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Action Alert No. 05-51
December 22, 2005
NOTICE OF MEETINGS
OPEN BOARD MEETING
(Board
meetings are available by audio webcast and telephone.)
No Board meetings are planned for the week of December 26, 2005. The
next scheduled Board meeting is Wednesday, January 4, 2006, and will be
announced in next week’s issue of Action Alert.
OPEN EDUCATION SESSION
No education sessions are planned for the week of December 26, 2005.
The next scheduled education session is Wednesday, January 4, 2006, and
will be announced in next week’s issue of Action Alert.
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.
December 14, 2005 Board Meeting
Hybrid
financial instruments. The Board addressed issues raised by
respondents on its Exposure Draft, Accounting for Certain Hybrid
Financial Instruments, as well as issues raised in the December 8,
2005 education session. The Board decided to:
- Require that any cumulative effect resulting from electing the fair
value option for existing bifurcated hybrids be accounted for consistent
with current guidance established in EITF Issue No. 02-3, "Issues
Involved in Accounting for Derivative Contracts Held for Trading
Purposes and Contracts Involved in Energy Trading and Risk Management
Activities."
- Eliminate the term beneficial from the final Statement to
clarify that the references were generic in nature rather than specific
to beneficial interests as defined in the Exposure Draft on transfers of
financial assets.
- Not address comments related to paragraph 40(c) of FASB Statement
No. 140, Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities, in redeliberations on the hybrid
financial instruments project, but to move consideration of these
comments to the transfer of financial assets project.
- Clarify in the basis for conclusions of the final Statement that the
intent of the Board regarding paragraph 35(c) of Statement 140 was not
to imply that the separate company reporting by a qualifying
special-purpose entity (SPE) could have implications on the qualified
status of that SPE when evaluated by the beneficial interest holders in
the SPE.
- Clarify that the fair value election is intended to apply to both
issuers and holders of hybrid financial instruments by adding a sentence
at the end of paragraph 16 that states, "Both hybrid financial
instruments that are purchased as well as those that are issued
are eligible for the fair value measurement elections."
- Include no changes in the hybrid's final Statement to preclude
embedding an insignificant derivative to achieve a fair value
measurement of an instrument that otherwise could not be measured at
fair value under the proposed guidance in the Exposure Draft.
- Not address whether the evaluation for embedded derivatives is a
continuous test.
- Clarify that unrecognized financial instruments are excluded from
the scope of the final Statement and to change the term inception
to first acquired, issued, or modified.
- Amend FASB Statement 133 Implementation Issue No. B39, "Application
of Paragraph 13(b) to Call Options That Are Exercisable Only by the
Debtor," to clarify that if a prepayment option is passed through
without modification, that option would continue to be considered
clearly and closely related and would not require bifurcation by the
beneficial interest holder.
- Not address certain comments raised by respondents to the Exposure
Draft including: accounting for failed sales, the possible multiple
recognition of assets, and the definition of the term payoff
structure.
- Require either of the following disclosures related to the effects
of the fair value election on the balance sheet:
- Separate balance sheet presentation of elements measured at fair
value. That is, to the extent that loans or debt included hybrid
instruments for which the fair value election had been applied,
amounts in these balance sheet captions would have to be separately
presented from balances measured at amortized cost. This disclosure
would apply to any balance sheet caption that included hybrids where
the fair value option was elected.
- Parenthetical disclosure on the face of the balance sheet for each
caption including hybrid instruments for which the fair value election
had been applied. This would have the same effect as the first
alternative except in parenthetical form.
- Provide information for each period for which an income statement is
presented that will allow users to understand the impact of changes in
the fair values of hybrid instruments subsequently measured at fair
value.
Fair value
option and servicing of financial assets. The Board discussed
financial statement presentation requirements for assets and liabilities
reported at fair value due to the reporting entity’s having elected fair
value as the subsequent measurement attribute. The Board decided:
- In each statement of financial position presented, an entity should
report its assets and liabilities that are subsequently measured at fair
value in a manner that separates those reported fair values from the
carrying amounts of assets and liabilities subsequently measured using
another measurement attribute. To accomplish that separate reporting, an
entity may either (a) display separate line items in an entity’s
statement of financial position for the fair value and non-fair-value
carrying amounts or (b) present amounts that aggregate those fair value
and non-fair-value amounts provided that those fair value and
non-fair-value amounts are separately disclosed parenthetically on the
face of the entity’s statement of financial position. The following
Board projects will include this requirement: fair value option,
servicing of financial assets, life settlements, and hybrid financial
instruments. The fair value option project will amend FASB Statement No.
115, Accounting for Certain Investments in Debt and Equity
Securities, to require that securities reported at fair value in
accordance with Statement 115 satisfy this financial statement
presentation requirement.
- For each period for which an income statement is presented, an
entity should provide information that will allow users to understand
the impact of changes in the fair values of assets and liabilities
subsequently measured at fair value as a result of a fair value
election. This general principle will be included in the life
settlements project, the hybrid financial instruments project, and the
fair value option project.
Postretirement
benefit obligations including pensions. The Board deliberated
issues relating to the limited-scope, first phase of its project to
reconsider the accounting for postretirement benefits. The Board
decided:
- That the objectives and scope of phase 1 are as follows:
- To improve the reporting of employers’ obligations for pensions
and other postretirement benefits by recognizing the overfunded or
underfunded status of defined benefit postretirement plans as an asset
or a liability in the statement of financial position. This means that
a sponsoring entity will recognize all previously unrecognized items
(such as unrecognized actuarial gains and losses), even when the plan
is fully funded.
