Revised 10/31/06—See below

Action Alert No. 06-43
October 26, 2006

NOTICE OF MEETINGS

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

Wednesday, November 1, 2006, 9:00 a.m.

  1. Application of Interpretation 46(R) to investment companies (estimated 30-minute discussion). The Board will continue its consideration of a draft of a proposed FSP on the application of FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities, to investment companies.

  2. [Revised 10/31/06—This topic has been postponed to a future date.] Statement 133 Implementation Issue—hedging foreign exchange risk for a forecasted foreign currency-denominated debt issuance (estimated 30-minute discussion). The Board will continue its discussion on whether to issue tentative guidance on hedging foreign exchange risk for a forecasted foreign currency-denominated debt issuance.

  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, November 1, 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 November 8, 2006 Board meeting and other future Board meetings. 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.

October 18, 2006 Board Meeting

Business combinations: applying the acquisition method. The Board continued redeliberations of its June 2005 Exposure Draft, Business Combinations, focusing on three issues related to the recognition of intangible assets other than goodwill.

Assembled Workforce

  1. The Board reaffirmed the existing provision in FASB Statement No. 141, Business Combinations, stipulating that assembled workforce not be recognized as an intangible asset separately from goodwill on the basis that it generally does not meet the separability criterion.

  2. The Board decided, however, that the final Statement should define assembled workforce as a collection of employees that allows the acquirer to continue to operate from the date of the acquisition rather than the intellectual capital of the skilled workforce.

Research and Development (R&D) Assets

  1. The Board affirmed the following proposed provisions regarding the accounting for R&D assets acquired in a business combination:

    1. That all identifiable R&D assets (including tangible and intangible R&D assets to be used in R&D activities that have no alternative future use) acquired would be recognized as assets and measured at fair value, superseding the existing guidance in FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method.

    2. That subsequent expenditures related to acquired R&D projects should generally be expensed as incurred.

    3. That in-process R&D projects should be classified as indefinite-lived until completion or abandonment of the project. Therefore, in-process R&D would not be amortized until completion or abandonment of the project but would be tested for impairment in accordance with FASB Statement No. 142, Goodwill and Other Intangible Assets.

    4. That the final Statement would provide guidance on impairment testing of in-process R&D projects that are temporarily idled or abandoned.

  2. The Board also decided to add a project to its agenda to extend the decisions reached for R&D assets acquired in a business combination to R&D assets acquired in an asset acquisition other than a business combination.

Preexisting Relationships and Reacquired Rights

  1. The Board reaffirmed that the effective settlement of a preexisting relationship between the parties to a business combination should be accounted for as a settlement separate from the business combination.

  2. The Board agreed to clarify the difference between an unfavorable contract and a loss (onerous) contract in the final Statement on business combinations.

  3. The Board affirmed that an acquirer should recognize a reacquired right in a business combination as a separately identifiable intangible asset. A reacquired right is a right that the acquirer had previously granted to the acquiree to use the acquirer's recognized or unrecognized intangible asset.

  4. The Board agreed to include guidance in the final Statement on business combinations that limits the useful life and the measurement of a reacquired right to the remaining contractual terms of the contract between two parties. Therefore, the acquirer cannot assume any noncontractual renewals in determining the useful life or the value of the reacquired right.

  5. The Board agreed to provide guidance in the final Statement on business combinations that if an entity reissues a reacquired right to a third party, the entity should charge any remaining unamortized asset against the proceeds received from the reissued right.

  6. The Board reaffirmed that the acquirer should recognize a settlement gain or loss if the contract giving rise to the reacquired right includes terms that are favorable or unfavorable when compared to pricing for current market transactions for the same or similar items.

  7. The Board decided to broaden the disclosure for a preexisting relationship acquired in a business combination to address any transactions that occur simultaneously with the business combination but that are "substantively separate" from the acquisition. That disclosure would require the acquirer to disclose the nature and amount of each separate transaction.

Measurement Period

  1. The Board reaffirmed that measurement period adjustments should be recognized retrospectively.

Derivative disclosures. The Board previously decided to require the following disclosure in table format:

    Where and in what amount derivatives and related gains and losses are recorded in the balance sheet and income statement, respectively. Disclosure should be by major underlying, accounting designation, and purpose.

