Action Alert No. 06-37
September 14, 2006
NOTICE OF MEETINGS
OPEN BOARD MEETING
(Board meetings are available by audio webcast and telephone.)
Wednesday, September 20, 2006, 8:00 a.m.
The Board meeting will begin at 8:00 a.m. instead of 9:00 a.m.
- Business combinations: applying the acquisition method (estimated 2-hour discussion). The Board will continue redeliberations of the June 2005 Exposure Draft, Business Combinations. The Board will discuss proposals for recognition and measurement of intangible assets acquired.
- Financial statement presentation (estimated 2-hour discussion). The Board will discuss the definition of financing liabilities and treasury assets; application of the disaggregation working principle; and the presentation of strategic investments, income taxes, discontinued operations, and extraordinary items in the financial statements.
- Financial instruments: due process documents (estimated 90-minute discussion). The Board will discuss issues related to a due process document on financial instruments, including the definition of financial instruments, financial instruments to be excluded from the scope of the document, and other assets or liabilities to be included in the scope of the document.
- FASB ratification of EITF consensuses and tentative conclusions (estimated 15-minute discussion). The Board will consider the ratification of the consensuses and tentative conclusions reached at the September 7, 2006 EITF meeting (see discussion under EITF ACTIONS).
- 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 SESSIONS
Tuesday, September 19, 2006, 1:00 p.m.
Wednesday, September 20, 2006, following the Board meeting
The Board will hold educational, non-decision-making sessions to discuss topics that are anticipated to be discussed at the September 27, 2006 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 WITH THE INSTITUTE OF MANAGEMENT ACCOUNTANTS
Tuesday, September 19, 2006, 9:00 a.m.
The Board will meet with representatives of the Financial Reporting Committee of the Institute of Management Accountants to discuss matters of mutual interest.
OPEN MEETING OF THE FINANCIAL ACCOUNTING STANDARDS ADVISORY COUNCIL
(This meeting is available by audio webcast and telephone.)
Thursday, September 21, 2006, 9:00 a.m.
The Advisory Council will meet to discuss the following topics:
- Current business and financial reporting issues
- Preliminary results of the 2006 survey
- Private company financial reporting
- XBRL activities.
The Advisory Council will hear reports from the chairman of the FASB on other Board activities and the chief accountant of the SEC on current accounting-related developments. The Advisory Council also will hear a report from the chief auditor of the Public Company Accounting Oversight Board.
Closed to Public Observation (at approximately 12:00 noon)
The Advisory Council will hold a closed session with Board members to discuss strategic and administrative matters.
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.
September 6, 2006 Board Meeting
Derivative disclosures. The Board previously decided to require the following disclosures in table format:
- Where and in what amount derivatives and related gains and losses are recorded in the balance sheet and income statement, respectively. Disclosure should be by major underlying, accounting designation, and purpose.
- The notional amount and fair value of derivatives by major underlying, accounting designation, and purpose. Disclose instances in which derivative agreements contain leverage factors and the estimated magnitude of these features.
At this meeting, the Board discussed several issues related to those disclosures. The Board decided that in the tables summarizing an entity’s use of derivatives:
- Derivatives should be presented on a gross basis, even when they are subject to master netting arrangements and qualify for net presentation in the statement of financial position in accordance with FASB Interpretation No. 39, Offsetting of Amounts Related to Certain Contracts.
- Cash collateral payables and receivables associated with derivative instruments should be excluded from the disclosure.
- Fair value amounts should be presented as separate asset and liability values. Notional amounts should be presented based on the absolute amount associated with each derivative.
The Board also decided not to address, within the current scope of this project, financial statement presentation and classification of derivative instruments and hedged items falling within the scope of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
Fair value option. The Board redeliberated (1) election of the fair value option (FVO) and related documentation, (2) recognition, measurement, and presentation issues, and (3) certain disclosure issues of Phase 1 of the project. The Board decided:
Election of the FVO and Related Documentation Issues
- To require that the FVO continue to be an optional accounting treatment elected on a contract-by-contract basis.
- That the FVO should not be available for a portion of an item that is within the scope of Phase 1 of this project.
- To require that the election of the FVO be made at initial recognition or a new basis event. The basis for conclusions of the final Statement should clarify that if an entity is required to initially recognize an instrument at the trade date rather than the settlement date, the FVO should also be elected at the trade date (which would be the date that the contract is initially recognized).
- Not to impose any eligibility criteria.
- Not to provide specific documentation guidance. However, an enterprise should designate its election of the FVO at the time of initial recognition or a new basis event.
