Financial Accounting Standards Board

1
Financial Accounting Standards Board

• National Association of Regulatory Utility
  Commissioners
• September 19, 2005
• New Standards, Staff Positions, Proposals, and
  Projects at the FASB
• Robert C. Wilkins
• Senior Project Manager

2
Disclaimer

• The views expressed in this presentation are my
  own and do not represent positions of the
  Financial Accounting Standards Board.
• Official positions of the FASB Board are arrived
  at only after extensive due process and
  deliberations.

3
Organization of Topics

• Recent Pronouncements
• FIN 47, Conditional Asset Retirement Obligations
  (March 2005)
• FAS 154, Accounting Changes Error Corrections
  (May 2005)
• Recent Exposure Drafts
• Current Major Projects
• Other Project Activities

4
FIN 47 Conditional Asset Retirement Obligations

• Being addressed by the next speaker.

5
FAS 154 Accounting Changes Error Corrections

• A voluntary change in accounting principle should
  be accounted for retrospectively and all prior
  periods should be restated as if the newly
  adopted accounting policy had always been used,
  except when retroactive application is
  impracticable.
• Statement 154 effective for fiscal years
  beginning after December 15, 2005 .

6
Organization of Topics

• Recent Pronouncements
• Recent Exposure Drafts
• Business CombinationsAcquisition Method
• Noncontrolling Interests
• Uncertain Tax Positions
• Statement 140 Amendments
• Current Major Projects
• Other Project Activities

7
Applying the Acquisition Method and
Noncontrolling Interests

• Joint project with IASB
• Timetable
• Exposure Drafts ? 2nd Quarter 2005
• Final Statement ? 3rd Quarter 2006
• Scope
• Replacement of FAS 141 IASBs IFRS 3

8
Applying the Acquisition Method

• Overall Principle
• Business combinations are exchange transactions
  in which knowledgeable, unrelated willing parties
  exchange equal values
• The acquirer obtains control of the acquiree at
  the acquisition date and becomes responsible and
  accountable for all of the acquirees assets,
  liabilities, and activities, regardless of the
  percentage of its ownership in the acquiree

9
Applying the Acquisition Method and
Noncontrolling Interests

• 3 categories that affect the accounting
• Acquisition of 100 of the ownership of another
  business
• Acquisition of partial interests, including
  step-acquisitions
• Noncontrolling interests classification and
  transactions

10
Applying the Acquisition Method

• Acquisition of 100
• Equity securities issued as consideration
• Measured at their fair value as of the
  acquisition date (not the agreement date)
• Acquisition-related costs paid to third parties
• Expensed as incurred

11
Applying the Acquisition Method

• Acquisition of 100 (continued)
• Contingent Consideration Arrangements
• Determine whether the obligation is a liability
  or equity.
• Follow Statement 133 if arrangement is a
  derivative.
• If a liability, changes in fair value are
  recognized in income.
• If equity, no subsequent remeasurement.

12
Applying the Acquisition Method

• Acquisition of 100 (continued)
• Preacquisition contingencies (asset liab)
• Recognized at fair value as of the acquisition
  date
• Elimination of the FAS 5 approach to recognition
• Restructuring reserves (EITF 95-3)
• Only items that meet the definition of a
  liability at the acquisition date will be
  recognized as part of the business combination
  (EITF 95-3 will be nullified)

13
Applying the Acquisition Method

• Acquisition of 100 (continued)
• IPRD assets acquired
• Recognized as an asset (not expensed) and
  measured at fair value. The recognized asset
  will be accounted for under FAS 142.
• Subsequent RD efforts to complete the IPRD
  asset will be expensed.

14
Applying the Acquisition Method

• Partial Acquisition Identifiable net asset
• Reported at 100 of their fair values rather than
  the current mixture of fair value and historical
  carry over value for the outstanding
  noncontrolling interest portion
• Amount reported for noncontrolling interest will
  be its ownership interest in the fair value of
  the business acquired

15
Applying the Acquisition Method

• Partial Acquisition Goodwill
• Based on 100 of the acquired entitys goodwill
  rather than the goodwill related to the
  controlling interest only.
• Fair value of 100 of the acquired entity will
  need to be determined and the amount reported for
  noncontrolling interests will reflect their
  portion of the goodwill.

