Action Alert No. 03-50
December 18, 2003

NOTICE OF MEETINGS

OPEN BOARD MEETINGS    

No Board meetings are planned for the weeks of December 22 and December 29, 2003. The next scheduled Board meeting is Wednesday, January 7, 2004. Topics for that meeting will be announced in the next issue of Action Alert, which is expected to be issued on Tuesday, December 30, 2003.

OPEN EDUCATION SESSION

No education sessions are planned for the weeks of December 22 and December 29, 2003. The next scheduled education session is Wednesday, January 7, 2004, and topics for that session 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.

December 10, 2003 Board Meeting

Modifications of Interpretation 46. The Board considered comments received on the Exposure Draft of the proposed modification of FASB Interpretation No. 46, Consolidation of Variable Interest Entities, and redeliberated certain proposed modifications. The Board decided the final Interpretation would:

  1. Provide that an enterprise need not apply Interpretation 46 to an entity that is a business as to be defined in the final Interpretation, unless one or more of the following conditions exist (Other generally accepted accounting principles would apply to such entities.):

     

    1. The reporting enterprise and its related parties were involved in the formation of the entity. (The term related parties as used in this list of conditions refers to all parties identified in paragraph 16, except de facto agents under item 16(d)(i).) However, this condition would not apply if the entity is an operating joint venture under joint control of the reporting enterprise and one or more independent parties.

       

    2. Substantially all of the activities of the entity involve or are conducted on behalf of the reporting enterprise or its related parties.

       

    3. The reporting enterprise and its related parties provide more than half of the equity, subordinated debt, or other forms of subordinated financial support to the entity.

       

    4. The activities of the entity primarily relate to securitizations, leasing arrangements, or other forms of asset-backed financing.

       

  2. Remove the decision maker and guarantor bias in the calculation of an entity’s expected residual returns. Paragraph 8 of Interpretation 46 will be modified to indicate that the expected variability in fees paid to a decision maker and the expected variability in fees paid to providers of guarantees of the values of all or substantially all of the entity’s assets should not be included in a variable interest entity’s expected losses and expected residual returns (that is, those fees should be variable interests), unless such fees meet the criteria in FSP FIN 46-7, "Exclusion of Certain Decision Maker Fees from Paragraph 8(c) of FASB Interpretation No. 46, Consolidation of Variable Interest Entities." A footnote will be added to paragraph 8 that will refer to Appendix B, as amended, for discussion of other types of fees that may be considered variable interests.

     

  3. Extend the proposed exception to the application of Interpretation 46 to all entities created on or before December 31, 2003, for which an enterprise is unable to obtain the information necessary to apply that Interpretation after making an exhaustive effort. No examples or further explanation of the term exhaustive will be provided.

     

  4. Not include the proposed scope exception for mutual funds in the form of trusts, trusts of a bank’s trust department, and similar arrangements that are organized and operated in a manner consistent with customary existing practices. That exception is no longer necessary due to the modification to the treatment of a decision maker’s fees in paragraph 8.

     

  5. Retain and strengthen the emphasis on qualitative analysis of expected losses in determining whether an entity has sufficient equity.

     

  6. Amend paragraph 8 to clarify that a variable interest entity's expected losses should include the expected negative variability in the fair value of its net assets that are not variable interests and that a variable interest entity's expected residual returns should include the expected positive variability in the fair value of its net assets that are not variable interests. For this purpose, variability in fair value of net assets includes variability resulting from the entity’s operating results.

     

  7. Provide a list of events that would require an enterprise to reconsider whether an entity with which it is involved is a variable interest entity instead of stating a general principle with examples. The list of examples in the proposed Interpretation will be the only events that would require reconsideration.

     

  8. Provide a list of events that require reconsideration of whether an enterprise is the primary beneficiary of a variable interest entity instead of stating a general principle with examples. In addition to requiring reconsideration on the occurrence of the events listed in the proposed Interpretation as examples, the final Interpretation will (a) require the primary beneficiary to reconsider when the entity issues new interests to parties other than the existing primary beneficiary or its related parties and (b) require parties other than the primary beneficiary to reconsider when they acquire additional interests in the entity from any source. The Board discussed whether troubled debt restructurings should be accounted for in accordance with FASB Statement No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings, as amended, and not be considered reconsideration events. The Board plans to continue to discuss this matter on December 17, 2003.

     

  9. Clarify that the right of prior approval in paragraph 16(d) creates a de facto agency relationship only if the right could constrain the party’s ability to manage the economic risks or realize the economic rewards from its interests in a variable interest entity through sale, transfer, or encumbrance of those interests.

     

  10. Modify paragraph 17 to indicate that the determination of which party in a related party group is the primary beneficiary requires judgment as to which party is most closely associated with the entity, which should be based on an analysis of all relevant facts and circumstances. Factors that should be considered in making this determination would include:

     

    1. Principal/agency relationships within the related party group

       

    2. The relationship and relative significance of the activities of the variable interest entity to each of the parties within the related party group

       

    3. Each party’s exposure to the expected losses of the variable interest entity

       

    4. The design of the variable interest entity.

       

  11. Prohibit an enterprise from reinstating goodwill for variable interest entities to which Interpretation 46 has been applied before the effective date of the modification that provides for the recognition of goodwill when an enterprise becomes the primary beneficiary of a business.

