Action Alert No. 03-33
August 20, 2003

NOTICE OF MEETINGS

OPEN BOARD MEETING

Wednesday, August 27, 2003, 9:00 a.m.

  1. Business combinations: purchase method procedures. The Board will discuss the outcome of its meeting on August 12, 2003, with members of the financial statement user community. Specifically, the Board will discuss certain existing and proposed business combination disclosures and proposals for the display of noncontrolling interests in the consolidated financial statements. (Estimated 60-minute discussion.)

  2. Stock-based compensation. The Board will discuss accounting for modifications and settlements of stock-based compensation awards. The Board also will discuss other issues, including whether the scope of the proposed standard will cover equity interests in unincorporated entities. (Estimated 90-minute discussion.)

  3. Financial instruments: liabilities and equity. The Board will discuss whether to reconsider whether nonpublic entities should be exempt from applying, or given further time to apply, the provisions of FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, requiring mandatorily redeemable shares to be classified as liabilities. (Estimated 30-minute discussion.)

  4. Fair value measurement. The Board will discuss proposed clarifications to the guidance for using present value to estimate fair value in FASB Concepts Statement No. 7, Using Cash Flow Information and Present Value in Accounting Measurements. (Estimated 60-minute discussion.)

  5. 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 SESSION

The Board has not scheduled any educational, non-decision-making sessions for the week of August 25, 2003. If the Board should decide to add an educational session, that information will be posted to the FASB calendar as soon as possible.

OPEN MEETING WITH REPRESENTATIVES OF THE NEW YORK SOCIETY OF SECURITY ANALYSTS

Monday, August 25, 2003, 1:00 p.m.

The Board will meet with representatives of the Committee for Improved Corporate Reporting of the New York Society of Security Analysts to discuss matters of mutual interest.

OPEN ROUNDTABLE DISCUSSION ON QUALIFYING SPECIAL-PURPOSE ENTITIES AND ISOLATION OF TRANSFERRED ASSETS

Thursday, August 28, 2003, 9:00 a.m. – noon and 1:30 p.m. – 4:30 p.m.

The Board will hold a public roundtable meeting with respondents to the June 10, 2003 FASB Exposure Draft, Qualifying Special-Purpose Entities and Isolation of Transferred Assets, to discuss various aspects of that document.

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.

August 12, 2003 Board Meeting

Business combinations: purchase method procedures. The Board met with members of the financial statement user community and others to discuss issues related to (1) the accounting, presentation, and disclosure of minority (noncontrolling) interests and (2) disclosures for a business combination. The meeting was educational, and no decisions were reached.

August 13, 2003 Board Meeting

Stock-based compensation. The Board discussed several issues relating to the definition of grant date and the accounting for and attribution of stock-based compensation arrangements classified as liabilities. The Board reached the following decisions with respect to those issues:

  1. The definition of grant date in FASB Statement No. 123, Accounting for Stock-Based Compensation, will be retained.

  2. The guidance in paragraph 39 of Statement 123 will be retained and subsequently revised, if necessary, based on the outcome of the Board’s deliberations in phase two of its project on liabilities and equity.

  3. The guidance in FASB Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, with respect to stock-based compensation awards with tax net-settlement features will be retained.

  4. The guidance on cashless exercises found in EITF Issue No. 00-23, “Issues Related to the Accounting for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44,” will be retained.

  5. Stock-based compensation arrangements with characteristics similar to financial instruments classified as liabilities under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, will be classified as liabilities.

  6. For public entities, stock-based compensation liabilities will be accounted for using fair value as the measurement attribute. The Board will consider this issue as it relates to nonpublic entities at a subsequent meeting.

  7. Stock-based compensation liabilities will be attributed according to the method established in FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans, with the initial grant-date fair value of stock-based compensation liabilities and subsequent fluctuations in value characterized as compensation cost.

  8. The guidance in paragraph 39 as well as illustrations 7 and 8 of Statement 123 with respect to measurement and attribution of stock-based compensation arrangements with multiple settlement features will be retained and subsequently revised, if necessary, based on the outcome of the Board’s deliberations in phase two of its project on liabilities and equity.

Revenue recognition. The Board discussed an inventory of the existing guidance related to revenue recognition and the various revenue recognition conventions that are used in practice. The Board also discussed an approach to developing a comprehensive standard on revenue recognition. The Board was not asked to make any decisions at this meeting; instead, the Board was asked to consider the following aspects of that approach.

  1. Scope of the standard. Several Board members suggested that the staff consider removing financial instruments from the scope of the revenue recognition standard. Other Board members suggested that the removal of issues from the project’s scope is premature; they asked the staff to continue to develop broad-scoped guidance.

  2. Balancing principles-based guidance and rules-based guidance. The Board generally agreed that the staff should develop a standard that balances broad principles with clear, concise implementation guidance. Some Board members noted that some industries or transactions may require more detailed guidance than others.

  3. Transition from existing guidance. The Board noted that it will need to consider existing literature individually for retention, modification, or elimination.

