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Action Alert No. 05-51
December 22, 2005

NOTICE OF MEETINGS

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

No Board meetings are planned for the week of December 26, 2005. The next scheduled Board meeting is Wednesday, January 4, 2006, and will be announced in next week’s issue of Action Alert.

OPEN EDUCATION SESSION

No education sessions are planned for the week of December 26, 2005. The next scheduled education session is Wednesday, January 4, 2006, and will be announced in next week’s issue of Action Alert.

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, or FSP.

December 14, 2005 Board Meeting

Hybrid financial instruments. The Board addressed issues raised by respondents on its Exposure Draft, Accounting for Certain Hybrid Financial Instruments, as well as issues raised in the December 8, 2005 education session. The Board decided to:

1. Require that any cumulative effect resulting from electing the fair value option for existing bifurcated hybrids be accounted for consistent with current guidance established 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."

2. Eliminate the term beneficial from the final Statement to clarify that the references were generic in nature rather than specific to beneficial interests as defined in the Exposure Draft on transfers of financial assets.

3. Not address comments related to paragraph 40(c) of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, in redeliberations on the hybrid financial instruments project, but to move consideration of these comments to the transfer of financial assets project.

4. Clarify in the basis for conclusions of the final Statement that the intent of the Board regarding paragraph 35(c) of Statement 140 was not to imply that the separate company reporting by a qualifying special-purpose entity (SPE) could have implications on the qualified status of that SPE when evaluated by the beneficial interest holders in the SPE.

5. Clarify that the fair value election is intended to apply to both issuers and holders of hybrid financial instruments by adding a sentence at the end of paragraph 16 that states, "Both hybrid financial instruments that are purchased as well as those that are issued are eligible for the fair value measurement elections."

6. Include no changes in the hybrid's final Statement to preclude embedding an insignificant derivative to achieve a fair value measurement of an instrument that otherwise could not be measured at fair value under the proposed guidance in the Exposure Draft.

7. Not address whether the evaluation for embedded derivatives is a continuous test.

8. Clarify that unrecognized financial instruments are excluded from the scope of the final Statement and to change the term inception to first acquired, issued, or modified.

9. Amend FASB Statement 133 Implementation Issue No. B39, "Application of Paragraph 13(b) to Call Options That Are Exercisable Only by the Debtor," to clarify that if a prepayment option is passed through without modification, that option would continue to be considered clearly and closely related and would not require bifurcation by the beneficial interest holder.

10. Not address certain comments raised by respondents to the Exposure Draft including: accounting for failed sales, the possible multiple recognition of assets, and the definition of the term payoff structure.

11. Require either of the following disclosures related to the effects of the fair value election on the balance sheet:
    1. Separate balance sheet presentation of elements measured at fair value. That is, to the extent that loans or debt included hybrid instruments for which the fair value election had been applied, amounts in these balance sheet captions would have to be separately presented from balances measured at amortized cost. This disclosure would apply to any balance sheet caption that included hybrids where the fair value option was elected.

    2. Parenthetical disclosure on the face of the balance sheet for each caption including hybrid instruments for which the fair value election had been applied. This would have the same effect as the first alternative except in parenthetical form.

12. Provide information for each period for which an income statement is presented that will allow users to understand the impact of changes in the fair values of hybrid instruments subsequently measured at fair value.

Fair value option and servicing of financial assets. The Board discussed financial statement presentation requirements for assets and liabilities reported at fair value due to the reporting entity’s having elected fair value as the subsequent measurement attribute. The Board decided:

1. In each statement of financial position presented, an entity should report its assets and liabilities that are subsequently measured at fair value in a manner that separates those reported fair values from the carrying amounts of assets and liabilities subsequently measured using another measurement attribute. To accomplish that separate reporting, an entity may either (a) display separate line items in an entity’s statement of financial position for the fair value and non-fair-value carrying amounts or (b) present amounts that aggregate those fair value and non-fair-value amounts provided that those fair value and non-fair-value amounts are separately disclosed parenthetically on the face of the entity’s statement of financial position. The following Board projects will include this requirement: fair value option, servicing of financial assets, life settlements, and hybrid financial instruments. The fair value option project will amend FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities, to require that securities reported at fair value in accordance with Statement 115 satisfy this financial statement presentation requirement.

2. For each period for which an income statement is presented, an entity should provide information that will allow users to understand the impact of changes in the fair values of assets and liabilities subsequently measured at fair value as a result of a fair value election. This general principle will be included in the life settlements project, the hybrid financial instruments project, and the fair value option project.

Postretirement benefit obligations including pensions. The Board deliberated issues relating to the limited-scope, first phase of its project to reconsider the accounting for postretirement benefits. The Board decided:

1. That the objectives and scope of phase 1 are as follows:
   1. To improve the reporting of employers’ obligations for pensions and other postretirement benefits by recognizing the overfunded or underfunded status of defined benefit postretirement plans as an asset or a liability in the statement of financial position. This means that a sponsoring entity will recognize all previously unrecognized items (such as unrecognized actuarial gains and losses), even when the plan is fully funded.

   2. Not to change how plan assets and benefit obligations are measured under FASB Statements No. 87, Employers’ Accounting for Pensions, and No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions. The asset or liability (overfunded or underfunded status) would be measured as the difference between the fair value of plan assets and the benefit obligation (that is, the projected benefit obligation (PBO) for pensions and the accumulated postretirement benefit obligation (APBO) for other postretirement benefits).

