Action Alert No. 07-08
February 22, 2007

NOTICE OF MEETINGS

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

Wednesday, February 28, 2007, 9:00 a.m.

  1. Conceptual framework (estimated 90-minute discussion). The Board will discuss comments received on the July 2006 FASB Preliminary Views, Conceptual Framework for Financial Reporting: Objective of Financial Reporting and Qualitative Characteristics of Decision-Useful Financial Reporting Information, and the plan for redeliberating the issues raised by respondents.

  2. Business combinations: applying the acquisition method (estimated 2-hour discussion). As part of its redeliberations of the June 2005 Exposure Draft, Business Combinations, the Board will discuss:

    1. The accounting for contingencies

    2. Measuring a lessor’s asset that is subject to an operating lease acquired in a business combination

    3. Sweep issues for the final noncontrolling interests Statement

    4. Transition for the final business combinations and noncontrolling interests Statements.

  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, February 28, 2007, following the Board meeting

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.

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.

February 13, 2007 Board Meeting

Business combinations: applying the acquisition method. The Board continued redeliberations of its June 2005 Exposure Draft, Business Combinations, and discussed insurance contracts and share-based payments. With respect to insurance contracts, the Board decided to:

  1. Affirm the guidance in the Exposure Draft that fair value measurement is required for insurance contract assets and liabilities at the date of acquisition.

  2. Affirm the guidance in the Exposure Draft requiring the acquisition method in accounting for combinations of mutual insurance entities.

  3. Affirm that the general guidance in the Exposure Draft for determining whether a transaction is a business combination or an asset purchase is sufficient to determine whether a reinsurance arrangement was entered into to effect a business combination or simply to indemnify the reinsured.

  4. Include all insurance and insurance-related contracts in the scope of the guidance in paragraph 36(b)(2) of the Exposure Draft, which specifies that the difference between the fair value of an insurance contract’s assets and liabilities and the current generally accepted accounting principles (GAAP) carrying amounts for those contract elements should be accounted for as an intangible asset (the fair value intangible asset) determined at the date of acquisition. In the Exposure Draft, that guidance applied only to insurance contracts accounted for under FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises.

  5. Require that the fair value intangible asset be accounted for as a fixed amount determined at the date of acquisition and only adjusted for amortization and impairment.

  6. Affirm the guidance in the Exposure Draft requiring the use of the premium deficiency test when testing the fair value intangible asset (for short- and long-duration insurance contracts) for impairment and to provide for a voluntary accounting change to include investment income in the impairment testing for short-duration contracts.

  7. Clarify the insurance accounting example included in paragraph A49(d) of the Exposure Draft by specifying that, in addition to the fair value intangible asset, other customer/contract based intangible assets also may require recognition.

  8. Require that the contract inception date be used in determining retrospective measurements for contracts for periods after the date of acquisition.

The Board asked the staff to perform additional research on the following issues:

    Whether assets such as deferred acquisition costs and the value of the business acquired are considered current GAAP in determining the postacquisition balance sheet for the acquired insurance contracts.

    Whether the seller’s guarantee of the adequacy of acquired short-duration claims liabilities should be accounted for after the date of acquisition as a guarantee or reinsurance.

    Whether the accounting classification of a broad range of contracts, including insurance contracts, that is based on contract characteristics (for example, insurance versus deposit accounting) should be reevaluated at the date of acquisition.

With respect to share-based payments, the Board decided to:

  1. Modify the guidance in the Exposure Draft for the purpose of being consistent with FASB Statement No. 123 (revised 2004), Share-Based Payment, and require that excess fair value in the acquirer’s replacement award over the acquiree’s award be recognized over the postcombination requisite service period of the acquirer’s replacement award along with any portion of the award attributable to future services.

  2. Modify the guidance in the Exposure Draft related to the allocation of the remaining fair value (that is, after considering any excess fair value) of the acquirer award between consideration transferred in the business combination and postcombination compensation cost by revising the description of the calculation amounts attributable to past services. The revision would result in the portion of the award attributable to future services being equal to the total fair value of the acquirer replacement award less the portion attributable to past services.

  3. Modify the guidance in the Exposure Draft by aligning the definition of total service period with the definition used by the IASB. Specifically, the total service period should include only periods of employee service that are required to vest in the award.

  4. Require that an acquirer replacement award classified as a liability be allocated between consideration transferred in the business combination and compensation cost in the same manner that awards classified as equity instruments would be.

