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Action Alert No. 08-12
March 20, 2008
NOTICE OF MEETINGS
OPEN BOARD MEETING
(Board
meetings are available by audio webcast and telephone.)
Wednesday, March 26, 2008, 8:00 a.m.
The Board meeting will begin at 8:00 a.m. instead of 9:00
a.m.
- FASB
ratification of EITF consensuses and tentative conclusions
(estimated 15-minute discussion). The Board will consider the
ratification of the consensuses reached at the March 12, 2008 EITF
meeting. (See discussion under EITF ACTIONS.)
- GAAP
hierarchy (estimated 30-minute discussion). The Board
will discuss issues raised by respondents to the near-final version of
the Statement on the hierarchy of generally accepted accounting
principles.
- Convertible
debt instruments that may be settled in cash upon conversion (including
partial cash settlement) (estimated 2-hour discussion).
The Board will discuss issues raised by respondents to proposed FSP APB
14-a, Accounting for Convertible Debt Instruments That May Be Settled
in Cash upon Conversion (Including Partial Cash Settlement), and
whether to issue that FSP as final.
- Omnibus
changes to consolidation and equity method guidance for not-for-profit
organizations (estimated 45-minute discussion). The Board
will discuss issues raised by respondents to proposed FSP SOP 94-3-a and
AAG HCO-a, Omnibus Changes to Consolidation and Equity Method
Guidance for Not-for-Profit Organizations, and whether to issue that
FSP as final.
- 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 26, 2008, 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.
March 11, 2008 Board Meeting
Accounting
for certain nonfinancial liabilities: contingency disclosures. The
Board decided to expose for comment a proposed amendment to FASB Statement
No. 5, Accounting for Contingencies. The Board decided that the
proposed amendment will have a 60-day comment period. The Board also
decided to hold a public roundtable discussion on the Exposure Draft.
The Board decided that the Exposure Draft will address the following
issues:
- Principle—The Board affirmed the recommended principle
requiring an entity to provide disclosures that are sufficient to enable
users of financial statements to assess the likelihood, timing, and
amount of future cash flows associated with loss contingencies. Those
disclosures should include discussion of the risks loss contingencies
pose to the entity and their effects on the financial statements.
- Scope—The Board agreed with the proposed principle that all
loss contingencies should be disclosed unless certain narrow criteria
are met. If management determines that the likelihood of a loss is
remote, disclosure would not be required. However, the Board decided
that any contingency, regardless of the likelihood of a loss, with the
potential to result in a near-term and severe impact on
the financial position, cash flows, or results of operations of an
entity should be included within the scope of the proposed amendment.
The Board asked the staff to clarify that the possibility of a
near-term, severe impact should be based on events that are expected to
occur in the near term.
- Quantitative Requirements—The Board decided to require that
an entity disclose the claim amount or, in the absence of a claim
amount, an estimate of the maximum potential exposure to loss. An entity
would be allowed the option to include a supplemental disclosure of its
best estimate of the possible loss or range of loss if it believes the
claim or maximum amount is not indicative of the entity’s actual
exposure. Other disclosures that will be required include:
- Reconciliation—The Board decided to require a tabular
reconciliation of the total amount recognized in the aggregate for
loss contingencies in the statement of financial position at the
beginning and end of each period.
- Recoveries—The Board decided to require a qualitative and
quantitative description of the terms of relevant insurance or
indemnification arrangements that could lead to a recovery of some or
all of the possible loss and disclosure of the amount accrued for
recoveries.
- Legal fees—The Board decided that an entity would not be
required to disclose legal fees associated with defending against loss
contingencies.
- Qualitative Requirements—The Board decided to require that an
entity disclose information, including the description of the
contingency, a description of the factors that are likely to affect the
ultimate outcome of the contingency, management’s qualitative assessment
of the most likely outcome of the contingency, and any assumptions made
by management in estimating the amounts in its quantitative disclosures
and in assessing the most likely outcome.
- Reporting Period—The Board decided that the proposed tabular
reconciliation should be provided in both annual and interim reporting
periods.
- Prejudicial Exemption—The Board decided to include a
prejudicial exemption that would consist of a two-step process. First,
an entity would be allowed to aggregate the required disclosures about
loss contingencies at a higher level than otherwise allowed such that
the information is not prejudicial. Second, in rare cases in which
disclosures aggregated at a higher level still would be prejudicial (for
example, if an entity is involved in only one legal dispute), the entity
would be allowed to forgo disclosing only the information that would be
prejudicial to the entity’s case. The Board asked the staff to clarify
that in no circumstance may an entity forgo providing the amount of the
claim, a description of the contingency, and a description of the
factors that are expected to affect the ultimate outcome of the
contingency.