Recognition, Measurement, and Presentation Issues
- To require recognition of changes in fair value for items accounted for pursuant to the FVO in earnings as those changes occur.
- To affirm the decision not to permit entities to elect (outside of the hedge accounting outlined in Statement 133) to recognize in earnings the change in an asset’s or liability’s fair value attributable to only certain selected risks (rather than the total change in fair value).
- Not to exclude the effect of changes in an entity’s creditworthiness from earnings in reporting liabilities at fair value.
- Not to provide specific presentation guidance for the effects of fair value measurements on earnings, but rather address the need for understanding the effects of changes in fair values of items for which the FVO has been elected through disclosures.
- To continue to require that an entity provide separate presentation or parenthetical disclosure on the face of the statement of financial position for fair value and non-fair-value carrying amounts.
- Not to amend FASB Statement No. 95, Statement of Cash Flows, as part of the project, to permit changing the cash flow classification of financial assets and liabilities based on management’s intent at the reporting date.
Certain Disclosure Issues
- Not to modify the disclosure requirement in paragraph 12(a) of the Exposure Draft, which requires that the difference between the carrying amount of any financial liabilities reported at fair value due to election of the FVO and the aggregate principal amount the entity would be contractually required to pay to the holders of the obligation at maturity (or through the maturity date for any debts whose principal amounts are payable in installments), if any, be disclosed.
- To modify the disclosure requirement in paragraph 12(b) of the Exposure Draft to require disclosure of the method and significant assumptions used to estimate fair value and to encourage disclosure of quantitative information about the market risk of instruments that is consistent with the way the entity manages or adjusts those risks, for items whose fair value measurements, in their entirety, fall within level 3 of the fair value hierarchy defined in the Statement on fair value measurements. With respect to the required disclosure, the Board decided not to require sensitivity analysis or a specific requirement to provide information about model validation procedures.
- To add clarifying language to the disclosure requirement in paragraph 12(b) of the Exposure Draft to state that the entity is required to disclose sufficient information about changes in fair value for those items for which the FVO has been elected rather than disclose of the effect on earnings resulting from election of the FVO.
- Not to modify the disclosure requirement in paragraph 12(c) of the Exposure Draft because it is already sufficiently clear that the requirement applies to all gains and losses (not just unrealized ones), but to include additional background in the basis for conclusions of the final Statement on the Board’s decisions about separate disclosures of only unrealized gains and losses.
- To revise the disclosure in paragraph 12(d) of the Exposure Draft and the basis for conclusions in the final Statement to clarify that the FVO does not address methods for recognizing and measuring the amount of interest and dividend income.
- To require an entity that is reporting a financial liability at fair value pursuant to the FVO that has experienced a significant change in creditworthiness during the reporting period to disclose an approximation of the amount of change attributable to its creditworthiness that is included in current-period earnings. The Board also decided not to provide (a) guidance on when a change in a debtor’s creditworthiness is considered significant or (b) detailed computational guidance regarding how to determine the approximation of the amount of the liabilities’ fair value change attributable to the change in creditworthiness.
September 7, 2006 EITF Meeting
The Task Force discussed the following issues:
- Issue No. 06-1, "Accounting for Consideration Given by a Service Provider to Manufacturers or Resellers of Equipment Necessary for an End-Customer to Receive Service from the Service Provider." The Task Force affirmed as a consensus the tentative conclusion that if the consideration given by a service provider to a manufacturer or reseller (that is not a customer of the service provider) can be linked contractually to the benefit received by the service provider's customer, a service provider should account for the characterization of the consideration in accordance with Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)." The service provider should characterize the consideration given to a third-party manufacturer or reseller based on the form of consideration directed by the service provider to be provided to the service provider's customer. If the form of the consideration is stipulated to be anything other than "cash consideration" (as defined in Issue 01-9), then the form of the consideration should be characterized as "other than cash" consideration for purposes of applying Issue 01-9. If the service provider does not control the form of the consideration provided to the service provider's customer, the consideration should be characterized as "other than cash" consideration for purposes of applying Issue 01-9. In reaching that conclusion, Task Force members observed that consideration paid by a service provider that results in a customer receiving a reduced price on equipment purchased from a manufacturer or reseller should be characterized as "other than cash" consideration for purposes of applying Issue 01-9. The Board will consider the ratification of this consensus at its September 20, 2006 meeting.
