FASB Update

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• FASB Update
• September 24, 2007
• Edward W. Trott

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FASB Who Is It?What Is Its Role?

• Private-sector, independent accounting
  standard-setter
• Not part of the SEC or any other organization.
• Board members from various backgrounds selected
  by Trustees of Financial Accounting Foundation
  (an independent organization).
• Board members are full time and not affiliated
  with any other employer.
• Has extensive due process for all guidance it
  issues whether Statements, Interpretations, FSPs,
  EITFs or DIGS.
• Accounting standards identify what information a
  company is to provide to the capital markets and
  other users of financial information and how that
  communication is to be done.

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Areas of Importanceto the FASB

• Converge with the IASB to an Excellent set of
  accounting standards that are used world-wide.
• Improve existing and create new standards to make
  financial reporting more useful.
• Simplify standards by making them more consistent
  with one another, easier to work with, and more
  understandable.

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Convergence Activities

• A majority of FASB staff and Board resources are
  involved with joint, modified joint or
  convergence specific projects. See The FASB
  Report.
• Joint and Modified Joint Projects are on
  fundamental, important areas
• Conceptual Framework Business Combinations
• Revenue Recognition Consolidations
• Leasing Insurance
• Financial Statement Presentation Liability and
  Equity
• Pensions
• Although, the joint project on Business
  Combinations has not resulted in total
  convergence, it will result in consistent
  accounting in most areas for these significant
  transactions.
• Even where the FASB or the IASB works on
  standalone projects there are significant
  convergence efforts.

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Improvement ActivitiesInterpretation 48
Fin 48, Accounting for Uncertainty in Income
Taxes, was issued in June 2006 and is effective
for fiscal years beginning after 12-15-06. FSP
FIN 48-1 issued in May 2007.

• Provides guidance for when to recognize in the
  financial statements a benefit for an uncertain
  tax position taken on a tax return.
• Assume the position will be examined by the tax
  authority.
• Recognizing the benefit if it is more likely
  than not, based in technical merits, that the
  position will be sustained.
• If the recognition requirement is NOT met,
  increase tax expense and setup a tax liability.

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Improvement Activities Interpretation 48 (cont)

• Provides measurement guidance.
• If the benefit is recognizable, the amount to be
  recognized is the largest amount of the benefit
  that is greater than 50 likely to be realized
  upon effective settlement with the tax authority.
• Requires disclosures about income tax
  uncertainties.
• A tabular reconciliation of unrecognized tax
  benefits, including the amount that will effect
  the effective tax rate.
• Information about positions for which it is
  reasonably possible for the unrecognized amount
  to significantly change within 12 months.

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Improvement ActivitiesStatement 157 (cont)
FAS 157, Fair Value Measurements, was issued in
September 2006 and is effective for fiscal years
beginning after 11-15-07.

• Provides a definition of Fair Value to be used
  throughout the literature. It does NOT require
  any new fair value measurements.
• Fair Value is the price that would be received to
  sell an asset or paid to transfer a liability in
  an orderly transaction between market
  participants at the measurement date.
• Provides guidance for making an estimate of Fair
  Value.
• Consider all attributes specific to the asset or
  liability that the market participant would
  consider.
• Fair Value is the price excluding transaction
  costs.
• Uses a valuation premise and highest and best
  use for assets.
• Establishes a Fair Value hierarchy.

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Improvement ActivitiesStatement 157 (cont)

• Requires disclosures.
• Identifies where Fair Value measurements are
  being used.
• Provides information on where in the hierarchy
  the data came from for the Fair Value estimate.
• Identifies changes during the period in
  situations using significant unobservable inputs.

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Improvement ActivitiesStatement 158 (cont)

• FAS 158, Employers Accounting for Defined
  Benefit Pension and Other Postretirement Plans,
  was issued in September 2006 and the display
  requirements were effective for entities with
  publicly traded equity securities for the end of
  the fiscal year ending after 12-15-06 for
  companies without publicly traded equity
  securities after 6-15-07. For the measurement
  date requirement, for all entities for fiscal
  years ending 12-15-08.
• The display requirement requires the funding
  status of plans to be on the sponsors balance
  sheet.
• The measurement date requirement requires the
  actuarial valuation to be done at year-end.

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Improvement Activities Statement 159

• FAS 159, The Fair Value Option for Financial
  Assets and Financial Liabilities, was issued in
  February 2007 and is effective for fiscal years
  beginning after 11-15-07.
• Permits all entities to chose, at specified
  election dates, to measure eligible items at fair
  value.
• Provides entities the opportunity to eliminate
  the accounting volatility caused by having mixed
  attributes used to measure related items.

