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Action Alert No. 07-38
September 20, 2007
NOTICE OF MEETINGS
OPEN BOARD MEETING
(Board meetings are available by audio webcast and telephone.)
Wednesday, September 26, 2007, 9:00 a.m.
- Derivative disclosures (estimated 45-minute discussion). The Board will continue its redeliberations of the Exposure Draft, Disclosures about Derivative Instruments and Hedging Activities. The Board will discuss requirements for a tabular presentation of information about fair values of derivatives, gains and losses on derivatives, and gains and losses on hedged items in designated and qualifying hedging relationships.
- Agenda decision: Interaction between Statement 13 and Statement 157 (estimated 1-hour discussion). The Board will discuss whether to add a project to its agenda to address the interaction between FASB Statement No. 13, Accounting for Leases, and FASB Statement No. 157, Fair Value Measurements, and the alternatives to address those issues.
- FASB ratification of EITF consensuses and tentative conclusions (estimated 15-minute discussion). The Board will consider the ratification of the consensuses reached at the September 11, 2007 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 SESSION
Wednesday, September 26, 2007, following the Board meeting
The Board will hold an educational, non-decision-making session to discuss topics that are anticipated to be discussed at a future Board meeting. Those topics will be posted to the FASB calendar four days prior to the education session.
BOARD ACTIONS
No Board meetings were held during the week of September 10, 2007.
EITF ACTIONS
September 11, 2007 EITF Meeting
The Task Force discussed the following issues:
- Issue No. 07-1, "Accounting for Collaborative Arrangements." The Task Force reached a consensus-for-exposure that a collaborative arrangement is a contractual arrangement in which the participating entities are active participants and are exposed to significant risks and rewards that are dependent on the ultimate commercial success of the endeavor. All relevant facts and circumstances should be evaluated before determining whether an arrangement is a collaborative arrangement.
The Task Force reached a consensus-for-exposure that revenue generated and costs incurred by the participants should be reported gross or net on the appropriate line item in each participant's respective financial statements in accordance with the guidance in EITF Issue No. 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent." In addition, the equity method of accounting under APB Opinion No. 18, The Equity Method of Accounting for Investments in Common Stock, should not be applied to arrangements that are conducted by the participants without the creation of a separate legal entity for the arrangement.
The Task Force reached a consensus-for-exposure that the income statement classification of payments between participants in accordance with the collaborative arrangement should be evaluated based on the nature of the arrangement, the nature of each entity's business operations, and the contractual terms of the arrangement. An entity's accounting policy regarding the income statement classification for the payments among participants of a collaborative arrangement should be based on authoritative accounting literature (when applicable) or analogy to other authoritative literature and should be reasonable, rational, and consistently applied.
The Task Force reached a consensus-for-exposure that a participant in a collaborative arrangement should disclose annually:
- Information about the nature and purpose of its collaborative arrangements
- Its rights and obligations under the collaborative arrangements
- The stage of the underlying endeavor's life cycle
- The accounting policy for collaborative arrangements in accordance with Opinion 22
- The income statement classification and amounts attributable to transactions among other participants to the collaborative arrangement
- Amounts due from or owed to other participants under the collaborative arrangements.
Finally, the Task Force reached a consensus-for-exposure that this Issue should be effective for fiscal years beginning after December 15, 2007. An entity should report the effects of applying this Issue as a change in accounting principle through retrospective application to all periods. If it is impracticable to apply the effects of a change in accounting principle retrospectively, an entity should disclose both the reasons why reclassification was not made and the effect of the reclassification on the current period in accordance with the guidelines in paragraph 9 of FASB Statement No. 154, Accounting Changes and Error Corrections. The entity should evaluate whether transition through retrospective application is practicable on an arrangement-by-arrangement basis.
The Board will consider the ratification of the consensuses-for-exposure at its September 26, 2007 meeting. If ratified, a draft abstract will be posted to the FASB website for public comment. This Issue will be discussed further at a future meeting.
