Action Alert No. 05-41
October 13, 2005


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

Wednesday, October 19, 2005, 9:00 a.m.

  1. First time IFRS adopters. The Board will consider whether to add a project to its agenda to provide certain one-time accommodations to foreign private issuers registered with the SEC who are adopting International Financial Reporting Standards (IFRS) for the first time. (Estimated 30-minute discussion.)

  2. Fair value option. The Board will discuss whether a debtor electing the fair value option for its debt liabilities should recognize changes in fair value resulting from changes in the debtor’s creditworthiness in earnings. (Estimated 30-minute discussion.)

  3. Minimum revenue guarantees. The Board will discuss comments received on proposed FSP FIN 45-b, "Application of FASB Interpretation No. 45 to Minimum Revenue Guarantees Granted to a Business or Its Owners," and consider whether to proceed to issuance of a final FSP. (Estimated 45-minute discussion.)

  4. Life settlements. The Board will discuss comments received on proposed FSP TB 85-4-a, "Accounting for Life Settlement Contracts by Investors." The Board will focus on the use of fair value as a measurement attribute and clarifying the scope of the proposed FSP. (Estimated 45-minute discussion.)

  5. Transition for the tax effects of share-based payment awards. The Board will discuss comments received on proposed FSP FAS 123(R)-c, "Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards," and consider whether to proceed to issuance of a final FSP. (Estimated 30-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.


Tuesday, October 18, 2005, 8:30 a.m.

The Board will hold an educational, non-decision-making session to discuss topics that are anticipated to be discussed at the October 24–25, 2005, joint IASB and FASB Board meetings. Those topics will be posted to the FASB calendar four days prior to the education session.


Monday, October 17, 2005, 9:00 a.m.

The Board will hold an educational forum on the FASB Exposure Draft, Accounting for Transfers of Financial Assets, with representatives of the securitization and capital markets industries.


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.

October 5, 2005 Board Meeting

Financial instruments: liabilities and equity. The Board continued its discussion of the "ownership-settlement" approach to accounting for financial instruments with characteristics of equity, liability, or both. This meeting focused on how multiple-component instruments might be separated under that approach, including (1) the separation principles used to identify components and (2) the initial and subsequent measurement of those components.

The Board agreed on the following separation principles:

  1. Instruments would be separated if they embody an obligation and have both equity and nonequity components involving one of the following:

    1. Two or more settlement alternatives or possibilities with differing counterparty payoffs at the settlement date

    2. At least one settlement alternative or possibility and at least one perpetual alternative or possibility with differing counterparty payoffs at the settlement or outcome date

    3. One settlement requirement with a counterparty payoff at settlement that is based on more than one market factor.

  2. Applying those separation principles would produce the following results:

    1. Only instruments with both equity and nonequity components would be separated. Instruments with more than one equity component would be classified as equity, and those with more than one nonequity component would be classified as liabilities or assets.

    2. Instruments that do not embody an obligation would not be separated; for example, callable stock that is otherwise perpetual would be classified as equity in its entirety.

    3. Instruments having interim settlements consisting of instruments that would be separated (for example, warrants on puttable stock) would not be separated until the interim settlement occurs. Prior to any interim settlement, those instruments would be liabilities or assets in their entirety.

    4. Upon separation, there would be only two ultimate components—equity and nonequity; components would not be further subdivided (unless required by FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities).

    5. The fair value option for an instrument in its entirety would not be available in lieu of separation. However, the fair value option could be applied to the nonequity component. (This requirement is pending the Board’s finalization of the fair value option and hybrid instruments projects.)

For instruments that would be separated under the above principles, the Board agreed:

  1. To first identify and measure the obligation embodied in the debt component at its fair value and then allocate the remaining proceeds to equity.

  2. That the following measurement requirements would apply under the obligation-first approach:

    1. Embedded issuance costs (if any) would be expensed before separation occurs.

    2. The debt component that has been identified would be separated and measured at its fair value. If the debt component contains a stated settlement date and amount, present value techniques would be used to determine the component’s fair value. At future meetings, the Board will further discuss how to apply present value techniques to a debt component that contains various put and call features (for example, puttable, callable convertible debt).

    3. If the debt component’s settlement date or amount is unknown, the debt component would be subjected to Statement 133 to determine whether the component is or has an embedded derivative that is measured at fair value or is accounted for under FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. (See requirements 2(g) and 2(h) of this summary.) If so, the debt component (or a part of the debt component for embedded derivatives) would be accounted for under those provisions. If the component is not within the scope of Statement 133 or Interpretation 45, it would be measured at the amount that would be paid if settlement occurred at the reporting date in an orderly liquidation.

    4. If an instrument’s debt outcome occurs (for example, the debt is put or called early) or the terms of an instrument are modified, requirement 2(b) or 2(c) would be reapplied. That is, the extinguishment proceeds (ignoring any issuance costs) would be reallocated by remeasuring the debt component at the discount rate in effect at that date for the remaining most distant stated maturity period. A gain or loss would be recognized through income for the difference between the old and new carrying amounts. Any remaining portion of the proceeds would be allocated to equity.

