Revised 10/31/06—See below
Action Alert No. 06-43
October 26, 2006
NOTICE OF MEETINGS
OPEN BOARD MEETING
meetings are available by audio webcast and telephone.)
Wednesday, November 1, 2006, 9:00 a.m.
of Interpretation 46(R) to investment companies (estimated
30-minute discussion). The Board will continue its consideration of
a draft of a proposed FSP on the application of FASB Interpretation No.
46 (revised December 2003), Consolidation of Variable Interest
Entities, to investment companies.
- [Revised 10/31/06—This topic has been
postponed to a future date.] Statement
133 Implementation Issue—hedging foreign exchange risk for a forecasted
foreign currency-denominated debt issuance (estimated
30-minute discussion). The Board will continue its discussion on
whether to issue tentative guidance on hedging foreign exchange risk for
a forecasted foreign currency-denominated debt issuance.
- 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, November 1, 2006, 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 November 8,
2006 Board meeting and other future Board meetings. Those topics will be
posted to the FASB calendar four
days prior to the education session.
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
October 18, 2006 Board Meeting
combinations: applying the acquisition method. The Board
continued redeliberations of its June 2005 Exposure Draft, Business
Combinations, focusing on three issues related to the recognition of
intangible assets other than goodwill.
- The Board reaffirmed the existing provision in FASB Statement No.
141, Business Combinations, stipulating that assembled workforce
not be recognized as an intangible asset separately from goodwill on the
basis that it generally does not meet the separability criterion.
- The Board decided, however, that the final Statement should define
assembled workforce as a collection of employees that allows the
acquirer to continue to operate from the date of the acquisition rather
than the intellectual capital of the skilled workforce.
Research and Development (R&D) Assets
- The Board affirmed the following proposed provisions regarding the
accounting for R&D assets acquired in a business combination:
- That all identifiable R&D assets (including tangible and
intangible R&D assets to be used in R&D activities that have
no alternative future use) acquired would be recognized as assets and
measured at fair value, superseding the existing guidance in FASB
Interpretation No. 4, Applicability of FASB Statement No. 2 to
Business Combinations Accounted for by the Purchase Method.
- That subsequent expenditures related to acquired R&D projects
should generally be expensed as incurred.
- That in-process R&D projects should be classified as
indefinite-lived until completion or abandonment of the project.
Therefore, in-process R&D would not be amortized until completion
or abandonment of the project but would be tested for impairment in
accordance with FASB Statement No. 142, Goodwill and Other
- That the final Statement would provide guidance on impairment
testing of in-process R&D projects that are temporarily idled or
- The Board also decided to add a project to its agenda to extend the
decisions reached for R&D assets acquired in a business combination
to R&D assets acquired in an asset acquisition other than a business
Preexisting Relationships and Reacquired Rights
- The Board reaffirmed that the effective settlement of a preexisting
relationship between the parties to a business combination should be
accounted for as a settlement separate from the business combination.
- The Board agreed to clarify the difference between an unfavorable
contract and a loss (onerous) contract in the final Statement on
- The Board affirmed that an acquirer should recognize a reacquired
right in a business combination as a separately identifiable intangible
asset. A reacquired right is a right that the acquirer had previously
granted to the acquiree to use the acquirer's recognized or unrecognized
- The Board agreed to include guidance in the final Statement on
business combinations that limits the useful life and the measurement of
a reacquired right to the remaining contractual terms of the contract
between two parties. Therefore, the acquirer cannot assume any
noncontractual renewals in determining the useful life or the value of
the reacquired right.
- The Board agreed to provide guidance in the final Statement on
business combinations that if an entity reissues a reacquired right to a
third party, the entity should charge any remaining unamortized asset
against the proceeds received from the reissued right.
- The Board reaffirmed that the acquirer should recognize a settlement
gain or loss if the contract giving rise to the reacquired right
includes terms that are favorable or unfavorable when compared to
pricing for current market transactions for the same or similar items.
- The Board decided to broaden the disclosure for a preexisting
relationship acquired in a business combination to address any
transactions that occur simultaneously with the business combination but
that are "substantively separate" from the acquisition. That disclosure
would require the acquirer to disclose the nature and amount of each
- The Board reaffirmed that measurement period adjustments should be
disclosures. The Board previously decided to require the following
disclosure 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
At this meeting, the Board discussed several issues related to that
disclosure. The Board decided that the following items should be
separately disclosed in the tables summarizing an entity's use of
- Gains and losses on hedged items for fair value hedges
- The ineffective portion of gains and losses on derivatives related
to cash flow hedges
- The effective portion of gains and losses on derivatives related to
cash flow hedges that was reclassified from other comprehensive income
- Gains and losses on (a) all derivatives and related hedged items
that exist at the end of the reporting period, (b) all derivatives that
existed throughout the reporting period but are no longer on the books
of the entity at the end of the reporting period, and (c) all hedged
items that existed throughout the reporting period but are no longer on
the books of the entity or are no longer in a designated hedging
relationship at the end of the reporting period.