- Issue No. 07-4, "Application of the Two-Class Method under FASB Statement No. 128 to Master Limited Partnerships." The Task Force reached a consensus-for-exposure that the scope of this Issue applies only to master limited partnerships (MLPs) that have concluded that an incentive distribution is an equity distribution. The Task Force discussed but was not asked to conclude on when an incentive distribution would be an expense in the MLP. The Task Force also reached a consensus-for-exposure that this Issue should apply to all MLP arrangements regardless of whether the incentive distribution rights (IDRs) are a separate interest or embedded in the general partnership (GP) interest. When the IDRs are a separate interest, the Task Force concluded that the IDRs would represent a participating security and therefore the MLP would allocate current-period earnings to the GP, limited partners (LPs), and IDR holder using the two-class method. In contrast, when the IDR is embedded in the GP interest, the IDR would not be considered a participating security; however, the MLP would still apply the two-class method to the interests of the GP and LPs (although the GP’s earnings allocation would include the rights of the IDRs). The Task Force recommended that the Notice for Recipients in the draft abstract specifically request input from constituents on whether they agree that the scope of this Issue includes IDRs that are embedded in the GP interest.
The Task Force reached a consensus-for-exposure that when applying the two-class method and if current-period earnings are in excess of cash distributions and the IDRs are a separate LP interest, undistributed earnings should be allocated to the GP, LPs, and IDR holder as if the undistributed earnings were available cash utilizing the distribution waterfall specified in the partnership agreement. Similarly, when an IDR is embedded in the GP interest, undistributed earnings should be allocated to the GP (including the distribution rights of the embedded IDR) and LPs as if the undistributed earnings were available cash. In reaching its consensus-for-exposure, the Task Force observed that the distribution waterfall for available cash would not be considered a specified threshold as described in Example F in paragraph 16 of EITF Issue No. 03-6, "Participating Securities and the Two-Class Method under FASB Statement No. 128."
The Task Force also reached a consensus-for-exposure that when cash distributions are in excess of current-period earnings and the IDRs are a separate LP interest, net income (or loss) should be reduced (or increased) by distributions to the GP, LPs, and IDR holder. The resulting hypothetical loss would be allocated to the GP and LPs based on their respective sharing of losses specified in the partnership agreement. This consensus-for-exposure assumes that the IDR holder does not have a contractual obligation to share in the losses of the MLP (as described in paragraphs 17 and 18 of Issue 03-6). If the IDR holder has a contractual obligation to share in the losses of the MLP on a basis that is objectively determinable, then the hypothetical loss would be allocated to the GP, LPs, and IDR holder based on their respective sharing of losses specified in the partnership agreement. Similarly, when the IDR is embedded in the GP interest, net income (or loss) should be reduced (or increased) by distributions to the GP (including the distribution rights of the embedded IDR) and LPs. The resulting hypothetical loss would be allocated to the GP and LPs based on their respective sharing of losses specified in the partnership agreement.
The Task Force reached a consensus-for-exposure that this Issue should be effective for financial statements issued for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. The Task Force recommended that the Notice for Recipients in the draft abstract, request input from constituents on whether the effective date provides sufficient time for entities to understand and apply the requirements of this Issue. Earlier application is not permitted. The guidance in this Issue should be applied retrospectively for all financial statements presented.
The Board will consider the ratification of the consensuses-for-exposure at its September 26, 2007 meeting. If ratified, a draft abstract will be posted to the FASB website for public comment. This Issue will be discussed further at a future meeting.
- Issue No. 07-5, "Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock." The Task Force reached a tentative conclusion that contingent exercise provisions do not preclude an instrument or embedded feature from being indexed to an entity's own stock, provided that those provisions are not based on (a) an observable market, other than the market for the entity's stock (if applicable), or (b) an observable index, other than those calculated solely by reference to the entity's own operations. This tentative conclusion is consistent with the existing consensus in EITF Issue No. 01-6, "The Meaning of 'Indexed to a Company's Own Stock.'"
The Task Force reached a tentative conclusion that an entity is not permitted to consider the likelihood of occurrence for a contingent event or other condition that would adjust the settlement terms of that instrument or embedded feature when evaluating whether an instrument or embedded feature is indexed to its own stock.
On another issue the Task Force was not asked to reach a conclusion and requested that a working group be formed to assist in developing a framework for evaluating whether the instruments and embedded features addressed in this Issue are indexed to an entity's own stock. The working group will focus on developing a framework under which an instrument or embedded feature would be indexed to an entity's own stock if its ultimate settlement amount will equal the difference between the fair value of a fixed number of the entity's equity shares and a fixed strike price. An instrument or embedded feature for which the number of shares used to calculate the settlement amount and/or the strike price may vary would not be indexed to an entity's own stock unless the only variables that could affect the settlement amount would be inputs to a fair value measurement of any option or forward contract on equity shares. However, under that approach, standard antidilution provisions would not preclude an instrument or embedded feature from being indexed to an entity's own stock.
