Action Alert No. 02-30
August 9, 2002



Wednesday, August 14, 2002, 8:30 a.m.

The Board meeting will start at 8:30 a.m. instead of 9:30 a.m.

  1. Statement 123 transition. The Board will continue discussions of issues related to its limited-scope agenda project to reconsider the transition provisions of FASB Statement No. 123, Accounting for Stock-Based  Compensation. (Estimated 60-minute discussion.)   


  2. Financial performance reporting by business enterprises. The Board will consider issues of financial statement display related to the reporting and classification of items of revenue, expense, gains, and losses in a statement of performance (which might be titled a statement of comprehensive income, an income statement, or another  similar title). (Estimated 60-minute discussion.)   


  3. Financial instruments: measuring at fair value. The Board will discuss plans for the project on the replacement of FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments. (Estimated 30-minute 


  4. 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.


No Board meetings are planned for the week of August 19, 2002. The next scheduled Board meeting is Wednesday, August 28, and topics for that meeting will be announced in the next issue of Action Alert on August 21.


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 7, 2002 Board Meeting

Business combinations: acquisitions of certain financial institutions. The Board redeliberated the provisions of and discussed the comments received on the FASB Exposure Draft, Acquisitions of Certain Financial Institutions. Except for the changes described below, the Board affirmed the provisions of that Exposure Draft and directed the staff to proceed to a draft of a final Statement for vote by written ballot.

  • The Board decided to delete the transition provision in paragraph 13(b) of the Exposure Draft related to reclassification of amounts recognized as an unidentifiable intangible asset under FASB Statement No. 72, Accounting for Certain Acquisitions of Banking or Thrift Institutions, to goodwill. As a result of that decision, the final Statement will require that the carrying amount of any unidentifiable intangible assets arising from past business combinations be reclassified to goodwill.


  • The Board decided to amend Statement 72 to delete the guidance on accounting for regulatory assistance received in a business combination. (The Exposure Draft would have carried forward that guidance without reconsideration, except for changes made necessary by the issuance of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.)


Guarantor’s accounting and disclosure requirements for guarantees. The Board discussed the comments received on the Exposure Draft of a proposed Interpretation, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, and redeliberated the issues addressed in that Exposure Draft. The Board supported issuance of a final Interpretation that would require a guarantor to make in its financial statements the specific disclosures proposed in the Exposure Draft about its obligations under certain guarantees that it has issued. The final Interpretation also would require the guarantor to recognize, at the inception of a guarantee, a liability for the obligations it has undertaken in issuing the guarantee. The Board indicated that the objective of the initial measurement of that liability is the fair value of the guarantee at its inception.

The Board also made the following changes to the proposed guidance in the Exposure Draft:

  • For guarantees that are product warranties, the Board decided to eliminate the proposed requirement to disclose the maximum potential amount of future payments the guarantor could be required to make. However, the Board reaffirmed that guarantors should comply with the other proposed disclosure requirements regarding the nature of the product liability guarantee, the related liability’s current carrying amount, and the nature of any related recourse provisions or collateral held. The Board decided that a guarantor also should disclose its accounting policy and methodology used in determining its liability for product warranties as well as a tabular reconciliation of the changes in the guarantor’s product warranty liability for the reporting period. That reconciliation should present the beginning balance of the product warranty liability, the aggregate reductions in that liability for settlements made (in cash or in kind) under the warranty, the aggregate changes in the liability for accruals related to both newly issued product warranties and preexisting warranties (including adjustments related to changes in estimates), and the ending balance of the product warranty liability.


  • The Board decided to limit the characteristic used to identify indemnification agreements that are subject to the Interpretation to those agreements that contingently require the indemnifying party to make payments to the indemnified party based on changes in an underlying that is related to an asset or liability of the indemnified party. The Board emphasized that the Interpretation’s scope would not encompass indemnifications or guarantees of an entity’s own future performance.


  • The Board decided to create a new scope exception from the initial recognition and initial measurement provisions for (1) guarantees issued between either parents and their subsidiaries or corporations under common control, (2) a parent’s guarantee of a subsidiary’s debt to a third party, and (3) a subsidiary’s guarantee of the debt owed to a third party by its parent or another subsidiary of that parent. That scope exception would apply to separate-company financial statements and to consolidated statements (if needed). The Board observed that the disclosure requirements in the Interpretation would continue to apply to those guarantees. The Board also noted that in consolidated financial statements, a parent’s guarantee of a consolidated subsidiary’s debt to a third party would not be included in the scope of the Interpretation because, from the perspective of the consolidated reporting entity, the parent’s guarantee of a consolidated subsidiary’s debt is a guarantee of the consolidated entity’s own future performance in making payments on the consolidated debt.


  • The Board decided that the disclosure requirements in the Interpretation should be effective for financial statements of interim or annual periods ending after December 15, 2002. The Board also decided that the initial recognition and initial measurement provisions of the Interpretation should be applied only on a prospective basis to guarantees issued after December 31, 2002, irrespective of the guarantor’s fiscal year-end. The guarantor’s previous accounting for guarantees issued prior to the date of the Interpretation’s initial application should not be revised or restated to reflect the effect of the recognition and measurement provisions of the Interpretation.


