Action Alert No. 05-10
March 10, 2005
NOTICE OF MEETINGS
OPEN BOARD MEETING
meetings are available by audio webcast and telephone.)
No Board meetings are scheduled for the week of March 14,
OPEN EDUCATION SESSION
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.
OPEN MEETING OF THE EMERGING ISSUES TASK FORCE
(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
- 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"
- Issue No. 04-7, "Determining Whether an Interest Is a Variable
Interest in a Potential Variable Interest Entity"
- Issue No. 04-6, "Accounting for Stripping Costs in the Mining
- Issue No. 04-13, "Accounting for Purchases and Sales of Inventory
with the Same Counterparty"
- 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
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
March 2, 2005 Board Meeting
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:
- 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
- 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.
- 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.
- Retain the APB Opinion No. 20, Accounting Changes,
restatement requirement for a correction of an error, without providing
an impracticability exception.
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:
- 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
- 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.
- 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.”
- 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.
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
The Board decided to make the following clarifications to the draft of
the proposed guidance:
- Add a list of topics to the summary that will be covered and a brief
summary of related literature that may be affected.
- Clarify the definition and application of the term counterparty
payoff by adding examples to the definition.
- Clarify the definition and application of the term contingent
- Further explain why a written call option would not be a direct
- Clarify the scope of instruments that would be subject to the
Additionally, the Board decided to deliberate the following four
- Should perpetual instruments be subject to the direct ownership
- Should characteristics of a subsidiary’s instrument carry over to
the consolidated entity?
- How should instruments settled with a consolidated entity’s shares
be classified by a subsidiary of that consolidated entity?
- 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
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
The Board decided that:
- The scope of the guidance should include all leveraged leases.
- 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.
- 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.
- A change in timing of the realization of tax benefits from a
leveraged lease will require a recalculation of that leveraged lease.
- A reevaluation of the lease classification for a leveraged lease
should be performed when a recalculation of that leveraged lease is
- 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.
- The guidance will be effective for fiscal years ending after
December 15, 2005.
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
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
FUTURE OPEN MEETINGS
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
Wednesday, March 23, 2005—FASB Board Meeting
March 23, 2005—FASB Education Session
Wednesday, March 30, 2005—FASB
Wednesday, March 30, 2005—FASB Education
Wednesday, April 6, 2005—FASB Board Meeting
6, 2005—FASB Education Session
Wednesday, April 13, 2005—FASB Board
Wednesday, April 13, 2005—FASB Education Session
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