    5. If an instrument’s equity outcome occurs (for example, conversion), no gain or loss would be recognized. For example, if puttable, callable convertible debt were converted into a fixed number of shares, then the carrying amount of the liability would become equity with no gain or loss recognized through income.

    6. However, if the conversion terms are modified resulting in the equity outcome (for example, changing the terms of an instrument to induce conversion), extinguishment accounting (requirement 2(d)) would be applied to compute any gain or loss before the carrying amount is recorded in equity.

    7. A debt component that is a guarantee or a derivative in its entirety would be accounted for under Interpretation 45 or Statement 133.

    8. Debt components that are separated but that are not derivatives in their entirety also would be first analyzed under Statement 133 to determine if there are any embedded derivatives that must be bifurcated before applying the measurement requirements in 2(b) or 2(c).

    9. All instruments are reevaluated at each reporting date to determine if they continue to meet the separation criteria. If they do not (for example, if a put option expires such that puttable stock becomes a perpetual instrument), the instruments would be accounted for as single-component instruments as of the date the change occurred. No gains or losses would be recognized through income for such reclassifications unless a debt extinguishment or modification occurs.

The Board directed the staff to continue development of the ownership-settlement approach for later comparison to other possible approaches to accounting for instruments in the scope of this project.

Auction rate securities. The Board considered but decided not to add a project to its agenda, at this time, to address the financial statement classification of auction rate securities pursuant to the definition of cash equivalents under FASB Statement No. 95, Statement of Cash Flows. The Board recommended that the staff bring this agenda topic back to the Board once staff resources become available.

Limits of derivatives held by a QSPE (formerly Interpretation of paragraphs 40(b) and 40(c) of Statement 140). The Board discussed three key issues raised in comments from constituents on proposed FSP FAS 140-c, "Clarification of the Application of Paragraphs 40(b) and 40(c) of FASB Statement No. 140." The Board considered those issues and reached the following decisions:

  1. The term analysis rather than comprehensive analysis should be used with regard to the requirement that an analysis be performed of expected limits on the notional amount of derivative financial instruments that a qualifying special-purpose entity (SPE) may hold over the life of the qualifying SPE.

  2. The limits on the notional amount of derivative financial instruments that may be held by a qualifying SPE will not be impacted by purchases of beneficial interests by a transferor that were previously issued to outside parties as long as the transferor holds those beneficial interests temporarily and reports those beneficial interests as trading securities in accordance with FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities.

  3. The effective date of the guidance in the FSP is the date that the final FSP is issued. The guidance for unexpected prepayments should be applied to new SPEs and existing SPEs that receive additional assets or issue additional beneficial interests (other than those previously committed to be received or issued as a result of commitments to parties other than the transferor) after the FSP’s effective date.

  4. The guidance for a transferor’s purchases of beneficial interests from outside parties as described in paragraph 10 of the FSP is effective as of the date that the final FSP is issued for such purchases and for transferors’ previous purchases of beneficial interests from outside parties that were consistent with the guidance in the FSP.

The Board directed the staff to proceed to a draft of a final FSP for vote by written ballot.

Open discussion: FASB technical plan. The Chairman announced that the Board’s plan for research and technical activities for the six months ending March 31, 2006, will be posted to the website on October 14, 2005. The approved technical plan chart that is part of that plan was posted to the website on October 7, 2005.


The EITF Agenda Committee canceled the November 9–10, 2005 Emerging Issues Task Force meeting. The next scheduled meeting of the EITF is January 6, 2006.


The following FASB Staff Positions (FSPs) are available on the FASB website:

Final FSP FAS 13-1, "Accounting for Rental Costs Incurred during a Construction Period," was issued on October 6, 2005.

Proposed FSP SOP 94-6-a, "Nontraditional Loan Products," was posted to the FASB website on October 13, 2005. Comments are requested by November 11, 2005.


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.

Monday, October 24, 2005—Joint IASB/FASB Meeting
Tuesday, October 25, 2005—Joint IASB/FASB Meeting
Wednesday, October 26, 2005—FASB Insurance Forum
Thursday, October 27, 2005—Business Combinations Roundtable Meetings
Wednesday, November 2, 2005—No Board Meeting Scheduled
Wednesday, November 2, 2005—FASB Education Session
Monday, November 7, 2005—Liaison Meeting with American Gas Association
Wednesday, November 9, 2005—No Board Meeting Scheduled
Wednesday, November 9, 2005—FASB Education Session
Wednesday, November 9, 2005—Business Combinations Roundtable Meetings, London
Thursday, November 10, 2005—(Canceled) Emerging Issues Task Force Meeting
Wednesday, November 16, 2005—FASB Board Meeting
Wednesday, November 16, 2005—FASB Education Session
Tuesday, November 22, 2005—FASB Board Meeting
Tuesday, November 22, 2005—FASB Education Session
Tuesday, November 29, 2005—FASB Board Meeting
Tuesday, November 29, 2005—FASB Education Session
Wednesday, November 30, 2005—Small Business Advisory Committee