Action Alert No. 06-52
December 28, 2006

NOTICE OF MEETINGS

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

Wednesday, January 3, 2007, 9:00 a.m.

  1. Financial instruments: liabilities and equity (estimated 30-minute discussion). The Board will discuss alternatives for possible short-term improvements to existing standards for distinguishing between liabilities and equity.

  2. Fair value option (estimated 60-minute discussion). The Board will continue its redeliberations of the proposed guidance in the FASB Exposure Draft, The Fair Value Option for Financial Assets and Financial Liabilities, and discuss certain disclosures and drafting issues.

OPEN EDUCATION SESSION

Wednesday, January 3, 2007, following the Board meeting

The Board will hold educational, non-decision-making session to discuss topics that are anticipated to be discussed at future Board meetings. Those topics will be posted to the FASB calendar four days prior to the education sessions.

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.

December 19, 2006 Board Meeting

Business combinations: applying the acquisition method. The Board continued redeliberations of its June 2005 Exposure Draft, Business Combinations, and discussed (1) valuation allowances, (2) combinations between mutual entities, (3) accounting for business combinations achieved by contract alone or in the absence of a transaction involving the acquirer, and (4) accounting for contingencies in a business combination. The Board decided:

  1. Receivables, including loan and finance leases, should be recognized and measured at fair value as of the date of acquisition, and recognition of a separate valuation allowance should not be permitted. The Board directed the staff to evaluate the types of disclosures that should be made, if any, relating to the credit quality of acquired receivables.
  2. A combination between mutual entities should be in the scope of the final standard and, therefore, accounted for using the acquisition method. The Board agreed that the definition of mutual entity in the Exposure Draft and final Statement includes cooperative entities.
  3. The acquisition method should be applied to a business combination achieved in the absence of a transaction involving the acquirer and to a business combination achieved by contract alone.
  4. The final Statement on business combinations should clarify that a contingency that is an intangible asset would need to meet the intangible asset recognition criteria to be recognized separately from goodwill (contractual or separable) and that it should be subsequently accounted for under FASB Statement No. 142, Goodwill and Other Intangible Assets.

The Board discussed the proposal that all contingencies be recognized in a business combination and initially measured at fair value but did not reach any conclusions. Rather, the Board requested that the staff consider alternative approaches to the recognition and measurement of contingencies for discussion at a future meeting.

Quantification of misstatements for the determination of materiality and correction of errors. The Board discussed whether to issue guidance applicable to nonregistrants and not-for-profit entities for the quantification and correction of current-year misstatements arising from the carryover or reversal of prior-year uncorrected errors. Specifically, the Board discussed, for purposes of evaluating materiality, whether to require the dual method approach set forth in SEC Staff Accounting Bulletin (SAB) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 requires that when quantifying misstatements for the purposes of evaluating materiality the effects on both the income statement and balance sheet should be considered. The Board also considered whether it should issue guidance applicable to nonregistrants and not-for-profit entities to provide for a one-time cumulative-effect adjustment when correcting misstatements that were deemed material after the application of the dual method approach. The Board decided:

  1. Guidance should be issued for the quantification of misstatements on current-year financial statements arising from the carryover or reversal of prior-year uncorrected misstatements. The Board concluded that guidance should be issued requiring the dual method approach illustrated in SAB 108 for quantifying misstatements arising from the carryover or reversal of prior-year misstatements for purposes of evaluating materiality.
  2. Current standards should be modified to allow for a one-time cumulative-effect adjustment for private companies and not-for-profit entities to correct misstatements resulting from recording of prior-year misstatements.

December 20, 2006 Board Meeting

Registration payment arrangements. The Board discussed the comment letters received on proposed FSP EITF 00-19-b, "Accounting for Registration Payment Arrangements," and agreed to issue that FSP as final. The Board directed the staff to proceed to a draft of a final FSP for vote by written ballot.