At this meeting, the Board discussed several issues related to that disclosure. The Board decided that the following items should be separately disclosed in the tables summarizing an entity's use of derivatives:

  1. Gains and losses on hedged items for fair value hedges

  2. The ineffective portion of gains and losses on derivatives related to cash flow hedges

  3. The effective portion of gains and losses on derivatives related to cash flow hedges that was reclassified from other comprehensive income into earnings

  4. Gains and losses on (a) all derivatives and related hedged items that exist at the end of the reporting period, (b) all derivatives that existed throughout the reporting period but are no longer on the books of the entity at the end of the reporting period, and (c) all hedged items that existed throughout the reporting period but are no longer on the books of the entity or are no longer in a designated hedging relationship at the end of the reporting period.

The Board also decided that the comment period for the Exposure Draft will last until March 2, 2007. The proposed disclosures would be effective for both interim and annual reporting periods ending after December 15, 2007, with early application encouraged. At initial adoption, disclosures for earlier periods presented for comparative purposes would be encouraged. Disclosures for earlier periods presented for comparative purposes would be required beginning in the first year after the year of initial adoption.

Conceptual framework. The Board discussed the meaning and significance of an element as part of its deliberations on the elements and recognition phase of the project (Phase B).

The Board agreed that elements should:

  1. Continue to focus on and define the economic things (resources and claims) and changes in them that pertain to a particular entity. Those "things" and "changes" in them are also called "stocks" and "flows."

  2. Focus on the most basic of the real-world economic phenomena that pertain to an entity. Distinctions that are made for purposes of financial statement display or presentation go beyond the notion of basic elements.

The IASB reached the same conclusions at its Board meeting on October 18, 2006.

Transfers of financial assets. The Board continued redeliberations of the August 2005 revised Exposure Draft, Accounting for Transfers of Financial Assets, and discussed whether and how to amend the isolation guidance in FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.

The Board decided to amend the isolation criteria in paragraph 9(a) of Statement 140 for consolidated financial statements that include a transferor by requiring that the legal analysis treat all of the involvements in the transferred financial assets by any entity included in the consolidated financial statements being presented as if those involvements were made by the transferor. In order for a parent entity of a transferor to meet the isolation requirement, an isolation analysis must conclude that the transferred financial assets would be beyond the reach of all of the entities (and their creditors) included in the financial statements being presented, using the assumption that all of the involvements of the entities were made by the transferor.

Fair value option. The Board redeliberated certain issues related to the following:

  1. Election of the Fair Value Option (FVO)

  2. Recognition, Measurement, and Presentation

  3. Proposed New Disclosures

  4. Transition and Effective Date

  5. Scope of the Statement.

The Board decided:

Election of the Fair Value Option (FVO)

  1. To indicate in the final Statement that if financial assets that have been reported at fair value (with changes included in earnings) because of the nature of the subsidiary that has been holding those assets are transferred to another entity within the consolidated reporting entity for which such fair value accounting is not required, the FVO may be elected on the date of the transfer.

  2. To have the staff perform further work on the contract-by-contract election and to provide the Board with examples of its application to certain financial instruments, including insurance.

Recognition, Measurement, and Presentation

  1. To refer to existing guidance on operating measures/performance indicators in FASB Statement No. 117, Financial Statements of Not-for-Profit Organizations, AICPA Statement of Position 02-2, Accounting for Derivative Instruments and Hedging Activities by Not-for-Profit Health Care Organizations, and Clarification of the Performance Indicator, and the AICPA Audit and Accounting Guide, Health Care Organizations, rather than imposing a one-size-fits-all requirement. Consequently, not-for-profit health care providers would include the changes in fair value within the performance indicator, whereas other not-for-profit organizations would include such changes either within or outside their operating measure/performance indicator, consistent with how they define that measure.

  2. To modify the disclosure requirements in paragraphs 12(b) and 12(c) of the proposed Statement to ensure sufficient transparency of the impact of the FVO on the reporting by not-for-profit organizations of changes in net assets, operating measures/performance indicators (if presented), and the line item components therein.

  3. To expand the disclosure requirements in paragraphs 12(b) and 12(c) of the proposed Statement with regard to not-for-profit organizations to encompass the impact of the FVO not only on an operating measure/performance indicator but also on the overall changes in the three classes of net assets (unrestricted, temporarily restricted, and permanently restricted).

  4. To require the costs and fees related to financial assets or financial liabilities for which the FVO is elected upon initial recognition to be recognized in earnings as incurred and not deferred. Similarly, the final Statement will indicate that the unamortized deferred costs, fees, premiums, and discounts related to existing financial assets and financial liabilities for which the FVO has been elected at the initial application of the final Statement should be written off as part of the cumulative-effect adjustment to the opening balance of retained earnings.