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Improvement ActivitiesFSPs, DIGs and EITFswith
General Applicability
FSPs

• EITF 00-19-02, Accounting for Registration
  Payment Arrangements, issued December 2006.
• Requires separate accounting to relieve
  classification between liability or equity
  pressure.
• FAS 126-1, Applicability of Certain Disclosure
  and Interim Reporting Requirements for Obligor
  for Conduit Debt Securities, issued October 2006.
• Recognizes that some Obligors have issued
  publicly traded debt.
• FIN 39-1, Amendment of FIN 39, issued April 2007.
• Clarifies when a collateral receivable/payable
  related to derivatives can be part of the net
  presentation.
• AUG AIR-1, Accounting for Planned Major
  Maintenance Activities, issued September 2006.
• Eliminates the accrue-in-advance approach.

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Improvement ActivitiesFSPs, DIGs and EITFswith
General Applicability (cont)
EITFs

• Issues 06-10, 06-4 and 06-5 Guidance with
  respect to Split-Dollar Life Insurance Policies
  and CSV, issued in September 2006 and March 2007.
• Requires OPEB liabilities to be recorded.
• Issues 06-6, 06-7 Guidance with respect to
  Convertible Debt, issued in November 2006.
• Provides guidance for modifications or
  extinguishments and conversion options.
• Issue 06-8, Applicability of the Assessment of a
  Buyers Continuing Investment under FAS 66, for
  Sales of Condominiums, issued November 2006.
• The continuing investment requirement applies.
• Issue 06-3, How Taxes Collected from Customers
  and Remitted to Governmental Authorities Should
  Be Presented in the Income Statement (That is,
  Gross versus Net), issued June 2006.
• A policy decision with disclosure requirements.

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Improvement ActivitiesFSPs, DIGs and EITFswith
General Applicability (cont)
DIGs

• B40, Application of Paragraph 13(b) to
  Securitized Interests in Prepayable Financial
  Assets, issued January 2007.
• Scopes out of FAS 155 some securitizations that
  need to be evaluated for embedded derivatives.
• G26, Hedging Interest Cash Flows on Variable-Rate
  Assets and Liabilities That Are Not Based on a
  Benchmark Interest Rate, issued January 2007.
• Clarifies that these cannot be hedged if they
  involve only interest rate cash flows.
• Get a weekly e-mail from the FASB.
• Use the Effective Date practice aid.

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Improvement ActivitiesGuidance to be Issued in
2007

• Business Combinations and Noncontrolling
  Interests
• Result of first major joint project undertaken
  with the IASB.
• The Boards confirmed much of the guidance that
  was proposed in the June 2005 EDs.
• Will be effective for fiscal years beginning
  after 12-15-08.
• Disclosures about Derivatives and Hedging
• ED issued in December 2006.
• Substantial support in comment letters.
• Redeliberations in summer 2007.
• FSP FAS-154-a, Considering the Effects of
  Prior-Year Misstatements, ED posted March 2007.
• Incorporates SAB 108 into GAAP.
• Redeliberations in May/June 2007.
• Board decided not to issue in July 2007 meeting.
• FSP FAS 140-d, Transfers with Repurchase
  Agreement.
• ED posted Comments due September 14, 2007
• FSP Convertible Debt.
• To be posted in the 3rd Qtr. 2007.
• DIG E23 Shortcut Method.
• ED posted Comments due September 21, 2007.

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Improvement ActivitiesFinancial Statement
Presentation

• ? A Preliminary View Document is expected to be
  issued in 2007 for this joint project. The
  objective of this project is to determine the
  format for financial statements that
• Portrays a cohesive financial picture of an
  entity.
• Separates an entitys financing activities from
  its business and other activities and further
  separates its financing activities between equity
  and liabilities.
• Provides information about liquidity and
  solvency.
• Helps a user understand the basis on which assets
  and liabilities are measured, what caused the
  change in reported amounts and the uncertainty
  that exists in the measurements.
• Disaggregates line items to the extent the
  disaggregation produces useful information.

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Financial StatementPresentation (cont)

• ? To accomplish these objectives the Statement of
  Financial Position, Statement of Earnings and
  Comprehensive Income, Statement of Cash Flow will
  have their information separated into the
  following categories
• Business ? Discontinued Operations
• Operating ? Income Taxes
• Investments ? Equity
• Financing
• Assets
• Liabilities
• ? Additionally there will be a Statement of
  Changes in Equity.

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Financial StatementPresentation (cont)

• Limited classification guidance will be provided
  for determining which category each asset or
  liability will be placed and the classification
  in the Statement of Financial Position will
  control the classification of activity in the
  other statements.
• Classification will reflect the specific entitys
  business model.
• Discontinued operations will be done on an
  operating segment level.
• No intraperiod tax allocation will be done.
• Disaggregation in the Statement of Earnings and
  Comprehensive Income will be first by function
  and then by nature of significant expenses.

