Action Alert No. 07-25
June 21, 2007

NOTICE OF MEETINGS

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

Wednesday, June 27, 2007, 9:00 a.m.

  1. Conceptual framework: objectives and qualitative characteristics (estimated 75-minute discussion). The Board will redeliberate issues raised by respondents to the July 2006 Preliminary Views, Conceptual Framework for Financial Reporting: Objective of Financial Reporting and Qualitative Characteristics of Decision-Useful Financial Reporting Information, focusing on issues related to the objective of financial reporting.

  2. Liabilities and equity (estimated 45-minute discussion). The Board will discuss the classification of instruments in which an issuer may be economically compelled to settle or choose a certain settlement alternative.

  3. Accounting for leases (estimated 60-minute discussion). The Board will discuss measurement of a lessee’s liability to the lessor, measurement of a lessee’s right to use asset, and initial recognition of assets and liabilities in lease contracts. The meeting will be informational and no decisions are expected.

  4. FASB ratification of EITF consensuses and tentative conclusions (estimated 15-minute discussion). The Board will consider the ratification of the consensuses reached at the June 14, 2007 EITF meeting. (See discussion under EITF ACTIONS.)

  5. 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, June 27, 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, FSP, or Statement 133 Implementation Issue.

June 13, 2007 Board Meeting

Business combinations. The Board reconsidered its decisions about the initial and subsequent accounting for contingencies acquired or assumed in a business combination.

  1. The Board affirmed its decision that, as of the acquisition date, the acquirer should recognize at fair value (a) all contingencies that arise from contractual rights and obligations and (b) those contingencies that do not arise from contractual rights and obligations (noncontractual contingencies) if it is more likely than not that the contingency meets the definition of an asset or liability.

  2. The Board changed its previous decision that any noncontractual contingency acquired or assumed as part of a business combination that does not meet the more likely than not recognition threshold at the acquisition date should be initially recognized and measured at fair value on the first date after the business combination that it does meet the recognition threshold. The Board decided instead that noncontractual contingencies that are not recognized at the acquisition date should subsequently be accounted for in accordance with FASB Statement No. 5, Accounting for Contingencies.

  3. The Board affirmed its decision that after the acquisition date, contingencies in the scope of another standard should be accounted for in accordance with that standard (for example, FASB Statement No. 60, Accounting and Reporting by Insurance Enterprises). The Board also affirmed its decision to remeasure at fair value contingencies recognized at the acquisition date that otherwise would be included in the scope of Statement 5. Changes in the fair value of those contingencies after the acquisition date should be recognized in net income in the period they occur.

Open discussion: Statement 140 implementation—repurchase financing agreements. The Board discussed the proposed FSP on accounting for transfers of financial assets and repurchase financing transactions. The Board made the following decisions:

  1. The FSP should be effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Earlier application should not be permitted.

  2. The guidance should be applied to existing repurchase financings as of the beginning of the fiscal year in which the FSP is initially applied as a cumulative-effect adjustment. The cumulative effect of the change in accounting principle should be recognized as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position). The cumulative-effect adjustment is the difference between the amounts (if any) recognized in the statement of financial position before the initial application of the FSP and the amounts recognized in the statement of financial position at initial application of the FSP.

  3. In the year of initial application of the FSP, an entity should disclose the nature of the change and the cumulative effect of the change on retained earnings or on other components of equity or net assets in the statement of financial position. An entity also should disclose the effect of the change on any other affected financial statement line item in the statement of financial position.

  4. The comment period for the proposed FSP should end on the later of 30 days after issuance or August 31, 2007.

The Board directed the staff to proceed to a draft of the proposed FSP for vote by written ballot. The Board expects that the proposed FSP will be issued in July 2007.

EITF ACTIONS

June 14, 2007 EITF Meeting

The Task Force discussed the following issues:

  1. Issue No. 06-11, "Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards." The Task Force affirmed as a consensus its tentative conclusion that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and paid to employees for equity-classified nonvested equity shares, nonvested equity share units, and outstanding equity share options should be recognized as an increase to additional paid-in capital. The amount recognized in additional paid-in capital for the realized income tax benefit from dividends on those awards should be included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards. The Task Force also discussed how the consensus on this Issue interacts with the guidance in footnote 61 of FASB Statement No. 123 (revised 2004), Share-Based Payment, which requires dividends on equity-classified share-based payment awards to be reallocated between retained earnings (for awards expected to vest) and compensation cost (for awards not expected to vest) each reporting period to reflect current forfeiture estimates. The Task Force reached a consensus that adjustments to additional paid-in capital for reclassifications of the tax benefits from dividends on those awards in subsequent periods (that is, when the entity’s estimate of forfeitures changes and the related dividends are reclassified between retained earnings and compensation expense) would increase or decrease the entity’s pool of excess tax benefits available to absorb tax deficiencies by a corresponding amount. Additionally, the amount of tax benefits from dividends that are reclassified from additional paid-in capital to the income statement (that is, as a reduction of income tax expense or an increase of income tax benefit) when an entity’s estimate of forfeitures increases (or actual forfeitures exceed the entity’s estimates) should be limited to the entity’s pool of excess tax benefits available to absorb tax deficiencies on the date of the reclassification.

