Action Alert No. 05-49
December 8, 2005
NOTICE OF MEETINGS
OPEN BOARD MEETING
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
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
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:
- Recognition of actuarial gains and losses, prior service costs,
and transition assets and obligations
- The measurement date for measuring plan assets and benefit
- Balance sheet aggregation, classification, and display
- Interim period reporting.
framework (estimated 2.5 hour discussion). The Board will
discuss three different aspects of its conceptual framework project.
- 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.
- 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
- 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.
- 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 SESSIONS
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
November 29, 2005 Board Meeting
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.
- The Board agreed on the following measurement requirements for
- 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.
- 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
- For instruments that are separated, the Board affirmed its previous
- Equity and nonequity components would be identified by examining
the possible payoffs.
- The nonequity component would be initially measured at its fair
- The residual amount of the proceeds (the difference between the
transaction price and the nonequity component’s fair value) would be
allocated to equity.
- 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:
- The amount and timing of the nonequity outcome may be affected by
various factors including share prices, put, call, and conversion
- 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.
- 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.
- 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.
- The Board also decided on the following subsequent accounting
requirements for separated nonequity components:
- 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.
- 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.
- 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
- Based on the above decisions, the Board agreed that its following
prior decisions would be revised as follows:
- 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
- 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.
- 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
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:
- 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.
- The revised definition of fully benefit responsive should be
effective as of the last day of the annual period ending after December
- The requirement for retroactive application should be retained in
the final FSP, except with respect to the revised definition of fully
Regarding the grandfathering of nondefined-contribution investors, the
Board decided that:
- The “essentially all” restriction should be removed from paragraph
13 of the proposed FSP.
- 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
Regarding modifications to the definition of fully benefit responsive,
the Board decided that:
- 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
- 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
- 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).
- 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.
- The final FSP should not include additional example financial
FUTURE OPEN MEETINGS
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
21, 2005—FASB Board Meeting
Wednesday, December 21, 2005—FASB Education
Wednesday, December 28, 2005—No FASB Board Meeting or
Education Session scheduled
Wednesday, January 4, 2006—FASB Board
Wednesday, January 4, 2006—FASB Education Session
January 11, 2006—FASB Board Meeting
Wednesday, January 11, 2006—FASB
Wednesday, January 18, 2006—FASB Board
Wednesday, January 18, 2006—FASB Education
Wednesday, January 25, 2006—FASB Board Meeting
January 25, 2006—FASB Education Session