The Board directed the staff to proceed to a draft of a final Interpretation for vote by written ballot.

Financial instruments: liabilities and equity. The Board reached decisions on the following issues: (1) the application of the ownership relationship notion contained in the revised definition of liabilities, (2) the initial and subsequent measurement of derivative financial instruments classified as liabilities that require as their only settlement alternative delivery of cash in exchange for a fixed number of shares, and (3) issues related to mandatorily redeemable instruments.

Application of the Ownership Relationship Notion

  • The Board decided that an ownership relationship would be established if (1) a financial instrument is an outstanding share of stock of the issuer and does not embody an obligation on the part of the issuer, (2) a financial instrument embodying an obligation requires (or permits at the issuer’s discretion) settlement of the obligation by the issuance of a fixed number of the issuer’s equity shares and the contract requires the holder to pay and the issuer to receive a fixed amount of cash in exchange for those shares, or (3) a financial instrument embodying an obligation requires (or permits at the issuer’s discretion) settlement of the obligation by the issuance of a variable number of the issuer’s equity shares and any change in the obligation’s monetary value is in the same direction as the change in fair value of the underlying equity shares and is attributable to and equal to the change in fair value of a fixed number of the issuer’s equity shares.


  • The Board decided to include an explanation of the ownership relationship notion in the Concepts Statements as an amendment to the equity description in paragraph 60 of FASB Concepts Statement No. 6, Elements of Financial Statements.


Initial and Subsequent Measurement

  • The Board decided that forward contracts meeting the definition of a derivative that require as their only settlement alternative delivery of cash in exchange for a fixed number of the issuer’s own equity shares (physically settled forward purchase contracts that meet the definition of a derivative) should be initially measured at the present value of the redemption amount. Subsequent measurement of those contracts would require accretion of the initial recorded amount to the redemption amount.


Mandatorily Redeemable Instruments

  • The Board decided that mandatorily redeemable instruments meet the current definition of liabilities in Concepts Statement 6.


  • The Board decided that a financial instrument is mandatorily redeemable if it (1) embodies an obligation outside the control of the issuer and the holder to redeem the instrument by transferring cash or other assets and (2) the obligation is required to be redeemed at a specified or determinable date or upon an event certain to occur.


  • The Board decided that all enterprises should be required to classify mandatorily redeemable instruments as liabilities; however, if an entity only has one class of stock and that stock is mandatorily redeemable, those instruments should be captioned so as to distinguish them from other financial statement liabilities.


Agenda decision: Statement 123 transition. In response to constituent requests, the Board decided to undertake a limited-scope project to reconsider the transition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation. The Board tentatively decided to amend Statement 123 to permit enterprises that voluntarily adopt the fair value recognition provisions to choose from the following alternative transition provisions:

  • The existing transition provisions under Statement 123 (prospective application only to new awards)


  • Prospective application to all new awards and the unvested portion of awards granted in years prior to year of adoption


  • Retroactive restatement of all periods presented.


In addition, the Board decided that except for entities that choose the retroactive restatement alternative, the financial statements should disclose pro forma net income and earnings per share as if the Statement 123 recognition provisions had been applied to all awards in all periods presented.


On September 30, 2002, the FASB will hold a public roundtable discussion to obtain information from and views of interested individuals and organizations about its June 28, 2002 Exposure Draft of a proposed Interpretation, Consolidation of Certain Special-Purpose Entities. An individual or organization desiring to participate must notify the FASB by sending an email to by August 15, 2002, and submit a position paper or a comment letter addressing the provisions of the proposed Interpretation by August 30, 2002. Depending on the response, the Board may not be able to accommodate all requests to participate in the roundtable discussion. However, all submissions by those requesting to participate in the roundtable discussion will be available at the roundtable discussion for review.


Minutes of the roundtable discussion and copies of all written submissions on this project will be available for review in the FASB’s Public Reference Room. Copies are available for a duplication fee.


The AICPA’s Accounting Standards Executive Committee issued a proposed Statement of Position (SOP), Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts. The proposed SOP has a 90-day comment period ending October 31, 2002. That document is available from the AICPA at


The following is a list of open meetings tentatively scheduled through September. Because schedules may change, please check the FASB calendar of meetings on this website before finalizing your plans. Revisions to this list since the last issue of Action Alert are highlighted in bold.

Wednesday, August 28, 2002—FASB Board Meeting

Thursday, August 29, 2002—Liaison Meeting with the New York Society of Security Analysts

Wednesday, September 4, 2002—FASB Board Meeting

Friday, September 6, 2002—Liaison Meeting with the Institute of Management Accountants

Wednesday, September 11, 2002—FASB Board Meeting

Wednesday, September 11, 2002—Emerging Issues Task Force Meeting

Thursday, September 12, 2002—Emerging Issues Task Force Meeting

Wednesday, September 18, 2002—FASB/IASB Joint Board Meeting

Thursday, September 19, 2002—Liaison Meeting with the American Council of Life Insurance

Tuesday, September 24, 2002—Financial Accounting Standards Advisory Council Meeting

Wednesday, September 25, 2002—FASB Board Meeting

Thursday, September 26, 2002—Liaison Meeting with the American Gas Association

Monday, September 30, 2002—FASB Open Roundtable Discussion on Certain Special-Purpose Entities

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