Action Alert No. 05-49
December 8, 2005


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

Wednesday, December 14, 2005, 8:00 a.m.

The Board Meeting will begin at 8:00 a.m. instead of 9:00 a.m.

  1. Hybrid financial instruments (estimated 60-minute discussion). The Board will consider remaining issues raised in the comment letters received on its Exposure Draft, Accounting for Certain Hybrid Financial Instruments.

  2. Postretirement benefit obligations including pensions (estimated 90-minute discussion). The Board will discuss the proposed amendments to FASB Statements No. 87, Employers’ Accounting for Pensions, and No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions, that would be necessary to recognize the net overfunded or net underfunded status of defined benefit postretirement plans in the balance sheet. Issues to be discussed include:

    1. Recognition of actuarial gains and losses, prior service costs, and transition assets and obligations

    2. The measurement date for measuring plan assets and benefit obligations

    3. Balance sheet aggregation, classification, and display

    4. Interim period reporting.

  3. Conceptual framework (estimated 2.5 hour discussion). The Board will discuss three different aspects of its conceptual framework project.

    1. Qualitative characteristics of financial information—the Board will continue its discussion of qualitative characteristics of financial information, focusing on how cost-benefit considerations affect the standard-setting process, including the application of the qualitative characteristics of relevance, faithful representation, comparability, understandability, and their subcharacteristics.

    2. Definition of financial statement elements—the Board will begin its discussions of issues relating to the definitions of elements of financial statements, focusing on the definition of assets.

    3. The reporting entity concept—the Board also will begin its discussions of issues relating to the concept and definition of a reporting entity. The planned discussion will include a comparison of the reporting entity concepts in the frameworks of other standard setters such as the United Kingdom’s Accounting Standards Board and the Australian Accounting Standards Board.

  4. 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, December 13, 2005, 9:00 a.m.
Wednesday, December 14, 2005, following the Board meeting

The Board will hold educational, non-decision-making sessions to discuss topics that are anticipated to be discussed at the December 21, 2005 Board meeting. Those topics will be posted to the FASB calendar four days prior to the education sessions.


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 29, 2005 Board Meeting

Financial instruments: liabilities and equity. The Board continued its discussion of the “ownership-settlement” approach for instruments with characteristics of equity, liabilities, or both. This meeting focused on the measurement of multiple-component instruments that under the separation principles, would not be separated or would be separated using the obligation-first approach.

  1. The Board agreed on the following measurement requirements for non-separated instruments:

    1. Instruments classified as equity that may ultimately be settled with cash or other assets would be separately displayed in the same section as single-component instruments that have cash or asset settlement requirements (for example, callable stock). Subsequently, those instruments would be remeasured at the amount that results from applying the redemption formula at the reporting date. Changes in amounts would be recorded in equity accounts and not as part of net income or comprehensive income. All other instruments classified in equity would not be remeasured subsequent to initial recognition.

    2. Instruments classified as either a liability or as an asset that are comprised of two or more nonequity components would be subsequently measured at fair value with changes reflected in net income if at least one of the nonequity components represents an outcome with a payoff at settlement that would vary based on an underlying.

  2. For instruments that are separated, the Board affirmed its previous decisions that:

    1. Equity and nonequity components would be identified by examining the possible payoffs.

    2. The nonequity component would be initially measured at its fair value.

    3. The residual amount of the proceeds (the difference between the transaction price and the nonequity component’s fair value) would be allocated to equity.

  3. For purposes of determining initial fair value, the Board decided that a nonequity component would be described by constructing a hypothetical freestanding instrument with terms that would affect the same outcome (as observed by the payoff profile under the nonequity outcome). That description includes consideration of the following:

    1. The amount and timing of the nonequity outcome may be affected by various factors including share prices, put, call, and conversion features.

    2. Under the obligation-first approach, a minimum settlement amount (a floor) results in describing a fixed amount that is 100 percent likely to be paid. For example, the floor in convertible debt or shares puttable at a fixed price would always be paid even if the equity outcome occurs.

    3. If the amount or timing of a settlement obligation varies or is uncertain, the fair value of the nonequity component would be described by considering the probability-weighted (expected) settlement date (or dates) and amount (or amounts) due.