  5. Require that the measurement and attribution of acquirer replacement awards with graded vesting follow the acquirer’s accounting policy elections under Statement 123(R) for such awards.

  6. Require that a forfeiture estimate be included in the fair value of unvested awards included in the purchase price. That is, the fair value of the portion of unvested awards attributed to past service should be recorded net with the forfeiture estimate based on the acquirer’s estimate of pre-vesting forfeitures.

  7. Affirm the guidance in the Exposure Draft that postcombination forfeitures of awards considered to be consideration transferred in the business combination do not affect the purchase price. That is, all changes in postcombination forfeiture estimates should be accounted for as adjustments to compensation cost in the periods in which the change in estimate occurred.

  8. Affirm the guidance in the Exposure Draft requiring an acquirer to account for the postcombination effects of replacement share-based payment awards classified as liabilities that were issued in a business combination and included in the consideration transferred in the business combination through adjustments to compensation cost and income tax expense in the period in which they arise.

  9. Require an acquirer to account for the income tax effects that ordinarily would result in future tax deductions under current tax law from awards classified as equity that were issued in a nontaxable business combination and included in the consideration for the business combination on (a) day 1 and on (b) day 2 as follows:

    1. Record deferred taxes in the business combination based on the fair value of equity-classified share-based payment awards issued in a business combination and included as consideration for the business combination with respect to day 1 accounting.

    2. Account for the difference in the deferred taxes recorded in the business combination and the ultimate deduction received by the acquirer as an adjustment to additional paid-in capital, that is, an adjustment to equity as a transaction with a shareholder. Such an adjustment would have no effect on the additional paid-in capital pool.

  10. Require that an acquirer account for the income tax effects that ordinarily would not result in future tax deductions under current tax law from awards classified as equity that were issued in a nontaxable business combination and included in the consideration for the business combination on (a) day 1 and on (b) day 2 as follows:

    1. Do not record deferred taxes. That is, the tax benefits should only be recognized when they occur. The Board believes that this approach is consistent with Statement 123(R).

    2. Recognize the income tax effects of these awards as an adjustment to equity as a transaction with a shareholder.

  11. Require that an acquirer account for the income tax effects from awards classified as equity that were issued in a business combination and considered postcombination cost in a manner consistent with Statement 123(R) as if they were granted absent a business combination.

  12. Require that the income tax effects of awards issued in a business combination be evaluated against a pool of excess tax benefits from awards granted by any entities that are consolidated within the reporting entity’s consolidated financial statements. The income tax effect must be evaluated in comparison to the pool at exercise, vesting, or settlement of the award. The Board believes that this approach would be consistent with the objectives of Statement 123(R) with respect to accounting for the tax effects of share-based payment awards.

FASB DOCUMENT AVAILABLE

Final FSP FAS 158-1, "Conforming Amendments to the Illustrations in FASB Statements No. 87, No.88, and No. 106 and to the Related Staff Implementation Guides," was issued on February 21, 2007, 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, March 7, 2007—FASB Board Meeting
Wednesday, March 7, 2007—FASB Education Session
Wednesday, March 14, 2007—FASB Board Meeting
Wednesday, March 14, 2007—FASB Education Session
Thursday, March 15, 2007—Emerging Issues Task Force Meeting
Tuesday, March 20, 2007—Financial Accounting Standards Advisory Council Meeting
Wednesday, March 21, 2007—FASB Board Meeting
Wednesday, March 21, 2007—FASB Education Session
Tuesday, March 27, 2007—Not-for-Profit Roundtable Meeting
Wednesday, March 28, 2007—FASB Board Meeting
Wednesday, March 28, 2007—FASB Education Session
Wednesday, April 4, 2007—FASB Board Meeting
Wednesday, April 4, 2007—FASB Education Session
Wednesday, April 11, 2007—FASB Board Meeting
Wednesday, April 11, 2007—FASB Education Session
Tuesday, April 17, 2007—Valuation Guidance for Financial Reporting Roundtable
Wednesday, April 18, 2007—FASB Board Meeting
Wednesday, April 18, 2007—FASB Education Session
Monday, April 23, 2007—FASB/IASB Joint Board Meeting, London
Tuesday, April 24, 2007—FASB/IASB Joint Board Meeting, London
Thursday, April 26, 2007—FASB Education Session