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Financial StatementPresentation (cont)

• The Statement of Cash Flow will relate to cash
  not cash and cash equivalents. Still considering
  direct or indirect method.
• Liquidity information principally will be
  presented in footnotes but short-term/long-term
  amounts may be shown in each category in the
  Statement of Financial Position.
• Measurement basis information and some form of
  line-item reconciliation of beginning to ending
  amount for assets and liabilities will probably
  be presented in some form.
• See attached example financial statements.

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Improvement ActivitiesLiability and
EquityFinancial Instruments

• A Preliminary View Document is expected to be
  issued in 2007 for this modified joint project.
  The objective of this project is to develop a
  comprehensive standard of accounting and
  reporting for financial instruments with
  characteristics of equity, liabilities, or both
  and assets. The guidance is expected to
  replaceAPB 14, FAS 150 and numerous FSPs and
  EITF issues.
• Three approaches have been developed to meet the
  objectives of this project. The approaches, with
  their application to a number of different
  financial instruments, are explained in documents
  available from the FASB website. The following
  is a summary of the approaches.

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Improvement ActivitiesLiability and
EquityFinancial Instruments (cont)

• The Ownership Approach
• This approach focuses on the nature of the return
  to the holder of the instrument and classifies
  only Direct Ownership instruments (but not
  perpetual instruments) as equity. All other
  instruments or components of combined instruments
  are liabilities or assets.
• Direct Ownership instruments (think common stock)
  are those with the lowest priority to the assets
  of the entity in the event of bankruptcy or
  liquidation.
• Indirect ownership instruments (think stock
  options, warrants and the conversion component of
  convertible debt) are not classified as equity.
  Because these instruments are not classified as
  equity, they would be carried at fair value with
  the change in fair value recorded in Earnings.

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Improvement ActivitiesLiability and
EquityFinancial Instruments (cont)

• The perceived benefits of this approach are its
  simplicity at the classification level, it
  results in fewer combined instruments to be
  bifurcated and it includes the negative affect on
  existing Direct Ownership instruments in
  Earnings.
• The Ownership-Settlement Approach
• This approach focuses on (1) the nature of the
  return, (2) the settlement features and (3) the
  consideration used to effect settlement. Direct
  Ownership, Indirect Ownership and Perpetual
  instruments are classified as equity
• Indirect ownership instruments (think stock
  options warrants and the conversion component of
  convertible debt) are instruments that have a
  return based on Direct Ownership instruments and
  are settled in those instruments.

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Improvement ActivitiesLiability and
EquityFinancial Instruments (cont)

• The perceived benefits of this approach are that
  it results in a faithful representation of the
  instruments and better communicates the
  attributes of items like warrants that can only
  result in a cash inflow to the entity (under the
  Ownership Approach warrants are classified as a
  liability).
• The Reassessed Expected Outcome (REO) Approach
• This approach reflects the probability-based
  outcomes of instruments that have the possibility
  of more than one outcome. It involves
  remeasurements and reclassification each
  reporting period if the probability of the
  outcomes change. The measurements under this
  approach are based on contingent claims modeling
  techniques.
• The perceived benefits of this approach is that
  the classifications will reflect the current
  probability of the various outcomes. For
  example, a convertible debt instrument with an
  in-the-money conversion option will be classified
  as mostly equity whereas if the conversion option
  is out-of-the-money it would be mostly liability.

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Simplification Activities

• A new style of writing guidance has been
  demonstrated in the Exposure Draft, Financial
  Guarantee Insurance. Comments have been
  requested. This new style is designed to make
  the guidance more understandable.
• Project to simplify Hedge Accounting.
• How to balance simplification and accounting for
  complex activity involving complex instruments!
• The Codification Project is the largest project
  undertaken by the FASB

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Codification Project

• US GAAP has been created over many years by
  various organizations in various forms. Thus,
  accounting guidance can be found in ARBs, APB
  Opinions and Interpretations, SOPs, Accounting
  and Auditing Guides, FASB Statements,
  Interpretations, Technical Bulletins, EITFs,
  DIGs, and FSPs.
• The FASBs Codification Project is pulling all of
  this guidance into one place that will be
  available electronically by subject. After a
  verification period, the Codification will be
  the authoritative literature. Future guidance
  and amendments will be written to be added
  directly to the Codification.

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Additional Agenda Itemsand Activities

• Members of the Private Company Financial
  Reporting Committee have been announced and
  meetings to provide input to the FASB are to
  start in 2007.
• An Invitation to Comment Document was issued in
  January 2007 seeking input from constituents on
  whether additional and more specific valuation
  guidance is needed for financial reporting as
  well as the process for developing that guidance.
  The Board decided to use valuation experts as a
  resource to the FASB. Limited additional
  guidance will be issued by the Board.