Action Alert No. 07-13
March 29, 2007

NOTICE OF MEETINGS

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

No Board meetings are planned for the week of April 2, 2007. The next scheduled Board meeting is Wednesday, April 11, 2007, and topics for that meeting will be announced in next week’s issue of Action Alert.

OPEN EDUCATION SESSION

Wednesday, April 4, 2007, 9:00 a.m.

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.

March 21, 2007 Board Meeting

Statement 133 Implementation Issue—hedging functional-currency-equivalent proceeds to be received from a forecasted foreign-currency-denominated debt issuance. The Board continued its redeliberations of the proposed FASB Statement 133 Implementation Issue No. H17, "Hedging Functional-Currency-Equivalent Proceeds to Be Received from a Forecasted Foreign-Currency-Denominated Debt Issuance." The Board decided not to issue a final Implementation Issue and removed this project from its agenda. The Board indicated that it would prefer to address the application of cash flow hedging and other issues in this project within the scope of a possible broader derivatives project, which will be considered at a future agenda decision Board meeting.

Financial statement presentation. The Board discussed three issues: (1) the presentation of changes in assets and liabilities; (2) the presentation of other comprehensive income items; and (3) whether to retain the concept of cash equivalents and, if so, its definition.

Presentation of Changes in Assets and Liabilities

The Board decided that the cohesiveness principle should be applied at the line-item level, if practicable. That is, changes in individual line items on the statement of financial position should be linked to similarly classified line items on the statement of comprehensive income and statement of cash flows, to the extent possible. To achieve line-item cohesiveness, the Board agreed to consider a reconciliation of beginning and ending statements of financial position. The purpose of this reconciliation would be to provide information that would help investors and other users of financial statements understand the cause of a change in reported amounts of assets and liabilities, consistent with one of the project working principles.

The Board decided that in determining what information should be presented in a reconciliation of statements of financial position, it would consider the characteristics of persistence and measurement subjectivity as those are factors that a user takes into account in predicting future cash flows. For example, changes related to recurring fair value measurements (as those terms are used in FASB Statement No. 157, Fair Value Measurements) might be presented separately from other changes in assets and liabilities. The Board will continue its discussion of what types of changes should be disaggregated at a future meeting.

Presentation of Other Comprehensive Income Items

The Board affirmed its December 2006 decision that other comprehensive income items other than foreign currency translation adjustments would be classified on the statement of comprehensive income consistent with the classification of the asset or liability that gives rise to those items. For example, an unrealized gain or loss on an available-for-sale security classified in the investing category on the statement of financial position would be classified in the investing category on the statement of comprehensive income. The Board discussed but did not reach a decision on how foreign currency translation adjustments should be classified on the statement of comprehensive income. A subcategory within each functional category would distinguish items of income and expense that are components of other comprehensive income from those that are not. The Board also affirmed its December 2006 decision that another comprehensive income item should continue to be recycled, as required by other standards, within the functional category in which the other comprehensive income item was initially recognized.

To achieve the Board’s long-term goal of presenting other comprehensive income items in the same manner as all other changes in assets and liabilities, the Board decided to address the standards that give rise to other comprehensive income items individually and separately, rather than as part of the financial statement presentation project.

Cash Equivalents

The Board decided that the notion of cash equivalents should not be retained in financial statement presentation. The definition of cash in existing literature would be retained, and the statement of cash flows would present information on movements of cash only. The Board directed the staff to consider whether net amounts of receipts and payments related to items previously classified as cash equivalents would continue to be permitted for presentation on the statement of cash flows. The Board will discuss how financial assets should be presented in the statement of financial position and what related disclosures in the notes to financial statements should be required when it revisits other liquidity disclosure issues.

Accounting for leases. The Board discussed assets and liabilities arising in a simple lease contract as well as a staff analysis of different possible accounting models. For the simple, noncancelable lease example, the Board decided that:

  1. The lessee has an asset for the right to use the leased item over the lease term and a liability for the obligation to make payments over the lease term. The lessor has an asset for the right to receive payments over the lease term.

  2. The staff should base future analyses on the existing conceptual framework; however, the staff should monitor proposed revisions to the framework made in the conceptual framework project and consider if those revisions would change the staff’s analyses.

  3. The staff should continue to develop the right-of-use model with the understanding that issues pertaining to measurement, presentation, derecognition, recognition, and scope have not yet been considered and could affect preliminary conclusions. The Board directed the staff to provide journal entries under the simple lease example to better understand the accounting and presentation under a right-of-use model for both the lessee and the lessor.

Business combinations: applying the acquisition method. The Board continued redeliberations of its June 2005 Exposure Drafts, Business Combinations, and Consolidated Financial Statements, Including Accounting and Reporting of Noncontrolling Interests in Subsidiaries.