Consolidation of variable interest entities. The Board added a limited-scope project to its agenda to modify FASB Interpretation No. 46, Consolidation of Variable Interest Entities, to address the following issues:

  1. Whether the term investor in part (i) of the last sentence of paragraph 5 should include the investor’s related parties as indicated in footnote 6

  2. Whether to change the second reference to paragraph 5 in paragraph 11 (regarding development stage enterprises) to paragraph 5(a) to clarify that paragraph 11 does not exempt development stage companies from the requirements of paragraph 5(b)

  3. Whether events other than those listed in paragraph 15 should require an enterprise to reconsider whether it is the primary beneficiary of a variable interest entity

  4. Whether a decision maker’s fee should be considered part of the expected returns of a variable interest entity under paragraph 8(c) if the decision maker has (a) no exposure to the expected losses of the entity (its fee does not provide subordinated financial support), (b) no right to expected residual returns except a fee that has no expected variability, and (c) no other interest in the entity.

The Board also directed the staff to prepare FASB Staff Positions to delay the effective date of Interpretation 46 for the following parties:

  1. Non-registered investment companies that are currently accounting for their investments in accordance with the specialized accounting guidance in the AICPA Audit and Accounting Guide, Audits of Investment Companies (the Audit Guide). The deferral would not extend to investments made after March 27, 2002, that are held by an investment company that is not a separate legal entity. The Board decided to delay the effective date for these parties while the AICPA finalizes its Statement of Position (SOP) on the clarification of the scope of the Audit and Accounting Guide, Audits of Investment Companies, and accounting by the parent companies and equity method investors for investments in investment companies. When the AICPA issues the final SOP, the Board will consider modifying paragraph 4(e) of Interpretation 46 to provide an exception for companies that apply the Audit Guide as revised by the SOP.

  2. A decision maker that (a) receives fees paid by a variable interest entity that provide the decision maker with no exposure to expected losses (the fees do not provide subordinated financial support for the entity) and no rights to receive expected residual returns other than expected residual returns provided by paragraph 8(c) and (b) has no other interests in the variable interest entity. The Board decided to delay the effective date for those parties to allow time to consider a modification of Interpretation 46 that may affect those parties. (See issue 4 above.)

The Board decided not to delay the effective date for any other entities.

The staff announced that draft FASB Staff Positions are being prepared to provide additional guidance on the following provisions of Interpretation 46:

  1. The computation of expected losses and expected residual returns, including:

    1. The amounts of the fees required to be included by paragraphs 8(c) and 8(d)

    2. The effects of those fees on expected losses

    3. Whether other parties’ rights to remove the decision maker are a factor to consider

    4. Clarification that the expected variability in paragraph 8(a) is based on estimates of an entity’s net income or loss before the effects of variable interests

  2. The determination of which party absorbs a majority of expected losses and expected residual returns.

One Board member suggested that financial statements issued prior to the finalization of the FASB Staff Positions should be based on the preparers’ and auditors’ current understanding of how to apply the Interpretation. The staff indicated that transition guidance will be included in the FASB Staff Positions for those situations for which the finalized FASB Staff Position is different from the approach used in issued financial statements.

FASB ratification of EITF consensuses. The Board discussed and ratified consensuses reached at the July 31, 2003 EITF meeting. The Board ratified the task force's consensuses for Issues No. 03-5, "Applicability of AICPA Statement of Position 97-2, Software Revenue Recognition, to Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software," No. 03-7, "Accounting for the Settlement of the Equity-Settled Portion of a Convertible Debt Instrument That Permits or Requires the Conversion Spread to Be Settled in Stock (Instrument C of EITF Issue No. 90-19, 'Convertible Bonds with Issuer Option to Settle for Cash upon Conversion')," and No. 03-11, "Reporting Realized Gains and Losses on Derivative Instruments That Are Subject to FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, and Not 'Held for Trading Purposes' as Defined 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.'" No further EITF discussion of those Issues is planned.

INTERPRETATION 46/STATEMENT 133 TENTATIVE GUIDANCE AVAILABLE

The FASB staff posted tentative guidance for Statement 133 Implementation Issue No. G24, "Accounting for the Discontinuance of Hedging Relationships Arising from Changes in Consolidation Practices Due to Initially Applying FASB Interpretation No. 46." Comments on this Implementation Issue are requested by Wednesday, September 17, 2003.

FUTURE OPEN MEETINGS

The following is a list of open meetings tentatively scheduled through September. 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, September 3, 2003—FASB Board Meeting (p.m. meeting)
Wednesday, September 3, 2003—FASB Education Session
Friday, September 5, 2003—Liaison Meeting with the Institute of Management Accountants
Tuesday, September 9, 2003—Liaison Meeting with the American Council of Life Insurers
Wednesday, September 10, 2003—FASB Board Meeting
Wednesday, September 10, 2003—FASB Education Session
Friday, September 12, 2003—Liaison Meeting with the Financial Managers Society
Wednesday, September 17, 2003—FASB Board Meeting
Wednesday, September 17, 2003—FASB Education Session
Wednesday, September 24, 2003—FASB Board Meeting
Wednesday, September 24, 2003—FASB Education Session
Thursday, September 25, 2003—Financial Accounting Standards Advisory Council Meeting