Action Alert No. 03-35
September 3, 2003
Revised 09/04/03—See below
NOTICE OF MEETINGS
OPEN BOARD MEETING
Wednesday, September 10, 2003, 9:00 a.m.
- Stock-based compensation. The Board will discuss issues related to measuring the fair value of stock-based compensation awards granted to employees. The Board also will discuss certain scope issues. (Revised 9/4/03) (Estimated 3-hour 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
Monday, September 8, 2003, 10:00 a.m. (Revised 9/4/03)
Wednesday, September 10, 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 September 10 and 17 Board meetings. Those topics will be posted to the FASB calendar four days prior to the education session.
OPEN MEETING WITH REPRESENTATIVES OF THE AMERICAN COUNCIL OF LIFE INSURERS
Tuesday, September 9, 2003, 2:00 p.m.
The Board will meet with representatives of the American Council of Life Insurers' Accounting Committee to discuss matters of mutual interest.
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 27, 2003 Board Meeting
Business combinations: purchase method procedures. The Board discussed the outcome of its educational meeting on August 12, 2003, with members of the financial statement user community. Specifically, the Board discussed (1) certain existing and proposed business combination disclosures, (2) proposals for the display of the effect of transactions with noncontrolling interests in the consolidated financial statements, and (3) a proposed noncontrolling interest disclosure requirement.
The Board decided that except for certain disclosures relating to acquired research and development assets, the current disclosure requirements in FASB Statement No. 141, Business Combinations, should be carried forward as part of the purchase method procedures project. The Board also decided that certain additions and modifications to those disclosure requirements should be made either (1) to incorporate disclosures proposed by the International Accounting Standards Board in its Exposure Draft 3, Business Combinations (ED3), or (2) as a result of proposed changes to current accounting requirements for business combinations.
The Board decided to add stated objectives of the business combination disclosure requirements, similar to the objectives proposed in ED3, and the following specific disclosure requirements:
- The amount of acquisition-related costs paid to third parties expensed under the Board’s tentative decisions, and the income statement line item in which that expense is recorded
- Revenue and net income of the acquired business, for public business enterprises, if practicable:
- For a minimum of the period from the date of acquisition through the end of the current fiscal year
- For the current interim period and from the acquisition date through the end of the current interim period until the end of the current fiscal year
- For a minimum of the period from the date of acquisition through the end of the current fiscal year
- A reconciliation of beginning and ending balances of contingencies for liabilities assumed and liabilities for contingent consideration arrangements, which would show changes in fair value estimates recorded in income, payments, and other changes or settlements
- The maximum potential amount of future payments for contingent consideration
- The acquisition dates and aggregate amounts recognized for each class of assets acquired and liabilities assumed for individually immaterial business combinations if material in the aggregate.
The Board agreed to make the following modifications to existing business combination disclosure requirements:
- Replace the required disclosure of extraordinary gains recognized for negative goodwill with disclosure of the amount of gain recognized in the period, the line item in the income statement in which it is recognized, and a description of the reasons why the acquirer was able to achieve a bargain purchase.
- Instead of disclosing the period for which the results of operations of the acquired entity are included in the income statement of the combined entity, disclose the acquisition date.
- Eliminate the requirement to disclose the amount of in-process research and development acquired and written off.
With respect to the display of the effect of transactions with noncontrolling interests in the consolidated financial statements, the Board decided to require that:
- Entities with one or more partially owned subsidiaries disclose in an additional schedule in the notes to the consolidated financial statements the effects of transactions with noncontrolling shareholders on the equity attributable to common shareholders
- Entities that present earnings per share also disclose in that schedule an additional per-share metric that includes in the calculation the effects of equity transactions with noncontrolling shareholders.
The Board also decided to require the disclosure of any gain or loss recognized and the line item in the income statement in which that gain or loss is recognized if an entity:
- Obtains control of a business in a step acquisition and remeasures any preacquisition investment in that business to fair value on the acquisition date
- Sells or otherwise loses control of a subsidiary, either in whole (disposes of its entire ownership interest) or in part (disposes of its controlling ownership interest but retains a noncontrolling ownership interest). The Board also decided that if a subsidiary is disposed but a noncontrolling ownership interest is retained, the portion of the gain or loss related to the remeasurement of the retained interest to fair value should be separately disclosed.
Stock-based compensation. The Board discussed several issues relating to the method of accounting for stock-based compensation transactions classified as modifications or settlements. The Board decided that:
- The definition of modification should include all changes in terms and conditions of an award, including changes in quantity, price, transferability, settlement provisions, and vesting requirements.
