Action Alert No. 03-48
December 4, 2003

NOTICE OF MEETINGS

OPEN BOARD MEETING

Wednesday, December 10, 2003, 8:30 a.m.

1. Modifications of Interpretation 46. The Board will redeliberate the proposed modifications to FASB Interpretation No. 46, Consolidation of Variable Interest Entities, and consider comments received on the Exposure Draft. (Estimated 2.5-hour discussion.)

2. Revenue recognition. The Board will discuss conceptual decisions made to date and will consider whether additional conceptual guidance is necessary to clarify those decisions. In addition, the Board will discuss the enforceability of contracts under the conceptual model. (Estimated 60-minute discussion.)

3. FASB Staff Position (FSP). [Revised 12/04/03] The Board will discuss issuance of a proposed FSP on the accounting and disclosure requirements under FASB Statement No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 that is expected to be signed into law by the President before the end of 2003. (Estimated 30-minute discussion.)

4. Qualifying special-purpose entities and isolation of transferred assets. The Board will discuss issues that have arisen in the redrafting of the amendment to FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. (Estimated 15-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

Wednesday, December 10, 2003, immediately following the Board meeting

The Board will hold an educational, non-decision-making session to discuss topics that are anticipated to be discussed at the December 17, 2003 Board meeting. Those topics will be posted to the FASB calendar four days prior to the education session.

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 25, 2003 Board Meeting

FASB ratification of EITF consensuses. The Board discussed consensuses reached at the November 12–13, 2003 EITF meeting.

The Board ratified the task force's consensuses for Issues 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," and 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.'" No further EITF discussion of Issues 03-10 and 03-12 is planned.

With respect to Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments," the Board ratified the task force's consensus regarding disclosures about unrealized losses on marketable debt and equity securities accounted for under FASB Statements No. 115, Accounting for Certain Investments in Debt and Equity Securities, and No. 124, Accounting for Certain Investments Held by Not-for-Profit Organizations, that are classified as either available-for-sale or held-to-maturity. The task force has not reached a consensus on accounting guidance regarding determination of what constitutes an “other-than-temporary” impairment pending further consideration at a future EITF meeting.

Insurance contracts. The Board met with the director of research of the International Accounting Standards Board (IASB) and discussed the findings of the IASB’s project on accounting for insurance contracts, the next steps for the IASB, and issues to be resolved in accounting for insurance contracts. The meeting was educational, and no decisions were reached.

November 26, 2003 Board Meeting

FASB Staff Position (FSP) on Interpretation 46. A majority of the Board directed the FASB staff to release the final FSP FIN 46-7, "Exclusion of Certain Decision Maker Fees from Paragraph 8(c) of FASB Interpretation No. 46, Consolidation of Variable Interest Entities." The FSP requires that all fees paid to a decision maker should be excluded from paragraph 8(c) and should not be considered variable interests if all of the following conditions exist:

1. The fees are compensation for services provided and are commensurate with the level of effort required to provide those services.
2. The fees are at or above the same level of seniority as other operating liabilities of the entity that arise in the normal course of business, such as trade payables.
3. Except for the fees described in conditions 1 and 2, the decision maker and the decision maker’s related parties do not hold interests in the variable interest entity that individually, or in the aggregate, 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.
4. The decision maker is subject to substantive kick-out rights, as the term is described in the FSP. However, 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.

In addition to those four criteria, the FSP includes factors that may be useful in determining if the fees exceed the level of compensation that would be commensurate with the services provided. The FSP also lists characteristics that kick-out rights must have to be considered substantive.

Although issued immediately, the guidance in the FSP shall be applied in accordance with the effective date and transition provisions that are to be provided in the final FASB Interpretation, Consolidation of Variable Interest Entities, which was exposed for comment on October 31, 2003.

Disclosures about pension plans. The Board discussed and finalized its decisions regarding narrative descriptions of investment policies and strategies, the disclosure of estimated future benefit payments, and the effective dates for disclosures about plan assets and interim-period information.