- Issue No. 06-4, "Accounting for the Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements." The Task Force affirmed as a consensus the tentative conclusion that for endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to postretirement periods, an employer should recognize a liability for future benefits in accordance with FASB Statement No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, or APB Opinion No. 12, Omnibus Opinion1967, (depending on whether a substantive plan is deemed to exist) based on the substantive agreement with the employee. For example, if the employer has effectively agreed to maintain a life insurance policy during the employee's retirement, the cost of the insurance policy during the postretirement periods should be accrued in accordance with either Statement 106 or Opinion 12. Similarly, if the employer has effectively agreed to provide the employee with a death benefit, the employer should recognize a liability for the future death benefit in accordance with either Statement 106 or Opinion 12. The Board will consider the ratification of this consensus at its September 20, 2006 meeting.
- Issue No. 06-5, "Accounting for Purchases of Life InsuranceDetermining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4." The Task Force affirmed as a consensus the tentative conclusion that a policyholder should consider any additional amounts included in the contractual terms of the policy in determining the amount that could be realized under the insurance contract. When it is probable (as defined in FASB Statement No. 5, Accounting for Contingencies) that contractual restrictions would limit the amount that could be realized, the Task Force agreed that these contractual limitations should be considered when determining the realizable amounts. Amounts that are recoverable by the policyholder at the discretion of the insurance company should be excluded from the amount that could be realized. The Task Force observed that amounts that are recoverable by the policyholder in periods beyond one year from the surrender of the policy should be discounted in accordance with APB Opinion No. 21, Interest on Receivables and Payables. The Task Force affirmed as a consensus the tentative conclusion that a policyholder should determine the amount that could be realized under the insurance contract assuming the surrender of an individual-life by individual-life policy (or certificate by certificate in a group policy). The Task Force noted that any amount that would be ultimately realized by the policyholder upon the assumed surrender of the final policy (or final certificate in a group policy) shall be included in the amount that could be realized under the insurance contract. The Task Force also affirmed as a consensus the tentative conclusion that a policyholder should not discount the cash surrender value component of the amount that could be realized when contractual restrictions on the ability to surrender a policy exist. However, the Task Force observed that if the contractual limitations prescribe that the cash surrender value component of the amount that could be realized is a fixed amount, then the amount that could be realized should be discounted in accordance with Opinion 21. The Board will consider the ratification of this consensus at its September 20, 2006 meeting.
- Issue No. 06-6, "Debtor's Accounting for a Modification (or Exchange) of Convertible Debt Instruments." The Task Force reached a tentative conclusion that the change in the fair value of an embedded conversion option resulting from an exchange of debt instruments or a modification in the terms of an existing debt instrument should not be included in the cash flow test of whether the terms of the new debt instrument are substantially different from the terms of the original debt instrument under Issue No. 96-19, "Debtor's Accounting for a Substantive Modification or Exchange of Debt Instruments." However, a separate analysis must be performed if the cash flow test under Issue 96-19 does not result in a conclusion that a substantial modification or exchange has occurred. Under that separate analysis, a substantial modification or exchange has occurred and the issuer should apply extinguishment accounting if the change in the fair value of the embedded conversion option (calculated as the difference between the fair value of the embedded conversion option immediately before and after the modification or exchange) is at least 10 percent of the carrying value of the original debt instrument immediately prior to the modification or exchange. Additionally, a modification or exchange of debt instruments that adds a substantive conversion option or eliminates a conversion option that was substantive at the date of the modification or exchange would always be considered substantial and debt extinguishment accounting would be required in those circumstances. The Task Force decided that for purposes of evaluating whether an embedded conversion option was substantive on the date it was added to or eliminated from a debt instrument, the factors described in Issue No. 05-1, "Accounting for the Conversion of an Instrument That Becomes Convertible upon the Issuer's Exercise of a Call Option," should be considered.
The Task Force also reached a tentative conclusion that when a convertible debt instrument is modified or exchanged in a transaction that is not accounted for as an extinguishment, an increase in the fair value of the embedded conversion option (calculated as the difference between the fair value of the embedded conversion option immediately before and after the modification or exchange) should reduce the carrying amount of the debt instrument (increasing a debt discount or reducing a debt premium) with a corresponding increase in additional paid-in capital. However, a decrease in the fair value of an embedded conversion option resulting from a modification or exchange should not be recognized.