  1. The Board affirmed the initial and subsequent accounting for contingent consideration that was proposed in the business combinations Exposure Draft. Therefore, an acquirer would:

    1. Measure and recognize contingent consideration at fair value as of the acquisition date.

    2. Classify contingent consideration as either a liability or equity as of the acquisition date.

    3. After initial recognition:

      (1)  Not remeasure contingent consideration classified as equity.

      (2)  Remeasure to fair value contingent consideration classified as a liability.

      (3)  Recognize changes in the fair value of contingent consideration classified as a liability in earnings with one exception. The acquirer may recognize changes in the fair value of contingent consideration classified as a liability in other comprehensive income if the contingent consideration is a hedging instrument and recognition of the changes in other comprehensive income is permitted in accordance with FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.

  2. The Board clarified how the measurement period guidance applies to contingent consideration. The measurement period allows the acquirer a period of time to gather information about facts and circumstances that existed at the acquisition date. After the acquisition date, the fair value of contingent consideration classified as a liability will change due to changes in circumstances like meeting specified sales targets, fluctuations in share price, or subsequent events like receiving FDA approval on an in-process research and development project. Changes in the fair value of contingent consideration classified as a liability due to changes in circumstances since the acquisition date should be recognized in earnings. Changes in the fair value of contingent consideration due to gathering of new information about facts and circumstances that existed at the acquisition date, however, would be considered measurement-period adjustments and reflected in the purchase price.

  3. With respect to disclosures about contingent consideration, the Board:

    1. Affirmed that an acquirer should disclose the amount of contingent consideration recognized on the acquisition date.

    2. Affirmed that an acquirer should disclose the range of potential payments (undiscounted).

    3. Affirmed that if there is no limitation on the maximum potential amount of future payments, the acquirer should disclose that fact and the basis for determining the amount of the payment.

    4. Decided that instead of a roll forward, the acquirer should disclose changes in the amounts recognized for the contingent consideration, changes in the range of outcomes (undiscounted), and the reasons for the changes. That disclosure would be required each period until the contingent consideration is settled.

  4. The Board affirmed the decision reached in FASB Statement No. 141, Business Combinations, and in the business combinations Exposure Draft that an assembled workforce should not be recognized as an intangible asset separately from goodwill. That is because an at-will workforce cannot be separated from the business. Therefore, it does not meet the separability criterion.

  5. The Board decided that if an acquisition is a bargain purchase, the acquirer should calculate the amount of the gain attributable to the acquirer as the excess of (a) the amounts recognized for the identifiable assets acquired and liabilities assumed and (b) the acquisition date fair values of the consideration transferred and the acquisition date fair values of any noncontrolling interest in the acquiree. This decision is a change from the proposals in the business combinations Exposure Draft, which proposed to measure any noncontrolling interest in a bargain purchase at its proportional interest in the amounts recognized for the identifiable assets acquired and liabilities assumed.

  6. The Board decided to clarify that the guidance that was proposed in the noncontrolling interests Exposure Draft for calculating the gain or loss when a parent loses control of a subsidiary does not apply to nonreciprocal transfers to owners. Nonreciprocal transfers to owners, such as spinoffs, should continue to be accounted for in accordance with APB Opinion No. 29, Accounting for Nonmonetary Transactions.

  7. In December 2006, the Board affirmed the proposal in the business combinations Exposure Draft that assets recognized at fair value, including receivables, loans, and finance leases, should be recognized and measured at fair value at the acquisition date. Therefore, an acquirer would be prohibited from recognizing a separate valuation allowance. At this meeting, the Board decided that an acquirer should disclose, by major class of receivable, the receivables’ fair value, gross contractual amounts receivable, and the best estimate of cash flows not expected to be collected at the acquisition date.

Agenda decision: intangible assets. The Board added to its agenda a project to provide guidance on how subparagraph 11(d) of FASB Statement No. 142, Goodwill and Other Intangible Assets, should be evaluated in determining the useful life of renewable intangible assets. The Board expects the guidance will be provided in the form of an FSP.

FUTURE OPEN MEETINGS

The following is a list of open meetings tentatively scheduled through May. 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 11, 2007—FASB Board Meeting
Wednesday, April 11, 2007—FASB Education Session
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
Monday, April 30, 2007—Valuation Guidance for Financial Reporting Roundtable
Tuesday, May 1, 2007—User Advisory Council Meeting, New York City
Wednesday, May 2, 2007—FASB Board Meeting
Wednesday, May 2, 2007—FASB Education Session
Tuesday, May 8, 2007—FASB Board Meeting
Tuesday, May 8, 2007—FASB Education Session
Wednesday, May 16, 2007—FASB Board Meeting
Wednesday, May 16, 2007—FASB Education Session
Wednesday, May 23, 2007—FASB Board Meeting
Wednesday, May 23, 2007—FASB Education Session
Wednesday, May 30, 2007—FASB Board Meeting
Wednesday, May 30, 2007—FASB Education Session