The Board agreed to the following:

1. A description of investment strategies will be required for all entities, and that disclosure should include a description of target asset allocations if they are used.
2. Disclosure of benefit payments used in the calculation of the expected benefit obligation (includes estimated future employee service) will be required, and they should be presented separately for years 1–5 and in the aggregate for years 6–10.
3. Disclosure of domestic plan asset information will be required for annual periods ending after December 15, 2003. The Board reaffirmed that all new disclosure requirements related to foreign plans (including plan asset information) could be deferred until annual periods ending after June 15, 2004. For companies that defer disclosure of foreign plan asset information until annual periods ending after June 15, 2004, domestic and foreign information should be shown separately in financial statements in which only domestic information is presented. This is a transitional requirement only, and it applies to certain information such as the total fair value of plan assets, the projected benefit obligation, and the expected long-term rate of return on assets.
4. Disclosure of interim-period information will be required for interim periods beginning after the issuance of the final Statement.

The Board authorized the staff to proceed to a draft of the final Statement for vote by written ballot. The staff noted that the final Statement will be FASB Statement No. 132 (revised 2003) rather than FASB Statement No. 151.

Equity-based compensation (EBC). The Board discussed disclosure requirements relating to EBC arrangements and affirmed its previous decisions that enterprises would be required to disclose information enabling a financial statement user to understand the following:

1. The nature and terms of the financial instruments granted and the rights and obligations embodied in those instruments
2. The fair value of the goods or services received, or the fair value of the equity instruments granted, during the period
3. The effect of expenses arising from EBC arrangements on the enterprise’s income statement for the period
4. The cash flows related to EBC arrangements
5. The potential outcomes from EBC arrangements on the transfer of wealth from shareholders to equity award holders.

The Board also expressed support for certain revised specific disclosure requirements that are expected to be included in the proposed Statement. Those disclosures were revised to reflect the suggestions made by the Board in connection with the October 29, 2003 meeting. The Board suggested additional changes to the revised specific disclosure requirements; those suggestions are intended to reduce the volume of required disclosures related to EBC arrangements. The Board will consider the specific disclosure requirements revised for those suggestions at a future Board meeting.

The Board also discussed the effective date and method of transition for nonpublic enterprises and reached the following decisions:

1. The proposed Statement would be effective for all employee awards granted, modified, or settled after the beginning of the first fiscal year for fiscal years beginning after December 15, 2005. Early adoption would be permitted. Enterprises would be required to disclose the effect of the change from FASB Statement No. 123, Accounting for Stock-Based Compensation, to the proposed Statement in the year of adoption.
2. The method of transition required for awards that would be classified as equity under the proposed Statement would be described as a “prospective method”—that method would require expense recognition for all employee awards granted, modified, or settled after the beginning of the fiscal year in which the provisions of the proposed Statement are first applied.
3. The method of transition required for awards that would be classified as liabilities under the proposed Statement would be described as similar to a cumulative effect of a change in an accounting principle—under that method, a liability for awards outstanding at the effective date would be recognized at that date in the amount of the fair value or intrinsic value of those awards (as required by the proposed Statement). The cumulative effect adjustment also should reflect the effect of income taxes associated therewith.

Further, the Board discussed certain issues related to transition for both public and nonpublic enterprises and reached the following decisions:

1. In connection with EBC awards that would have been classified as equity under Statement 123 or APB Opinion No. 25, Accounting for Stock Issued to Employees, but would be classified as liabilities under the proposed Statement, (a) a cumulative effect of a change in an accounting principle would be recognized by initially measuring the liability at fair value or intrinsic value as required by the proposed Statement, and (b) if any amounts related to those awards have been previously recognized in equity, a liability would be established. This would be done by debiting equity to the extent of those previously recognized amounts and crediting such liability unless the liability’s fair value or intrinsic value at the effective date exceeds the amount previously recognized in equity, in which case, a cumulative-effect adjustment would be recognized. If the liability’s fair value or intrinsic value is less than the amount previously recognized in equity, no cumulative-effect adjustment would be recognized.
2. In connection with certain awards with graded vesting that are not attributed according to FASB Interpretation No. 28, Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans, (because the enterprise elected to attribute the compensation cost using the straight-line method) and that are unvested as of the effective date of the proposed Statement, these awards would continue to be attributed using the original provisions of Statement 123.

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 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