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Action Alert No. 03-46
November 20, 2003
NOTICE OF MEETINGS
OPEN BOARD MEETINGS
Tuesday, November 25, 2003, 9:00 a.m.
- FASB Staff Positions (FSPs). The Board will continue
discussing the issuance of the following: (Estimated 60-minute
discussion.)
- Final FSP on exclusion of certain decision-maker fees from
paragraph 8(c) of FASB Interpretation No. 46, Consolidation
of Variable Interest Entities
- Proposed FSP on identifying variable interests and computing
expected losses under Interpretation 46.
- FASB
ratification of EITF consensuses. The Board will consider
the ratification of consensuses reached at the November 12–13,
2003 EITF meeting. See discussion under EITF ACTIONS.
(Estimated 15-minute discussion.)
- Insurance contracts. The Board will discuss the
findings of the International Accounting Standards Board’s (IASB)
project on accounting for insurance contracts, the next steps for
the IASB, and issues to be resolved in accounting for insurance
contracts. This topic is educational; no decisions are expected.
(Estimated 2-hour discussion.)
Wednesday, November 26, 2003, 8:30 a.m.
The Board meeting will begin at 8:30 a.m. instead of 9:00
a.m.
- Disclosures
about pension plans. The Board will discuss and finalize
its decisions regarding narrative descriptions of investment
policies and strategies, the effective date for disclosures about
plan assets, and the disclosure of estimated future benefit
payments. (Estimated 45-minute discussion.)
- Equity-based
compensation (EBC). The Board will discuss issues related
to the method of transition and effective date for nonpublic
enterprises. Additionally, the Board will discuss issues related
to disclosures that should be made about equity-based compensation
arrangements. (Estimated 90-minute discussion.)
- 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, November 25, 2003, immediately following the Board
meeting
Wednesday, November 26, 2003, immediately 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
3, 2003 Board meeting and other future Board meetings. Those topics
will be posted to the FASB calendar
four days prior to those education sessions.
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 hearings, and through other
communication channels. Decisions become final only after a formal
written ballot to issue a final Statement or Interpretation.
November 11, 2003 Board Meeting
FASB Staff Position (FSP) on Interpretation 46. The Board
discussed the nature of a decision maker’s fee arrangement that
should be excluded from paragraph 8(c) of FASB Interpretation No.
46, Consolidation of Variable Interest Entities, in the
calculation of an entity’s expected residual returns. The Board
directed the staff to revise a draft FSP that would exclude a
decision maker’s fees from paragraph 8(c) if all of the following
conditions are met:
- The fees are compensation for services provided commensurate
with the level of effort required to provide those services. The
determination of whether fees are commensurate compensation should
be based on all relevant facts and circumstances.
- The decision maker’s fees:
- Have no more than a trivial amount of variability, for
example, a fee that is fixed in terms of amount and timing with
no more than a remote probability of nonpayment, or
- Are calculated based on a fixed rate, such as a fixed
percentage of assets managed or a fixed dollar amount per unit
of service.
- The decision maker’s fees are not linked primarily to the net
income of the variable interest entity. Although net income may
affect the level of assets managed, a fee based on a fixed
percentage of assets managed would not necessarily be linked
primarily to net income.
- The payment of the decision maker’s fees is not subordinated
to other cash flows of the variable interest entity; that is, the
fees are at the same level of seniority as other operating
liabilities of the entity.
- Except for the fees for services, the decision maker and the
decision maker’s related parties do not hold interests in the
variable interest entity that provide more than a trivial amount
of subordinated financial support to the entity or the right to
receive more than a trivial amount of the entity’s expected
residual returns.
- The decision maker is subject to substantive kick-out rights.
The rights to remove a decision maker (kick-out rights) are
substantive if (a) the decision maker can be removed by the vote
of a simple majority of the voting interests held by parties other
than the decision maker and the decision maker’s related parties
and (b) the parties holding the kick-out rights have the ability
to exercise those rights if they choose to do so; that is, there
are no significant barriers to the exercise of the rights.
Barriers include, but are not limited to:
(1) Kick-out rights subject to conditions that make it
unlikely they will be exercisable, for example, conditions that
narrowly limit the timing of the exercise
(2) Financial or operational penalties associated with
replacing the decision maker that would act as a more than
insignificant disincentive for removal
(3) The absence of an adequate number of qualified
replacement decision makers or inadequate compensation to attract
a qualified replacement
(4) The inability of parties holding the rights to obtain
information necessary to exercise them
(5) The absence of an explicit, reasonable mechanism in
the contractual arrangement or in the applicable law or
regulations by which the parties holding the rights can call for
and conduct a vote to exercise those rights.
Substantive kick-out rights alone are not sufficient to allow a
decision maker’s fees to be excluded from paragraph 8(c) in the
calculation of an entity’s expected residual returns.
