Programs with Specific Features (Such As Terms Specified in Altersteilzeit Early Retirement Arrangements)"

  4. Issue No. 05-6, "Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business Combination."

The Board also considered and ratified the modifications to the existing consensuses in the following four EITF Issues:

  1. Issue No. 96-16, "Investor’s Accounting for an Investee When the Investor Has a Majority of the Voting Interest but the Minority Shareholder or Shareholders Have Certain Approval or Veto Rights"

  2. Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)"

  3. Issue No. 04-6, "Accounting for Stripping Costs Incurred during Production in the Mining Industry"

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

Additionally, the Board agreed to finalize proposed FSP SOP 78-9-a, "Interaction of AICPA Statement of Position 78-9 and EITF Issue No. 04-5," and directed the staff to proceed to a draft for vote by written ballot. That FSP will amend the guidance in SOP 78-9, Accounting for Investments in Real Estate Ventures, to conform that guidance to the consensus in Issue 04-5.

FUTURE OPEN MEETINGS

The following is a list of open meetings tentatively scheduled through August. 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, July 20, 2005—FASB Board Meeting
Wednesday, July 20, 2005—FASB Education Session
Monday, July 25, 2005—Liaison Meeting with the Edison Electric Institute
Wednesday, July 27, 2005—FASB Board Meeting
Wednesday, July 27, 2005—FASB Education Session
Wednesday, August 3, 2005—FASB Board Meeting
Wednesday, August 3, 2005—FASB Education Session
Friday, August 5, 2005—Liaison Meeting with Financial Managers Society
Wednesday, August 10, 2005—No FASB Board Meeting
Wednesday, August 10, 2005—FASB Education Session
Wednesday, August 17, 2005—FASB Board Meeting
Wednesday, August 17, 2005—FASB Education Session
Wednesday, August 24, 2005—FASB Board Meeting
Wednesday, August 24, 2005—FASB Education Session
Wednesday, August 31, 2005—FASB Board Meeting
Wednesday, August 31, 2005—FASB Education Session