SUMMARY OF BOARD DECISIONS

Summary of Board decisions 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 standard.

May 6, 2009 Board Meeting

Applying fair value to interests in alternative investments. The Board decided to provide additional guidance related to determining the fair value of certain alternative investments, such as interests in private equity, venture capital, and hedge funds, in accordance with FASB Statement No. 157, Fair Value Measurements.

The scope of the proposed guidance would be limited to investments in entities that apply the AICPA Audit and Accounting Guide, Investment Companies, with a scope exception for exchange traded funds (for example, a registered closed-end fund that is actively or inactively traded).

The Board decided that an investor entity would estimate the fair value of its interests in alternative investments using the net asset value as of the investor entity's financial statement date, as long as the net asset value has been calculated in accordance with the investment companies Guide.

The proposed guidance also would require an investor entity to disclose the fair value (net asset value) of investments in alternative investments and:

  1. For an interest in a private equity fund, the investor's best estimate of the fund's remaining life

  2. The investor's best estimate of the amount and timing of any remaining capital commitments

  3. For an investment with redemption rights:

    1. The terms and conditions upon which the investor may redeem its investment (for example, quarterly redemption with 60 days' notice).

    2. The terms and conditions of any restrictions that would (or could) temporarily preclude redemption by the investor, including the investor's best estimate of when the restriction will lapse.

The proposed guidance would be effective upon issuance and would be applied prospectively to any periods for which financial statements have not been issued. Revisions to values of interests in alternative investments resulting from a change in the valuation technique or its application should be accounted for as a change in accounting estimate. The disclosure provisions of FASB Statement No. 154, Accounting Changes and Error Corrections, for a change in accounting estimate are not required for revisions resulting from a change in valuation technique or its application.

The Board directed the staff to proceed to a draft of a proposed FSP for vote by written ballot. The Board plans to issue that proposed FSP for public comment on or about May 22, 2009, with a 30-day comment period.


Financial instruments with characteristics of equity. The Board discussed and expressed support for a set of draft principles that could be used to distinguish between equity and liabilities and a related set of decision rules to operationalize those principles. The principles are as follows:

  1. Equity instruments are always subordinated to all liability instruments but may be senior to other classes of equity.

  2. An instrument is equity if the issuer cannot be required to settle it unless the issuer winds up its operations and distributes all of its remaining assets. (That is a sufficient but not necessary condition for equity classification.)

  3. A settlement requirement that becomes effective when the holder has died, retired, resigned, or otherwise ceased to take an interest in the activities of the entity does not cause an instrument to be classified as a liability if the holder was required to hold the instrument in order to transact with the entity or otherwise engage in the activities of the entity.

  4. Settlement requirements other than those described in item (3) indicate that an instrument is a liability or a liability-equity hybrid instrument (part equity and part liability).

  5. An instrument should be separated into liability and equity components if the instrument has two separate or alternative outcomes, one of which would require equity classification if it were the only outcome and one of which would require liability classification if it were the only outcome.

  6. Claims to percentages of remaining assets are neither necessary nor sufficient to identify an equity instrument. However, they may help to classify otherwise borderline instruments.

The decision rules to produce results consistent with the principles are as follows:

  1. An entity must classify as equity retained earnings and capital contributed without the contributor receiving a claim against the entity in exchange even if that entity has issued no equity instruments.

  2. An issuer must classify an instrument as a liability if the instrument has a fixed settlement date or must be settled on the occurrence of an event that is certain to occur, excluding those described in item 3(a) and 3(b) below.

  3. An issuer must classify the following other instruments as equity:

    1. Instruments that the issuer cannot be required to settle before winding up its operations and distributing all of its assets (regardless of the amount of the claim).

    2. Instruments that the holder is required to own in order to do business with or otherwise actively engage in activities of the issuer and that are redeemable only if the holder dies, retires, resigns, or otherwise ceases to actively engage in the activities of the issuer. (This would include holdings, the amounts of which vary based on volume of business transacted by the holder.)

  4. An instrument should be separated into liability and equity components if the instrument has two separate or alternative outcomes, one of which would require equity classification if it were the only outcome and one of which would require liability classification if it were the only outcome.

The Board will continue to refine the principles in future Board meetings.