Action Alert No. 05-47
November 23, 2005

NOTICE OF MEETINGS

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

Tuesday, November 29, 2005, 9:00 a.m.

The Board meeting will be held on Tuesday instead of Wednesday.

  1. Financial instruments: liabilities and equity. The Board will discuss measurement issues for multiple component instruments that: (a) would not be separated or (b) would be separated using an obligation-first approach. (Estimated 60-minute discussion.)

  2. Stable value investments. The Board will discuss comment letters received on proposed FSP AAG INV-a, “Reporting of Fully Benefit-Responsive Investment Contracts Held by Certain Investment Companies Subject to the AICPA Investment Company Guide,” and redeliberate certain decisions. (Estimated 45-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.

OPEN EDUCATION SESSION

Tuesday, November 29, 2005, 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 December 7, 2005 Board meeting. Those topics will be posted to the FASB calendar four days prior to the education session.

OPEN MEETING OF THE SMALL BUSINESS ADVISORY COMMITTEE
(This meeting is available by audio webcast and telephone.)

Wednesday, November 30, 2005, 9:00 a.m.

FASB Offices
401 Merritt 7
Norwalk, Connecticut

The Board and the Small Business Advisory Committee will meet to discuss the Board’s projects on:

  1. The conceptual framework
  2. Uncertain tax positions
  3. Pensions and other postretirement benefits.

The Advisory Committee will hear a report on other Board activities from the FASB chairman and other members of the Board. The Advisory Committee also will hear reports from representatives of the Office of the Chief Accountant of the Securities and Exchange Commission and the Office of the Chief Auditor of the Public Company Accounting Oversight Board.

Closed to Public Observation

The Advisory Committee will hold a closed session with the Board to discuss administrative and strategic matters. The closed session, which will be the last item on the agenda, is expected to begin at approximately 1:45 p.m.

OPEN MEETING OF THE FINANCIAL ACCOUNTING STANDARDS ADVISORY COUNCIL
(This meeting is available by audio webcast and telephone.)

Thursday, December 1, 2005, 9:00 a.m.

FASB Offices
401 Merritt 7
Norwalk, Connecticut

The Advisory Council will meet to discuss:

  1. The Board’s project on the conceptual framework
  2. Improving lease accounting
  3. The Board’s project on pensions and other postretirement benefits.

The Advisory Council will hear reports from the chairman of the FASB on other Board activities and the associate chief accountant of the SEC on current accounting-related developments. The Advisory Council also will hear a report from the chief auditor of the PCAOB. In addition, the chairman of the International Accounting Standards Board’s Standards Advisory Council (SAC) will attend the meeting and report on SAC activities.

Closed to Public Observation

The Advisory Council will hold a closed session with the Board to discuss administrative and strategic matters. The closed session, which will be the last item on the agenda, is expected to begin at approximately 1:30 p.m.

BOARD ACTIONS

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.

November 16, 2005 Board Meeting

Life settlements. The Board reached the following decisions regarding life settlement contracts:

  1. An entity’s election to measure investments in life settlement contracts at fair value should be an irrevocable item-by-item decision made upon entering into the life settlement contract.
  2. At adoption, an entity can elect the fair value option for investments in life settlement contracts that are currently held by the entity at the date of adoption.
  3. For investments measured at fair value, an entity should:
    1. Account for premiums paid in the income statement on the same financial reporting line as the changes in fair value are recognized.
    2. Report the cash flows associated with the investments in life settlement contracts under cash flows from investing activities in the statement of cash flows.
    3. Apply the following additional disclosure requirements:
      (1) Its accounting policy on accounting for investments in life settlement contracts
      (2) The method(s) and significant assumptions used to estimate the fair value of investments in life settlement contracts, including any mortality tables used by the entity
      (3) The total realized gains or losses for each reporting period presented
      (4) The change in unrealized gains or losses during the period for investments that are held at the balance sheet date.
  4. For investments measured under the investment method, an entity should disclose the following:
    1. Its accounting policy on accounting for investments in life settlement contracts
    2. Premiums anticipated to be paid in order to keep the policy in force (instead of maximum premiums per paragraph 8 of the proposed FSP)
    3. Five years’ worth of such premiums (instead of one year’s per paragraph 8 of the proposed FSP).
  5. For investments measured under the investment method, an entity should write an impaired investment down to fair value. The Board decided that an entity should test its investments for impairment only when the investor becomes aware of factors that indicate that an impairment may exist. Such indicators would not include a change in interest rates. However, the effect of a change in interest rates would be incorporated into the determination of fair value.
  6. The scope exception for certain insurance contracts in paragraph 10(g) of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, will be expanded to include investments in life settlement contracts.
  7. An entity should display on the face of the balance sheet and income statement its investments measured at fair value separately from those measured under the investment method.
  8. An entity should apply this guidance prospectively for all new investments and recognize a cumulative effect for all existing investments at the date of adoption as an adjustment of the opening balance of retained earnings.
  9. This guidance would be effective for fiscal years beginning after June 15, 2006, with early adoption permitted for entities that have not yet issued financial statements for the first quarter.