- Modifications of an award occur as a result of the employment relationship, rather than the equity relationship between the issuing enterprise and the award holder. Thus, any incremental value transferred to an employee, as the result of a modification of an award should be recognized as additional compensation. The Board discussed but did not reach a decision on the measurement of incremental value. The Board directed the staff to prepare examples of modification accounting using various alternative measurements of incremental or decremental value for discussion at a future meeting.
- Short-term inducements should be treated as modifications for award holders that accept the inducement; the incremental value associated with such accepted inducements would be measured in the same manner as other modifications.
- The guidance in paragraph 36 of FASB Statement No. 123, Accounting for Stock-Based Compensation, will be retained for stock splits and stock dividends, and that guidance will be extended to certain other antidilutive provisions (for example, for unusually large cash dividends).
- It would retain the guidance in Statement 123 for settlements that establishes (a) that a settlement of a stock-based compensation award should be accounted for as the repurchase of an equity instrument, (b) that the excess of the amount paid by the issuing enterprise to settle such an award over its settlement date value should be recognized as additional compensation, and (c) that the settlement of an unvested award represents a substantive vesting acceleration event and, therefore, all unrecognized compensation cost associated with the settled award should be immediately recognized on the date of the settlement. The Board discussed but did not reach a decision on how to measure the settlement date value of an award.
- The reconveyance of an award from the employee to the employer would be recognized by the issuing entity as a credit in the income statement in an amount equal to the lesser of (a) the fair value of the award on the reconveyance date or (b) the recognized cumulative compensation cost associated with the award.
Financial instruments: liabilities and equity. The Board discussed 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. The Board decided:
- Not to exempt nonpublic entities from applying the provisions of Statement 150 requiring mandatorily redeemable shares to be classified as liabilities
- For mandatorily redeemable financial instruments of a nonpublic entity, Statement 150 should be effective for existing or new contracts for fiscal periods beginning after December 15, 2004, instead of December 15, 2003.
The Board instructed the staff to draft a change to the effective date for Statement 150’s applicability to mandatorily redeemable financial instruments of nonpublic companies, which will be issued in a proposed FASB Staff Position (FSP). (See announcement below.)
Fair value measurement. The Board discussed 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. The Board decided to revise one aspect of that guidance and to clarify the terminology used to describe various methods that will be carried forward to the fair value standard.
The Board decided to refer to the expected cash flow approach in Concepts Statement 7 as an expected present value technique. The Board clarified that an expected present value technique is consistent with the use of probability-weighted (expected) cash flows that either are (1) explicitly adjusted for systematic risk and discounted at a risk-free rate or (2) discounted using a rate that incorporates a risk premium for the systematic risk inherent in the expected cash flows. In reaching that decision, the Board emphasized the need to adjust for systematic risk (in either the expected cash flows or discount rate) and decided to eliminate the potential default of no risk adjustment in certain circumstances in paragraphs 62 and 68 of Concepts Statement 7.
The Board also decided to refer to the traditional approach in Concepts Statement 7 as a discount rate adjusted approach (present value technique). The Board clarified that a discount rate adjustment present value technique is consistent with the use of contractual cash flows, a most-likely estimate of cash flows, or a best estimate of cash flows, each discounted at a discount rate commensurate with the risks inherent in the cash flows.
PROPOSED FASB STAFF POSITIONS AVAILABLE
The Board did not object to the release of two proposed FSPs for public comment:
- Proposed FSP No. FAS 150-a, "Issuer’s Accounting for Freestanding Financial Instruments Composed of More Than One Option or Forward Contract Embodying Obligations under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity"
- Proposed FSP No. FAS 150-b, "Accounting for Mandatorily Redeemable Shares Requiring Redemption by Payment of an Amount That Differs from the Book Value of Those Shares, under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity."
Those proposed FSPs are available on the FASB website, and comments will be accepted until September 27, 2003.
FUTURE OPEN MEETINGS
The following is a list of open meetings tentatively scheduled through October. 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.
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
Wednesday, October 1, 2003—FASB Board Meeting
Wednesday, October 1, 2003—FASB Education Session
Thursday, October 2, 2003—Liaison Meeting with the American Gas Association
Tuesday, October 7, 2003—User Advisory Council Meeting, New York City
Wednesday, October 8, 2003—FASB Board Meeting
Wednesday, October 8, 2003—FASB Education Session
Thursday, October 9, 2003—Liaison Meeting with the National Investor Relations Institute
Friday, October 10, 2003—Liaison Meeting with the AICPA Private Companies Practice Section Technical Issues Committee
Wednesday, October 15, 2003—FASB Board Meeting
Wednesday, October 15, 2003—FASB Education Session
Wednesday, October 22, 2003—Joint FASB/IASB Meeting, Canada
Thursday, October 23, 2003—Joint FASB/IASB Meeting, Canada
Wednesday, October 29, 2003—FASB Board Meeting
Wednesday, October 29, 2003—FASB Education Session