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Action Alert No. 05-41
October 13, 2005
NOTICE OF MEETINGS
OPEN BOARD MEETING
(Board
meetings are available by audio webcast and telephone.)
Wednesday, October 19, 2005, 9:00 a.m.
- First time IFRS adopters. The Board will consider whether to
add a project to its agenda to provide certain one-time accommodations
to foreign private issuers registered with the SEC who are adopting
International Financial Reporting Standards (IFRS) for the first time.
(Estimated 30-minute discussion.)
- Fair value
option. The Board will discuss whether a debtor electing the
fair value option for its debt liabilities should recognize changes in
fair value resulting from changes in the debtor’s creditworthiness in
earnings. (Estimated 30-minute discussion.)
- Minimum
revenue guarantees. The Board will discuss comments received on
proposed FSP FIN 45-b, "Application of FASB Interpretation No. 45 to
Minimum Revenue Guarantees Granted to a Business or Its Owners," and
consider whether to proceed to issuance of a final FSP. (Estimated
45-minute discussion.)
- Life
settlements. The Board will discuss comments received on
proposed FSP TB 85-4-a, "Accounting for Life Settlement Contracts by
Investors." The Board will focus on the use of fair value as a
measurement attribute and clarifying the scope of the proposed FSP.
(Estimated 45-minute discussion.)
- Transition
for the tax effects of share-based payment awards. The Board
will discuss comments received on proposed FSP FAS 123(R)-c, "Transition
Election Related to Accounting for the Tax Effects of Share-Based
Payment Awards," and consider whether to proceed to issuance of a final
FSP. (Estimated 30-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
Tuesday, October 18, 2005, 8:30 a.m.
The Board will hold an educational, non-decision-making session to
discuss topics that are anticipated to be discussed at the October 24–25,
2005, joint IASB and FASB Board meetings. Those topics will be posted to
the FASB calendar four
days prior to the education session.
OPEN FASB SECURITIZATION INDUSTRY FORUM ON TRANSFERS OF FINANCIAL
ASSETS
Monday, October 17, 2005, 9:00 a.m.
The Board will hold an educational forum on the FASB Exposure Draft,
Accounting for Transfers of Financial Assets, with representatives
of the securitization and capital markets industries.
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.
October 5, 2005 Board Meeting
Financial
instruments: liabilities and equity. The Board continued its
discussion of the "ownership-settlement" approach to accounting for
financial instruments with characteristics of equity, liability, or both.
This meeting focused on how multiple-component instruments might be
separated under that approach, including (1) the separation principles
used to identify components and (2) the initial and subsequent measurement
of those components.
The Board agreed on the following separation principles:
- Instruments would be separated if they embody an obligation and have
both equity and nonequity components involving one of the following:
- Two or more settlement alternatives or possibilities with
differing counterparty payoffs at the settlement date
- At least one settlement alternative or possibility and at least
one perpetual alternative or possibility with differing counterparty
payoffs at the settlement or outcome date
- One settlement requirement with a counterparty payoff at
settlement that is based on more than one market factor.
- Applying those separation principles would produce the following
results:
- Only instruments with both equity and nonequity components would
be separated. Instruments with more than one equity component would be
classified as equity, and those with more than one nonequity component
would be classified as liabilities or assets.
- Instruments that do not embody an obligation would not be
separated; for example, callable stock that is otherwise perpetual
would be classified as equity in its entirety.
- Instruments having interim settlements consisting of instruments
that would be separated (for example, warrants on puttable stock)
would not be separated until the interim settlement occurs. Prior to
any interim settlement, those instruments would be liabilities or
assets in their entirety.
- Upon separation, there would be only two ultimate
components—equity and nonequity; components would not be further
subdivided (unless required by FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities).
- The fair value option for an instrument in its entirety would not
be available in lieu of separation. However, the fair value option
could be applied to the nonequity component. (This requirement is
pending the Board’s finalization of the fair value option and hybrid
instruments projects.)
For instruments that would be separated under the above principles, the
Board agreed:
- To first identify and measure the obligation embodied in the debt
component at its fair value and then allocate the remaining proceeds to
equity.
- That the following measurement requirements would apply under the
obligation-first approach:
- Embedded issuance costs (if any) would be expensed before
separation occurs.
- The debt component that has been identified would be separated and
measured at its fair value. If the debt component contains a stated
settlement date and amount, present value techniques would be used to
determine the component’s fair value. At future meetings, the Board
will further discuss how to apply present value techniques to a debt
component that contains various put and call features (for example,
puttable, callable convertible debt).
- If the debt component’s settlement date or amount is unknown, the
debt component would be subjected to Statement 133 to determine
whether the component is or has an embedded derivative that is
measured at fair value or is accounted for under FASB Interpretation
No. 45, Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others. (See requirements 2(g) and 2(h) of this summary.) If so,
the debt component (or a part of the debt component for embedded
derivatives) would be accounted for under those provisions. If the
component is not within the scope of Statement 133 or Interpretation
45, it would be measured at the amount that would be paid if
settlement occurred at the reporting date in an orderly liquidation.
- If an instrument’s debt outcome occurs (for example, the debt is
put or called early) or the terms of an instrument are modified,
requirement 2(b) or 2(c) would be reapplied. That is, the
extinguishment proceeds (ignoring any issuance costs) would be
reallocated by remeasuring the debt component at the discount rate in
effect at that date for the remaining most distant stated maturity
period. A gain or loss would be recognized through income for the
difference between the old and new carrying amounts. Any remaining
portion of the proceeds would be allocated to equity.
