Action Alert No. 06-31
August 3, 2006

NOTICE OF MEETINGS

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

Wednesday, August 9, 2006, 9:00 a.m.

  1. Financial guarantee insurance (estimated 60-minute discussion). The Board will discuss accounting models for financial guarantee insurance contracts. In particular, the Board will discuss claims recognition models.

  2. GAAP hierarchy (estimated 30-minute discussion). The Board will discuss the following issues that have arisen subsequent to its redeliberations of FASB Exposure Draft, The Hierarchy of Generally Accepted Accounting Principles—(a) whether to carry forward the grandfathering provision for Statements of Positions that were included in AICPA Statement on Auditing Standards No. 69, The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles, and (b) where EITF D-Topics should reside in the GAAP hierarchy.

  3. 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, August 9, 2006, 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 August 16, 2006 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, Interpretation, or FSP.

July 26, 2006 Board Meeting

Transfers of financial assets. The Board continued redeliberations of the August 2005 revised Exposure Draft, Accounting for Transfers of Financial Assets, and discussed whether to (1) redeliberate three decisions made during the transfers project, (2) combine discussions and decisions related to the Board’s project on servicer discretion with the transfers project, and (3) redeliberate the limitations on a qualified special-purpose entity’s (QSPE) ability to hold passive derivative financial instruments. The Board decided:

  1. To proceed with redeliberations of the proposed guidance related to rollovers of beneficial interests.

  2. To address issues on the permitted activities of a QSPE jointly by combining discussions and decisions related to its servicer discretion project with the transfers project.

  3. To redeliberate the issues on initial measurement of interests that continue to be held by the transferor and passive derivative financial instruments held by a QSPE that pertain to a transferor’s beneficial interests. This decision reverses the Board’s previous decision made at the June 7, 2006 meeting to delete consideration of those issues.

  4. To defer making a decision on participating interests (paragraph 8(a)) and transferability requirements (paragraph 9(b)) until completion of redeliberations of the permitted activities of a QSPE and the effects of continuing involvements on isolation.

Postretirement benefit obligations, including pensions. The Board continued redeliberations of its March 2006 Exposure Draft, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.

The Board made the following decisions related to the effective date for the recognition provisions:

  1. The effective date for a public entity would be its fiscal year ending after December 15, 2006. For this purpose, the Board decided to use the definition of public entity in FASB Statement No. 123 (revised 2004), Share-based Payment (that is, an entity with equity securities traded in a public market), rather than the public entity definition in proposed FSP FAS 126-a, "Revision to the Definition of a Public Entity to Include an Obligor for Conduit Debt Securities."

  2. The effective date for a nonpublic entity would be the fiscal year ending after June 15, 2007, one year later than proposed in the Exposure Draft.

The Board made the following decisions related to the proposed amendments to the measurement date provisions of FASB Statements No. 87, Employers’ Accounting for Pensions, and No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions:

  1. The Board affirmed the proposal to require measurement of plan assets and benefit obligations as of the date of the employer’s statement of financial position. The Board decided that the effective date of that change for all entities—both public and nonpublic entities—would be fiscal years ending after December 15, 2008.

  2. The Board decided to simplify transition and reduce implementation costs by allowing an alternative transition method to that proposed in the Exposure Draft. Under the alternative, net periodic benefit cost for the period would be determined using the prior measurement date. The periodic benefit cost would be proportionally allocated to the current fiscal year with the remaining portion recognized as an adjustment to retained earnings. For example, a calendar year-end company that historically used a September 30 measurement date would determine net periodic benefit cost for the period from October 1, 2007, through December 31, 2008, using the September 30, 2007, measurement of plan assets and obligations.

Also, the Board decided that the illustrations included in Statements 87 and 106 of continuing relevance will be updated following issuance of a final Statement. The updated illustrations will be published in the form of an FSP.

Measurement of nonfinancial assets and nonfinancial liabilities in business combinations and impairment evaluations. The Board discussed the diversity in practice that has arisen with respect to the use of an entity’s own assumptions, rather than market-participant assumptions, to measure the fair value of nonfinancial assets and nonfinancial liabilities. The Board decided to provide guidance to address that diversity in practice and directed the staff to develop alternative approaches for discussion at a future Board meeting.

Conceptual framework: elements and recognition. The Board continued its discussion of elements and recognition (phase B) of the joint IASB/FASB conceptual framework project. The Board discussed the following proposed working definition of an asset:

An asset is a present economic resource to which an entity has a present right or other privileged access. An asset of an entity has three essential characteristics:

  1. There is an economic resource.

  2. The entity has rights or other privileged access to the economic resource.

  3. The economic resource and the rights or other privileged access both exist at the financial statement date.

The Board directed the staff to continue developing the proposed working definition by clarifying certain aspects of the definition and amplifying text, particularly the meaning of economic resource and the relationship of rights to contractual promises. The Board anticipates discussing the proposed working definition of a liability together with clarifying revisions to the proposed working definition of an asset in September 2006. The IASB discussed similar issues and reached similar conclusions on the proposed working definition of an asset at its meeting in July 2006.