The Board decided not to require entities to disclose anticipated future premium payments for investments measured at fair value. In addition, the Board asked the staff to provide it with more information regarding potential disclosure requirements for (1) disclosing an entity’s actual versus anticipated mortality and (2) whether an entity should disclose the anticipated average life settlement contract duration.

Hybrid financial instruments. The Board addressed issues raised by respondents on the Exposure Draft, Accounting for Certain Hybrid Financial Instruments. The Board decided:

  1. To reinsert the practicability exception that had been removed from paragraph 16 of Statement 133.
  2. To add no additional bifurcation guidance other than that which is already contained in Statement 133.
  3. To not add any clarification pertaining to whether an interest issued from a securitization vehicle could be considered an equity interest.
  4. To add three examples to clarify what types of risks should be evaluated to determine if an embedded derivative exists.
  5. To clarify the wording in paragraph 14 of Statement 133 to further illustrate which interest-only and principle-only strips the Board intends to be eligible for the exemption from the bifurcation requirements of that Statement.
  6. To make the final Statement effective for fiscal years beginning after September 15, 2006, and to allow early application as of the beginning of a fiscal year for which the entity has not previously issued interim financial statements. This is consistent with the Board’s decision on the servicing rights project.
  7. To expand the fair value election to bifurcated instruments that exist as of the initial date of adoption of the Statement.

Servicing of financial assets. The Board addressed issues raised by respondents on the Exposure Draft, Accounting for Servicing of Financial Assets. The Board decided:

  1. Under FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, an entity that undertakes an obligation to service financial assets should recognize a servicing asset or a servicing liability for that servicing contract if the servicing obligation is a result of:
    1. A transfer of the servicer’s financial assets that meets the requirements for sale accounting
    2. An acquisition or assumption of a servicing contract that does not relate to financial assets that have been transferred by the servicer.
    The Board stated that if a servicer transfers financial assets and the transfer does not meet the requirements for sale accounting, a separate servicing right should not be recognized.
  2. To permit a one-time reclassification of available-for-sale (AFS) securities to trading securities, without calling into question the treatment of those securities under FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities. This reclassification would be permitted upon initial application of the Statement as of the beginning of the fiscal year of application.
    1. This reclassification is restricted to AFS securities identified as economic hedges of servicing rights that a servicer elects to subsequently measure at fair value.
    2. Any gains and losses that are carried in accumulated other comprehensive income at the time of the reclassification should be included in the cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of the adoption of the amendment to Statement 140.
    3. A reclassification should be disclosed along with the notional amounts of the reclassified securities and the effect of the reclassification on retained earnings.
  3. To allow a risk management approach for identifying the classes of servicing rights to apply the fair value election based on the different valuation and risk characteristics of the underlying assets and the way that the economic risks are managed.
  4. Not to readdress initial measurement of separately recognized servicing rights.
  5. To adopt the disclosure requirements proposed in the Exposure Draft with the following changes:
    1. Delete the basis for management’s decision to subsequently measure servicing assets and servicing liabilities at either fair value or amortized cost but require a disclosure that describes the characteristics that management is using to identify its asset classes under the risk management approach.
    2. Modify the requirement to provide contractual servicing fees as a component of the roll forward and report it separately instead as well as include an illustrative example of roll forward in the final Statement.
    3. Delete the requirement to provide a sensitivity analysis or stress test separately for each class of servicing rights.
    4. Add the requirement from FASB Statement No. 154, Accounting Changes and Error Corrections, to disclose the effect of the change in accounting principle on income from continuing operations.
    5. Require that an election to reclassify securities from AFS to trading be disclosed along with the amount reclassified and the impact of that reclassification on the cumulative-effect adjustment to retained earnings.
  6. To make the final Statement effective for fiscal years beginning after September 15, 2006, and to allow early application as of the beginning of a fiscal year for which the entity has not previously issued interim financial statements. This is consistent with the Board’s decision on the hybrid financial instruments project.
  7. For transition provisions:
    1. To clarify when the new disclosure requirements are effective.
    2. To clarify that (1) the initial measurement of servicing rights at fair value should be applied prospectively and (2) servicing rights transactions should be initially measured at fair value as of the beginning of the fiscal year.
    3. To revise the language in paragraphs 6 and 7 to state that the cumulative-effect adjustment should be the difference between the fair value and the carrying amount of the servicing rights that exist as of the beginning of the fiscal year, not as of the date of the entity’s election.
    4. To clarify that subsequent measurement at fair value should be a policy decision that is (1) irrevocable, (2) made as of the beginning of the fiscal year, and (3) effective as of the first day of the fiscal year of the election.

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.

Wednesday, November 30, 2005—Small Business Advisory Committee
Thursday, December 1, 2005—Financial Accounting Standards Advisory Council
Wednesday, December 7, 2005—FASB Board Meeting
Wednesday, December 7, 2005—FASB Education Session
Thursday, December 8, 2005—New York Society of Security Analysts
Tuesday, December 13, 2005—FASB Education Session
Wednesday, December 14, 2005—FASB Board Meeting
Wednesday, December 14, 2005—FASB Education Session
Tuesday, December 20, 2005—FASB Board Meeting
Wednesday, December 21, 2005—FASB Board Meeting
Wednesday, December 21, 2005—FASB Education Session
Wednesday, December 28, 2005—No FASB Board Meeting or Education Session scheduled