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Action Alert No. 06-12
March 23, 2006
NOTICE OF MEETINGS
OPEN BOARD MEETING
(Board
meetings are available by audio webcast and telephone.)
Tuesday, March 28, 2006, 8:00 a.m.
The Board meeting will be held on Tuesday at 8:00 a.m. instead of
Wednesday at 9:00 a.m.
- Business
combinations (estimated 3-hour discussion). The Board
will discuss the basic principles underpinning the proposals in the
business combinations and noncontrolling interests Exposure Drafts. The
Board also will discuss some of the significant implications of applying
those basic principles, including:
- Accounting for partial and step acquisitions
- Accounting for bargain purchases and overpayments
- Accounting for increases or decreases in controlling ownership
interests without a change in control
- Accounting for loss of control of a subsidiary
- Presentation of noncontrolling interests in the consolidated
financial statements.
- FASB
ratification of EITF consensuses and tentative conclusions
(estimated 15-minute discussion). The Board will consider the
ratification of a consensus modification and the tentative conclusions
reached at the March 16, 2006 EITF meeting. (See discussion under EITF
ACTIONS.)
- 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, March 29, 2006, 8:00 a.m.
The Board will hold an educational, non-decision-making session to
discuss topics that are anticipated to be discussed at the April 5, 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.
March 15, 2006 Board Meeting
Postretirement
benefit obligations, including pensions. The Board discussed
several issues related to the limited-scope, first phase of this project,
including (1) the applicability of the proposed Statement to
not-for-profit organizations and (2) the effective date of that proposed
Statement for nonpublic entities and not-for-profit organizations. The
Board decided that:
- The proposed Statement would be applicable to all not-for-profit
organizations sponsoring defined benefit postretirement plans
(not-for-profit employers). In applying the provisions of the proposed
Statement:
- Not-for-profit employers that present an intermediate measure of
operations (or performance indicator) in their statement of activities
that is equivalent to income from continuing operations should
recognize, in separate line items outside that measure, the actuarial
gains and losses and prior service costs and credits that would be
recognized in other comprehensive income pursuant to the proposed
Statement.
- Not-for-profit employers that do not present an intermediate
measure of operations in their statement of activities that is
equivalent to income from continuing operations should recognize, in
separate line items apart from functional expenses, the actuarial
gains and losses and prior service costs and credits that would be
recognized in other comprehensive income pursuant to the proposed
Statement.
- Not-for-profit employers should recognize as an adjustment to the
opening balance of unrestricted net assets any transition asset or
obligation remaining from the initial application of FASB Statement
No. 87, Employers’ Accounting for Pensions, or No. 106,
Employers’ Accounting for Postretirement Benefits Other Than
Pensions.
- Not-for-profit employers should disclose the following in the
notes to financial statements:
(1) For each statement of activities presented, the net
actuarial gain or loss and prior service cost or credit recognized
outside of net periodic benefit cost in two parts—first, the actuarial
gain or loss and prior service cost and credit arising during the
period and, second, the amounts reclassified to net pension cost
during the period
(2) For each statement of financial position presented, the
cumulative amount of net actuarial gain or loss and prior service cost
or credit that have not yet been reclassified as components of net
periodic benefit cost
(3) The portion of the net actuarial gain or loss and prior
service cost or credit not yet recognized as a component of net
periodic benefit cost that will be reclassified as components of net
periodic benefit over the next fiscal year.
- The proposed Statement would be effective for nonpublic entities,
including not-for-profit organizations, on the following dates:
- The requirement to recognize the funded status in the statement of
financial position would apply in the first annual period ending after
December 15, 2006 (the same effective date that applies to public
entities)
- The requirement to measure plan assets and benefit obligations as
of the date of the employer’s statement of financial position would be
effective in the first annual period beginning after December 15, 2007
(one year later than the effective date that applies to public
entities).
- Statement 87 would be amended to clarify that an entity’s
determination of its assumed discount rate is independent of the
expected rate of return on plan assets.
- The perceived benefits of the proposed Statement outweigh the
perceived costs of its application.
Fair
value measurements. The Board clarified aspects of the guidance in
the October 21, 2005 working draft of the fair value measurements
Statement. The Board clarified that:
- A fair value measurement assumes an orderly transaction to sell or
otherwise dispose of an asset or transfer a liability in the principal
market for the asset or liability or, in the absence of a principal
market, the most advantageous market for the asset or liability.
