FASB

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FASB EITF UPDATEFinancial Reporting
UpdateOctober 21, 2004
Ben Neuhausen BDO Seidman, LLP
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Overview

• FASB Projects
• FASB Staff Positions
• EITF Update
• Mining and Oil and Gas Industries
• Questions and Answers

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FASB Projects
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FASB Projects 2004 or Early 2005

• Equity-Based Compensation Transactions with
  employees
• Final Statement will be issued this year
• Requires fair value accounting for equity based
  compensation

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FASB Projects 2004 or Early 2005

• Equity-Based Compensation Transactions with
  employees
• Changes from Exposure Draft
• Effective for quarters beginning after 6/15/05
  for public companies
• No preference for particular option-pricing
  models
• Straight-line amortization OK for awards with
  graded vesting
• Limited offset of excess and deficient tax
  benefits

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FASB Projects 2004 or Early 2005

• Fair Value Measurements
• Short-Term International Convergence
• Accounting Changes and Error Corrections
• Exchanges of Productive Assets
• Earnings per Share
• Inventory Costs
• Interpretation of FAS 143
• Uncertain tax positions

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FASB Projects - Later in 2005

• Business Combinations
• Purchase Method Procedures, including mutual
  enterprises
• Noncontrolling Interests
• Combinations of Not-for-Profit Organizations
• FAS 140 Issues
• QSPEs and Isolation of Financial Assets
• Beneficial Interests in Securitized Financial
  Assets
• Servicing Rights
• Cash balance pension plans

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FASB Staff Positions
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FSPs - Final

• FSP FAS 106- 2
• Provides guidance on accounting for the effects
  of the Medicare Prescription Drug, Improvement
  and Modernization Act of 2003
• Applies only to sponsors of single-employer
  defined benefit postretirement health care plans
  for which (1) prescription drug benefits are
  actuarially equivalent to Medicare Part D and
  thus qualify for the subsidy provided by the Act,
  and (2) the expected subsidy will offset or
  reduce the employers share of the underlying
  prescription drug coverage
• Provides guidance on measuring the APBO and net
  periodic postretirement benefit cost, and the
  effects of the Act on APBO
• Requires certain disclosures about the Act and
  its effects in financial statements.
• Is effective, for public companies for the first
  interim or annual period beginning after June 15,
  2004

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FSPs - Final

• FSP FAS 129-1
• Requires companies to disclose
• the significant conversion features of
  contingently convertible securities
• whether the contingently issuable shares are
  included in diluted EPS and reasons why or why
  not (Superseded by EITF 04-08)
• Effective immediately
• FSP FAS 97-1
• Life insurance issue

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FSPs Proposed

• FSP FAS 140-b Application of EITF 85-24 when
  future distribution fees of mutual funds are sold
  to unrelated third parties
• FSP FAS 142-c Application of FAS 142 to
  exchange memberships (will not be finalized)

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EITF Update
SELECTED EITF ISSUES DISCUSSED or EFFECTIVE 2004
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New! EITF Consensus Effective in 2004

• Issue 02-14
• Whether the Equity Method of Accounting Applies
  When an Investor Does Not Have an Investment in
  the Voting Stock of an Investee But Exercises
  Significant Influence Through Other Means

Significant Influence No vote
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New! EITF Consensus Effective in 2004

• Issue 02-14
• Use equity method when there is the ability to
  exercise significant influence and the investment
  is common stock and/or in-substance common stock

Significant Influence No vote
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New! EITF Consensus Effective in 2004

• Issue 02-14
• In-substance common stock is an investment that
  has risk and reward characteristics that are
  substantially similar to the entitys common
  stock
• Subordination
• Risks and rewards of ownership
• Obligation to transfer value
• Effective for periods beginning after 9/15/04

Significant Influence No vote
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New! EITF Consensus Effective in 2004

• Issue 02-14
• Initial determination should be based in
  circumstances that exist at adoption date
• For investments that are in substance common
  stock but were not accounted for under the equity
  method -- cumulative effect change in in
  accounting
• For investments that are not in-substance common
  stock but were accounted for under the equity
  method -- do not reverse previously issued equity
  method earnings or losses

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New! EITF Consensus Effective in 2004