   3. Not to change the basic approach for measuring the amount of annual net benefit cost reported in earnings.

   4. Implement phase 1 improvements as quickly as possible with a goal of making them effective for years ending after December 15, 2006.

2. To eliminate the provisions in Statements 87 and 106 that permit plan assets and obligations to be measured as of a date not more than three months prior to the balance sheet (that is, to require entities to report the overfunded or underfunded status measured as of the date of the financial statements).

3. Not to change the current accounting for defined benefit plans in interim-period financial statements.

4. To require recognition of an asset for overfunded plans and a separate liability for underfunded plans.

5. To recognize previously unrecognized items as follows:
   1. Previously unrecognized actuarial gains or losses would be recognized as a charge or credit to other comprehensive income (OCI). Gains or losses recognized in OCI would be recycled out of OCI into earnings based on the amortization and recognition requirements in Statements 87 and 106.

   2. Previously unrecognized prior service costs or credits also would be recognized as a charge or credit to OCI. These items would be recycled out of OCI into earnings based on the amortization and recognition requirements in Statements 87 and 106.

   3. Previously unrecognized net transition assets or obligations would be recognized as an adjustment of retained earnings. Those amounts would not be subsequently recycled through earnings.

6. To codify into Statement 87 the guidance in Q&A 41 of A Guide to Implementation of Statement 87 on Employers’ Accounting for Pensions, that articulates the present requirement to recognize the current and noncurrent portions of the assets and liabilities recognized for postretirement benefits.

7. Not to require separate line item presentation of amounts recognized in the balance sheet. In making that decision, the Board noted that amounts recognized in OCI would be subject to the separate presentation requirements of FASB Statement No. 130, Reporting Comprehensive Income (that is, classified based on the nature of the item).

Conceptual framework. The Board discussed issues relating to the reporting entity, the definition of an asset, and benefits and costs.

Reporting Entity

The Board began its deliberations on phase D, reporting entity. It discussed preliminary staff research on the reporting entity concept and decided that:

1. The reporting entity concept should focus on determining the boundaries of the reporting entity, for both an individual reporting entity and a group reporting entity.

2. The reporting entity concept should not be limited to those entities that have external users who are unable to demand the information they require and therefore must rely on information provided by the entity.

3. The staff should conduct further research into whether a parent-only entity is a reporting entity.

4. The staff should investigate whether the boundaries of a group reporting entity should be based on a broader concept of control, for example, a concept that might encompass entities under common control.

Definition of an Asset

The Board began deliberations of phase B, elements and recognition and measurement attributes, by discussing the following proposed working definition of an asset:

An asset of an entity is a present right, or other access, to an existing economic resource with the ability to generate economic benefits to the entity.

The Board agreed that staff should continue to develop the proposed working definition, refining it to deal with certain possible ambiguities, for example, what is meant by other access. The Board also noted that the definition of an asset will need to be considered together with recognition criteria to determine what assets are recognized in financial statements.

Benefits and Costs

The Board discussed benefits and costs as part of phase A, objectives and qualitative characteristics, and decided:

1. The concept that the benefits of an accounting standard should justify the costs involved is a pervasive constraint rather than a qualitative characteristic of accounting information.

2. The framework should indicate that, while information from preparers, users, and other constituents about their expectations concerning the nature and quantity of benefits, in particular, and costs is likely to be incomplete, standard setters should consider in their deliberations the information they can obtain.

3. The framework should describe what is included, and not included, in the benefits and costs to be considered.

4. There is no need to modify the cost-benefit constraint for application to smaller entities or any other particular type of entity. However, the results of considering whether benefits justify costs may differ for different types of entities.

The IASB also discussed the same topics and reached similar conclusions.

FASB DOCUMENTS AVAILABLE

The following documents were issued and are available on the FASB website:

Final FSP SOP 94-6-1, "Terms of Loan Products That May Give Rise to a Concentration of Credit Risk" (December 19, 2005).

Proposed FSP FAS 142-d, "Amortization and Impairment of Acquired Renewable Intangible Assets" (December 21, 2005). Comments are requested by March 27, 2006.

SPECIAL NOTICE

Your input requested for the Codification retrieval system—We are capturing feedback through January 15, 2006, for the planned FASB codification retrieval system for nongovernmental entities. The web-based survey takes about 5–10 minutes to complete and will provide us with very important feedback as we develop our list of requirements. Thanks in advance for your assistance!

FUTURE OPEN MEETINGS

The following is a list of open meetings tentatively scheduled through February. 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, January 4, 2006—FASB Board Meeting
Wednesday, January 4, 2006—FASB Education Session
Wednesday, January 11, 2006—FASB Board Meeting
Wednesday, January 11, 2006—FASB Education Session
Wednesday, January 18, 2006—FASB Board Meeting
Wednesday, January 18, 2006—FASB Education Session
Wednesday, January 25, 2006—FASB Board Meeting
Wednesday, January 25, 2006—FASB Education Session
Monday, January 30, 2006—Liaison Meeting with American Bar Association
Wednesday, February 1, 2006—FASB Board Meeting
Wednesday, February 1, 2006—FASB Education Session
Wednesday, February 8, 2006—FASB Board Meeting
Wednesday, February 8, 2006—FASB Education Session
Wednesday, February 15, 2006—FASB Board Meeting
Wednesday, February 15, 2006—FASB Education Session
Wednesday, February 22, 2006—FASB Board Meeting
Wednesday, February 22, 2006—FASB Education Session

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