Revenue recognition. The Board previously decided to explore revenue recognition based on the following criterion:

    Revenue should be recognized if the customer must accept performance to date. That is, the contract’s legal remedy for breach is, or is like, specific performance, or in the event of customer cancellation, the customer is obligated to pay damages reflecting performance to date.

The Board discussed the application of that decision to four examples. The Board decided that revenue should be recognized as the reporting entity performs under the contract and creates (produces) an asset for its customer if, in the event of customer breach, the legal remedy is one of the following:

  1. Specific performance, which requires both parties to the contract to fully perform as promised

  2. Partial physical settlement, which requires the customer to pay an amount that reimburses the reporting entity for its costs incurred for production to date plus a profit margin and, in exchange for paying those damages, the customer obtains the work in process

  3. Net cash settlement, which requires the customer to pay damages in an amount sufficient to place the reporting entity in as good a position as it would have been if the contract had been performed.

The Board also decided that if the contract contains explicit customer acceptance provisions that obligate the customer to compensate the reporting entity for performance to date at certain points during the contract term (and there are no other legal remedies available in the event of customer breach), revenue would be recognized only at those specified acceptance points.

Amendments to Statement 123(R): technical corrections. The Board decided to issue a proposed FSP to address certain technical corrections of FASB Statement No. 123 (revised 2004), Share-Based Payment. In approving the proposed FSP for issuance, the Board decided to amend:

  1. Paragraph A240(d)(1) to exempt nonpublic entities from disclosing the aggregated intrinsic value of outstanding fully vested share options (or share units) and share options expected to vest

  2. Paragraph A102 of Illustration 4(b) to revise the computation of the minimum compensation cost that must be recognized to comply with paragraph 42 of Statement 123(R)

  3. Paragraph A170 of Illustration 13(e) to indicate that on the date that the illustrative awards were no longer probable of vesting, any previously recognized compensation cost should be reversed.

The Board also decided that:

  1. The guidance in the FSP should be applied as follows:

    1. If in applying Statement 123(R) an entity did so in a manner consistent with the provisions of the FSP, then that entity should continue to apply the provisions in the FSP to prior periods.

    2. If an entity did not apply Statement 123(R) in a manner consistent with the provisions of the FSP, then that entity should retrospectively apply the provisions in the FSP to prior periods when those periods' financial statements are included for comparative purposes with current-period financial statements.

    3. Early application of the FSP is permitted in periods for which financial statements have not yet been issued.

  2. The comment period would be 30 days.

The Board directed the staff to proceed to a draft of a proposed FSP for vote by written ballot.

FASB DOCUMENT AVAILABLE

Proposed FSP FAS 123(R)-f, "Technical Corrections of FASB Statement No. 123(R)," was issued on August 2, 2006, and is available on the FASB website. Comments are requested by September 2, 2006.

FUTURE OPEN MEETINGS

The following is a list of open meetings tentatively scheduled through September. 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, August 16, 2006—FASB Board Meeting
Wednesday, August 16, 2006—FASB Education Session
Wednesday, August 23, 2006—FASB Board Meeting
Wednesday, August 23, 2006—FASB Education Session
Monday, August 28, 2006—Liaison Meeting with Edison Electric Institute and American Gas Association
Wednesday, August 30, 2006—FASB Board Meeting
Wednesday, August 30, 2006—FASB Education Session
Wednesday, September 6, 2006—FASB Board Meeting
Wednesday, September 6, 2006—FASB Education Session
Wednesday, September 6, 2006—p.m., Emerging Issues Task Force Meeting
Thursday, September 7, 2006—Emerging Issues Task Force Meeting
Tuesday, September 12, 2006—Liaison Meeting with the AICPA Accounting Standards Executive Committee
Wednesday, September 13, 2006—FASB Board Meeting
Wednesday, September 13, 2006—FASB Education Session
Tuesday, September 19, 2006—Liaison Meeting with Institute of Management Accountants
Wednesday, September 20, 2006—FASB Board Meeting
Wednesday, September 20, 2006—FASB Education Session
Thursday, September 21, 2006—Financial Accounting Standards Advisory Council Meeting
Wednesday, September 27, 2006—FASB Board Meeting
Wednesday, September 27, 2006—FASB Education Session
Friday, September 29, 2006—Liaison Meeting with the AICPA PCPS Technical Issues Committee