Action Alert No. 05-08
February 24, 2005


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

Wednesday, March 2, 2005, 9:00 a.m.

  1. Short-term convergence: accounting changes. The Board will continue its redeliberations of the FASB Exposure Draft, Accounting Changes and Error Corrections, focusing on the accounting for and reporting of indirect effects of a change in accounting principle, as well as other issues that have arisen in the drafting of the final Statement. (Estimated 60-minute discussion.)

  2. Fair value measurement. The Board will continue its redeliberations of the FASB Exposure Draft, Fair Value Measurements. The Board will discuss the definition of fair value and its application to liabilities. (Estimated 2-hour discussion.)

  3. Financial instruments: liabilities and equity. The Board will discuss comments received from resource group members on a draft of the proposed guidance communicating the Board’s decisions regarding the classification of single component instruments. The Board also will discuss certain issues related to the definition of ownership instruments that have arisen as a result of the comments received. (Estimated 60-minute discussion.)

  4. Leveraged leases. The Board will continue its discussion of various issues related to income tax settlements and their potential impact on transactions classified as leveraged leases under the provisions of FASB Statement No. 13, Accounting for Leases. The Board will consider whether to issue guidance to address those issues and, if so, in what form. (Estimated 60-minute discussion.)

  5. Financial instruments: derivatives implementation. The Board will discuss alternatives for addressing whether certain embedded prepayment options should be bifurcated and accounted for separately as derivatives in conjunction with a discussion of proposed Statement 133 Implementation Issue No. B38, "Evaluation of Net Settlement with Respect to Embedded Prepayment Options in Certain Debt Instruments." (Estimated 60-minute discussion.)

  6. 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.


Thursday, March 3, 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 9, 2005 Board meeting. 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 or Interpretation.

February 16, 2005 Board Meeting

Business combinations: purchase method procedures. The Board discussed certain drafting issues identified by the staff in developing the joint FASB-IASB Exposure Draft on business combinations. The staff reported that several of the issues identified for discussion were resolved as a result of decisions reached by the IASB at its February meeting and, thus, did not require discussion by the FASB. Of the remaining issues, the Board decided to:

  1. Require that any recognition of an acquirer’s deferred tax benefits (through the reduction of the acquirer’s previously recorded valuation allowance) that results from a business combination be included in income at the acquisition date. Currently, FASB Statement No. 109, Accounting for Income Taxes, requires that such a deferred tax benefit be recognized through a corresponding reduction to goodwill or certain noncurrent assets or an increase in negative goodwill. The amount of such benefits reported in income should be disclosed in the notes to the financial statements.

  2. Amend the disclosure requirement for the reconciliation of the carrying amount of goodwill in FASB Statement No. 142, Goodwill and Other Intangible Assets, to clarify that the reconciliation should include the items listed in paragraph 75 of IFRS 3, Business Combinations.

  3. Clarify the subsequent accounting for reacquired rights acquired in a business combination that would be initially accounted for as intangible assets under Statement 142 and the application guidance of EITF Issue No. 04-1, "Accounting for Preexisting Relationships between the Parties to a Business Combination." Subsequently, those rights would be amortized over the remaining contractual period of the precombination contract that granted those rights.

  4. Include in the joint Exposure Draft, reverse acquisition guidance and related example that is currently included in IFRS 3, modified as necessary to conform with the decisions made in this phase of the business combinations project.

The Board also considered, but decided not to require, certain additional disclosures currently required by IFRS 3.

Uncertain tax positions. The Board continued its discussions on this project and decided to:

  1. Require that an entity recognize the benefit of tax positions when it is probable, in the context of FASB Statement No. 5, Accounting for Contingencies, that the position will be sustained when challenged by taxing authorities.

  2. Require that an entity presume that a taxing authority will review a tax position when evaluating whether the position is probable of being sustained. Therefore, consideration of the risk of detection is inappropriate.

  3. Require that the benefit of tax positions be derecognized when it is more likely than not that the position will not be sustained.

  4. Require the use of a best estimate to measure the financial statement benefit of a tax position.

  5. Classify the liability that results from the difference between the probable tax basis in the financial statements and the as-filed tax basis based on the expected timing of cash flows to settle underpayment controversies with taxing authorities.

  6. Recognize an interest expense accrual for the settlement of underpayment controversies based on the amounts reflected on the tax return for which a benefit has not been recognized in the financial statements.

  7. Affirm its decision that disclosures should continue to be made in accordance with Statement 5.

  8. Account for the impact of adopting the new pronouncement as a cumulative effect of a change in accounting principle.

The Board instructed the staff to proceed to a draft of a proposed Interpretation for vote by written ballot.

Beneficial interests. The Board discussed the application alternatives for electing fair value to subsequently measure hybrid financial instruments with embedded derivatives that otherwise would require bifurcation. Additionally, the Board discussed the impact of identifying embedded derivatives in beneficial interests in securitized financial assets on the limitations on qualifying special-purpose entities holding derivatives as established in FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The Board made the following decisions:

  1. The option to elect fair value for hybrid financial instruments with embedded derivatives that otherwise would require bifurcation should be applied on an instrument-by-instrument basis.

  2. The parenthetical phrase other than another derivative financial instrument should be deleted from paragraph
    35(c)(2) of Statement 140. That would simplify the requirement to be met to be a qualifying special-purpose entity by eliminating the restriction that a derivative in the entity cannot pertain to a derivative beneficial interest.

FASB Staff Position (FSP) FIN 46(R)-b. The Board discussed the comment letters received on proposed FSP FIN 46(R)-b, "Implicit Variable Interests Resulting from Related Party Relationships under FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities." The Board decided to:

  1. Affirm its previous decision to issue an FSP that addresses whether a reporting enterprise should consider whether it has an implicit variable interest in a variable interest entity (VIE) or potential VIE

  2. Not provide a scope exception for small and midsize nonpublic companies

  3. Clarify that if a contractual arrangement between unrelated parties establishes a related party relationship, the potential existence of an implicit variable interest should be considered

  4. Include additional guidance in the example given in the proposed FSP to assist in determining whether an implicit variable interest exists and to clarify the applicability of the guidance in the title of the final FSP.

The Board directed the staff to post the final FSP to the website.

Life insurance settlements (viaticals). The Board decided to provide guidance related to life settlements. A life settlement occurs when an individual sells his or her life insurance policy to a third party. The Board considered, but decided against, including life insurance policies within the scope of the project. The Board will consider whether to add a life insurance project to its agenda at a later date.


The following is a list of open meetings tentatively scheduled through March. 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 8, 2005—User Advisory Council Meeting, New York City
Wednesday, March 9, 2005—FASB Board Meeting
Wednesday, March 9, 2005—FASB Education Session
Wednesday, March 16, 2005—FASB Board Meeting
Wednesday, March 16, 2005—FASB Education Session
Thursday, March 17, 2005—Emerging Issues Task Force Meeting
Tuesday, March 22, 2005—Financial Accounting Standards Advisory Council
Wednesday, March 23, 2005—FASB Board Meeting
Wednesday, March 23, 2005—FASB Education Session
Wednesday, March 30, 2005—FASB Board Meeting
Wednesday, March 30, 2005—FASB Education Session