Action Alert No. 05-20
May 19, 2005


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

Wednesday, May 25, 2005, 9:00 a.m.

  1. Conceptual framework. The Board will discuss the qualitative characteristics of accounting information. The Board's discussion will focus on relevance and reliability, including their sub-qualities. (Estimated 60-minute discussion.)

  2. Financial performance reporting by business enterprises. The Board will discuss consequential amendments to FASB Statement No. 128, Earnings per Share, as a result of its decision to require a single statement of earnings and comprehensive income. (Estimated 30-minute discussion.)

  3. 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.


Wednesday, May 25, 2005, immediately following the Board meeting

The Board will hold an educational, non-decision-making session to discuss topics that are anticipated to be discussed at the June 1, 2005 Board meeting. Those topics will be posted to the FASB calendar four days prior to the education session.


Tuesday, May 24, 2005, 10:00 a.m.

The Board will meet with representatives of the Financial Accounting Committee of the Equipment Leasing Association of America to discuss matters of mutual interest.


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.

May 11, 2005 Board Meeting

Employee compensation: classification of freestanding financial instruments. The Board discussed two issues raised through comment letters pertaining to proposed FSP EITF 00-19-a, "Application of EITF Issue No. 00-19, 'Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock,' to Freestanding Financial Instruments Originally Issued as Employee Compensation," along with whether to approve a final FSP to provide guidance on the application of Issue 00-19 to employee share options that cease to be subject to FASB Statement No. 123 (revised 2004), Share-Based Payment. The Board made the following decisions:

  1. An evaluation of the substantive terms of instruments subject to the guidance in the proposed FSP is appropriate (that is, retain paragraph 6 of the proposed FSP).

  2. Explicit guidance about the classification of instruments with multiple settlement alternatives should not be included in the final FSP.

The Board gave its approval to proceed to a final FSP subject to drafting and a final decision on whether to amend Statement 123(R).

Financial instruments: liabilities and equity. The Board discussed issues related to single component instruments including display and measurement, issuance costs, recognition of forward contracts, subsequent classification assessments, and accounting for a change in the classification of an instrument after its issuance.

The Board made the following decisions related to display and measurement of single-component instruments:

  1. All single-component instruments in the scope of the proposed Statement would initially be measured at the transaction price, which would generally be the amount of proceeds (unless there are other elements embedded in the proceeds, for example, issuance costs). Instruments accounted for under FASB Statement No. 123 (revised 2004), Share-Based Payment, would not be subject to those initial measurement requirements.

  2. Direct and indirect ownership instruments that are classified as equity but that by their terms will ultimately be settled with cash, other assets, services, or the use of assets would be separately displayed within the equity section of the statement of financial position. That display requirement is illustrated as Method 3 of the appendix to the Board meeting handout. Subsequent to their initial recognition at fair value, those instruments would be subsequently measured at the amount that results from applying the redemption formula at the reporting date (applied in the same manner it would be applied at the redemption date).

  3. All other equity instruments (including direct and indirect ownership instruments that ultimately would be settled with perpetual instruments and other instruments classified as equity) would not be remeasured subsequent to their initial recognition. The Board also decided not to change the presentation practices for such instruments.

  4. Entities would not be required to display, as a separate line item or caption within the statement of financial position, those instruments that are classified as liabilities or assets but would be settled or ultimately settled by the issuance or receipt of equity instruments.

  5. Liabilities that are in the form of mandatorily redeemable shares that by their terms have both fixed redemption amounts and fixed settlement dates would be subsequently remeasured at the present value of the amounts to be paid, with changes in value reflected in net income.

  6. Liabilities that are in the form of mandatorily redeemable shares that by their terms have varying redemption amounts or settlement dates would be subsequently remeasured at fair value with changes in value reflected in net income. Additionally, other single component instruments classified as liabilities for which the redemption amount varies based on the changes in the value of the issuer's direct ownership instruments (for example, debt indexed to common shares) would be measured at fair value.

  7. All remaining single-component instruments classified as liabilities or assets that are not included in the above measurement requirements should be subsequently measured at fair value with changes reflected in earnings, unless other accounting guidance specifies another measurement attribute.

The Board also made the following decisions:

  1. Issuance costs for all debt and equity instruments would be recognized as an expense when incurred.

  2. Forward contracts to issue or repurchase an entity's own shares should be recognized in the statement of financial position "net" and measured at fair value. Forward contracts that are liabilities or assets would be subsequently remeasured at fair value and the changes in value reflected in net income. Forward contracts that are equity instruments would not subsequently be remeasured.

  3. The classification of all single component instruments would be reassessed at each reporting date. If the instrument's classification changes as a result of events during the reporting period, the instruments should be reclassified as of the date of the events that caused the reclassification. There is no limit on the number of times instruments may be reclassified.

