Action Alert No. 06-14
April 6, 2006

NOTICE OF MEETINGS

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

No Board meetings are planned for the week of April 10, 2006. The next scheduled Board meeting is Wednesday, April 19, 2006, and topics for that Board meeting will be announced in next week's issue of Action Alert.

OPEN EDUCATION SESSION

Thursday, April 13, 2006, 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.

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

Tuesday, April 11, 2006, 9:00 a.m.

The Helmsley Hotel
212 East 42nd Street
New York, New York

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

  1. Conceptual framework issues

  2. Fair value measurement issues.

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. 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, Interpretation, or FSP.

March 28, 2006 Board Meeting

Business combinations. The Board affirmed that the following definitions, assertions, presumptions, and principles underpinning the FASB Exposure Draft, Business Combinations, provide an appropriate basis for a final Statement on business combinations:

Assertions and Definitions

  1. A business combination is a transaction or other event in which an acquirer obtains control of one or more businesses.

  2. An acquirer can be identified in every business combination.

  3. The business combination acquisition date is the date the acquirer obtains control of the acquiree.

  4. A business combination is accounted for by applying the acquisition method.

  5. By obtaining control of an acquiree, an acquirer becomes responsible and accountable for all of the acquiree’s assets, liabilities, and activities, regardless of the percentage of its ownership in the acquiree.

Main Principles for Applying the Acquisition Method

Recognition Principle:

In a business combination, the acquirer recognizes all of the assets acquired and all of the liabilities assumed.

Measurement Principle:

In a business combination, the acquirer measures each recognized asset acquired and each liability assumed at its acquisition-date fair value.

Disclosure Principle:

Users of the acquirer’s financial statements should be able to evaluate the nature and financial effect of business combinations recognized by the acquirer.

In relation to the principles, the Board agreed that if it decides to make an exception to one of those principles, the final Statement should label the exception clearly and provide the Board’s basis for allowing such an exception.

The Board also redeliberated and affirmed the following proposals in its Exposure Drafts, Business Combinations, and Consolidated Financial Statements, Including Accounting and Reporting of Noncontrolling Interests in Subsidiaries:

  1. In a partial or step acquisition, the acquirer should:

    1. Measure and recognize the acquiree’s identifiable assets and liabilities at 100 percent of their acquisition-date fair values, which is consistent with the recognition and fair value measurement principles.

    2. Recognize all of the acquiree’s goodwill, not just the acquirer’s share, which is consistent with the recognition principle. Goodwill should be measured as the difference between the acquisition-date fair value of the acquiree and the acquisition-date fair value of the acquiree’s assets acquired and liabilities assumed. (Goodwill is an exception to the fair value measurement principle because it is measured as a residual.)

  2. In a step acquisition, any previously held noncontrolling equity interests should be remeasured to fair value and the resulting adjustment should be recognized in net income. Consistent with the accounting for a step acquisition, if a parent loses control of a subsidiary but retains a noncontrolling equity investment in the former subsidiary, the retained noncontrolling equity investment should be remeasured to fair value and the resulting adjustment should be recognized in net income. In addition, the amount of any remeasurement gain or loss and the line item in the income statement where the gain or loss is recognized should be disclosed.

  3. In rare circumstances, a business combination is not an exchange of equal values. The acquirer should account for a business combination that is not an exchange of equal values as follows:

    1. If the acquisition-date fair value of the acquirer’s interest in the acquiree exceeds the acquisition-date fair value of the consideration transferred for that interest (referred to as a bargain purchase), the acquirer should reduce to zero any goodwill related to that acquisition and then recognize any remaining excess as a gain on the acquisition date. Therefore, the only time an acquirer would recognize a gain would be if the acquisition-date fair value of the net identifiable assets exceeds the acquisition-date fair value of the consideration transferred. In addition, the amount of the gain and the reasons why the acquirer was able to achieve a gain should be disclosed.

    2. If the acquisition-date fair value of the acquirer’s interest in the acquiree is less than the acquisition-date fair value of the consideration transferred for that interest (referred to as an overpayment), the acquirer would not recognize an expense on the acquisition date. Therefore, any overpayment would be subsumed in goodwill and subsequently tested for impairment.

      Business combinations that are not exchanges of equal values are exceptions to the recognition principle.

  4. Noncontrolling interests in subsidiaries are part of the equity of the consolidated group. Therefore:

    1. Noncontrolling interests in subsidiaries should be presented in the consolidated balance sheet within equity separate from the parent shareholders’ equity.

    2. Any acquisitions or dispositions of noncontrolling interests that do not result in a change of control should be accounted for as equity transactions.

    3. The effect on the equity attributable to the parent shareholders of any acquisitions or dispositions of noncontrolling interests that do not result in a change of control should be presented in the consolidated statement of changes in equity. However, to give those transactions additional prominence, any acquisitions or dispositions of noncontrolling interests that do not result in a change of control also should be disclosed in a separate schedule in the notes to the consolidated financial statements.

FASB ratification of EITF consensuses and tentative conclusions. The Board considered and ratified the tentative conclusions on the following issues reached at the March 16, 2006 EITF meeting. The Board also approved the exposure of a draft abstract for each of the issues for a 30-day public comment period. The draft abstracts are expected to be posted to the FASB website after April 4, 2006.

  1. Issue No. 05-1, "Accounting for the Conversion of an Instrument That Became Convertible upon the Issuer’s Exercise of a Call Option" (including related modifications to Issue No. 03-7, "Accounting for the Settlement of the Equity-Settled Portion of a Convertible Debt Instrument That Permits or Requires the Conversion Spread to Be Settled in Stock (Instrument C of Issue No. 90-19)")

  2. Issue No. 06-2, "Accounting for Sabbatical Leave and Other Similar Benefits Pursuant to FASB Statement No. 43"

  3. Issue No. 06-3, "How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation)."

The Board also considered and ratified the modification to the existing consensus in Issue No. 05-7, "Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues." The modification is effective as of March 28, 2006.

FASB DOCUMENT AVAILABLE

FASB Exposure Draft, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, was issued on March 31, 2006, and is available on the FASB website. Comments are requested by May 31, 2006.

FUTURE OPEN MEETINGS

The following is a list of open meetings tentatively scheduled through May. 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, April 19, 2006—FASB Board Meeting
Wednesday, April 19, 2006—FASB Education Session
Thursday, April 27, 2006—FASB/IASB Joint Board Meeting, London
Friday, April 28, 2006—FASB/IASB Joint Board Meeting, London
Wednesday, May 3, 2006—FASB Board Meeting
Wednesday, May 3, 2006—FASB Education Session
Tuesday, May 9, 2006—Liaison Meeting with Healthcare Financial Management Association
Wednesday, May 10, 2006—FASB Board Meeting
Wednesday, May 10, 2006—FASB Education Session
Wednesday, May 17, 2006—No FASB Board Meeting
Wednesday, May 17, 2006—FASB Education Session
Wednesday, May 24, 2006—FASB Board Meeting
Wednesday, May 24, 2006—FASB Education Session
Thursday, May 25, 2006—Liaison Meeting with American Accounting Association
Wednesday, May 31, 2006—FASB Board Meeting
Wednesday, May 31, 2006—FASB Education Session