Action Alert No. 03-51
December 30, 2003
NOTICE OF MEETINGS
OPEN BOARD MEETINGS
Wednesday, January 7, 2004, 9:00 a.m.
- FASB Staff Position (FSP). The Board will consider comments received on proposed FSP FAS 106-a, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," and whether to direct the staff to issue a final FSP. (Estimated 30-minute 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 SESSION
Wednesday, January 7, 2004, 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 January 14, 2004 Board meeting. Those topics will be posted to the FASB calendar four days prior to the education session.
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 17, 2003 Board Meeting
Revenue recognition. The Board discussed various concepts-level issues related to "enforceable" rights and obligations as that term is utilized in the conceptual model for revenue recognition. The Board reached the following tentative conclusions:
- The term enforceable refers to legal compulsion for the counterparties to perform their promises. Enforceable rights and obligations may be contractual or noncontractual (for example, rights and obligations that are legally enforceable under the doctrine of promissory estoppel). Unconditional rights and obligations that stem from contracts with customers and other legally enforceable promises might meet the definitions of assets and liabilities.
- A contract does not have to be worthy of enforcement in order to give rise to assets and liabilities. (A contract is not worthy of enforcement if the costs of enforcing it would outweigh the benefits of doing so.) The assessment of the probability that contractual rights will contribute to future net cash inflows and that contractual obligations will result in future net cash outflows should affect measurement, but not recognition of related assets and liabilities.
- Contracts that include cancellation and "cancellation-like" provisions might give rise to assets and liabilities that should be recognized and measured at fair value. The concepts-level guidance should include an acknowledgment that measurement uncertainties might dictate whether assets and liabilities that arise from contracts with "cancellation-like" provisions should be recognized.
- Concepts-level guidance should acknowledge that contractual promises may be express or implied. Standards-level guidance should be provided for implied contractual promises, including those that may arise as a result of the seller’s history of providing concessions.
- Concepts-level guidance should address contracts and contractual rights and obligations. Standards-level guidance should be provided for what constitutes evidence that a contract with the customer exists.
- Standards-level guidance should acknowledge that "side agreements" alter the nature of contractual rights and obligations and should be viewed as an integral part of the contract for purposes of analyzing assets and liabilities that arise from contractual rights and obligations.
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 staff announced that, in response to requests by constituents, the final Interpretation will include the complete text of Interpretation 46 as revised, and will be FASB Interpretation No. 46, Consolidation of Variable Interest Entities (revised December 2003), also referred to as Interpretation 46(R).
The Board decided that Interpretation 46(R) would:
- Provide that the condition that would preclude an enterprise from applying the scope exception for certain entities that are businesses if that enterprise and/or its related parties participated significantly in the design or redesign of the entity should not apply if the entity is a franchisee. The remaining conditions in this scope exception, adopted by the Board at the December 10, 2003 Board meeting, apply to a franchisee.
- Provide that an enterprise shall not consolidate a governmental organization and shall not consolidate a financing entity established by a governmental organization unless the financing entity (a) is not a governmental organization and (b) is used by the business enterprise in a manner similar to a variable interest entity in an effort to circumvent the provisions of Interpretation 46(R).
- Provide that a troubled debt restructuring, as defined in paragraph 2 of FASB Statement No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings, as amended, shall be accounted for in accordance with that Statement and is not an event that requires the reconsideration of whether the entity involved is a variable interest entity or whether an enterprise with a variable interest in a variable interest entity is the primary beneficiary of that entity.
- Provide that an enterprise with an interest in an entity to which the provisions of Interpretation 46 have not been applied as of December 24, 2003, shall apply Interpretation 46 or Interpretation 46(R) to that entity in accordance with the effective date provisions of Interpretation 46(R) as described in item 5 below.
- Provide the following effective date provisions for a:
- Public Entity That Is Not a Small Business Issuer
(1) A public entity1 (enterprise) that is not a small business issuer shall apply Interpretation 46(R) to all entities subject to it no later than the end of the first reporting period that ends after March 15, 2004 (as of March 31, 2004 for calendar-year enterprises). This effective date includes those entities to which Interpretation 46 was previously applied.