- The inputs referred to within the fair value hierarchy are market
inputs that reflect the assumptions that market participants in the
principal (most advantageous) market would use in pricing an asset or
liability and differ with respect to the extent to which they are
observable. The fair value hierarchy gives the highest priority to
observable market inputs (Level 1) and the lowest priority to
unobservable market inputs (Level 3).
- A fair value measurement must include all of the assumptions that
market participants in the principal (most advantageous) market would
consider in pricing the asset or liability, including assumptions about
risk if the measurement is based on unobservable market inputs.
- In many cases, a transaction price will represent the fair value of
an asset or liability at initial recognition, but not presumptively.
The Board affirmed its previous decision not to reexpose its June 2004
Exposure Draft, Fair Value Measurements. Instead, the Board decided
to delay the effective date of the final Statement. The final Statement
will be effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods within those
fiscal years. Earlier application is encouraged if the reporting entity
has not yet issued financial statements (annual or interim) for the fiscal
year in which the final Statement is initially applied. The Board plans to
distribute a draft of the final Statement to external reviewers after it
completes its redeliberations of disclosure issues.
Life
settlements. The Board discussed an issue that was raised during
the external review process of a draft of the final FSP FTB 85-4-1,
“Accounting for Life Settlement Contracts by Third-Party Investors.” The
Board concluded that for life settlement contracts accounted for under the
fair value method, the life settlement contracts should initially be
recognized at the transaction price.
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, and
assets. The Board focused on (1) the accounting for two or more
instruments issued or acquired as part of the same arrangement as if they
were a single instrument (linkage) and (2) the consideration of unstated
and stated features in depicting an instrument’s (or linked group of
instruments’) substantive features for classification purposes.
The Board agreed on the following scope, objective, and principles for
linkage:
- The principles of linking instruments would apply to separately
issued or acquired instruments that (a) are equity instruments or have
equity components or (b) have payoffs that are based on equity
instruments.
- The objective of linkage is to account for two or more instruments
issued as part of the same arrangement in the same manner as a single
instrument with the same or similar outcome (or set of possible outcomes
with the same or similar probabilities of occurrence).
- To achieve the objective, a reporting entity should link (account
for as a single instrument) two or more instruments that are part of the
same arrangement if accounting for the instruments individually differs
from accounting for them as if they were a single instrument with the
same or similar outcome (or possible outcomes).
- Instruments are part of the same arrangement if at least one of the
following conditions exists:
- Interdependency exists between the instruments. For example,
interdependency exists if (1) exercise of one depends on exercise of
the other or causes the expiration of the other, (2) an instrument is
specifically tied to the underlying instrument, or (3) there is
contractual evidence of interacting payoff structures affecting an
outcome. In these cases, the timing or the counterparty does not
matter.
- The instruments have interacting payoff structures and are entered
into at or near the same time with the same or a related counterparty
or a counterparty acting as an agent.
- In the context of condition 4(b), the Board also decided to examine
at a later date whether instruments should ever be linked if they are
issued under any other circumstances, such as with different
counterparties that are not related or acting as agents. Additionally,
the Board directed the staff to consider its development of the above
linkage principles for possible improvements to other current generally
accepted accounting principles for which this is an issue.
- The Board agreed to the following objectives and principles of
substantive features:
- The objective is to classify an instrument in the same manner as
another instrument (or linked group of instruments) with the same or
similar outcome (or set of possible outcomes with the same or similar
probabilities of occurrence) by depicting an instrument according to
its substantive features (whether stated or unstated).
- To achieve the objective, an entity should classify an instrument
(or a linked group of instruments) by considering stated or unstated
substantive features and ignoring any features that are not
substantive.
(1) A stated or unstated feature is substantive if it has
more than a remote likelihood of affecting an instrument’s outcome and
more than a minimal effect as compared with other features in the
instrument. For example, an unstated cash settlement feature would be
included in the depiction of an instrument if there is more than a
remote likelihood that an entity would be unable to deliver shares to
settle the instrument and it is more than minimal. In that case, two
substantive settlement alternatives are identified—shares or cash—and
the instrument would be classified as a liability.
(2) All other features are nonsubstantive.
- In accordance with the Board’s previous decisions, at each reporting
date, an entity should reexamine the features of each instrument or
group of instruments issued as part of the same arrangement to determine
whether the accounting is still appropriate. If circumstances change, an
instrument may need to be reclassified or remeasured. In accordance with
previous decisions, no gain or loss would be recognized upon that
reclassification.