Proposed New Disclosures

  1. To require an entity to (a) disclose management's basis for its decision to elect the FVO for a contract or group of similar contracts and (b) if the fair value election is not chosen for all contracts within a group of similar contracts, disclose the reasons for only partial election as of each date for which a statement of financial position is presented. The disclosure of the reasons for electing the FVO for only certain contracts within a group of similar contracts should provide sufficient information for users to understand how those groups of similar contracts reconcile to the line items presented in the statement of financial position.

  2. To require an entity to disclose the difference between an asset's fair value carrying amount and the aggregate principal amount to be received for those assets for which the FVO has been elected as of each date for which a statement of financial position is presented.

  3. For loans and receivables for which the FVO has been elected, not to require disclosure of the maximum amount of credit risk of the loan or receivable at the reporting date, but to require separate disclosure of (a) the creditor's estimate of the fair value changes attributable to changes in expected cash flows relative to borrower-specific credit risk and (b) all other changes in fair value that are included in current-period earnings for each period for which an income statement is presented. The Board also decided not to provide detailed computational guidance on how to determine the approximation of the amount of the loan's or receivable's fair value change attributable to changes in borrower-specific credit risk.

  4. If an entity classifies a loan as held for investment and elects the FVO for that loan, to require the entity to disclose the fair value carrying amount of loans ninety days past due. In addition, if an entity's policy for such loans is to continue to recognize interest income on an amortized cost basis separately from other changes in fair value, the entity will be required to disclose the aggregate fair value carrying amount of loans that are in nonaccrual status. Those disclosure requirements are required as of each date for which a statement of financial position is presented.

  5. Not to require any special disclosures in the year of initial application of the final Statement if an existing financial asset or financial liability for which the FVO has been elected at the beginning of that fiscal year is sold or settled (extinguished) later in that year prior to its maturity.

  6. Not to require that all fair value disclosures for assets and liabilities reported at fair value pursuant to the FVO be provided in a single note to the financial statements.

  7. To require entities to disclose, as of each date for which a statement of financial position is presented, the following for investments that would otherwise be accounted for under the equity method (because of having significant influence over the operating and financial policies of the investee) but that are reported at fair value pursuant to the FVO:

    1. The name of each investee and the percentage of ownership of common stock, as well as the accounting policies of the investor with respect to investments in common stock. (The disclosure should include the names of any significant investee corporations in which the investor holds 20 percent or more of the voting stock but the investor is not deemed to have significant influence over the operating and financial policies of the investee, together with the reasons why the investor is not deemed to have significant influence. The disclosure should also include the names of any significant investee corporations in which the investor holds less than 20 percent of the voting stock and the investor is deemed to have significant influence over the operating and financial policies of the investee, together with the reasons why the investor is deemed to have significant influence.)

    2. Summarized information about the assets, liabilities, and results of operations of the investees to be presented in the notes or in separate statements, either individually or in groups, as appropriate when investments in common stock of corporate joint ventures or other equity method investments are, in the aggregate, material in relation to the financial position or results of operations of an investor.

  8. To require quantitative and qualitative disclosures of the effect on earnings of initially measuring at fair value under the FVO election if an entity elects the FVO either upon the occurrence of a new-basis event or at the time the entity obtains significant influence for an investment that would otherwise be accounted for under the equity method. Those disclosures should indicate where in the income statement the effect on earnings is reflected.

  9. To require that the disclosure requirements in the final Statement also apply to investments in securities that are classified in the trading category under FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, and the hybrid financial instruments that are reported at fair value through earnings under the fair value election permitted by FASB Statement No. 155, Accounting for Certain Hybrid Financial Instruments, and its amendment of paragraph 16 of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.

  10. To require that the fair value disclosures in the notes be presented together with those related individual carrying amounts for those line items, if the carrying amounts of individual line items reported in the statement of financial position are a combination of fair value and non-fair-value amounts.

Transition and Effective Date

  1. To require that the effective date of the final Statement be the same as the effective date of Statement 157; thus, the final Statement should be effective for financial statements issued for fiscal years beginning after November 15, 2007.

  2. To permit an entity to early adopt the final Statement provided that the entity also adopts all of the requirements (measurement and disclosure) of Statement 157 concurrent with or prior to the early adoption of the final Statement.

  3. To permit early adoption of the final Statement within 120 days of the beginning of the reporting entity's fiscal year, thereby making the FVO election retroactive to the beginning of that fiscal year (or the date of initial recognition, if later).

  4. Not to modify the requirements that the effect of initial adoption be accounted for as a cumulative-effect adjustment through retained earnings or the prohibition against retrospective application.

  5. To require a one-time reconciliation that presents the current historical/amortized cost amount with the corresponding fair value measures as of the date of adoption for those items reported pursuant to the FVO. That reconciliation should be presented by category of assets and liabilities as presented in the statement of financial position.

