Action Alert No. 05-38
September 22, 2005

NOTICE OF MEETINGS

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

Wednesday, September 28, 2005, 10:00 a.m.

The Board meeting will begin at 10:00 a.m. instead of 9:00 a.m.

  1. FASB ratification of EITF consensuses. The Board will consider the ratification of the consensuses reached at the September 15, 2005 EITF meeting. (See discussion under EITF ACTIONS). (Estimated 15-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 SESSION

Wednesday, September 28, 2005, 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 5, 2005 Board meeting. Those topics will be posted to the FASB calendar four days prior to the education session.

OPEN MEETING OF THE FINANCIAL ACCOUNTING STANDARDS BOARD'S USER ADVISORY COUNCIL

Thursday, September 29, 2005, 9:00 a.m.

The University Club
1 West 54th Street
New York, New York

The Board and the User Advisory Council will meet to discuss the following:

  1. Pension accounting issues

  2. Business combinations

  3. Derivatives disclosures

  4. Liabilities and equity.

The User Advisory Council will hear reports from the chairman of the FASB and from a representative of the Office of the Chief Accountant of the SEC. A brief discussion also is planned on financial reporting initiatives concerning smaller public companies and private companies. The agenda is subject to change.

Closed to Public Observation

The User Advisory Council will hold a closed session with the Board to discuss administrative matters. The public portion of the meeting is expected to end at approximately 1:00 p.m.

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 14, 2005 Board Meeting

Insurance risk transfer. The Board agreed to adopt the draft working definitions of insurance terms and related supplemental guidance based on those in Appendixes A and B of IFRS 4, Insurance Contracts. The IFRS guidance will be modified to reflect existing U.S. GAAP. The Board directed the staff to maintain a narrow scope for the project, focusing on finite risk insurance and reinsurance contracts. Accordingly, the next phase of the project will examine the potential for bifurcating finite risk contracts into risk and nonrisk components.

Fair value measurement. The Board clarified aspects of the guidance to be included in a final Statement on fair value measurements. Specifically:

  1. The Board clarified that a restricted security refers to a security with legal or contractual restrictions that limit or prohibit sale for a specified period. The fair value of a restricted security, as defined, should be estimated based on the quoted price for an unrestricted security of the issuer, adjusted as appropriate for the effect of the restriction.

  2. The Board decided to amend FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, to remove the definition of restricted stock in footnote 2 of paragraph 3(a). Therefore, the fair value of restricted stock included in the scope of that Statement (stock with restrictions that terminate within one year) should be estimated in accordance with the final Statement.

  3. The Board clarified that fair value estimates within Level 5 should be separately disclosed. In addition, the requirement to disclose unrealized gains or losses applies only if those gains or losses relate to fair value estimates within Level 5.

The Board discussed effective date, transition, and timing of the final Statement. The Board decided:

  1. The final Statement will be effective for financial statements issued for fiscal years beginning after December 15, 2006, except as follows. The fair value disclosures required by the final Statement will be effective for financial statements issued for fiscal years ending after December 15, 2006. Earlier application is encouraged.

  2. The provisions of the final Statement should be initially applied prospectively, except as follows. For large positions of unrestricted securities with quoted prices in active markets (blocks), the provisions of the final Statement should be initially applied retrospectively to all prior periods (a "full" retrospective transition approach). The cumulative effect of the change in accounting principle on periods prior to those presented should be reflected in the carrying amounts of assets and liabilities as of the beginning of the first period presented. An offsetting adjustment should be made to the opening balance of retained earnings for that period. The disclosures for a change in accounting principle in FASB Statement No. 154, Accounting Changes and Error Corrections, are required.

The Board decided not to reexpose the Exposure Draft of the proposed FASB Statement, Fair Value Measurements. The Board plans to issue the final Statement by year-end 2005. Before finalizing the Statement, the Board plans to post a working draft of the standards section of the final Statement to the FASB website as a replacement of the "summary of decisions reached" section in the fair value project update. The Board believes that a working draft will more effectively communicate the decisions reached. The Board does not plan to formally seek comments on the working draft. However, the Board will consider comments on the working draft otherwise provided by interested parties.

Measuring fair value of certain derivative contracts under Statement 133. The Board discussed effective date and transition of a proposed FSP on measuring fair value of certain derivative contracts under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.

The Board decided that the proposed FSP should be effective for financial statements issued for fiscal years beginning after December 15, 2006. Earlier application is encouraged if the final Statement on fair value measurements is initially applied before or concurrent with the FSP.

The Board also decided that the provisions of the FSP should be initially applied retrospectively (similar to a change in accounting principle). The cumulative effect of the change in accounting principle should be applied to the carrying amounts of the related assets and liabilities as of the beginning of the fiscal year in which the FSP is initially applied. An offsetting adjustment, if any, should be made to the opening balance of retained earnings for that fiscal year. The disclosures for a change in accounting principle in Statement 154 are required.

The Board plans to issue the proposed FSP in the fourth quarter of 2005 with a 30-day comment period.