- Not to change how plan assets and benefit obligations are measured
under FASB Statements No. 87, Employers’ Accounting for
Pensions, and No. 106, Employers’ Accounting for Postretirement
Benefits Other Than Pensions. The asset or liability (overfunded
or underfunded status) would be measured as the difference between the
fair value of plan assets and the benefit obligation (that is, the
projected benefit obligation (PBO) for pensions and the accumulated
postretirement benefit obligation (APBO) for other postretirement
benefits).
- Not to change the basic approach for measuring the amount of
annual net benefit cost reported in earnings.
- Implement phase 1 improvements as quickly as possible with a goal
of making them effective for years ending after December 15, 2006.
- To eliminate the provisions in Statements 87 and 106 that permit
plan assets and obligations to be measured as of a date not more than
three months prior to the balance sheet (that is, to require entities to
report the overfunded or underfunded status measured as of the date of
the financial statements).
- Not to change the current accounting for defined benefit plans in
interim-period financial statements.
- To require recognition of an asset for overfunded plans and a
separate liability for underfunded plans.
- To recognize previously unrecognized items as follows:
- Previously unrecognized actuarial gains or losses would be
recognized as a charge or credit to other comprehensive income (OCI).
Gains or losses recognized in OCI would be recycled out of OCI into
earnings based on the amortization and recognition requirements in
Statements 87 and 106.
- Previously unrecognized prior service costs or credits also would
be recognized as a charge or credit to OCI. These items would be
recycled out of OCI into earnings based on the amortization and
recognition requirements in Statements 87 and 106.
- Previously unrecognized net transition assets or obligations would
be recognized as an adjustment of retained earnings. Those amounts
would not be subsequently recycled through earnings.
- To codify into Statement 87 the guidance in Q&A 41 of A Guide
to Implementation of Statement 87 on Employers’ Accounting for
Pensions, that articulates the present requirement to recognize the
current and noncurrent portions of the assets and liabilities recognized
for postretirement benefits.
- Not to require separate line item presentation of amounts recognized
in the balance sheet. In making that decision, the Board noted that
amounts recognized in OCI would be subject to the separate presentation
requirements of FASB Statement No. 130, Reporting Comprehensive
Income (that is, classified based on the nature of the item).
Conceptual
framework. The Board discussed issues relating to the reporting
entity, the definition of an asset, and benefits and costs.
Reporting Entity
The Board began its deliberations on phase D, reporting entity. It
discussed preliminary staff research on the reporting entity concept and
decided that:
- The reporting entity concept should focus on determining the
boundaries of the reporting entity, for both an individual reporting
entity and a group reporting entity.
- The reporting entity concept should not be limited to those entities
that have external users who are unable to demand the information they
require and therefore must rely on information provided by the entity.
- The staff should conduct further research into whether a parent-only
entity is a reporting entity.
- The staff should investigate whether the boundaries of a group
reporting entity should be based on a broader concept of control, for
example, a concept that might encompass entities under common control.
Definition of an Asset
The Board began deliberations of phase B, elements and recognition and
measurement attributes, by discussing the following proposed working
definition of an asset:
An asset of an entity is a present right, or other
access, to an existing economic resource with the ability to generate
economic benefits to the entity.
The Board agreed that staff should continue to develop the proposed
working definition, refining it to deal with certain possible ambiguities,
for example, what is meant by other access. The Board also noted
that the definition of an asset will need to be considered together with
recognition criteria to determine what assets are recognized in financial
statements.
Benefits and Costs
The Board discussed benefits and costs as part of phase A, objectives
and qualitative characteristics, and decided:
- The concept that the benefits of an accounting standard should
justify the costs involved is a pervasive constraint rather than a
qualitative characteristic of accounting information.
- The framework should indicate that, while information from
preparers, users, and other constituents about their expectations
concerning the nature and quantity of benefits, in particular, and costs
is likely to be incomplete, standard setters should consider in their
deliberations the information they can obtain.
- The framework should describe what is included, and not included, in
the benefits and costs to be considered.
- There is no need to modify the cost-benefit constraint for
application to smaller entities or any other particular type of entity.
However, the results of considering whether benefits justify costs may
differ for different types of entities.
The IASB also discussed the same topics and reached similar
conclusions.
FASB DOCUMENTS AVAILABLE
The following documents were issued and are available on the FASB
website:
Final
FSP SOP 94-6-1, "Terms of Loan Products That May Give Rise to a
Concentration of Credit Risk" (December 19, 2005).
Proposed
FSP FAS 142-d, "Amortization and Impairment of Acquired Renewable
Intangible Assets" (December 21, 2005). Comments are requested by March
27, 2006.
SPECIAL NOTICE
Your
input requested for the Codification retrieval system—We are
capturing feedback through January 15, 2006, for the planned FASB
codification retrieval system for nongovernmental entities. The web-based
survey takes about 5–10 minutes to complete and will provide us with very
important feedback as we develop our list of requirements. Thanks in
advance for your assistance!
FUTURE OPEN MEETINGS
The following is a list of open meetings tentatively scheduled through
February. 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, 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
Monday, January 30, 2006—Liaison Meeting with American Bar
Association
Wednesday, February 1, 2006—FASB Board
Meeting
Wednesday, February 1, 2006—FASB Education
Session
Wednesday, February 8, 2006—FASB Board Meeting
Wednesday,
February 8, 2006—FASB Education Session
Wednesday, February 15,
2006—FASB Board Meeting
Wednesday, February 15, 2006—FASB Education
Session
Wednesday, February 22, 2006—FASB Board Meeting
Wednesday,
February 22, 2006—FASB Education Session
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