The Board also decided that the comment period for the Exposure Draft
will last until March 2, 2007. The proposed disclosures would be effective
for both interim and annual reporting periods ending after December 15,
2007, with early application encouraged. At initial adoption, disclosures
for earlier periods presented for comparative purposes would be
encouraged. Disclosures for earlier periods presented for comparative
purposes would be required beginning in the first year after the year of
framework. The Board discussed the meaning and significance of an
element as part of its deliberations on the elements and
recognition phase of the project (Phase B).
The Board agreed that elements should:
- Continue to focus on and define the economic things (resources and
claims) and changes in them that pertain to a particular entity. Those
"things" and "changes" in them are also called "stocks" and "flows."
- Focus on the most basic of the real-world economic phenomena that
pertain to an entity. Distinctions that are made for purposes of
financial statement display or presentation go beyond the notion of
The IASB reached the same conclusions at its Board meeting on October
of financial assets. The Board continued redeliberations of the
August 2005 revised Exposure Draft, Accounting for Transfers of
Financial Assets, and discussed whether and how to amend the isolation
guidance in FASB Statement No. 140, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities.
The Board decided to amend the isolation criteria in paragraph 9(a) of
Statement 140 for consolidated financial statements that include a
transferor by requiring that the legal analysis treat all of the
involvements in the transferred financial assets by any entity included in
the consolidated financial statements being presented as if those
involvements were made by the transferor. In order for a parent entity of
a transferor to meet the isolation requirement, an isolation analysis must
conclude that the transferred financial assets would be beyond the reach
of all of the entities (and their creditors) included in the financial
statements being presented, using the assumption that all of the
involvements of the entities were made by the transferor.
option. The Board redeliberated certain issues related to the
- Election of the Fair Value Option (FVO)
- Recognition, Measurement, and Presentation
- Proposed New Disclosures
- Transition and Effective Date
- Scope of the Statement.
The Board decided:
Election of the Fair Value Option (FVO)
- To indicate in the final Statement that if financial assets that
have been reported at fair value (with changes included in earnings)
because of the nature of the subsidiary that has been holding those
assets are transferred to another entity within the consolidated
reporting entity for which such fair value accounting is not required,
the FVO may be elected on the date of the transfer.
- To have the staff perform further work on the contract-by-contract
election and to provide the Board with examples of its application to
certain financial instruments, including insurance.
Recognition, Measurement, and Presentation
- To refer to existing guidance on operating measures/performance
indicators in FASB Statement No. 117, Financial Statements of
Not-for-Profit Organizations, AICPA Statement of Position 02-2,
Accounting for Derivative Instruments and Hedging Activities by
Not-for-Profit Health Care Organizations, and Clarification of the
Performance Indicator, and the AICPA Audit and Accounting Guide,
Health Care Organizations, rather than imposing a
one-size-fits-all requirement. Consequently, not-for-profit health care
providers would include the changes in fair value within the performance
indicator, whereas other not-for-profit organizations would include such
changes either within or outside their operating measure/performance
indicator, consistent with how they define that measure.
- To modify the disclosure requirements in paragraphs 12(b) and 12(c)
of the proposed Statement to ensure sufficient transparency of the
impact of the FVO on the reporting by not-for-profit organizations of
changes in net assets, operating measures/performance indicators (if
presented), and the line item components therein.
- To expand the disclosure requirements in paragraphs 12(b) and 12(c)
of the proposed Statement with regard to not-for-profit organizations to
encompass the impact of the FVO not only on an operating
measure/performance indicator but also on the overall changes in the
three classes of net assets (unrestricted, temporarily restricted, and
- To require the costs and fees related to financial assets or
financial liabilities for which the FVO is elected upon initial
recognition to be recognized in earnings as incurred and not deferred.
Similarly, the final Statement will indicate that the unamortized
deferred costs, fees, premiums, and discounts related to existing
financial assets and financial liabilities for which the FVO has been
elected at the initial application of the final Statement should be
written off as part of the cumulative-effect adjustment to the opening
balance of retained earnings.
Proposed New Disclosures
- To require an entity to (a) disclose management's basis for its
decision to elect the FVO for a contract or group of similar contracts
and (b) if the fair value election is not chosen for all contracts
within a group of similar contracts, disclose the reasons for only
partial election as of each date for which a statement of financial
position is presented. The disclosure of the reasons for electing the
FVO for only certain contracts within a group of similar contracts
should provide sufficient information for users to understand how those
groups of similar contracts reconcile to the line items presented in the
statement of financial position.
