Action Alert No. 05-10
March 10, 2005


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

No Board meetings are scheduled for the week of March 14, 2005.


Wednesday, March 16, 2005, 9:00 a.m.

The Board will hold an educational, non-decision-making session to discuss topics that are anticipated to be discussed at the March 23, 2005 Board meeting and other future Board meetings. Those topics will be posted to the FASB calendar four days prior to the education session.

(This meeting is available by audio webcast and telephone.)

Thursday, March 17, 2005, 8:00 a.m. – 4:30 p.m.

The task force plans to discuss the following issues in the order shown:

  1. Issue No. 04-5, "Investor's Accounting for an Investment in a Limited Partnership When the Investor Is the Sole General Partner and the Limited Partners Have Certain Rights"

  2. Issue No. 04-7, "Determining Whether an Interest Is a Variable Interest in a Potential Variable Interest Entity"

  3. Issue No. 04-6, "Accounting for Stripping Costs in the Mining Industry"

  4. Issue No. 04-13, "Accounting for Purchases and Sales of Inventory with the Same Counterparty"

  5. Issue No. 05-1, "The Accounting for the Conversion of an Instrument That Becomes Convertible upon the Issuer's Exercise of a Call Option That Otherwise Is Not Convertible or Not Currently Convertible Based on a Contingency."


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 or Interpretation.

March 2, 2005 Board Meeting

Short-term convergence: accounting changes. The Board redeliberated certain issues related to the provisions of the December 2003 FASB Exposure Draft, Accounting Changes and Error Corrections. The Board decided to:

  1. Require that retrospective application consider the direct effects of a change in accounting principle and the related income tax effects of the change. Indirect effects on items based on income before taxes or net income, such as profit-sharing expense and certain royalties, that would have been recognized if the newly adopted accounting principle had been followed in prior periods should not be included in the retrospective application. Adjustments relating to indirect effects should be reported in the period in which the adjustment is actually recorded and disclosed in accordance with the disclosure requirements of the final Statement. The Board also asked the staff to clarify that this guidance also applies to cases in which a limited retrospective application is used because full retrospective application is impracticable.

  2. Require disclosure of the portion of any indirect effect recorded in the current period that is attributable to each specific prior period presented, if it is practicable to determine that information.

  3. Clarify that the reference to depreciation, amortization, and depletion in the final Statement refers only to methods of allocating costs of long-lived, nonfinancial assets and not to other uses of those terms in GAAP.

  4. Retain the APB Opinion No. 20, Accounting Changes, restatement requirement for a correction of an error, without providing an impracticability exception.

Fair value measurement. The Board continued redeliberations of its Exposure Draft, Fair Value Measurements, focusing on the definition of fair value and its application to liabilities and related issues. The Board reached the following decisions:

  1. For a liability, fair value should reflect the amount that would be paid by the reporting entity to transfer the liability to a willing third party of comparable credit standing (layoff amount). Accordingly, liability remeasurements at fair value should include the effect of changes in the entity’s credit standing so that the estimate reflects the amount that would be observed in an exchange (layoff) between willing parties of the same credit quality, considering the terms of any collateral and other credit enhancements included in the contract for the liability being measured. At a future meeting, the Board plans to consider whether to add to its agenda a separate project to address concerns about including the effect of credit downgrades in those remeasurements required under existing pronouncements, in particular, FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.

  2. At initial recognition where there is an actual transaction for the asset or liability being measured, the transaction price provides presumptive evidence of the fair value of that asset or liability. That presumption can be rebutted in certain circumstances in which there is persuasive evidence to the contrary.

  3. In circumstances in which the transaction price presumption is rebutted, guidance specifying how to recognize the difference between the transaction price and the initial estimate of fair value should be provided in individual pronouncements that require fair value measurements, not in the final Statement. At a future meeting, the Board plans to consider whether to add to its agenda a separate project to address related recognition issues under existing pronouncements, in particular, EITF Issue No. 02-3, “Issues Involved in Accounting for Derivative Contracts Held for Trading Purposes and Contracts Involved in Energy Trading and Risk Management Activities.”

  4. In the absence of observable market data, fair value estimates may be developed using entity data as a practical expedient within Level 4 of the fair value hierarchy, as previously revised.

Financial instruments: liabilities and equity. The Board discussed comments received from resource group members on a draft of the proposed guidance communicating the Board’s decisions on the classification for single component instruments.

The Board decided to make the following clarifications to the draft of the proposed guidance:

  1. Add a list of topics to the summary that will be covered and a brief summary of related literature that may be affected.