If these tentative conclusions become final consensuses at a future EITF meeting and are ratified by the Board, the guidance in Issue No. 05-7, "Accounting for Modifications to Conversion Options Embedded in Debt Instruments and Related Issues," would be nullified and Issue 96-19 would be amended to (a) eliminate the guidance that was previously added as a result of Issue 05-7 and (b) include the guidance in this Issue in determining whether an entity has a substantial modification. However, the existing consensus in Issue 05-7 continues to apply until such time as it is superseded by a consensus on this Issue at a future meeting that is subsequently ratified by the Board. The Board will consider the ratification of these tentative conclusions at its September 20, 2006 meeting. If ratified, a draft abstract will be posted to the FASB website for a comment period ending on October 13, 2006. This Issue will be discussed further at a future meeting.
- Issue No. 06-7, "Issuer's Accounting for a Previously Bifurcated Conversion Option in a Convertible Debt Instrument When the Conversion Option No Longer Meets the Bifurcation Criteria in FASB Statement No. 133." The Task Force reached a tentative conclusion that an issuer should account for a previously bifurcated conversion option in a convertible debt instrument if the embedded conversion option no longer meets the bifurcation criteria in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, by reclassifying the carrying value of the liability for the conversion option to shareholders’ equity. Any debt discount recorded at the issuance of the convertible debt should continue to be amortized. The Board will consider the ratification of this tentative conclusion at its September 20, 2006 meeting. If ratified, a draft abstract will be posted to the FASB website for a comment period ending on October 13, 2006. This Issue will be discussed further at a future meeting.
- Issue No. 06-8, "Applicability of the Assessment of a Buyer's Continuing Investment under FASB Statement No. 66 for Sales of Condominiums." The Task Force reached a tentative conclusion that in assessing the collectibility of the sales price pursuant to paragraph 37(d) of FASB Statement No. 66, Accounting for Sales of Real Estate, an entity should evaluate the adequacy of the buyer’s initial and continuing investment in order to conclude that the sales price is collectible. An entity can meet the continuing investment criterion in paragraph 12 of Statement 66 by requiring the buyer to either (a) make additional payments during the construction term at least equal to the level annual payment to fund principal and interest on a customary mortgage for the remaining purchase price of the property or (b) increase the minimum initial investment by an equivalent aggregate amount. The remaining purchase price should be determined based on the sales price of the property. If an entity is unable to meet the initial or continuing investment tests in paragraphs 812 of Statement 66, then an entity should use the deposit method to recognize profit as described in paragraphs 6567 of Statement 66. The Board will consider the ratification of this tentative conclusion at its September 20, 2006 meeting. If ratified, a draft abstract will be posted to the FASB website for a comment period ending on October 13, 2006. This Issue will be discussed further at a future meeting.
- Issue No. 06-9, "Reporting a Change in (or the Elimination of) a Previously Existing Difference between the Fiscal Year-End of a Parent Company and That of a Consolidated Entity or between the Reporting Period of an Investor and That of an Equity Method Investee." The Task Force reached a tentative conclusion that a parent or investor should report a voluntary change to (or the elimination of) a previously existing difference between the parent's reporting period and the reporting period of a consolidated entity or between the reporting period of an investor and the reporting period of an equity method investee in the parent’s or investor’s consolidated financial statements as a change in accounting principle in accordance with the provisions of FASB Statement No. 154, Accounting Changes and Error Corrections, unless it is impracticable to do so pursuant to paragraph 11 of Statement 154. The Board will consider the ratification of this tentative conclusion at its September 20, 2006 meeting. If ratified, a draft abstract will be posted to the FASB website for a comment period ending on October 13, 2006. This Issue will be discussed further at a future meeting.
FASB DOCUMENT AVAILABLE
Final FSP AUG AIR-1, "Accounting for Planned Major Maintenance Activities," was issued on September 8, 2006, and is available on the FASB website.
FUTURE OPEN MEETINGS
The following is a list of open meetings tentatively scheduled through October. 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, September 27, 2006FASB Board Meeting
Wednesday, September 27, 2006FASB Education Session
Friday, September 29, 2006Liaison Meeting with the AICPA PCPS Technical Issues Committee
Tuesday, October 3, 2006User Advisory Council Meeting, New York City
Wednesday, October 4, 2006FASB Board Meeting
Wednesday, October 4, 2006FASB Education Session
Wednesday, October 11, 2006FASB Board Meeting
Wednesday, October 11, 2006FASB Education Session
Tuesday, October 17, 2006Liaison Meeting with CFA Institute
Wednesday, October 18, 2006FASB Board Meeting
Wednesday, October 18, 2006FASB Education Session
Monday, October 23, 2006FASB/IASB Joint Board Meeting, Norwalk, CT
Tuesday, October 24, 2006FASB/IASB Joint Board Meeting, Norwalk, CT