- Business Combinations—The Board decided that loss
contingencies assumed in a business combination and accounted for under
FASB Statement No. 141 (revised 2007), Business Combinations,
should be in the scope of the proposed amendment both at the time of
acquisition and subsequently. That would require an amendment to
Statement 141(R).
- Guarantees—The Board decided that guarantees within the scope
of the disclosure requirements of FASB Interpretation No. 45,
Guarantor’s Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others, would not
be included within the scope of the proposed amendment. The Board also
decided not to amend the disclosure requirements in Interpretation 45 as
part of this project.
- Transition and Effective Date—The Board decided that the
proposed amendment should be effective for annual financial statements
issued for fiscal years ending after December 15, 2008, and for interim
and annual periods in subsequent fiscal years.
The Board directed the staff to proceed to a draft of a proposed
Statement for vote by written ballot.
March 12, 2008 Board Meeting
Financial
statement presentation. The Board discussed its tentative view
expressed in September 2006 that income taxes should be presented as a
separate section in each of the financial statements rather than allocated
as required under FASB Statement No. 109, Accounting for Income
Taxes. The Board agreed that the Preliminary Views would be more
effective in soliciting comment on this issue if it explored and
illustrated two views (one view being presentation of income taxes in a
separate section of each financial statement and the other view being the
allocation of income taxes). Thus, the document will not contain a
preliminary view on this issue.
The Board agreed with the IASB’s decision that in addressing the
allocation view, the Preliminary Views should discuss whether an entity
should allocate income taxes to all or some of the components of
comprehensive income. For example, income taxes could be allocated to (1)
all of the categories and sections in the working format, (2) continuing
operations, discontinued operations, items of other comprehensive income,
or (3) only items of other comprehensive income. In addition, the Board
agreed with the IASB’s decision that the Preliminary Views should discuss
whether income taxes on transactions with owners should continue to be
charged or credited directly to equity.
The Board also discussed a previous decision that if income taxes are
presented in a separate section, there should be supplemental disclosures
in the notes to financial statements. The Board decided that those
proposed disclosures would include the following:
- A numerical reconciliation between the effective income tax rate
(income tax expense divided by pre-tax comprehensive income) and the
statutory (applicable) rate, and between the effective income tax rate
and the “current” effective tax rate (the current portion of income tax
expense divided by pre-tax comprehensive income). Alternatively, the
reconciliation could be between the corresponding tax amounts rather
than the tax rates.
- A discussion about each significant reconciling item in (1) above,
focusing on the effect of tax rates in different jurisdictions and on
the transactions or events that influenced effective tax rates and how
those factors may affect effective rates in the future.
- A discussion about the effect of income taxes on the operating,
investing, financing, discontinued operations, and other comprehensive
income categories/sections in the statement of comprehensive income (to
the extent not covered in (2)). The focus of the disclosure should be on
whether income taxes in each category differ from what a user would
expect based on the entity’s statutory tax rate. If major differences
exist, the disclosure should provide information that allows a user to
gauge whether each difference is likely to be maintained or reversed in
future periods.
EITF ACTIONS
March 12, 2008 EITF Meeting
The Task Force discussed the following issues:
- Issue No. 98-5, "Accounting for Convertible Securities with
Beneficial Conversion Features or Contingently Adjustable Conversion
Ratios." The Task Force approved conforming changes for this Issue to
reflect more clearly the consensus on EITF Issue No. 00-27, "Application
of Issue No. 98-5 to Certain Convertible Instruments," and the issuance
of FASB Statement No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. In
addition, the Task Force decided to provide transition guidance for
those conforming changes. (Refer to EITF Issue No. 08-4, "Transition
Guidance for Conforming Changes to Issue No. 98-5," below.) The Board
will consider ratification of the conforming changes at its March 26,
2008 meeting.
The Task Force also discussed a related issue about whether
convertible instruments that have terms that provide for settlement
through the issuance of (a) a variable number of shares with a fixed
monetary amount if settlement occurs when the share price is less than a
certain amount or (b) a fixed number of shares if settlement occurs when
the share price is equal to or greater than a certain amount should be
evaluated as if it had (1) a single compound embedded feature (that is,
one embedded feature with the characteristics of a share-settled “put
warrant”) or (2) two separate embedded features (that is, an embedded
put option and an embedded conversion feature), but decided not to
address this issue. As a result, Case 1(d) in Exhibit 98-5A to Issue
98-5 in EITF Abstracts will be nullified as part of the
conforming changes as it illustrates the accounting for a financial
instrument with terms that provide for settlement through the issuance
of (a) a variable number of shares with a fixed monetary amount if
settlement occurs when the share price is less than a certain amount or
(b) a fixed number of shares if settlement occurs when the share price
is equal to or greater than a certain amount.