Statement 133 Implementation Issue—application of paragraph 13(b) to securitized interests in prepayable financial assets. The Board decided:

  1. To eliminate criterion (b) from proposed Implementation Issue B40, which would have required an entity to look through to the assets underlying the securitized interests to evaluate whether those assets contain any embedded derivatives.
  2. For certain instruments, to delay the effective date of criterion (c) in proposed Implementation Issue B40, which requires an entity to evaluate whether its securitized interest(s) contain an embedded derivative for which bifurcation would be required other than an embedded derivative that results solely from the embedded call options in the underlying financial assets. Criterion (c) would not have to be applied to securitized interests that (a) were issued before a certain date that will be specified in the final Implementation Issue and (b) include other embedded derivatives that have a fair value of zero (or close to zero) at the effective date of FASB Statement No. 155, Accounting for Certain Hybrid Financial Instruments.
  3. To address other issues in drafting the final Implementation Issue, including changes to the transition guidance of Implementation Issue B40 to include other fact patterns suggested in constituents' comment letters.
  4. To issue Implementation Issue B40 as final guidance as soon as practicable.

Fair value option. The Board discussed the scope exception for convertible debt and certain issues related to the following disclosures:

  1. Disclosures upon initial adoption
  2. Fair value methods and significant assumptions
  3. Drivers of changes in fair values
  4. Debt issuances
  5. Information about loans and other receivables reported at fair value pursuant to the fair value option
  6. Difference between fair value carrying amounts and aggregate principal amounts for assets and liabilities.

Disclosures

The Board decided:

     Disclosures upon Initial Adoption

  1. To require an entity to disclose, by individual line item in the statement of financial position, if applicable, the amounts of any allowances for loan losses that have been removed from the statement of financial position and included in the cumulative-effect adjustment in conjunction with the initial adoption of the final Statement.
  2. Not to require an entity to disclose, by individual line item in the statement of financial position, the individual amounts of unamortized deferred costs, fees, premiums, and discounts that have been removed from the statement of financial position and included in the cumulative-effect adjustment in conjunction with the initial adoption of the final Statement.
  3. To require separate disclosure of the unrealized net gains and losses (but not gross gains and gross losses) by line item in the statement of financial position as part of the one-time reconciliation disclosing the historical/amortized cost amount for selected assets and liabilities existing at the effective date for which the fair value option has been elected with the corresponding fair value measures as of the date of adoption for those items.
  4. To require an entity to disclose, as of the date of adoption, management's basis for its decision to elect the fair value option for an instrument or group of similar instruments. If the fair value option is not elected for all instruments within a group of similar instruments, an entity must disclose its reasons for only partial election. In addition, the entity must provide sufficient information for users to understand how those groups of similar instruments relate to the assets and liabilities presented in individual line items on the statement of financial position.

     Fair Value Methods and Significant Assumptions

  1. To withdraw its previous decision to require an entity to disclose its methods and significant assumptions used to estimate the fair value of assets and liabilities for which the fair value option has been elected if the fair value measurement of that asset or liability represents a Level 3 measurement within the fair value hierarchy.

     Drivers of Changes in Fair Values

  1. Not to require an entity to provide additional detailed information about drivers of changes in fair values (such as specific market-observable inputs) for items for which the fair value option has been elected.

     Debt Issuances

  1. Not to require an entity to disclose the proceeds received and the date of issuance if the entity has issued debt securities or other notes payable during the period.

     Information about Loans and Other Receivables Reported at
     Fair Value Pursuant to the Fair Value Option