Scope of the Statement

  1. To permit the FVO election for a host financial instrument that is being accounted for separately due to the bifurcation of an embedded derivative nonfinancial instrument from a hybrid nonfinancial instrument pursuant to paragraph 12 of Statement 133, provided that the scope exceptions in the final Statement are not applicable to the host financial instrument.

  2. To add a scope exception to the final Statement for (a) contracts issued or held by the reporting entity that are both (1) indexed to its own stock and (2) classified in stockholders' equity in its statement of financial position and (b) contracts issued or held by the reporting entity that contain embedded derivatives that both (1) are indexed to its own stock and (2) would, on a standalone basis, be classified in stockholders' equity in its statement of financial position.

  3. To amend Statement 115 to exclude from its scope all investments that, absent a FVO election under the final Statement, would be required to be accounted for under the equity method of accounting under APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock (rather than excluding "investments in equity securities accounted for under the equity method").

EITF AGENDA DECISIONS

At its October 11, 2006 meeting, the EITF Agenda Committee discussed the following five potential new issues and made the following decisions:

  1. Accounting for the Tax Benefit of Dividends on Restricted Stock and Option Awards—This issue was added to the EITF agenda.

  2. Accounting for the Deferred Compensation and Postretirement Benefit Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements—This issue was added to the EITF agenda.

  3. Determining the Attribution of Incentive Compensation to Interim Financial Statements—This issue was not added to the EITF agenda.

  4. The Application of the Two-Class Method to Master Limited Partnerships for FASB Statement No. 128, Earnings per Share—A decision on this potential issue was deferred pending a decision on the Committee's recommendation that the FASB and the IASB consider including this issue in the short-term international convergence project on earnings per share or, alternatively, that the Board address this matter through the issuance of an FASB Staff Position (FSP).

  5. The Impact of a Sale of Receivables with Recourse under FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, on the Determination of Profit Recognition for the Sale of Real Estate Pursuant to FASB Statement No. 66, Accounting for Sales of Real Estate—This issue was not added to the EITF agenda; however, the Committee recommended that the Board pursue the issuance of an FSP to provide guidance on this issue.

FASB DOCUMENTS AVAILABLE

The following documents are available on the FASB website:

Final FSP FAS 123(R)-6, "Technical Corrections of FASB Statement No. 123(R)," was issued on October 20, 2006.

Final FSP FAS 126-1, "Applicability of Certain Disclosures and Interim Reporting Requirements for Obligors for Conduit Debt Securities," was issued on October 25, 2006.

Proposed FSP EITF 00-19-b, "Accounting for Registration Payment Arrangements," was issued on October 20, 2006. Comments are due by December 4, 2006.

Proposed FSP EITF 03-6-a, "Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities," was issued on October 20, 2006. Comments are due by December 19, 2006.

Proposed FSP FAS 141-b, 142-e, and 144-b, "Fair Value Measurements in Business Combinations and Impairment Tests," was issued on October 23, 2006. Comments are due by November 22, 2006.

Proposed FSP FAS 144-c, "Classifying and Accounting for a Depreciable Asset as Held-for-Sale When an Equity Method Investment Is Obtained," was issued on October 26, 2006. Comments are due by December 15, 2006.

FUTURE OPEN MEETINGS

The following is a list of open meetings tentatively scheduled through December. 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.

Tuesday, November 7, 2006—Liaison Meeting with National Investors Relations Institute (canceled)
Wednesday, November 8, 2006—FASB Board Meeting
Wednesday, November 8, 2006—FASB Education Session
Wednesday, November 15, 2006—FASB Board Meeting
Wednesday, November 15, 2006—FASB Education Session
Thursday, November 16, 2006—Emerging Issues Task Force Meeting
Tuesday, November 21, 2006—FASB Board Meeting
Tuesday, November 21, 2006—FASB Education Session
Wednesday, November 29, 2006—FASB Board Meeting
Wednesday, November 29, 2006—FASB Education Session
Wednesday, December 6, 2006—FASB Board Meeting
Wednesday, December 6, 2006—FASB Education Session
Thursday, December 7, 2006—Financial Accounting Standards Advisory Council Meeting
Friday, December 8, 2006—Small Business Advisory Committee Meeting
Wednesday, December 13, 2006—FASB Board Meeting
Wednesday, December 13, 2006—FASB Education Session
Wednesday, December 20, 2006—FASB Board Meeting
Wednesday, December 20, 2006—FASB Education Session
Wednesday, December 27, 2006—No FASB Board Meeting or Education Session scheduled