(2) However, prior to the required application of Interpretation 46(R), a public entity (enterprise) that is not a small business issuer shall apply Interpretation 46 or Interpretation 46(R) to those entities that are considered to be special-purpose entities2 no later than as of the end of the first reporting period that ends after December 15, 2003 (as of December 31, 2003, for calendar-year enterprises).
(3) A public entity (enterprise) that is not a small business issuer that has applied Interpretation 46 to an entity prior to the effective date of Interpretation 46(R) shall either continue to apply Interpretation 46 until the effective date of Interpretation 46(R) or apply Interpretation 46(R) at an earlier date.
- Public Entity That Is a Small Business Issuer
(1) A public entity (enterprise) that is a small business issuer shall apply Interpretation 46(R) to all entities subject to it no later than the end of the first reporting period that ends after December 15, 2004 (as of December 31, 2004, for calendar-year enterprises). This effective date includes those entities to which Interpretation 46 had previously been applied.
(2) However, prior to the required application of Interpretation 46(R), a public entity (enterprise) that is a small business issuer shall apply Interpretation 46 or Interpretation 46(R) to those entities that are considered to be special-purpose entities no later than as of the end of the first reporting period that ends after December 15, 2003 (as of December 31, 2003, for calendar-year enterprises).
(3) A public entity (enterprise) that is a small business issuer that has applied Interpretation 46 to an entity prior to the effective date of Interpretation 46(R) shall either continue to apply Interpretation 46 until the effective date of Interpretation 46(R) or apply Interpretation 46(R) at an earlier date.
- Nonpublic Entity
A nonpublic entity3 (enterprise) with an interest in an entity that is subject to Interpretation 46(R) and that is created after December 31, 2003, shall apply Interpretation 46(R) to that entity immediately. A nonpublic enterprise shall apply Interpretation 46(R) to all entities that are subject to it by the beginning of the first annual period beginning after December 15, 2004.
- Public Entity That Is Not a Small Business Issuer
- Provide the following transition guidance;
- The effect of adopting Interpretation 46(R) shall be reported as a cumulative effect of an accounting change.
- Restatement of previously issued financial statements will be encouraged but not required.
- The effect of adopting Interpretation 46(R) shall be reported as a cumulative effect of an accounting change.
- Incorporate revised guidance on the identification of variable interests into Appendix B of Interpretation 46(R).
The Board decided not to reexpose Interpretation 46(R) for further comment and to proceed with the balloting process. The full text of Interpretation 46(R) has been posted to the FASB website.
The FASB staff announced that 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," will be posted to the FASB website no later than the end of the day on Friday, December 19, 2003.
1The term public entity is defined in paragraph 395 of FASB Statement No. 123, Accounting for Stock-Based Compensation. The term small business issuer is defined in SEC Regulation S-B §228.10(a)(1).
2The term special-purpose entity refers to an entity that previously would have been accounted for by applying the guidance in EITF Issues No. 90-15, “Impact of Nonsubstantive Lessors, Residual Value Guarantees, and Other Provisions in Leasing Transactions,” No. 96-21, “Implementation Issues in Accounting for Leasing Transactions involving Special-Purpose Entities,” and No. 97-1, “Implementation Issues in Accounting for Lease Transactions, including Those involving Special-Purpose Entities,” and EITF Topic No. D-14, “Transactions involving Special-Purpose Entities.”
Special-purpose entities for this provision are expected to include any entity whose activities are primarily related to securitizations or other forms of asset-backed financings or single-lessee leasing arrangements.
3The term nonpublic entity is defined in paragraph 395 of Statement 123.
In its project on combinations between mutual enterprises, the Board decided:
- To provide broadly applicable guidance for determining the fair value of an acquired business in the absence of observable prices from transactions in active markets. Additionally, the Board decided to provide certain guidance specific to measuring the fair value of an acquired mutual enterprise, in particular, that benefits to members (for example, the distribution of member benefits in the form of reduced fees charged for goods or services) should be considered when measuring fair value.