The staff also announced that proposed FSP FIN
46-f, "Evaluating Whether as a Group the Holders of the
Equity Investment at Risk Lack the Direct or Indirect Ability to
Make Decisions about an Entity's Activities through Voting Rights or
Similar Rights under FASB Interpretation No. 46, Consolidation of
Variable Interest Entities," will be posted to the FASB website
by November 14, 2003, for a 30-day comment period ending December
14, 2003.
Disclosures
about pension plans. The Board made the following decisions
about additional pension and other postretirement benefit
disclosures:
- The following disclosures would be required as proposed in the
September 12, 2003 FASB Exposure Draft, Employers’ Disclosures
about Pensions and Other Postretirement Benefits:
- The accumulated benefit obligation (ABO).
- The use of a tabular format for disclosure of the following
key assumptions:
(1) The assumed discount rates.
(2) Rates of compensation increase (for pay-related
plans).
(3) Expected long-term rates of return on plan
assets.
- Information about each major category (equity, debt, real
estate, other) of plan assets:
(1) Percentage of the fair value of total plan assets
as of the measurement date used for each statement of financial
position presented.
(2) Target allocation percentage or range of
percentages, presented on a weighted-average basis. For sponsors
that do not have investment targets by major category, a
statement to that effect.
(3) A narrative description of investment strategies.
- Interim disclosure of the following:
(1) The components of net periodic benefit cost.
(2) An update of the employer’s expected contributions
to be paid during the year, if that expectation changed
significantly from the previous annual or interim period
disclosure amount.
- The following disclosures would be required; provisions of the
disclosures have changed from those proposed in the Exposure
Draft:
- A narrative description of the basis for determining the
overall expected long-term rate of return. (The requirement to
disclose the expected rate of return by individual asset
category has been eliminated.)
- In all cases, measurement dates used for plans that make up
the majority of a sponsor’s plan assets and benefit obligations.
(The requirement that disclosure of measurement dates be
conditioned upon the occurrence of significant economic events
has been eliminated; that disclosure now is required in all
circumstances, for all sponsors.)
- Reconciliations of beginning and ending balances of the fair
value of plan assets and benefit obligations. (This reinstates
the reconciliations as required by FASB Statement No. 132,
Employers’ Disclosures about Pensions and Other
Postretirement Benefits.)
- The employer’s best estimate, once known, of its
contributions to be paid to fund the plan for the next fiscal
year beginning after the date of the latest statement of
financial position. Amounts would be presented in the aggregate,
considering all estimated contributions, such as contributions
required by funding regulations or laws and additional
discretionary contributions. (This eliminates the requirement to
disclose required, discretionary, and noncash contributions
separately and adds the language “best estimate, once known.”)
- The projected/expected benefit payments, including
employees’ future service, for each of the next five years and
thereafter, with a reconciliation back to the projected benefit
obligation that would reflect interest, future service accruals,
and participant contributions. (This replaces disclosure of
benefit payments used in determining the projected benefit
obligation that do not consider future service.) This disclosure
is subject to reconsideration.
- The Board reaffirmed that all requirements would be applied to
nonpublic entities, except for exemptions carried forward from
Statement 132 and for the interim-period disclosure of the
components of net periodic benefit cost.
- The following information would not be required:
- Sensitivity information.
- Other provisions identified in Issue 9 of the Exposure
Draft.
- Debt maturity information.
- Expected long-term rate of return for individual asset
categories of plan assets.
- The effective date of the final Statement, for other than
nonpublic entities, would be for fiscal years ending after
December 15, 2003, for all disclosures except the following, which
would be effective for fiscal years ending after June 15, 2004:
- Any new disclosures not previously required by Statement 132
about foreign plans.
- The projected value of all benefit payments.
The Board further is evaluating whether to require information
about plan assets in financial statements for years ending after
December 15, 2003, but has not yet finalized that decision.
- The effective date of the final Statement for nonpublic
entities would be for fiscal years ending after June 15, 2004.
Equity-based
compensation (EBC). The Board discussed certain issues
relating to the measurement basis of EBC arrangements of nonpublic
enterprises and the interaction of FASB Statements No. 123,
Accounting for Stock-Based Compensation, and No. 150,
Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity. The Board made the following
decisions:
- Nonpublic enterprises would be permitted the option of
measuring EBC arrangements using either a fair value-based method
or an intrinsic value based method. Enterprises would be required
to make a one-time policy decision that would apply to all EBC
arrangements. The measurement date for arrangements measured using
the fair value-based method would be the grant date for EBC equity
awards; for EBC liability awards, the fair value would be revised
at each reporting date until settlement. The measurement date for
arrangements measured at intrinsic value would be the grant date
for EBC awards of stock and the exercise date for EBC awards of
option or similar instruments; for EBC option and liability
awards, the intrinsic value would be revised at each reporting
date until settlement.