16
Applying the Acquisition Method

• Step Acquisition
• If an acquirer obtains control of an acquiree
  through a step acquisition, preacquisition equity
  investments held by the acquirer at the date
  control is obtained will be remeasured at their
  fair value
• Any unrealized holding gains or losses on those
  preacquisition investments will be recognized in
  consolidated net income for the period

17
Noncontrolling Interests

• Classification
• Noncontrolling interests reported as part of
  equity rather than as a liability or a
  mezzanine item.
• Changes in controlling ownership interests
• Subsequent increases or decreases in the
  ownership interests of the subsidiary by the
  consolidating entity while that entity controls
  the subsidiary will be accounted for as capital
  transactions.

18
Noncontrolling Interests

• Loss of control
• A transaction that causes the subsidiary to cease
  being consolidated results in recognition of a
  gain or loss in the income statement.
• Any investment in the previously consolidated
  subsidiary that is retained by the reporting
  entity initially is measured at its fair value.

19
Noncontrolling Interests

• Allocation of net income and losses
• Net income or loss and each component of other
  comprehensive income is attributed to the
  controlling and noncontrolling interests based on
  their relative ownership interests.

20
Uncertain Tax Positions

• Amendment of FAS 109
• Exposure Draft ? July 2005
• Final Statement ? 4th Quarter 2005
• Also issued a related Proposed FSP FAS 13-a on
  the interaction of income tax changes and
  leveraged lease accounting

21
Uncertain Tax Positions

• Recognition Guidance
• Whenever the FAS 5 probable threshold is met, the
  tax position shall be recognized
• Assumes tax positions will be examined.
• When it is more likely than not that the position
  will not be sustained, the benefit of the tax
  position must be derecognized
• Use of a valuation allowance or valuation account
  for derecognition is not appropriate

22
Uncertain Tax Positions

• Measurement Guidance
• Record the financial statement benefit of an
  uncertain tax position based on the best
  estimate of the amount that will be ultimately
  sustained
• Two step model first determine if probable
  threshold is met, then recognize best estimate
  for positions that meet the probable criterion

23
Uncertain Tax Positions

• Transition
• Applies if statute of limitations is open
• Account for the impact of adopting the new
  pronouncement as a cumulative effect of a change
  in accounting principle
• Effective Date
• Annual fiscal periods ending after December 15,
  2005

24
Statement 140 Amendments

• Three Separate Exposure Drafts
• Transfers of Financial Assets
• Servicing of Financial Assets
• Certain Hybrid Financial Instruments
• Each ED presents FAS 140 as amended for all three
  proposed amendments

25
Statement 140 Amendments

• Certain Hybrid Financial Instruments
• Eliminates the DIG Issue D-1 deferral of the need
  to look for embedded derivatives in beneficial
  interests (and provides guidance on how to look
  for the derivatives).

26
Statement 140 Amendments

• Certain Hybrid Financial Instruments (continued)
• It would amend Statement 133 to permit fair value
  remeasurement for any hybrid financial instrument
  that contains an embedded derivative that
  otherwise would require bifurcation

27
Statement 140 Amendments

• Certain Hybrid Financial Instruments (continued)
• The fair value subsequent measurement election
  would be made on an instrument-by-instrument
  basis at inception in lieu of bifurcation. Fair
  value changes would be included in earnings.

28
Organization of Topics

• Recent Pronouncements
• Recent Exposure Drafts
• Current Major Projects
• with Exposure Drafts or Final Pronouncements due
  in the Near Term
• Fair Value Measurement
• Fair Value Option
• Financial Performance Reporting
• Other Project Activities

29
Fair Value Measurement

• Timetable
• Exposure Draft ? 2nd Quarter 2004
• Final Statement ? 4th Quarter 2005
• Scope
• Guidance to determine fair value when GAAP
  requires
• No new items required to be measured at fair
  value
• Establish consistent definition of fair value
• Terms understood by both accountants and
  valuation experts
• Hierarchy of approaches to determining fair value
• Maximum use of market data

30
Fair Value Measurement

• Fair Value Definition
• An estimate of the price that would be received
  for an asset or paid for a liability in a current
  transaction between marketplace participants in
  the reference market for the asset or liability.

31
Fair Value Measurement

• Current Transaction
• An orderly transaction that reflects market
  conditions at measurement date, not a forced or
  liquidation transaction or distress sale.

32
Fair Value Measurement

• Marketplace Participants
• Buyers and sellers for the asset or liability
  that are independent of the entity (unrelated),
  knowledgeable, able to transact, and willing to
  transact.