The Board discussed the need to make a conforming amendment to Statement 133 Implementation Issue B6, "Allocating the Basis of a Hybrid Instrument to the Host Contract and the Embedded Derivative," consistent with its decisions in the FSP. The Board decided to amend Implementation Issue B6 to clarify that for a hybrid instrument with an embedded derivative that would be subject to the FSP if that derivative were freestanding, a dealer profit component should be separately recognized in accordance with the provisions of the FSP, that is, separately recognized in earnings or as a deferred credit (debit), depending on where within the hierarchy the estimate of fair value falls.

The Board also discussed the interaction of the FSP with the FASB Exposure Draft, Accounting for Certain Hybrid Financial Instruments, but did not reach any decisions in that regard. The Board plans to discuss related issues at a future Board meeting.

Other-than-temporary impairment. The Board decided to include in the FSP guidance similar to that provided in EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," regarding the accounting for debt securities subsequent to an other-than-temporary impairment. The Board also decided to add a footnote to clarify that the final FSP will not address when a debt security should be designated as nonaccrual or how to subsequently report income on a nonaccrual debt security. In addition, the Board decided that (1) the FSP would be applied prospectively and (2) the effective date would be reporting periods beginning after December 15, 2005.

Mutual understanding of the key terms of a share-based payment arrangement with an employee. The Board discussed issues related to issuing a proposed FSP on the practical exception to the application of grant date as defined in FASB Statement No. 123 (revised 2004), Share-Based Payment. The Board decided the following:

  1. Practical guidance should be provided related to the concept of mutual understanding, which is one component of the definition of grant date in Statement 123(R).

  2. Assuming all other criteria have been met, a mutual understanding of the key terms and conditions of an award to individual employees should be presumed to exist at the date the award is approved in accordance with the relevant corporate governance requirements (that is, by the Board or management with the relevant authority) if both of the following conditions are met:

    1. The recipient does not have the ability to negotiate the key terms and conditions of the award with the employer.

    2. The key terms of the award are expected to be communicated to the recipients within a relatively short time period* from the date of approval.
      ___________________
      *A relatively short time period is that period an entity could plausibly complete all actions necessary to communicate the awards to the recipients  in accordance with the entity’s customary human resource practices.

  3. A change in the key terms of an approved award that meet the conditions described above should be accounted for as a modification.

  4. The guidance in the FSP should be applied upon initial adoption of Statement 123(R). An entity that adopted Statement 123(R) prior to the issuance of this FSP should apply the guidance in this FSP in the first reporting period beginning after the date the final FSP is posted to the FASB website.

The Board directed the staff to proceed to a draft of a proposed FSP for vote by written ballot. On September 16, 2005, proposed FSP FAS 123(R)-b, "Practical Exception to the Application of Grant Date as Defined in FASB Statement No. 123(R)," was issued. Comments are requested by October 1, 2005.

EITF ACTIONS

September 15, 2005 EITF Meeting

The task force discussed the following issues:

  1. Issue No. 04-13, "Accounting for Purchases and Sales of Inventory with the Same Counterparty." A consensus was reached. The Board will consider the ratification of that consensus at its September 28, 2005 meeting.

  2. Issue No. 05-1, "Accounting for the Conversion of an Instrument That Becomes Convertible upon the Issuer's Exercise of a Call Option." The Task Force asked the FASB staff to research an alternative that would result in either debt conversion accounting or debt extinguishment accounting depending on whether the instrument contains a substantive conversion feature. This Issue will be discussed further at a future meeting.

  3. Issue No. 05-6, "Determining the Amortization Period for Leasehold Improvements Purchased after Lease Inception or Acquired in a Business Combination." The Task Force agreed to make certain changes to clarify that the consensus reached at the June 15–16, 2005 EITF meeting in this Issue does not apply to preexisting leasehold improvements. Therefore, that consensus should not be used to justify the reevaluation of preexisting leasehold improvements for additional renewal periods when new leasehold improvements are placed into service significantly after and are not contemplated at or near the beginning of the lease term. The Board will consider the ratification of these changes at its September 28, 2005 meeting.

  4. Issue No. 05-7, "Accounting for Modifications to Conversion Options Embedded in Debt Securities and Related Issues." A consensus was reached. The Board will consider the ratification of that consensus at its September 28, 2005 meeting.

  5. Issue No. 05-8, "Income Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature." A consensus was reached. The Board will consider the ratification of that consensus at its September 28, 2005 meeting.

SEC Staff Announcement: The SEC staff announced certain revisions to EITF Abstracts, Topic No. D-98, "Classification and Measurement of Redeemable Securities."

FUTURE OPEN MEETINGS

The following is a list of open meetings tentatively scheduled through October. 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 5, 2005—FASB Board Meeting
Wednesday, October 5, 2005—FASB Education Session
Monday, October 10, 2005—Uncertain Tax Positions Roundtable Meeting
Wednesday, October 12, 2005—FASB Board Meeting
Wednesday, October 12, 2005—FASB Education Session
Friday, October 14, 2005—Liaison Meeting with the National Investor Relations Institute
Tuesday, October 18, 2005—FASB Education Session
Wednesday, October 19, 2005—FASB Board Meeting
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