- If an instrument’s equity outcome occurs (for example,
conversion), no gain or loss would be recognized. For example, if
puttable, callable convertible debt were converted into a fixed number
of shares, then the carrying amount of the liability would become
equity with no gain or loss recognized through income.
- However, if the conversion terms are modified resulting in the
equity outcome (for example, changing the terms of an instrument to
induce conversion), extinguishment accounting (requirement 2(d)) would
be applied to compute any gain or loss before the carrying amount is
recorded in equity.
- A debt component that is a guarantee or a derivative in its
entirety would be accounted for under Interpretation 45 or Statement
133.
- Debt components that are separated but that are not derivatives in
their entirety also would be first analyzed under Statement 133 to
determine if there are any embedded derivatives that must be
bifurcated before applying the measurement requirements in 2(b) or
2(c).
- All instruments are reevaluated at each reporting date to
determine if they continue to meet the separation criteria. If they do
not (for example, if a put option expires such that puttable stock
becomes a perpetual instrument), the instruments would be accounted
for as single-component instruments as of the date the change
occurred. No gains or losses would be recognized through income for
such reclassifications unless a debt extinguishment or modification
occurs.
The Board directed the staff to continue development of the
ownership-settlement approach for later comparison to other possible
approaches to accounting for instruments in the scope of this project.
Auction rate securities. The Board considered but decided not to
add a project to its agenda, at this time, to address the financial
statement classification of auction rate securities pursuant to the
definition of cash equivalents under FASB Statement No. 95, Statement
of Cash Flows. The Board recommended that the staff bring this agenda
topic back to the Board once staff resources become available.
Limits of
derivatives held by a QSPE (formerly Interpretation of paragraphs 40(b)
and 40(c) of Statement 140). The Board discussed three key issues
raised in comments from constituents on proposed FSP FAS 140-c,
"Clarification of the Application of Paragraphs 40(b) and 40(c) of FASB
Statement No. 140." The Board considered those issues and reached the
following decisions:
- The term analysis rather than comprehensive analysis
should be used with regard to the requirement that an analysis be
performed of expected limits on the notional amount of derivative
financial instruments that a qualifying special-purpose entity (SPE) may
hold over the life of the qualifying SPE.
- The limits on the notional amount of derivative financial
instruments that may be held by a qualifying SPE will not be impacted by
purchases of beneficial interests by a transferor that were previously
issued to outside parties as long as the transferor holds those
beneficial interests temporarily and reports those beneficial interests
as trading securities in accordance with FASB Statement No. 115,
Accounting for Certain Investments in Debt and Equity Securities.
- The effective date of the guidance in the FSP is the date that the
final FSP is issued. The guidance for unexpected prepayments should be
applied to new SPEs and existing SPEs that receive additional assets or
issue additional beneficial interests (other than those previously
committed to be received or issued as a result of commitments to parties
other than the transferor) after the FSP’s effective date.
- The guidance for a transferor’s purchases of beneficial interests
from outside parties as described in paragraph 10 of the FSP is
effective as of the date that the final FSP is issued for such purchases
and for transferors’ previous purchases of beneficial interests from
outside parties that were consistent with the guidance in the FSP.
The Board directed the staff to proceed to a draft of a final FSP for
vote by written ballot.
Open discussion: FASB technical plan. The Chairman announced
that the Board’s plan for research and technical activities for the six
months ending March 31, 2006, will be posted to the website on October 14,
2005. The approved technical plan
chart that is part of that plan was posted to the website on
October 7, 2005.
EITF MEETING ANNOUNCEMENT
The EITF Agenda Committee canceled the November 9–10, 2005 Emerging
Issues Task Force meeting. The next scheduled meeting of the EITF is
January 6, 2006.
FASB DOCUMENTS AVAILABLE
The following FASB Staff Positions (FSPs) are available on the FASB
website:
Final
FSP FAS 13-1, "Accounting for Rental Costs Incurred during a
Construction Period," was issued on October 6, 2005.
Proposed
FSP SOP 94-6-a, "Nontraditional Loan Products," was posted to the
FASB website on October 13, 2005. Comments are requested by November 11,
2005.
FUTURE OPEN MEETINGS
The following is a list of open meetings tentatively scheduled through
November. 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.
Monday, October 24, 2005—Joint IASB/FASB Meeting
Tuesday, October
25, 2005—Joint IASB/FASB Meeting
Wednesday, October 26, 2005—FASB
Insurance Forum
Thursday, October 27, 2005—Business Combinations
Roundtable Meetings
Wednesday, November 2, 2005—No Board Meeting
Scheduled
Wednesday, November 2, 2005—FASB Education
Session
Monday, November 7, 2005—Liaison Meeting with American Gas
Association
Wednesday, November 9, 2005—No Board Meeting
Scheduled
Wednesday, November 9, 2005—FASB Education
Session
Wednesday, November 9, 2005—Business Combinations Roundtable
Meetings, London
Thursday, November 10, 2005—(Canceled) Emerging
Issues Task Force Meeting
Wednesday, November 16, 2005—FASB Board
Meeting
Wednesday, November 16, 2005—FASB Education Session
Tuesday,
November 22, 2005—FASB Board Meeting
Tuesday, November 22, 2005—FASB
Education Session
Tuesday, November 29, 2005—FASB Board
Meeting
Tuesday, November 29, 2005—FASB Education Session
Wednesday,
November 30, 2005—Small Business Advisory Committee
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