  4. Upon reclassification, instruments reclassified to assets, liabilities, or separately displayed equity should be measured at the attributes at which they would have been measured as if they had previously been classified that way. No gain or loss should be recognized through income on the date of reclassification. For example, a direct ownership instrument separately displayed in equity and measured at settlement value that subsequently becomes a fixed-price liability would be reclassified at the present value of the liability using the implicit discount rate at the date of reclassification. Any difference in those values would remain in equity. Instruments reclassified to equity (not separately displayed) should be reclassified at their current carrying amounts. Previously recognized gains or losses should not be reversed, and there is no limit on future gains or losses.

Revenue recognition. The Board discussed whether the objective and scope of the project should be changed and, if so, how. The Board affirmed its past decision to develop a standard for revenue recognition based on recognized changes in assets and liabilities (consistent with the definition of revenues in FASB Concepts Statement No. 6, Elements of Financial Statements) that would not be overridden by additional recognition criteria such as realization and the completion of an earnings process (as described in FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises). The Board expects that the "realized or realizable" and "earned" criteria in Concepts Statement 5 will be eliminated and that the definition of revenues in Concepts Statement 6 will be refined to more clearly distinguish revenues from gains.

The Board also affirmed that its goal is to develop a comprehensive standard on revenue recognition that would apply broadly to all revenue arrangements. In connection with that decision, the Board agreed to pursue an approach under which performance obligations would be measured by allocating the customer consideration rather than at the fair value of the obligation (that is, the amount the reporting entity would be required to pay to transfer the performance obligation to a willing third party of comparable credit standing).

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

  1. Prohibit entities from changing a method of transition elected upon initial adoption of an accounting pronouncement.

  2. Retain but clarify the requirement that entities disclose the effect of an accounting change on affected financial statement line items. In particular, the Board decided to clarify that entities were not required to disclose the effects on reported totals and subtotals other then income from continuing operations and net income.

Life settlements. The Board decided the following regarding life settlements:

  1. Life settlements (active life insurance policies that are purchased by third parties who intend to continue paying the premiums and collect the benefit) would be accounted for under the investment method as follows:

    1. The initial investment and continuing costs would be capitalized as the carrying value of the investment.

    2. The income recognized would be the difference between the proceeds of the policy and the carrying amount of the investment.

    3. Once the carrying amount of the investment equals the face value of the policy, subsequent continuing costs would be expensed.

  2. The unit of account for measurement purposes would be an individual life settlement contract.

  3. The following disclosures would be required as of the latest balance sheet date:

    1. The following information in the aggregate for life settlement contracts, categorized by remaining expected term of the contracts:

      (1)  The number of contracts

      (2)  The face amount of the underlying insurance policies

      (3)  The carrying value of the contracts.

    2. The maximum cash outlay for premium payments during the next fiscal year, assuming that none of the life settlement contracts are settled.

  4. The guidance would be in the form of an FSP on FASB Technical Bulletin No. 85-4, Accounting for Purchases of Life Insurance, with a 45-day comment period.

  5. Retrospective application would be required.

This guidance would be effective for fiscal years beginning after the issuance of the final FSP, with early adoption permitted.

Amendment of Statements 87 and 35. The Board directed the staff to further research and analyze how the accounting for a defined benefit pension plan that provides active participants with the right to receive a lump-sum cash settlement upon termination or retirement might be impacted by changing the measurement of the accumulated benefit obligation (ABO) for purposes of calculating the minimum pension liability. For such a plan, the measure of the ABO for each participant eligible for a lump-sum payment could not be less than that amount.


The following is a list of open meetings tentatively scheduled through June. 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, June 1, 2005—FASB Board Meeting
Wednesday, June 1, 2005—FASB Education Session
Wednesday, June 8, 2005—FASB Board Meeting
Wednesday, June 8, 2005—FASB Education Session
Friday, June 10, 2005—Liaison Meeting with Financial Executives International, Stamford, CT
Tuesday, June 14, 2005—Joint International Group Meeting on Performance Reporting, New York, NY
Wednesday, June 15, 2005—FASB Board Meeting
Wednesday, June 15, 2005—FASB Education Session
Wednesday, June 15, 2005—p.m. Emerging Issues Task Force Meeting
Thursday, June 16, 2005—Emerging Issues Task Force Meeting
Friday, June 17, 2005—FASB Education Session
Tuesday, June 21, 2005—Financial Accounting Standards Advisory Council
Wednesday, June 22, 2005—Small Business Advisory Committee
Wednesday, June 22, 2005—p.m. FASB Board Meeting (tentative)
Thursday, June 23, 2005—FASB Education Session
Wednesday, June 29, 2005—FASB Board Meeting
Wednesday, June 29, 2005—FASB Education Session