Action Alert No. 08-25 June 19, 2008

FASB: Action Alert No. 08-25

Action Alert No. 08-25
June 19, 2008

NOTICE OF MEETINGS

OPEN BOARD MEETING
(Board meetings are available by audio webcast and telephone.)

Wednesday, June 25, 2008, 9:00 a.m.

  1. Conceptual framework: elements and recognition (estimated 1-hour discussion). The Board will continue discussion of the definition of a liability and consider (a) when a statute gives rise to a liability, (b) how to deal with uncertainty about the existence of a liability (and an asset), and (c) additional examples to test the robustness of the working definition of a liability.

  2. FASB ratification of EITF consensuses and tentative conclusions (estimated 30-minute discussion). The Board will consider the ratification of the consensuses reached at the June 12, 2008 EITF meeting. (See discussion under EITF ACTIONS.)

  3. 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, June 25, 2008, following the Board meeting

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

OPEN MEETING OF THE FINANCIAL ACCOUNTING STANDARDS ADVISORY COUNCIL
(This meeting is available by audio webcast and telephone, except the portion noted below.)

Tuesday, June 24, 2008, 8:30 a.m.

The Advisory Council will meet to discuss the following topics:

  1. Current business and financial reporting issues related to international convergence

  2. Recent studies and proposals on restatements

  3. Contingency disclosures.

The Advisory Council will hear reports from the chairman of the FASB on other Board activities. The Council also will hear reports on current developments from representatives of the Office of the Chief Accountant of the Securities and Exchange Commission and the Office of the Chief Auditor of the Public Company Accounting Oversight Board.

OPEN MEETING OF THE SMALL BUSINESS ADVISORY COMMITTEE
(This meeting is available by audio webcast and telephone.)

Friday, June 27, 2008, 9:00 a.m.

The Small Business Advisory Committee will meet to discuss the following topics:

  1. Convergence—The movement to IFRS

  2. Contingency disclosures.

The Advisory Committee will hear a report from the chairman of the FASB on other Board activities.  The Advisory Committee also will hear reports from representatives of the Office of the Chief Accountant of the Securities and Exchange Commission, the Office of the Chief Auditor of the Public Company Accounting Oversight Board, and the Private Company Financial Reporting Committee.

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, FSP, or Statement 133 Implementation Issue.

June 11, 2008 Board Meeting

Mergers and acquisitions by a not-for-profit organization. The Board considered issues raised by respondents to the October 2006 Exposure Draft, Not-for-Profit Organizations: Mergers and Acquisitions, and decided to:

  1. Affirm that for acquisitions by not-for-profit organizations, the acquirer should apply the criteria for recognition and measurement of identifiable assets acquired, including intangible assets, that is consistent with FASB Statement No. 141 (revised 2007), Business Combinations. Therefore, in accordance with paragraph 3(k) of Statement 141(R), an intangible asset is identifiable if it either:

    1. Is separable, that is, capable of being separated or divided from the entity and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract, identifiable asset, or liability, regardless of whether the entity intends to do so; or

    2. Arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.

  2. Communicate in the application guidance of the final standard that donor lists normally meet the separability criterion for recognition as intangible assets separate from goodwill. However, that criterion would not be met if, for example, an organization is bound by a confidentiality agreement that precludes the transfer of information about its donors.

  3. Communicate in the final standard that donor relationships would not be recognized as intangible assets separate from goodwill because the costs to separately recognize and measure the fair value of those relationships generally outweigh the benefits of providing that information.

Reconsideration of Interpretation 46(R). The Board deliberated options for guidance for determining the primary beneficiary in a variable interest entity in FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities. The Board reaffirmed the decision reached at the April 9, 2008 meeting, which would require an enterprise (including its related party and de facto agents) to determine whether it is the primary beneficiary primarily through a thorough qualitative assessment. If an enterprise is unable to determine if a primary beneficiary exists (or does not exist) through the qualitative assessment, the enterprise would perform the current quantitative analysis currently described in Interpretation 46(R) (that is, determining the primary beneficiary based on which enterprise quantitatively absorbs the majority of the expected losses, receives the majority of the residual returns, or both).

In making the qualitative assessment, an enterprise will assess if it has both (1) the power to direct matters that significantly affect the activities and success of the entity and (2) the right to receive benefits that could potentially be significant or the obligation to absorb losses that could potentially be significant. Criterion (2) is a qualitative assessment and, thus, is not based on the expected losses calculation provided in Interpretation 46(R). Specific guidance will be added to address an enterprise’s implicit or explicit financial responsibility to ensure that a variable interest entity operates as designed. This guidance will be added in part to address concerns about an enterprise’s reputation risk.

The Board also decided to include a current control notion for the qualitative analysis, particularly criterion (1) above. Specifically, when an enterprise’s power is deemed to be other than temporary, kick-out rights should generally not be considered in the assessment until they are exercised. However, if a single enterprise holds the majority of substantive kick-out rights, kick-out rights should be factored into the qualitative assessment.