    The Task Force reached a consensus that this Issue should be applied prospectively to the income tax benefits of dividends on equity-classified employee share-based payment awards that are declared in fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. Early application is permitted as of the beginning of a fiscal year for which interim or annual financial statements have not yet been issued. Retrospective application to previously issued financial statements is prohibited. Entities should disclose the nature of any change in their accounting policy for income tax benefits of dividends on share-based payment awards resulting from the adoption of this guidance. The Board will consider the ratification of the consensuses in this Issue at its June 27, 2007 meeting.

  2. Issue No. 07-1, "Accounting for Collaborative Arrangements." The Task Force reached a tentative conclusion that a collaborative arrangement is a contractual arrangement in which the participants are active participants to the arrangement and are exposed to significant risks and rewards that are dependent on the ultimate commercial success of the endeavor (for example, an endeavor would be a drug candidate in the biotechnology and pharmaceutical industries or a motion picture in the entertainment industry).

    The Task Force reached a tentative conclusion that the income statement characterization of payments between participants pursuant to a collaborative arrangement should be evaluated based on the nature of the arrangement, the nature of the entity's business operations, and whether these payments are within the scope of other authoritative literature regarding income statement characterization. If these payments are within the scope of existing literature, then the entity should apply the relevant provisions of that literature. To the extent that these payments are not within the scope of other authoritative literature, the income statement characterization for these payments should be based on analogy to authoritative literature or a reasonable, rational, and consistently applied accounting policy election.

    The Task Force reached a tentative conclusion that the resulting presentation of amounts related to the collaborative arrangement represents an accounting policy that should be disclosed in accordance with APB Opinion No. 22, Disclosure of Accounting Policies. In the footnotes to its annual financial statements, an entity should disclose (a) information about the nature and purpose of an entity's collaborative arrangements, (b) an entity's rights and obligations under the collaborative arrangements, (c) the life cycle stage of the underlying endeavor, (d) the income statement classification and amounts attributable to amounts due to or from other participants to the collaborative arrangement, and (e) cash payments and receipts under the collaborative arrangements in the period. Information related to individually significant collaborative arrangements should be disclosed separately.

    The Task Force reached a tentative conclusion that this Issue will be effective for annual periods beginning after December 15, 2007. Entities should report the effects of applying this Issue as a change in accounting principle through retrospective application to all periods. If it is impracticable to apply the effects of a change in accounting principle retrospectively, disclosure should be made of both the reasons why reclassification was not made and the effect of the reclassification on the current period pursuant to the guidelines in paragraph 9 of FASB Statement No. 154, Accounting Changes and Error Corrections. Upon application, required disclosures include: (a) a description of the prior-period information that has been retrospectively adjusted, if any, and (b) the effect of the change on revenue and operating expenses (or other appropriate captions of changes in the applicable net assets or performance indicator), and on any other affected financial statement line item.

    The Board will consider the ratification of the tentative conclusions at a meeting in July. If ratified, a draft abstract will be posted to the FASB website for public comment. This Issue will be discussed further at a future meeting.

  3. Issue No. 07-2, "Accounting for Convertible Debt Instruments That Are Not Subject to the Guidance in Paragraph 12 of APB Opinion No. 14." The Task Force discussed this Issue but was unable to reach a consensus. The Task Force agreed to discontinue discussion of this Issue and, accordingly, to remove it from the EITF’s agenda. The FASB Board members in attendance indicated that they would consider adding a project to the Board’s agenda to address the issue. No further EITF discussion is planned.

  4. Issue No. 07-3, "Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in Future Research and Development Activities." The Task Force affirmed as a consensus the tentative conclusion that nonrefundable advance payments for future research and development activities should be deferred and capitalized. Those amounts should be recognized as an expense as the goods are delivered or the related services are performed. Entities should continue to evaluate whether they expect the goods to be delivered or services to be rendered. If an entity does not expect the goods to be delivered or services to be rendered, the capitalized advance payment should be charged to expense.

    The Task Force also reached a consensus that this Issue will be effective for financial statements issued for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. Earlier application is not permitted. Entities should report the effects of applying the consensus in this Issue prospectively for new contracts entered into after the effective date of this Issue. The Board will consider the ratification of the consensuses in this Issue at its June 27, 2007 meeting.

  5. Issue No. 07-4, "Application of the Two-Class Method under FASB Statement No. 128 to Master Limited Partnerships." The Task Force discussed this Issue and requested that the FASB staff provide additional examples illustrating the application of the various alternatives for discussion at a future EITF meeting. In addition, the Task Force requested that the staff obtain additional information about incentive distribution rights and the nature of the general partner’s involvement with the master limited partnership. This Issue will be discussed further at a future meeting.

FUTURE OPEN MEETINGS

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

Thursday, July 5, 2007—FASB Education Session
Wednesday, July 11, 2007—FASB Board Meeting
Wednesday, July 11, 2007—FASB Education Session
Wednesday, July 18, 2007—FASB Board Meeting
Wednesday, July 18, 2007—FASB Education Session
Wednesday, July 25, 2007—FASB Board Meeting
Wednesday, July 25, 2007—FASB Education Session
Wednesday, August 1, 2007—FASB Board Meeting
Wednesday, August 1, 2007—FASB Education Session
Wednesday, August 8, 2007—FASB Board Meeting
Wednesday, August 8, 2007—FASB Education Session
Wednesday, August 15, 2007—FASB Board Meeting
Wednesday, August 15, 2007—FASB Education Session
Wednesday, August 22, 2007—FASB Board Meeting
Wednesday, August 22, 2007—FASB Education Session
Wednesday, August 29, 2007—FASB Board Meeting
Wednesday, August 29, 2007—FASB Education Session