• Issue 03-1
• The Meaning of Other-Than-Temporary Impairment
  and its Application to Certain Investments

Stock Market Jitters

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New! EITF Consensus Effective in 2004

• Issue 03-1 -- Applies to
• FAS 115 debt and equity securities
• FAS 124 debt and equity securities held by an
  entity that reports a performance indicator
• Cost method investments

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New! EITF Consensus Effective in 2004

• Issue 03-1 -- Three step approach
• Determine whether an investment is impaired
• Evaluate whether an impairment is other than
  temporary
• If impairment is other than temporary, recognize
  an impairment loss equal to the difference
  between the investments cost fair value

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New! EITF Consensus Effective in 2004

• Issue 03-1 Step 1
• Determine whether an investment is impaired
• An investment is impaired if the fair value
  of the investment is less than its carrying
  amount
• (Assessment should be made each reporting
  period)

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New! EITF Consensus Effective in 2004

• Issue 03-1 -- Step 2
• - Evaluate whether an impairment is other than
  temporary
• For equity securities and debt securities
  that can be settled in a way that the investor
  would not recover substantially all of its cost,
  an impairment is deemed other than temporary
  unless
• Investor has ability and intent to hold for a
  reasonable period of time sufficient for recovery
  of fair value, and
• positive evidence indicating that an investments
  carrying amount is recoverable within a
  reasonable period of time outweighs negative
  evidence to contrary

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New! EITF Consensus Effective in 2004

• Issue 03 --1 Step 2
• - Evaluate whether an impairment is other than
  temporary
• For ordinary debt securities, an impairment
  is deemed other than temporary if
• Investor does not have ability and intent to hold
  for a reasonable period of time sufficient for
  recovery of fair value, and
• It is probable that the investor will be unable
  to collect all contractual amounts due

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New! EITF Consensus Effective in 2004

• Issue 03 --1 Step 2
• - Evaluate whether an impairment is other than
  temporary
• For ordinary debt securities with no credit
  problems, decrease in fair value is caused solely
  by rising interest rates. An impairment is
  deemed other than temporary unless
• Investor has ability and intent to hold for a
  reasonable period of time sufficient for recovery
  of fair value
• This conclusion raised implementation issues
  leading to FASB deferral of EITF 03-1

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New! EITF Consensus Effective in 2004

• Issue 03-1 -- Step 3
• If impairment is other than temporary,
  recognize an impairment loss equal to the
  difference between the investments cost and fair
  value

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New! EITF Consensus Effective in 2004Issue 03-1

• Disclose as of each b/s date quantitative
  information, aggregated by category of
  investment, in tabular form
• (1) The aggregate amount of unrealized losses and
• (2) The aggregate related fair value of
  investments with unrealized losses
• Segregated by investments that have been in a
  continuous unrealized loss position for less than
  12 months and those that have been in a
  continuous unrealized loss position for 12 months
  or longer.

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New! EITF Consensus Effective in 2004Issue 03-1

• Disclose information that the entity
  considered in concluding that the impairments are
  not other than temporary
• (1) The nature of the investment
• (2) The cause of the impairment
• (3) The number of investment positions that are
  in an unrealized loss position
• (4) The severity and duration of the impairment
• (5) Other evidence considered by the entity, for
  example, industry analyst reports, sector credit
  ratings, and volatility of the security's fair
  value

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New! EITF Consensus Effective in 2004Issue 03-1

• Disclose, for cost method investmentsa.
  The aggregate carrying amount of all cost method
  investmentsb. The aggregate carrying amount of
  cost method investments that the investor did not
  evaluate for impairment, andc. When applicable,
  the fact that the fair value of a cost method
  investment is not estimated

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FSPs Final

• FSP EITF 03-1-1
• Delays the effective date for the measurement and
  recognition guidance contained in paragraphs
  1020 of EITF Issue 03-1.
• Does not suspend the requirement to recognize
  other-than-temporary impairments as required by
  existing authoritative literature.
• The disclosure guidance in paragraphs 21 and 22
  of Issue 03-1 remains effective