    4. However, if the nonequity component would be subsequently accreted, the probability-weighted (expected) settlement date is determined first and then used to calculate the amount due at that date and the implicit interest rate for the settlement period.

  4. The Board also decided on the following subsequent accounting requirements for separated nonequity components:

    1. Components that would be subsequently measured at fair value (by continuing to apply the descriptions described in item 3 above) include derivatives and nonequity components that have varying or uncertain settlement amounts.

    2. Nonequity components that are not subsequently measured at fair value would be accreted to the amount due at the initially determined expected settlement date based on the implicit interest rate.

    3. For those components that are accreted, reallocation of the nonequity and equity components would be required only if (1) the forecasted expected settlement date lapses and the nonequity component remains outstanding or (2) early settlement occurs. That reallocation would be performed by applying the extinguishment accounting procedures previously decided by the Board at its October 5, 2005 meeting.

  5. Based on the above decisions, the Board agreed that its following prior decisions would be revised as follows:

    1. The Board’s above decision for describing the nonequity component (see item 3) would be applied to all separated nonequity components instruments and not just those with contingent settlement date features.

    2. Under the obligation-first approach, conversion into a fixed number of shares is considered extinguishment of the nonequity component. In that case, conversion occurring earlier than the expected settlement date would result in a gain or loss similar to other early extinguishments.

    3. Finally, nonequity components with uncertain settlement dates would use an expected settlement date method and those with uncertain settlement amounts would be subsequently measured at fair value. As a result, the Board’s previous decision to require measurement at the current settlement value (for nonderivatives) would no longer be necessary.

Stable value investments. The Board discussed the 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 approved the issuance of a final FSP, subject to the changes described below.

Regarding effective date and transition, the Board decided that:

  1. The presentation and disclosure guidance in the final FSP should be effective for annual periods ending after December 15, 2006, with earlier application to interim periods within that fiscal year allowed but not required.

  2. The revised definition of fully benefit responsive should be effective as of the last day of the annual period ending after December 15, 2006.

  3. The requirement for retroactive application should be retained in the final FSP, except with respect to the revised definition of fully benefit responsive.

Regarding the grandfathering of nondefined-contribution investors, the Board decided that:

  1. The “essentially all” restriction should be removed from paragraph 13 of the proposed FSP.

  2. Language should be added to paragraph 13 of the proposed FSP requiring that “any portion of the net assets of the investment company that is not held in trust for the benefit of participants in qualified employer-sponsored defined-contribution plans is not permitted to increase after January 15, 2006, except for reinvestment of income earned.”

Regarding modifications to the definition of fully benefit responsive, the Board decided that:

  1. Paragraph 7(b) of the proposed FSP should be changed to indicate that the guidance is applicable to events that may affect the realization of full contract value, with a reference to a “significant” decline in creditworthiness of the issuer or wrapper provider as an example.

  2. The criterion in paragraph 7(d) of the proposed FSP should be clarified to state that for an investment contract to be considered fully benefit responsive an event that limits the ability of the fund to transact at contract value with the issuer and that also limits the ability of the fund to transact at contract value with the participants in the fund must not be probable of occurring.

Regarding the basis of the remaining financial statements, the Board decided that:

  1. The final FSP should clarify that the statement of changes in net assets should reconcile with net assets on the statement of assets and liabilities (rather than net assets at fair value).

  2. The final FSP should clarify that the statement of operations should be prepared on a basis that reflects income credited to participants in the fund and realized and unrealized gains and losses only on those investment contracts that are not deemed fully benefit responsive.

  3. The final FSP should not include additional example financial statements.


The following is a list of open meetings tentatively scheduled through January. 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, 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
Wednesday, January 4, 2006—FASB Board Meeting
Wednesday, January 4, 2006—FASB Education Session
Wednesday, January 11, 2006—FASB Board Meeting
Wednesday, January 11, 2006—FASB Education Session
Wednesday, January 18, 2006—FASB Board Meeting
Wednesday, January 18, 2006—FASB Education Session
Wednesday, January 25, 2006—FASB Board Meeting
Wednesday, January 25, 2006—FASB Education Session