33
Fair Value Measurement

• Reference Market
• The most advantageous market for the asset or
  liability from the perspective of the entity
• For an asset, the market with the price that
  maximizes the amount that would be received for
  the asset
• For a liability, the market with the price that
  minimizes the amount that would be paid to
  transfer the liability to a marketplace
  participant

34
Fair Value Measurement

• Hierarchy
• Level 1Quoted price for identical asset in an
  active market
• Level 2Quoted market price for identical asset
  in an inactive market or for similar asset
  adjusted
• Level 3Market inputs other than quoted prices
• Level 4Market-corroborated inputs
• Level 5Entity inputs not corroborated by other
  market data

35
Fair Value Measurement

• Disclosures
• Fair value estimates for each major category of
  assets/liabilities remeasured at fair value and
  the key inputs (value drivers) used to develop
  the estimates
• Valuation techniques (annual only)
• Unrealized gains or losses for the current
  reporting period that relate to estimates that
  fall within Level 5

36
Fair Value Measurement

• Disclosures (continued)
• Total gains or losses relating to fair value
  remeasurements during the current reporting,
  segregating gains or losses included in OCI
• Combine all fair value disclosures, including
  fair value disclosures under FAS 107, if
  practicable

37
Fair Value Measurement

• Creditworthiness of the Debtor
• Board affirmed that the most relevant measure of
  a liability always reflects the creditworthiness
  of the entity obligated to pay, as appropriate.
• Conceptually creditworthiness is an essential
  component of a fair value measurement. A
  measurement that does not consider credit
  standing is not a fair value measurement.

38
Fair Value Option Project

• Permit entities a one-time irrevocable election,
  at the initial recognition of each contract, to
  report financial instruments, and perhaps certain
  nonfinancial instruments, at fair value with the
  changes in fair value included in earnings.

39
Fair Value Option Project

• Reasons for Adding the Project
• Entities will be able to avoid reporting
  volatility in earnings that results from using
  different measurement attributes in reporting
  various assets and liabilities.
• Entities will be able to avoid some of the
  problems and effort required to apply Statement
  133.
• International convergencethe IASB has
  incorporated a fair value option for financial
  instruments in IAS 39, Financial Instrument
  Recognition and Measurement.

40
Fair Value Option Project

• Board Decisions to Date
• Not to expand the project to permit entities to
  elect (outside of the hedge accounting) to
  recognize in earnings the change in an assets or
  liabilitys fair value attributable to only
  certain selected risks (rather than the total
  change in fair value)

41
Fair Value Option Project

• Board Decisions to Date (continued)
• No eligibility criteria should be imposed on the
  election of the Fair Value Option
• Three scope exceptions are needed
• An investment that would otherwise be
  consolidated
• Obligations for employee benefits and deferred
  compensation
• Financial liabilities recognized under lease
  contracts

42
Fair Value Option Project

• Issues to Be Addressed
• What nonfinancial instruments should be included
  in project scope?
• Does the Board wish to curtail the debtors
  recognizing in earnings the effect of changes in
  its creditworthiness in valuing liabilities ?
• What disclosures should be required to compensate
  for the lack of comparability created by the fair
  value option

43
Fair Value Option Project

• Timetable
• An Exposure Draft is expected in the 1st quarter
  2006
• A final Statement is expected in the 2nd
  quarter 2006

44
Financial Performance Reporting

• Will propose that a complete set of financial
  statements include
• Beginning and end of period statements of
  financial position.
• Statement of earnings and comprehensive income
  (eliminates two of the presentation alternatives
  in Statement 130).
• Cash Flow Statement.
• Statement in changes in equity.

45
Financial Performance Reporting

• Will propose that comparative statements be
  required.
• EPS not changed (required for earnings but not
  for comprehensive income).
• Exposure Draft expected by year end.

46
Organization of Topics

• Recent Pronouncements
• Recent Exposure Drafts
• Current Major Projects
• Other Project Activities
• Other Than Temporary Impairment

47
Other Than Temporary Impairment

• FSP FAS 115, Other- than-Temporary Impairments,
  to be issued in 4th quarter 2005.
• Amends EITF 03-1 to replace the detailed guidance
  that was developed for 03-1 with references to
  previously existing guidance. The disclosure
  requirements in 03-1 continue.

48
Questions?
Statement 140
Servicing Rights
Statement 133
IAS 39
Beneficial Interests
Statement 140