Next, the Board decided to not reconsider and potentially amend the guidance for determining the purpose and design of a variable interest entity, including the risks that were designed and created to be passed through to interest holders in FSP FIN 46(R)-6, Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R).

Finally, the Board decided to provide examples of the application of the proposed amended guidance for determining the primary beneficiary in a variable interest entity to typical financial and nonfinancial entities in the proposed Exposure Draft on Interpretation 46(R).

Statement 140 implementation: transfers of financial assets. The Board decided not to add a specific minimum requirement for the amount of beneficial interests that must be held by parties other than the transferor and its consolidated affiliates for the transferor to meet the sale accounting conditions for transfers of financial assets.

Reconsideration of Interpretation 46(R) and Statement 140 implementation: transfers of financial assets. The Board discussed the comment period, transition, and effective date for the proposed amendments of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and Interpretation 46(R). The Board decided to require a 60-day comment period and hold a roundtable to allow constituents to provide comments on the proposed amendments to Statement 140 and Interpretation 46(R).

The Board decided that the amendments to Statement 140 should be applied in fiscal years beginning after November 15, 2008 (effective date) on a prospective basis (for example, a calendar year-end entity would apply the amendments to Statement 140 for new transactions completed after January 1, 2009). However, qualifying special-purpose entities (SPEs) that existed prior to the effective date would be subject to the consolidation guidance in fiscal years beginning after November 15, 2009.

The Board decided that the amendments to Interpretation 46(R) should be applied in fiscal years beginning after November 15, 2008 (effective date) on a limited retrospective basis, except for qualifying SPEs that existed as of the effective date. The amendments to the Interpretation would be applied to qualifying SPEs that existed prior to the effective date in fiscal years beginning after November 15, 2009. For example, a calendar year-end entity would apply the Interpretation 46(R) amendments to qualifying SPEs that existed as of December 31, 2008, in the entity’s 2010 first-quarter financial statements or its December 31, 2010, financial statements if quarterly financial statements are not required. The entity would apply the Interpretation 46(R) amendments to all other variable interest entities in its 2009 financial statements.

Transition disclosures would be provided for existing qualifying SPEs during the one-year deferral period.

In the event that the final amendments to the Interpretation are not effective for fiscal years beginning after November 15, 2008, the Board asked the staff to prepare separate disclosures for inclusion in the proposed Interpretation 46(R) Exposure Draft, based on the disclosures approved at the June 4, 2008 Board meeting.

The Board also discussed whether private entities should have a different effective date than public entities. The Board agreed to include a question in the notice for recipients.

The Board authorized the staff to proceed to drafts of the amendments to Interpretation 46(R) and Statement 140 for vote by written ballot.

Agenda decision announcements. To better align the Board’s agenda with the objectives established in the Memorandum of Understanding (MoU) between the FASB and the IASB updated last April, the FASB chairman announced that the following projects have been removed from the Board’s agenda:

  1. Insurance Risk Transfer—The Board plans to consider at a future date whether to address insurance accounting in a joint project with the IASB.

  2. Accounting for Certain Nonfinancial Liabilities: Recognition and Measurement (Phase 2)—The issues previously addressed by that project related to the recognition and measurement of contingent liabilities are being examined by the IASB in a project to potentially amend IAS 37, Provisions, Contingent Liabilities and Contingent Assets. The Board will monitor the development of the IASB’s project to consider whether similar changes would be appropriate for U.S. GAAP.

  3. Accounting for Defensive Intangible Assets—The issues previously addressed by that project will be deferred to the Emerging Issues Task Force (EITF) agenda.

EITF ACTIONS

June 12, 2008 EITF Meeting

The Task Force discussed the following issues:

  1. Issue No. 07-5, "Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock." The Task Force affirmed as a consensus the consensuses-for-exposure reached at the March 12, 2008 EITF meeting on Issues 4(a), 4(b), and 4(c). The Task Force also approved the addition of clarifying language and three additional illustrative examples to the draft abstract.

    The Task Force reached a consensus that this Issue should be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Earlier application is not permitted.

    The Task Force reached a consensus that this Issue should be applied to outstanding instruments as of the beginning of the fiscal year in which this Issue is initially applied. The cumulative effect of the change in accounting principle should be recognized as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that fiscal year, presented separately. The cumulative-effect adjustment is the difference between the amounts recognized in the statement of financial position before initial application of this Issue and the amounts recognized in the statement of financial position at initial application of this Issue. The amounts recognized in the statement of financial position at initial application of this Issue should be determined based on the amounts that would have been recognized if the guidance in this Issue had been applied from the issuance date of the instrument(s). However, in circumstances in which a previously bifurcated embedded conversion option in a convertible debt instrument no longer meets the bifurcation criteria in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, at initial application of this Issue, the carrying amount of the liability for the conversion option (that is, its fair value on the date of adoption) should be reclassified to shareholders' equity. Any debt discount that was recognized when the conversion option was initially bifurcated from the convertible debt instrument should continue to be amortized.

    The Task Force reached a consensus that the transition disclosures in paragraphs 17 and 18 of FASB Statement No. 154, Accounting Changes and Error Corrections, should be provided.