     

  12. Replace the guidance on the application of Interpretation 46 provided in Appendix B.

     

  13. Incorporate the guidance from the following FASB Staff Positions (FSPs) in the interpretation to modify Interpretation 46:

     

    1. FSP FIN 46-1, "Applicability of FASB Interpretation No. 46, Consolidation of Variable Interest Entities, to Entities Subject to the AICPA Audit and Accounting Guide, Health Care Organizations"

       

    2. FSP FIN 46-3, "Application of Paragraph 5 of FASB Interpretation No. 46, Consolidation of Variable Interest Entities, When Variable interests in Specified Assets of a Variable Interest Entity Are Not Considered Interests in the Entity under Paragraph 12 of Interpretation 46"

       

    3. FSP FIN 46-4, "Transition Requirements for Initial Application of FASB Interpretation No. 46, Consolidation of Variable Interest Entities"

       

    4. FSP FIN 46-6, "Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities"

       

    5. 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 proposed FSP FIN 46-d, "Treatment of Fees Paid to Decision Makers and Guarantors as Described in Paragraph 8 in Determining Expected Losses and Expected Residual Returns of a Variable Interest Entity under FASB Interpretation No. 46, Consolidation of Variable Interest Entities," will not be finalized because the key concepts discussed in that proposed FSP relating to the treatment of fees pursuant to paragraph 8(c) would not be applicable upon the modification to paragraph 8 previously described.

The Board deferred until December 17, 2003, its discussion related to a possible scope exception for entities created for the issuance of debt by governments, the effective date of the final Interpretation, and the discussion on whether to reexpose that Interpretation.

Revenue recognition. The Board discussed decisions made to date at the concepts level and considered the nature of additional conceptual guidance that may be needed. The Board affirmed the following decisions at the concepts level:

  1. The elements criterion adequately describes when a change in assets and liabilities results in revenues.

     

  2. An enforceable contract gives rise to rights and obligations that might meet the definitions of assets and liabilities. Specifically, unconditional and mature rights and obligations might meet the definitions of assets and liabilities, but conditional rights and obligations do not meet the definitions.

     

  3. A rebuttable presumption is that the unit of account for a wholly executory contract is the contract as a whole, unless the remedy of specific performance in the event of breach is a stated requirement in the contract or ordered by a court.

     

  4. For initial recognition, the most relevant measurement attribute of the assets and liabilities associated with revenue is fair value. (The Board agreed to postpone discussion of subsequent measurement of the assets and liabilities associated with revenue.)

     

  5. Assuming an active "wholesale" market exists, the fair value of performance obligations should reflect the price that the reporting entity would have to pay a third party to assume responsibility for performing all of its remaining obligations.

     

  6. The definition of revenues should be based on the "broad performance view," the "liability extinguishment view," or a combination thereof, rather than the "gross inflows view" or "value-added view."

     

  7. Revenues for a reporting entity do not arise from the performance by third parties of its obligations to deliver goods or render services if those obligations have been legally assumed by those parties.

     

The Board deferred extended discussion of whether additional conceptual guidance is needed and directed the staff to begin exploring the operationality of the conceptual model at the standards level.

FASB Staff Position (FSP) on the Medicare Bill. A majority of the Board directed the staff to issue a proposed FASB Staff Position 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 was signed into law on December 8, 2003.

Pending further consideration of certain issues, the proposed FSP concludes that it would be premature for any plan sponsor to reflect enactment of the Act in the accounting for its plan or providing disclosures related to the plan required by FASB Statement No. 132, Employers’ Disclosures about Pensions and Other Postretirement Benefits. Likewise, it would be premature to disclose any anticipated effects regarding the accounting in subsequent periods.

A plan sponsor is encouraged to provide additional disclosure of any information that the sponsor has and believes is appropriate for the reader to understand the Act’s possible economic consequences for the sponsor including whether the sponsor intends to amend the plan in light of the new legislation.

Proposed FSP FAS 106-a, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," is available on the FASB website for a 15-day comment period, which ends on December 26, 2003.

Qualifying special-purpose entities and isolation of transferred assets. The Board discussed 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, and directed the staff to perform additional research on issues related to the distinction between undivided interests and beneficial interests. At the October 1, 2003 meeting, the Board decided to amend paragraphs 80–84 and various related paragraphs of Statement 140 to require than an entity that issues either beneficial interests or undivided interests be a qualifying special-purpose entity (SPE) in order to satisfy the criteria in paragraph 9(b) of that Statement. Also, at that meeting, the Board noted that a qualifying SPE would be required for any transfer of a portion of a financial asset.

The Board deferred a decision to reconsider the provisions related to the accounting treatment for undivided interests and beneficial interests pending completion of additional research that should be completed by the end of January.

FASB EXPOSURE DRAFTS

On December 15, 2003, the Board issued the following FASB Exposure Drafts to improve accounting guidance and support convergence of global accounting standards:

  1. FASB Exposure Draft, Accounting Changes and Error Corrections
  2. FASB Exposure Draft, Exchanges of Productive Assets
  3. FASB Exposure Draft, Earnings per Share
  4. FASB Exposure Draft, Inventory Costs.

     

Those Exposure Drafts can be downloaded from the FASB website. Comments on those Exposure Drafts are requested by April 13, 2004. If you do not have access to the Internet, you can receive printed copies by calling the FASB Order Department at 1-800-748-0659.

FASB STATEMENT WILL BE AVAILABLE

The Board approved the issuance of FASB Statement No. 132 (revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits. This document is expected to be available on the FASB website by the end of business on December 24, 2003.

FASB STAFF POSITION GUIDANCE

On December 17, 2003, it was announced that a majority of the Board had not objected to the release of the final FSP FIN 46-8,"Evaluating Whether as a Group the Holders of the Equity Investment at Risk Lack the Direct or Indirect Ability to Make Decisions about an Entity's Activities through Voting Rights or Similar Rights under FASB Interpretation No. 46, Consolidation of Variable Interest Entities." This final FSP is expected to be available on the FASB website by the end of business on Thursday, December 18, 2003, where it will remain until it can be incorporated into printed FASB literature.

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.

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 (Canceled)
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
Friday, January 30, 2004—Liaison Meeting with the American Bar Association