- Issue No. 07-4, "Application of the Two-Class Method under FASB
Statement No. 128 to Master Limited Partnerships." The Task Force
affirmed as a consensus the consensus-for-exposure reached at the
November 29, 2007 EITF meeting.
The Task Force also considered an additional issue about determining
when the master limited partnership (MLP) should reflect its contractual
obligation to make distributions to the general partner (GP), limited
partners (LPs), and incentive distribution rights (IDR) holder. The Task
Force reached a consensus that for application of the two-class method,
the MLP should reflect its contractual obligation to make distributions
as of the end of the current reporting period. Therefore, an MLP would
reduce (increase) income (loss) from continuing operations (or net
income or loss) for the current reporting period by the amount of
available cash that has been or will be distributed to the GP, LPs, and
IDR holder (or GP with respect to an embedded IDR) for that current
reporting period. If distributions to the IDR holder (or GP with respect
to an embedded IDR) are contractually limited to available cash as
defined in the partnership agreement, then the specified threshold for
the current reporting period would be the holder’s share of available
cash that has been or will be distributed to the IDR holder (or GP with
respect to an embedded IDR) for that current reporting period.
This Issue should be effective for financial statements issued for
fiscal years beginning after December 15, 2008, and interim periods
within those fiscal years. Earlier application is not permitted. The
guidance in this Issue should be applied retrospectively for all
financial statements presented.
The Board will consider the ratification of the consensuses in this
Issue at its March 26, 2008 meeting.
- Issue No. 07-5, "Determining Whether an Instrument (or Embedded
Feature) Is Indexed to an Entity's Own Stock." The Task Force reached a
consensus-for-exposure that an entity should determine whether an
equity-linked financial instrument (or embedded feature) is indexed to
its own stock first by evaluating the instrument’s contingent exercise
provisions, if any, and then by evaluating the instrument’s settlement
provisions. An exercise contingency would not preclude an instrument (or
embedded feature) from being considered indexed to an entity’s own stock
provided that it is not based on (a) an observable market, other than
the market for the issuer’s stock (if applicable), or (b) an observable
index, other than an index calculated or measured solely by reference to
the issuer’s own operations. If the evaluation of any potential exercise
contingency does not preclude an instrument from being considered
indexed to the entity's own stock, then the second evaluation would be
performed. An instrument (or embedded feature) would be considered
indexed to an entity's own stock if its settlement amount will equal the
difference between the fair value of a fixed number of the entity's
equity shares and a fixed amount of cash or another financial asset. An
issued share option that gives the counterparty a right to buy a fixed
number of the entity's shares for a fixed price or for a fixed stated
principal amount of a bond would be considered indexed to an entity's
own stock. An instrument's strike price or the number of shares used to
calculate the settlement amount are not fixed if its terms provide for
any potential adjustment, regardless of the probability of such
adjustment(s) or whether such adjustments are in the entity's control.
In cases in which the instrument's strike price or the number of shares
used to calculate the settlement amount are not fixed, the Task Force
reached a consensus-for-exposure that the instrument would not be
considered indexed to an entity's own stock unless the only variables
that could affect the settlement amount would be inputs to the fair
value of a "fixed-for-fixed" forward or option on equity shares.
The Task Force reached a consensus-for-exposure that an equity-linked
financial instrument (or embedded feature) would not be considered
indexed to the entity's own stock if the strike price is denominated in
a currency other than the issuer's functional currency (including a
conversion option embedded in a convertible debt instrument that is
denominated in a currency other than the issuer's functional currency).
The determination of whether an equity-linked financial instrument is
indexed to an entity's own stock is not affected by the currency (or
currencies) in which the underlying shares trade.
The Task Force reached a consensus-for-exposure that market-based
employee stock option valuation instruments are not considered indexed
to the entity's own stock under the guidance in this Issue and that an
exception should not be provided. Consequently, those instruments do not
qualify for the scope exception in paragraph 11(a) of FASB Statement No.
133, Accounting for Derivative Instruments and Hedging
Activities.
The Task Force reached a consensus-for-exposure that this Issue
should be effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those
fiscal years. Early application is not permitted.
The Task Force reached a consensus-for-exposure that this Issue
should be applied to outstanding instruments as of the beginning of the
fiscal year in which this Issue is initially applied.
The Board will consider the ratification of the
consensuses-for-exposure in this Issue at its March 26, 2008 meeting. 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.
- Issue No. 08-1, "Revenue Recognition for a Single Unit of
Accounting." The Task Force considered whether, under certain facts and
circumstances, it may be acceptable to use a multiple attribution model
to account for a single unit of accounting. The Task Force discussed
this Issue and requested that the FASB staff perform more research for
Task Force consideration. This Issue will be discussed further at a
future meeting.