- To require an entity to disclose the difference between an asset's
fair value carrying amount and the aggregate principal amount to be
received for those assets for which the FVO has been elected as of each
date for which a statement of financial position is presented.
- For loans and receivables for which the FVO has been elected, not to
require disclosure of the maximum amount of credit risk of the loan or
receivable at the reporting date, but to require separate disclosure of
(a) the creditor's estimate of the fair value changes attributable to
changes in expected cash flows relative to borrower-specific credit risk
and (b) all other changes in fair value that are included in
current-period earnings for each period for which an income statement is
presented. The Board also decided not to provide detailed computational
guidance on how to determine the approximation of the amount of the
loan's or receivable's fair value change attributable to changes in
borrower-specific credit risk.
- If an entity classifies a loan as held for investment and elects the
FVO for that loan, to require the entity to disclose the fair value
carrying amount of loans ninety days past due. In addition, if an
entity's policy for such loans is to continue to recognize interest
income on an amortized cost basis separately from other changes in fair
value, the entity will be required to disclose the aggregate fair value
carrying amount of loans that are in nonaccrual status. Those disclosure
requirements are required as of each date for which a statement of
financial position is presented.
- Not to require any special disclosures in the year of initial
application of the final Statement if an existing financial asset or
financial liability for which the FVO has been elected at the beginning
of that fiscal year is sold or settled (extinguished) later in that year
prior to its maturity.
- Not to require that all fair value disclosures for assets and
liabilities reported at fair value pursuant to the FVO be provided in a
single note to the financial statements.
- To require entities to disclose, as of each date for which a
statement of financial position is presented, the following for
investments that would otherwise be accounted for under the equity
method (because of having significant influence over the operating and
financial policies of the investee) but that are reported at fair value
pursuant to the FVO:
- The name of each investee and the percentage of ownership of
common stock, as well as the accounting policies of the investor with
respect to investments in common stock. (The disclosure should include
the names of any significant investee corporations in which the
investor holds 20 percent or more of the voting stock but the investor
is not deemed to have significant influence over the operating and
financial policies of the investee, together with the reasons why the
investor is not deemed to have significant influence. The disclosure
should also include the names of any significant investee corporations
in which the investor holds less than 20 percent of the voting stock
and the investor is deemed to have significant influence over the
operating and financial policies of the investee, together with the
reasons why the investor is deemed to have significant influence.)
- Summarized information about the assets, liabilities, and results
of operations of the investees to be presented in the notes or in
separate statements, either individually or in groups, as appropriate
when investments in common stock of corporate joint ventures or other
equity method investments are, in the aggregate, material in relation
to the financial position or results of operations of an investor.
- To require quantitative and qualitative disclosures of the effect on
earnings of initially measuring at fair value under the FVO election if
an entity elects the FVO either upon the occurrence of a new-basis event
or at the time the entity obtains significant influence for an
investment that would otherwise be accounted for under the equity
method. Those disclosures should indicate where in the income statement
the effect on earnings is reflected.
- To require that the disclosure requirements in the final Statement
also apply to investments in securities that are classified in the
trading category under FASB Statement No. 115, Accounting for Certain
Investments in Debt and Equity Securities, and the hybrid financial
instruments that are reported at fair value through earnings under the
fair value election permitted by FASB Statement No. 155, Accounting
for Certain Hybrid Financial Instruments, and its amendment of
paragraph 16 of FASB Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities.
- To require that the fair value disclosures in the notes be presented
together with those related individual carrying amounts for those line
items, if the carrying amounts of individual line items reported in the
statement of financial position are a combination of fair value and
Transition and Effective Date
- To require that the effective date of the final Statement be the
same as the effective date of Statement 157; thus, the final Statement
should be effective for financial statements issued for fiscal years
beginning after November 15, 2007.
- To permit an entity to early adopt the final Statement provided that
the entity also adopts all of the requirements (measurement and
disclosure) of Statement 157 concurrent with or prior to the early
adoption of the final Statement.
- To permit early adoption of the final Statement within 120 days of
the beginning of the reporting entity's fiscal year, thereby making the
FVO election retroactive to the beginning of that fiscal year (or the
date of initial recognition, if later).
- Not to modify the requirements that the effect of initial adoption
be accounted for as a cumulative-effect adjustment through retained
earnings or the prohibition against retrospective application.