  2. Clarify the definition and application of the term counterparty payoff by adding examples to the definition.

  3. Clarify the definition and application of the term contingent settlement provision.

  4. Further explain why a written call option would not be a direct ownership instrument.

  5. Clarify the scope of instruments that would be subject to the classification requirements.

Additionally, the Board decided to deliberate the following four issues:

  1. Should perpetual instruments be subject to the direct ownership instrument requirements?

  2. Should characteristics of a subsidiary’s instrument carry over to the consolidated entity?

  3. How should instruments settled with a consolidated entity’s shares be classified by a subsidiary of that consolidated entity?

  4. Should instruments with claims that are limited prior to liquidation be direct ownership instruments?

The Board decided to consider the issue of distinguishing between substantive and nonsubstantive or remote settlement requirements after it addresses the definition of multiple component instruments.

The Board also decided that it would not reconsider the classification requirements for rights to receive assets or shares. The Board will revisit that issue after it develops its overall classification approach for both single- and multiple-component instruments.

The Board plans to post to the FASB website under its liabilities and equity project a summary of the Board’s decisions relating to the classification of single component instruments, and the basis for those decisions, in a format similar to a proposed Statement of financial accounting standards.

Leveraged leases. The Board discussed several issues related to transactions that are classified as leveraged leases under the provisions of FASB Statement No. 13, Accounting for Leases, and directed the staff to post a proposed FASB Staff Position to the website with a 45-day comment period.

The Board decided that:

  1. The scope of the guidance should include all leveraged leases.

  2. The types of changes in the timing of the realization of tax benefits should be those directly related to the leveraged lease and therefore should not include changes in timing as a result of alternative minimum tax and net operating loss carry forwards.

  3. A threshold should not be incorporated into the guidance for determining whether a recalculation should be performed for a change in the timing of the realization of tax benefits.

  4. A change in timing of the realization of tax benefits from a leveraged lease will require a recalculation of that leveraged lease.

  5. A reevaluation of the lease classification for a leveraged lease should be performed when a recalculation of that leveraged lease is performed.

  6. An entity should recognize the cumulative effect of initially applying this guidance as a change in accounting principle as described in paragraph 20 of APB Opinion No. 20, Accounting Changes.

  7. The guidance will be effective for fiscal years ending after December 15, 2005.

Financial instruments: derivatives implementation. The Board decided to provide an explicit scope exception from the requirements in paragraph 13(b) of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, to embedded call options in a debt instrument if the right to accelerate the settlement of the debt instrument can only be exercised by the borrower (issuer). The Board clarified that the guidance applies only to embedded call options with respect to the application of paragraph 13(b) of Statement 133 and that such call options are still subject to the requirements in paragraphs 13(a) and 61(d) of Statement 133. In addition, this guidance does not apply to other embedded features that may be present with a call option in the same hybrid instrument.

The exception will take the form of a new Statement 133 Implementation Issue (Issue B39) that the staff will provide to the Statement 133 Resource Group for its comments. The Board will discuss comments received from the Resource Group at a future meeting, at which time transition and effective date guidance will be discussed, prior to exposing the Implementation Issue for public comment. The Board directed the staff to perform additional research and return to the Board with a recommendation as to whether it should proceed with discussions on the original “net settlement” issue addressed in Statement 133 Implementation Issue No. B38, “Embedded Derivatives: Evaluation of Net Settlement with Respect to the Settlement of a Debt Instrument through Exercise of an Embedded Put or Call.”


The following is a list of open meetings tentatively scheduled through April. All meetings are held in Norwalk, Connecticut, unless otherwise noted. 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, March 22, 2005—Financial Accounting Standards Advisory Council
Wednesday, March 23, 2005—FASB Board Meeting
Wednesday, March 23, 2005—FASB Education Session
Wednesday, March 30, 2005—FASB Board Meeting
Wednesday, March 30, 2005—FASB Education Session
Wednesday, April 6, 2005—FASB Board Meeting
Wednesday, April 6, 2005—FASB Education Session
Wednesday, April 13, 2005—FASB Board Meeting
Wednesday, April 13, 2005—FASB Education Session
Thursday, April 21, 2005—IASB/FASB Joint Board Meeting, London
Friday, April 22, 2005—IASB/FASB Joint Board Meeting, London
Wednesday, April 27, 2005—No FASB Board Meeting
Wednesday, April 27, 2005—FASB Education Session