- The explicit scope exception for EBC arrangements in paragraph
17 of Statement 150 would be retained, and certain provisions in
the proposed Statement would make reference to Statement 150. The
Board expressed support for a proposal that would classify
financial instruments given under an EBC arrangement as
liabilities, if those financial instruments would have been
subject to Statement 150, absent the explicit scope exception in
paragraph 17.
- Generally, a freestanding EBC financial instrument accounted
for under Statement 123 would become subject to Statement 150 when
all employee-service conditions have been met or satisfied. For
mandatorily redeemable shares (and physically settled forward
contracts and certain arrangements that involve a fixed amount
settled in a variable number of shares) given in return for
employee services, this means that such shares would become
subject to Statement 150 at the date that the service period is
completed. For option arrangements and other arrangements settled
in a variable number of shares, this means that such instruments
would not become subject to Statement 150 unless the employment
relationship ceases or upon exercise, in which case the underlying
financial instruments may become subject to Statement 123 as long
as no other employer service conditions persist.
- Modifications of certain financial instruments that are
subject to Statement 150 because all employee-service conditions
have been met or satisfied would be accounted for in accordance
with the guidance on modifications and settlements set forth in
Statement 123, if those modifications or settlements are a result
of the holder’s employment status. The incremental value
transferred to the holder would be presumed compensatory unless
that value has been transferred to all holders of that class of
equity. However, if that class of equity is designed specifically
for employees, then that exception would not apply; that
incremental value would be recognized as compensation cost.
EITF ACTIONS
November 12 and 13, 2003 EITF Meeting
The task force discussed the following issues:
- Issue No. 02-14, "Whether the Equity Method of Accounting
Applies When an Investor Does Not Have an Investment in Voting
Stock of an Investee but Exercises Significant Influence through
Other Means." This Issue will be discussed further at a future
meeting.
- Issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." A
consensus was reached on one issue. The Board will consider the
ratification of that consensus at its November 25, 2003 meeting.
This Issue will be discussed further at a future meeting.
- Issue No. 03-6, "Participating Securities and the Two-Class
Method under FASB Statement No. 128, Earnings per Share."
This Issue will be discussed further at a future meeting.
- Issue No. 03-9, "Interaction of Paragraphs 11 and 12 of FASB
Statement No. 142, Goodwill and Other Intangible Assets,
Regarding Determination of the Useful Life and Amortization of an
Intangible Asset." This Issue will be discussed further at a
future meeting.
- Issue No. 03-10, "Application of EITF Issue No. 02-16,
'Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor,' by Resellers to Sales
Incentives Offered to Consumers by Manufacturers." A consensus was
reached. The Board will consider the ratification of that
consensus at its November 25, 2003 meeting.
- Issue No. 03-12, "Impact of FASB Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others, on EITF Issue No. 95-1, 'Revenue Recognition on Sales
with a Guaranteed Minimum Resale Value.'" The Board will consider
the ratification of that consensus at its November 25, 2003
meeting.
- Issue No. 03-13, "Applying the Conditions in Paragraph 42 of
FASB Statement No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, in Determining Whether to
Report Discontinued Operations." This Issue will be discussed
further at a future meeting.
- Issue No. 03-14, "Participants' Accounting for Emissions
Allowances under a 'Cap and Trade' Program." The task force
decided to drop this Issue from the EITF agenda.
- Issue No. 03-16, "Accounting for Investments in Limited
Liability Companies." This Issue will be discussed further at a
future meeting.
The task force discussed and approved revisions to the minutes of
the July 31, 2003 EITF meeting for Issue No. 03-6, "Participating
Securities and the Two-Class Method under FASB Statement No. 128,
Earnings per Share," to correct a typographical error.
EITF Issue No. 03-15, “Interpretation of Constraining Conditions
of a Transferee in a CBO Structure,” was on the agenda for the
November 12–13, 2003 EITF meeting but was not discussed.
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.
Wednesday, December 3, 2003—FASB Board Meeting
Wednesday,
December 3, 2003—FASB Education Session
Thursday, December 4,
2003—Financial Accounting Standards Advisory Council
Meeting
Wednesday, December 10, 2003—FASB Board
Meeting
Wednesday, December 10, 2003—FASB Education
Session
Wednesday, December 17, 2003—FASB Board
Meeting
Wednesday, December 17, 2003—FASB Education
Session
Thursday, December 18, 2003—Liaison Meeting with the
American Insurance Association
Tuesday, January 6,
2004—Liaison Meeting with the AICPA Audit Issues Task
Force
Wednesday, January 7, 2004—FASB Board Meeting
Wednesday,
January 7, 2004—FASB Education Session
Wednesday, January 14,
2004—FASB Board Meeting
Wednesday, January 14, 2004—FASB
Education Session
Thursday, January 15, 2004—EITF
Meeting
Wednesday, January 21, 2004—FASB Board
Meeting
Wednesday, January 21, 2004—FASB Education
Session
Wednesday, January 28, 2004—FASB Board
Meeting
Wednesday, January 28, 2004—FASB Education
Session
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