- To affirm that its tentative decisions reached for calculating and recognizing goodwill, which are consistent with those reached in its project on purchase method procedures for combinations of business enterprises, should apply to mutual enterprises.
- That the transition and effective date provisions for combinations between two or more mutual enterprises should be consistent with all other entities applying the purchase method procedures decisions. Those provisions would require that the purchase method procedures decisions be applied to combinations occurring in fiscal years beginning after December 15, 2004, and interim periods within those fiscal years.
- To require that acquiring credit unions apply the provisions of FASB Statement No. 141, Business Combinations, in making an assessment about whether the acquired assets include core deposit intangible assets that meet the requirements for recognition apart from goodwill.
In its project on purchase method procedures, the Board decided:
- To require that an acquiring entity disclose the basis (method used) for determining the fair value of the acquired business for all business combinations. The methods commonly used are (a) to estimate the fair value of the acquired enterprise based on the fair value of the consideration transferred or (b) a market or income approach for measuring an enterprise.
- Not to expand the scope of the project to include "basket purchases" of assets (and related liabilities). Instead the Board directed the staff to focus its efforts on clarifying the definition of a business.
Fair value measurement. The Board discussed clarifications to the fair value hierarchy and other related issues and reached the following decisions:
- The Board generally agreed that in applying the fair value hierarchy, an entity should maximize market inputs from active markets, even if the asset (or liability) being measured is not exchanged in an active market. Active markets should be distinguished from other markets based on the frequency with which assets (or liabilities) are traded without regard to liquidity. Level 1 and 2 estimates should be determined using quoted prices in active markets to which an entity has immediate access, considering the current ("as is") condition and location of the asset (or liability) being measured. In contrast, level 3 estimates should be determined using multiple valuation techniques and a combination of market (and other) inputs. The Board clarified the "upper" and "lower" ends of level 3 by reference to the extent to which market inputs are used in those techniques.
- The Board decided that the following information should be disclosed for recognized assets and liabilities measured at fair value: (a) the fair value amounts recognized in the statement of financial position, in total and as a percentage of total assets (and liabilities), (b) how those fair value amounts were determined; that is, whether using quoted market prices for identical or similar assets (or liabilities), or other valuation techniques and, if so, the extent to which observable market inputs were used in those techniques, and (c) changes in those fair value amounts reported in earnings (or other comprehensive income) for the period.
- The Board decided to retain the practicability exceptions to fair value in existing pronouncements.
FASB MEETINGS AUDIO WEBCAST
NEW FREE SERVICE
Beginning with the January 7, 2004 Board meeting, you will now be able to monitor FASB meetings by an audio webcast. The service is provided free of charge. To access the webcast, you will need to go to the FASB’s homepage to access the link. (This link will not be available until January 6, 2004.) You must have Windows Media Player™ installed on your computer to access the webcast. To listen to a recording of the most recent Board meeting via webcast for free, go to the FASB’s homepage to access the Board meeting playback link. The playback will be available until the next Board meeting.
FASB MEETINGS BY TELEPHONE
NEW LOWER PRICE
Because not everyone will choose to use the webcast to listen to the FASB meetings, we will continue to offer telephone broadcasting of meetings, at a lower price. Starting with the January 7, 2004 Board meeting, the telephone access charges will be reduced from the current $.75 per minute to $.45 per minute. Call 1-800-846-4717 to monitor the meetings by telephone. To listen by telephone to a recording of the most recent Board meeting, call 1-800-462-0393 (the playback will be available until the next Board meeting). For either of those options, you will be charged $.45 per minute, and VISA, MasterCard, American Express, or Discover Card is required. Questions can be directed to 1-800-846-4630.
FASB DOCUMENTS AVAILABLE
The Board recently issued FASB Statement No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits, and FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities.
These documents are available on the FASB website. Printed copies will be mailed to subscribers on or about January 12, 2004. Copies also will be available after that date from the FASB Order Department by calling 1-800-748-0659.
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, January 14, 2004—FASB Board Meeting
Wednesday, January 14, 2004—FASB Education Session
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