- Issue No. 07-6, "Accounting for the Sale of Real Estate When the Agreement Includes a Buy-Sell Clause." The Task Force reached a consensus-for-exposure that the buy-sell clause should be evaluated based on facts and circumstances to determine whether the clause constitutes an option or other form of prohibited substantial continuing involvement.
The Task Force considered factors that would result in the party that originally contributed the property in an arrangement (the seller) being compelled by the other party (the buyer) to repurchase the property. The Task Force also considered situations in which it would be crucial for the seller to reacquire the property. The Task Force also considered whether the parties could act independently. The Task Force did not consider any one factor to be presumptive or determinative but agreed that all factors must be considered. The factors discussed included the following:
Factors that may indicate that it is crucial for the seller to reacquire the real estate:
- The price specified in a buy-sell clause may indicate that the seller has already negotiated to acquire the buyer's interest.
- The seller may have a strategic necessity or an investment strategy that indicates that it is crucial that the seller reacquire full ownership of the real estate.
- The seller may have arrangements with the entity, such as management or third-party leasing arrangements, that may economically compel the seller to reacquire the real estate to retain the economic benefits (for example, leasing commissions from lessees) or escape the negative economic consequences (for example, below-market contract with the entity) of such arrangements.
Factors that may indicate the buyer can compel the seller to repurchase the property:
- Tax implications may economically motivate one investor to sell its interest in the entity to the other investor.
- The existence of a requirement that an appraisal be conducted or that the offer price be at fair value when the buyer is financially unable to acquire the seller's interest. The requirement for an appraisal may not be evidence of compulsion in other situations.
- The buy-sell clause stipulates a specified rate of return to the seller (or buyer), indicating that the buyer may not fully participate in the rewards of ownership from the real estate.
- The buyer may have a strategic necessity or an investment strategy that requires that it sell its interest to the seller.
- The buyer may be legally restricted from acquiring the seller's interest.
- If the real estate is integrated into the seller's business, the buyer may not have alternative means available, such as sale to an independent third party, to realize its economic interest.
The Task Force reached a consensus-for-exposure that this Issue should be effective for financial statements issued for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. Earlier application is not permitted. The guidance in this Issue should be applied prospectively for new arrangements entered into after the effective date.
The Board will consider the ratification of the consensuses-for-exposure at its September 26, 2007 meeting. If ratified, a draft abstract will be posted to the FASB website for public comment. This Issue will be discussed further at a future meeting.
FUTURE OPEN MEETINGS
The following is a list of open meetings tentatively scheduled through November. 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, October 3, 2007FASB Board Meeting
Wednesday, October 3, 2007FASB Education Session
Friday, October 5, 2007Liaison Meeting with the AICPA Private Companies Practice Section, Technical Issues Committee
Wednesday, October 10, 2007FASB Board Meeting
Wednesday, October 10, 2007FASB Education Session
Wednesday, October 17, 2007FASB Board Meeting
Wednesday, October 17, 2007FASB Education Session
Monday, October 22, 2007FASB/IASB Joint Board Meeting, Norwalk, CT
Tuesday, October 23, 2007FASB/IASB Joint Board Meeting, Norwalk, CT
Wednesday, October 24, 2007FASB/IASB Joint Board Meeting, Norwalk, CT
Wednesday, October 31, 2007FASB Board Meeting
Wednesday, October 31, 2007FASB Education Session
Wednesday, November 7, 2007FASB Board Meeting
Wednesday, November 7, 2007FASB Education Session
Tuesday, November 13, 2007Investors Technical Advisory Committee Meeting
Wednesday, November 14, 2007FASB Board Meeting
Wednesday, November 14, 2007FASB Education Session
Friday, November 16, 2007Liaison Meeting with Chartered Financial Analysts Institute
Wednesday, November 21, 2007FASB Board Meeting
Wednesday, November 21, 2007FASB Education Session
Wednesday, November 28, 2007FASB Board Meeting
Thursday, November 29, 2007Emerging Issues Task Force Meeting
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