Project Update

Project Objective

The overall objective of the short-term convergence effort is to improve financial reporting in the United States, while concurrently eliminating a variety of individual differences between U.S. generally accepted accounting principles (GAAP) and International Financial Accounting Standards (IFRS). These "short-term convergence" projects are limited to projects that address differences outside the scope of a major project and for which convergence around a high-quality solution appears to be achievable in the short term, usually by selecting between existing IFRS and U.S. GAAP.

In the current phase, the Board addressed five areas:

Due Process Documents

Decisions Reached at Last Meeting (Earnings per Share) (January 23, 2008)

See minutes below.

*Summary of Decisions Reached to Date (Earnings per Share)

Basic Earnings per Share

Mandatorily convertible instruments should be reflected in basic EPS using the two-class method only if holders could participate in current-period earnings with common shareholders. That is, if the mandatorily convertible instrument holders could receive additional consideration (above their contractual return) solely as a result of distributions to common shareholders, then, and only then, would the instrument be considered a participating security and, therefore, included in basic EPS using the two-class method. If the instrument holders could not participate in current-period earnings with common shareholders, those mandatorily convertible instruments would not be included in basic EPS using the two-class method.

Instruments for which the holder has (or is deemed to have) the right to share in current-period earnings with common shareholders should be included in the denominator of basic EPS. Examples of these instruments include (1) instruments that are currently exercisable or shares that are currently issuable at little or no cost to the holder or (2) participating securities that are not measured at fair value with changes in fair value recognized in current-period earnings.

Statement 128 will be amended to clarify that convertible participating securities are included in basic EPS using the two-class method—essentially codifying the requirement in Issue 7 of EITF Issue No. 03-6, "Participating Securities and the Two-Class Method under FASB Statement No. 128."

Diluted Earnings per Share

An entity should compute quarterly and year-to-date diluted EPS independently from any prior interim-period computation. The weighted-average computations for calculating contingently issuable shares will be eliminated; entities should include these shares in diluted EPS from the beginning of the quarterly and year-to-date periods in which the conditions for issuance are satisfied (or at the date of the contingent share agreement, if later).

The Board decided the following for instruments that can be settled in cash or shares:

1. When an entity has issued a contract that may be settled either in shares or in cash at the entity’s option, the entity should presume that the contract will be settled in shares if the effect is dilutive. That presumption may not be overcome, regardless of past practice or stated policy to the contrary.

2. The Board clarified that share settlement must be assumed (if dilutive) for the purpose of computing diluted EPS for an otherwise cash-settled instrument that contains a provision that requires or permits share settlement under certain circumstances. The Board decided to make one exception to this guidance for an instrument that does not permit share settlement under any circumstance other than the legal bankruptcy of the issuer.

The denominator of the computation of diluted EPS should not be increased by additional common shares resulting from the exercise or conversion of instruments that are freestanding or separately accounted for as a component of a compound instrument and that are measured at fair value with changes in fair value recognized in earnings for the period. Examples of these instruments include any instruments measured at fair value with changes in fair value recognized in earnings for the period that would otherwise be subject to the treasury stock method, the if-converted method, or the two-class method. Additionally, an entity should not increase the denominator of the computation of diluted EPS by additional common shares resulting from the exercise of a financial instrument or contract subject to FASB Statement No. 123 (revised 2004), Share-Based Payment, that is recognized (or will be recognized) as a liability and measured under that Statement’s fair-value-based measurement approach. The Board decided that the change in fair value (or fair-value-based amount as it relates to share-based-payment awards) recognized in earnings sufficiently reflects the dilutive effect of those instruments on current shareholders for the period, thus eliminating the need to include such instruments in the determination of diluted EPS. The Board acknowledged that in some cases, which it thinks would be rare, the inclusion of these instruments in EPS under the treasury stock and reverse treasury stock methods would be dilutive.

The treasury stock method should be modified for all instruments subject to the treasury stock method that are not remeasured at fair value at each reporting period. The modified treasury stock method should (1) include the end-of-period value of the liability as an assumed proceed (if applicable), and (2) use the end-of-period market price in computing the number of incremental shares in the determination of diluted EPS.

The guidance in proposed FASB Staff Position (FSP) FAS 128-a, Computational Guidance for Computing Diluted EPS under the Two-Class Method, will be codified into Statement 128 through the convergence project, rather than being issued in the form of an FSP.

Actual distributions (as opposed to hypothetical distributions) to outstanding common stock should be used in the computation of diluted EPS under the two-class method.

Transition and Effective Date

The amendments to Statement 128 will be effective for fiscal years beginning after December 15, 2008. Early adoption will not be permitted.

Retrospective application is required for all changes to Statement 128 except for contracts that were either settled in cash prior to adoption or modified prior to adoption to require cash settlement; for these types of contracts, retrospective application is prohibited.

Next Steps (Earnings per Share)

The FASB and the IASB have been working together to resolve the remaining differences between FASB Statement No. 128, Earnings per Share, and IAS 33, Earnings per Share. The Boards plan to issue an Exposure Draft for public comment in the second quarter of 2008. The proposed Statement will be exposed for a 120-day comment period. For the FASB, this Exposure Draft will represent the third Exposure Draft on the earnings per share project.

Board/Other Public Meetings

The Board meeting minutes 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 become final only after a formal written ballot to issue a final Statement, Interpretation, FSP, or Statement 133 Implementation Issue.

FASAC Meetings

Background Information

After acknowledging that convergence of IFRS and U.S. GAAP is a primary objective, the FASB and IASB made progress in reducing key differences between U.S. GAAP and IFRS by establishing a formal liaison relationship, monitoring relationships for major projects, and undertaking joint projects. However, many differences still existed. While not necessarily important issues for either Board individually, they were, collectively, major irritants to those using, preparing, auditing, or regulating cross-border financial reporting. Consequently, on October 2, 2002, the Board added a short-term international convergence project to its agenda to address those differences. The project is being conducted jointly with the IASB.

The short-term convergence project is only intended to address differences that meet the criteria for inclusion in the project scope. It will not address differences that are associated with issues requiring comprehensive reconsideration. Those differences will be addressed over a longer term as the Boards coordinate agenda setting in the future.

For each difference, each Board deliberates the effects of using the alternative accounting treatments based on shared research. If convergence around a high-quality solution can be achieved without comprehensive reconsideration of the issue, one or both Boards propose changes to existing GAAP to achieve convergence. If a particular difference requires more comprehensive reconsideration, the Boards will remove the difference from the scope of the short-term project. If they determine that additional items meet the criteria for inclusion in the short-term convergence project, the Boards may add those items to the project scope.

In addition to the short-term convergence project, the FASB staff is conducting a research project on international convergence. The objectives of the research project are to (1) identify every substantive difference between U.S. GAAP and IFRS, (2) catalog those differences according to the strategy for resolving them, and (3) recommend further agenda decisions to the Board to further the objective of convergence with the IFRS.

The IASB’s Short-Term Convergence Project

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