EITF ACTIONS
March 16, 2006 EITF Meeting
The Task Force discussed the following issues:
- 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 reached a tentative conclusion that the issuance of equity
securities to settle an instrument that, as of its issuance date,
contains a substantive conversion feature should be accounted for as a
conversion. That is, no gain or loss should be recognized related to the
equity securities issued to settle the instrument. Additionally, the
issuance of equity securities to settle an instrument that, as of its
issuance date, does not contain a substantive conversion feature should
be accounted for as a debt extinguishment. That is, the fair value of
the equity securities issued should be considered a component of the
reacquisition price of the debt. The Issue will include additional
guidance for determining whether the conversion feature is substantive.
The Task Force also discussed the interaction of Issue 05-1 and 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)," and
reached a tentative conclusion that Issue 03-7 should be amended to
clarify that Issue 03-7 does not apply to settlements within the scope
of Issue 05-1. The Board will consider the ratification of those
tentative conclusions at its March 28, 2006 meeting. If ratified, draft
abstracts will be posted to the FASB website for both Issues for a
30-day comment period. These Issues will be discussed further at a
future meeting.
- Issue No. 05-7, "Accounting for Modifications to Conversion Options
Embedded in Debt Instruments and Related Issues." The Task Force agreed
to make certain changes to clarify that the consensus in Issue 05-7,
which was ratified by the Board on September 28, 2005, also applies to a
modification of a debt instrument that either adds or eliminates an
embedded conversion option provided that the conversion option, in
either the original instrument or the modified instrument, is not
required to be bifurcated from its host pursuant to FASB Statement No.
133, Accounting for Derivative Instruments and Hedging
Activities. The Board will consider the ratification of that change
at its March 28, 2006 meeting. If ratified, the modification would be
effective immediately and would be accounted for prospectively.
- Issue No. 06-1, "Accounting for Consideration Given by a Service
Provider to Manufacturers or Resellers of Equipment Necessary for an
End-Customer to Receive a Service from the Service Provider." This Issue
will be discussed further at a future meeting.
- Issue No. 06-2, "Accounting for Sabbatical Leave and Other Similar
Benefits Pursuant to FASB Statement No. 43, Accounting for
Compensated Absences." The Task Force reached a tentative conclusion
that an employee's right to a compensated absence under a sabbatical
leave (or other similar benefit arrangement) that requires a service
period and does not increase its benefit with additional years of
service does accumulate pursuant to paragraph 6(b) of Statement 43 for
arrangements in which the individual continues to be a compensated
employee and is not required to perform duties for the entity during the
absence. Therefore, assuming all of the other conditions of paragraph 6
of Statement 43 are met, compensation associated with a sabbatical leave
or other similar benefit arrangement should be accrued over the
requisite service period. The Board will consider the ratification of
that tentative conclusion at its March 28, 2006 meeting. If ratified, a
draft abstract will be posted to the FASB website for a 30-day comment
period. This Issue will be discussed further at a future meeting.
- 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 Task Force reached a
tentative conclusion that the scope of this Issue includes any tax
assessed by a governmental authority that is directly imposed on a
revenue-producing transaction between a seller and a customer. The Task
Force also reached a tentative conclusion that the presentation of taxes
on either a gross or a net basis within the scope of this Issue is an
accounting policy decision that should be disclosed pursuant to APB
Opinion No. 22, Disclosure of Accounting Policies. A company
shall disclose the amount of these taxes that are recognized on a gross
basis in interim and annual financial statements. The Board will
consider the ratification of those tentative conclusions at its March
28, 2006 meeting. If ratified, a draft abstract will be posted to the
FASB website for a 30-day comment period. This Issue will be discussed
further at a future meeting.
- Issue No. 06-4, "Accounting for the Deferred Compensation and
Postretirement Benefit Aspects of Endorsement Split-Dollar Life
Insurance Arrangements." This Issue will be discussed further at a
future meeting.
FASB DOCUMENT AVAILABLE
FASB Statement No.
156, Accounting for Servicing of Financial Assets, was
issued on March 17, 2006, and is available on the FASB website.
FUTURE OPEN MEETINGS
The following is a list of open meetings tentatively scheduled through
April. 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 5, 2006—FASB Board Meeting
Wednesday, April 5,
2006—FASB Education Session
Tuesday, April 11, 2006—User Advisory
Council Meeting, New York City
Wednesday, April 12, 2006—FASB Board
Meeting
Wednesday, April 12, 2006—FASB Education Session
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
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