- To require a one-time reconciliation that presents the current
historical/amortized cost amount with the corresponding fair value
measures as of the date of adoption for those items reported pursuant to
the FVO. That reconciliation should be presented by category of assets
and liabilities as presented in the statement of financial position.
Scope of the Statement
- To permit the FVO election for a host financial instrument that is
being accounted for separately due to the bifurcation of an embedded
derivative nonfinancial instrument from a hybrid nonfinancial instrument
pursuant to paragraph 12 of Statement 133, provided that the scope
exceptions in the final Statement are not applicable to the host
- To add a scope exception to the final Statement for (a) contracts
issued or held by the reporting entity that are both (1) indexed to its
own stock and (2) classified in stockholders' equity in its statement of
financial position and (b) contracts issued or held by the reporting
entity that contain embedded derivatives that both (1) are indexed to
its own stock and (2) would, on a standalone basis, be classified in
stockholders' equity in its statement of financial position.
- To amend Statement 115 to exclude from its scope all investments
that, absent a FVO election under the final Statement, would be required
to be accounted for under the equity method of accounting under APB
Opinion No. 18, The Equity Method of Accounting for Investments in
Common Stock (rather than excluding "investments in equity
securities accounted for under the equity method").
EITF AGENDA DECISIONS
At its October 11, 2006 meeting, the EITF
Agenda Committee discussed the following five potential new issues
and made the following decisions:
- Accounting for the Tax Benefit of Dividends on Restricted Stock and
Option Awards—This issue was added to the EITF agenda.
- Accounting for the Deferred Compensation and Postretirement Benefit
Aspects of Collateral Assignment Split-Dollar Life Insurance
Arrangements—This issue was added to the EITF agenda.
- Determining the Attribution of Incentive Compensation to Interim
Financial Statements—This issue was not added to the EITF agenda.
- The Application of the Two-Class Method to Master Limited
Partnerships for FASB Statement No. 128, Earnings per Share—A
decision on this potential issue was deferred pending a decision on the
Committee's recommendation that the FASB and the IASB consider including
this issue in the short-term international convergence project on
earnings per share or, alternatively, that the Board address this matter
through the issuance of an FASB Staff Position (FSP).
- The Impact of a Sale of Receivables with Recourse under FASB
Statement No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, on the
Determination of Profit Recognition for the Sale of Real Estate Pursuant
to FASB Statement No. 66, Accounting for Sales of Real
Estate—This issue was not added to the EITF agenda; however, the
Committee recommended that the Board pursue the issuance of an FSP to
provide guidance on this issue.
FASB DOCUMENTS AVAILABLE
The following documents are available on the FASB website:
FAS 123(R)-6, "Technical Corrections of FASB Statement No.
123(R)," was issued on October 20, 2006.
FAS 126-1, "Applicability of Certain Disclosures and Interim
Reporting Requirements for Obligors for Conduit Debt Securities," was
issued on October 25, 2006.
EITF 00-19-b, "Accounting for Registration Payment Arrangements,"
was issued on October 20, 2006. Comments are due by December 4, 2006.
EITF 03-6-a, "Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities," was issued
on October 20, 2006. Comments are due by December 19, 2006.
FAS 141-b, 142-e, and 144-b, "Fair Value Measurements in Business
Combinations and Impairment Tests," was issued on October 23, 2006.
Comments are due by November 22, 2006.
FAS 144-c, "Classifying and Accounting for a Depreciable Asset as
Held-for-Sale When an Equity Method Investment Is Obtained," was issued on
October 26, 2006. Comments are due by December 15, 2006.
FUTURE OPEN MEETINGS
The following is a list of open meetings tentatively scheduled through
December. 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, November 7, 2006—Liaison Meeting with National Investors
Relations Institute (canceled)
Wednesday, November 8, 2006—FASB
Wednesday, November 8, 2006—FASB Education
Wednesday, November 15, 2006—FASB Board Meeting
November 15, 2006—FASB Education Session
Thursday, November 16,
2006—Emerging Issues Task Force Meeting
Tuesday, November 21, 2006—FASB
Tuesday, November 21, 2006—FASB Education
Wednesday, November 29, 2006—FASB Board Meeting
November 29, 2006—FASB Education Session
Wednesday, December 6,
2006—FASB Board Meeting
Wednesday, December 6, 2006—FASB Education
Thursday, December 7, 2006—Financial Accounting Standards
Advisory Council Meeting
Friday, December 8, 2006—Small Business
Advisory Committee Meeting
Wednesday, December 13, 2006—FASB Board
Wednesday, December 13, 2006—FASB Education
Wednesday, December 20, 2006—FASB Board Meeting
December 20, 2006—FASB Education Session
Wednesday, December 27,
2006—No FASB Board Meeting or Education Session