  1. Not to modify the scope of its previous decision to require that, for all loans and other receivables for which the fair value option has been elected, an entity disclose the estimated amount of change in fair value of loans and other receivables attributable to changes in instrument-specific credit risk separate from all other changes in fair value.
  2. To require an entity to describe how it estimates the change in fair value attributable to changes in instrument-specific credit risk.
  3. Not to include a statement in the Basis for Conclusions of the final Statement that clarifies that instrument-specific credit risk should exclude the risk of changes in the credit spread over the risk-free or benchmark rate.
  4. To require an entity to disclose its estimate of changes in fair value attributable to changes in instrument-specific credit risk without imposing a "significance threshold" similar to the one provided in the disclosure about significant changes in the fair value of a liability attributable to changes in an entity's own creditworthiness.
  5. To modify its previous decisions related to disclosures about loans held for investment. An entity will now be required to disclose the following for all loans receivable for which the fair value option has been elected, rather than just loans held for investment for which the fair value option has been elected, as of each date for which a statement of financial positions is presented:
    1. The fair value carrying amount of loans that are 90 days or more past due
    2. If the entity's policy is to recognize interest income on an amortized costs basis separately from other changes in fair value, the fair value carrying amount of loans that are in nonaccrual status.
  6. To require an entity to disclose, for loans receivable for which the fair value option has been elected and that are 90 days or more past due, in nonaccrual status, or both, the difference between the carrying amounts of those loans and the remaining aggregate principal amounts the entity would be contractually entitled to receive from the issuers of those obligations at maturity (or through the maturity date for any assets whose principal amounts are receivable in installments), if any, as of each date for which a statement of financial position is presented.
  7. Not to require an entity to disclose the aggregate principal amounts of loans measured at fair value pursuant to the fair value option that are charged off during each period for which an income statement is presented.

     Difference between Fair Value Carrying Amounts and
     Aggregate Principal Amounts for Assets and Liabilities

  1. To modify its previous decision to require an entity to disclose the difference between the carrying amount of any asset or liability reported at fair value due to election of a fair value option and the remaining aggregate principal amount the investor would be contractually entitled to receive from the issuers of the obligations at maturity (or through the maturity date for any assets or liabilities whose principal amounts are receivable or payable in installments), if any, as of each date for which a statement of financial position is presented. That disclosure will now be presented by line item in the statement of financial position and will apply only to (a) long-term loans and other receivables that are reported at fair value due to a fair value election, have a principal amount, and are not subject to FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, and (b) long-term debt instruments that are reported at fair value due to a fair value election and have a principal amount.

Scope Exception for Convertible Debt

The Board reconsidered a previous decision to add a scope exception that also would apply to contracts issued or held by the reporting entity that contain an embedded derivative that both (a) is indexed to its own stock and (b) would, on a standalone basis, be classified in shareholders' equity in its statement of financial position. The Board decided not to include that scope exception in the final Statement. The Board decided instead to add a scope exception to the final Statement to prohibit the issuer of convertible debt with beneficial conversion features from electing the fair value option for that contract.

FASB DOCUMENT AVAILABLE

Proposed FASB Statement 133 Implementation Issue H17, "Foreign Currency Hedges: Hedging Functional-Currency-Equivalent Proceeds to Be Received from a Forecasted Foreign-Currency-Denominated Debt Issuance," was issued on December 28, 2006, and is available on the FASB website. Comments are requested by February 2, 2007.

FUTURE OPEN MEETINGS

The following is a list of open meetings tentatively scheduled through February. 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, January 8, 2007—AICPA Statement of Position 05-1 Implementation Issues Roundtable
Tuesday, January 9, 2007—Liaison Meeting with the National Association of College and University Business Officers
Wednesday, January 10, 2007—FASB Board Meeting
Wednesday, January 10, 2007—FASB Education Session
Thursday, January 11, 2007—Investors Technical Advisory Council Meeting
Wednesday, January 17, 2007—FASB Board Meeting
Wednesday, January 17, 2007—FASB Education Session
Wednesday, January 24, 2007—FASB Board Meeting
Wednesday, January 24, 2007—FASB Education Session
Wednesday, January 31, 2007—FASB Board Meeting
Wednesday, January 31, 2007—FASB Education Session
Thursday, February 1, 2007—Conceptual Framework Measurement Roundtable
Monday, February 5, 2007—Liaison Meeting with National Investors Relations Institute
Wednesday, February 7, 2007—FASB Board Meeting
Wednesday, February 7, 2007—FASB Education Session
Tuesday, February 13, 2007—FASB Board Meeting
Tuesday, February 13, 2007—FASB Education Session
Thursday, February 15, 2007—Joint Working Group Meeting on Lease Accounting, London
Wednesday, February 21, 2007—FASB Board Meeting
Wednesday, February 21, 2007—FASB Education Session
Wednesday, February 28, 2007—FASB Board Meeting
Wednesday, February 28, 2007—FASB Education Session