- Issue No. 08-2, "Lessor Revenue Recognition for Maintenance
Services." The Task Force considered whether the scope of this Issue
should include all payments for maintenance services in an arrangement
accounted for as a lease, but it did not reach a tentative conclusion.
The Task Force requested that the FASB staff perform additional research
on the types of arrangements to which this Issue may apply and provide
further analysis of when payments for maintenance in those arrangements
would be considered executory costs, other service provided by the
lessor, or part of the lease payment for the leased item. The Task Force
also asked the staff to perform further research on the effect of this
Issue on the conclusions reached in FSP AUG AIR-1, Accounting for
Planned Major Maintenance Activities.
The Task Force reached a tentative conclusion that revenue related to
maintenance services should be recognized into income as those services
are performed utilizing a proportional performance method that is
determined to be the most appropriate method under the
circumstances.
Once tentative conclusions for both issues in this Issue have been
reached and they have been affirmed as consensuses-for-exposure, the
Board will consider them for ratification. This Issue will be discussed
further at a future meeting.
- Issue No. 08-3, "Accounting by Lessees for Maintenance Deposits
under Lease Agreements." The Task Force reached a consensus-for-exposure
that all nonrefundable maintenance deposits should be accounted for as a
deposit. When the underlying maintenance is performed, the deposit is
expensed or capitalized in accordance with the lessee’s maintenance
accounting policy. Once it is determined that an amount on deposit is
not probable of being used to fund future maintenance expense, it is
recognized as additional rent expense at the time such determination is
made.
The Task Force also reached a consensus-for-exposure that this Issue
should be effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those
fiscal years. Earlier application is not permitted.
The Task Force reached a consensus-for-exposure that entities should
recognize the effect of the change as a change in accounting principle
as of the beginning of the fiscal year in which this consensus is
initially applied for all arrangements existing at the effective date.
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) for that fiscal year, presented
separately.
The Board will consider the ratification of the
consensuses-for-exposure in this Issue at its March 26, 2008 meeting. 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.
- EITF Issue No. 08-4, "Transition Guidance for Conforming Changes to
Issue No. 98-5." The Task Force did not object to conforming changes
being made to Issue 98-5 that are the result of the consensus on Issue
00-27 and the issuance of FASB Statement No. 150, Accounting for
Certain Financial Liabilities with Characteristics of both Liabilities
and Equity. The Task Force also decided to provide transition
guidance for those conforming changes and reached a
consensus-for-exposure that those conforming changes should be effective
for financial statements issued for fiscal years ending after December
15, 2008, and interim periods within those fiscal years, with earlier
application permitted. The effect of applying the conforming changes, if
any, should be presented retrospectively with the cumulative effect of
the change being reported in retained earnings in the statement of
financial position as of the beginning of the first period presented
(retrospective application).
The Board will consider the ratification of the
consensus-for-exposure in this Issue at its March 26, 2008 meeting. 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.
FASB DOCUMENTS AVAILABLE
The following documents are available on the FASB website:
FASB Statement No.
161, Disclosures about Derivative Instruments and Hedging
Activities (March 19, 2008).
Proposed
FSP FAS 132(R)-a, Employers’ Disclosures about Postretirement
Benefit Plan Assets (March 18, 2008). Comments are requested by May 2,
2008.
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 2, 2008—FASB Board Meeting
Wednesday, April 2,
2008—FASB Education Session
Wednesday, April 9, 2008—FASB Board
Meeting
Wednesday, April 9, 2008—FASB Education Session
Wednesday,
April 16, 2008—FASB Board Meeting
Wednesday, April 16, 2008—FASB
Education Session
Monday, April 21, 2008—FASB/IASB Joint Board Meeting,
London
Tuesday, April 22, 2008—FASB/IASB Joint Board Meeting,
London
Thursday, April 24, 2008—FASB Education Session
Wednesday,
April 30, 2008—FASB Board Meeting
Wednesday, April 30, 2008—FASB
Education Session
Tuesday, May 6, 2008—FASB Insurance
Forum
Wednesday, May 7, 2008—FASB Board Meeting
Wednesday, May 7,
2008—FASB Education Session
Wednesday, May 14, 2008—FASB Board
Meeting
Wednesday, May 14, 2008—FASB Education Session
Wednesday,
May 21, 2008—FASB Board Meeting
Wednesday, May 21, 2008—FASB Education
Session
Thursday, May 22, 2008—Liaison Meeting with Healthcare
Financial Management Association
Wednesday, May 28, 2008—FASB Education
Session
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