    The Board will consider the ratification of the consensus in this Issue at its June 25, 2008 meeting.

  2. Issue No. 08-1, "Revenue Recognition for a Single Unit of Accounting." The Task Force discussed the initial findings of the Working Group on this Issue. The Task Force instructed the staff to continue to refine the recommendations developed by the Working Group and further develop this Issue. This Issue will be discussed further at a future meeting.

  3. Issue No. 08-2, "Lessor Revenue Recognition for Maintenance Services." The Task Force decided to recommend to the FASB chairman that this project be removed from the EITF agenda. No further EITF discussion is planned.

  4. Issue No. 08-3, "Accounting by Lessees for Nonrefundable Maintenance Deposits." The Task Force affirmed as a consensus the consensus-for-exposure reached at the March 12, 2008 EITF meeting with certain amendments. The amendments included the addition of a reference to a lessee's potential obligation to return the leased asset to the lessor in a certain condition; a clarification that payments made that are less than probable of being refunded by the lessor are not considered deposits considered by this Issue; a clarification that the accounting when a lessee subsequently determines that the deposit is less than probable of being returned because the lessee no longer expects to incur the underlying maintenance cost; and a clarification that probable is intended to be as defined in FASB Concepts Statement No. 6, Elements of Financial Statements.

    The Task Force agreed that revenue recognition guidance for the lessor did not need to be included in this Issue.

    The Task Force reached a consensus that this Issue should be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Earlier application is not permitted.

    The Task Force reached a consensus that entities should recognize the effect of the change as a change in accounting principle as of the beginning of the fiscal year in which this consensus is initially applied for all arrangements existing at the effective date. The cumulative effect of the change in accounting principle should be recognized as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that fiscal year, presented separately. The transition effect of applying this Issue should comply with the disclosure requirements of Statement 154, for changes in accounting principles.

    The Board will consider the ratification of the consensus in this Issue at its June 25, 2008 meeting.

  5. EITF Issue No. 08-4, "Transition Guidance for Conforming Changes to EITF Issue No. 98-5." The Task Force affirmed as a consensus the consensus-for-exposure reached at the March 12, 2008 EITF meeting.

    The Board will consider the ratification of the consensus in this Issue at its June 25, 2008 meeting.

  6. EITF Issue No. 08-5, "Issuer's Accounting for Liabilities Measured at Fair Value with a Third-Party Guarantee." The Task Force reached a consensus-for-exposure that the scope of this Issue should apply to all third-party credit enhancements that are issued with, and are inseparable from, a debt instrument and that are measured at fair value. The Task Force clarified that this Issue should be considered when the fair value of a debt instrument is required to be disclosed (such as by FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments), even if measured on a different basis in the financial statements.

    The Task Force also reached a consensus-for-exposure that the issuer should not include the effect of the third-party guarantee in the fair value measurement of the liability. The Task Force concluded that the unit of accounting for the debt does not include the guarantee and that the guarantee does not represent an asset of the issuer. That guarantee is obtained for the benefit of the investor.

    The Task Force discussed disclosures and decided that no additional disclosures, other than those required by other accounting pronouncements are necessary, except the transition disclosure below.

    The Task Force reached a consensus-for-exposure that this Issue should be effective on a prospective basis in the first reporting period beginning after the date of the Board ratification of the consensuses. The effect of initially applying the guidance in this Issue should be included in the change in fair value in the year of adoption. Earlier application is not permitted.

    The Task Force reached a consensus-for-exposure that in the period of adoption an entity should disclose the valuation technique(s) used to measure the fair value of liabilities in the scope of this Issue and a discussion of changes, if any, in the valuation techniques used to measure those liabilities in prior periods.

    The Board will consider the ratification of the consensus-for-exposure in this Issue at its June 25, 2008 meeting. If ratified, a draft abstract will be posted to the FASB website for public comment. This Issue will be discussed further at a future meeting.

FASB DOCUMENT AVAILABLE

Final FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities, was issued on June 16, 2008, and is available on the FASB website.

FUTURE OPEN MEETINGS

The following is a list of open meetings tentatively scheduled through August. 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, July 2, 2008—FASB Board Meeting
Wednesday, July 2, 2008—FASB Education Session
Thursday, July 10, 2008—FASB Education Session
Wednesday, July 16, 2008—FASB Board Meeting
Wednesday, July 16, 2008—FASB Education Session
Wednesday, July 23, 2008—FASB Board Meeting
Wednesday, July 23, 2008—FASB Education Session
Wednesday, July 30, 2008—FASB Board Meeting
Wednesday, July 30, 2008—FASB Education Session
Wednesday, August 6, 2008—FASB Board Meeting
Wednesday, August 6, 2008—FASB Education Session
Wednesday, August 13, 2008—FASB Board Meeting
Wednesday, August 13, 2008—FASB Education Session
Wednesday, August 20, 2008—FASB Board Meeting
Wednesday, August 20, 2008—FASB Education Session
Wednesday, August 27, 2008—FASB Board Meeting
Wednesday, August 27, 2008—FASB Education Session