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FSPs Proposed

• FSP EITF Issue 03-1
• Addresses the application of EITF 03-1 to debt
  securities that are impaired solely due to
  interest-rate and/or sector-spread increases
• Proposed conclusions
• An entity should assert its intent and ability to
  hold an investment until a forecasted recovery at
  the individual security level
• An entity can consider a minor impairment caused
  by interest rate and/or sector spread increases
  temporary and would not need to assert its
  ability and intent to hold an investment until a
  forecasted recovery
• An impairment is considered OTT when the entitys
  assertion to hold an investment to a forecasted
  recovery changes
• There are circumstances for such a change in
  ability or intent that would not necessarily call
  into question the entitys ability or intent to
  hold other securities to recovery

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New! EITF Consensus Effective in 2004

• Issue 03-6
• Participating Securities and the Two-Class
  Method under FASB Statement No. 128, Earnings per
  Share

The Two-Class Method
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New! EITF Consensus Effective in 2004

• Issue 03-6
• Provides guidance on the calculation and
  disclosure of EPS when a company has
  participating securities
• Answers
• What is a participating security
• How to apply the two-class method including how
  to allocate undistributed earnings to a
  participating security

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New! EITF Consensus Effective in 2004

• Issue 03-6
• Disclosure of EPS for participating securities is
  permitted but is only required for common
  securities
• A participating security is a security that may
  participate with common shareholders in
  undistributed earnings regardless of whether
  participation is conditioned on the occurrence of
  a specified event or not and regardless of the
  form of participation
• Dividends transferred to the holder in the form
  of a reduced conversion price or increased
  conversion ratio are not considered participation
  rights
• Forward contracts that contains a price
  adjustment based on dividends are considered
  participating securities

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New! EITF Consensus Effective in 2004

• Issue 03-6
• Undistributed earnings should be allocated to a
  participating security in the calculation of
  basic EPS based on the contractual rights of the
  security (if objectively determinable) as if all
  earnings were distributed, even if the issuer
  ultimately could avoid paying those dividends
• Undistributed earnings should not be allocated
  based on arbitrary assumptions
• Losses should be allocated for EPS purposes when
  the holder is obligated to fund the losses of the
  issuing entity or when losses incurred by the
  issuing entity have reduced the principal amount
  of the participating security

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New! EITF Consensus Effective in 2004

• Issue 03-6
• Nullifies Topic D-95, Effect of Participating
  Convertible Securities on the Computation of
  Basic Earnings per Share
• Effective in periods beginning after March 31,
  2004
• Should be applied by restating previously
  reported EPS

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New! EITF Consensus Effective in 2004

• Issue 03-16
• Accounting for Investments in Limited Liability
  Companies

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New! EITF Consensus Effective in 2004

• Issue 03-16
• Investments in LLCs that have separate ownership
  accounts for each investor should be accounted
  for like investments in partnerships
• Effective for periods beginning after
  June 15, 2004
• Report the change as the cumulative effect
  of a change in accounting

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New! EITF Consensus Effective in 2004

• Issue 04-1
• Accounting for Pre-Existing Contracts between
  the Parties to a Purchase Business Combination

New York City Court House
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New! EITF Consensus Effective in 2004

• Issue 04-1
• Consummation of a business combination between
  two parties that have a preexisting relationship
  is a multiple element transaction
• Consensus provides guidance on accounting for the
  settlement of the preexisting relationships
• Consensus should be applied to
• Executory contracts
• Reacquired rights
• Lawsuits
• Disclose the
• Nature of the preexisting relationship
• FV of the acquired entitys assets and
  liabilities that were settled
• Amount of settlement gain or loss

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New! EITF Consensuses Effective in 2004

• Issue 04-8
• Accounting Issues Related to Certain Features of
  Contingently Convertible Debt and the Effect on
  Diluted Earnings per Share

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New! EITF Consensuses Effective in 2004

• Issue 04-8
• Co-Cos should be included in diluted EPS in all
  periods regardless of whether the contingency is
  met or whether the market price contingency is
  substantive
• Applies to convertible securities with a market
  price contingency
• Retroactive restatement of EPS is required
  unless
• The entire agreement is settled in cash before
  the consensus is first applied or
• The agreement is amended so that the entire
  agreement must be settled in cash

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New! EITF Consensuses Effective in 2004

• Issue 04-10 -Determining Whether to Aggregate
  Operating Segments That Do Not Meet the
  Quantitative Thresholds
• A company can aggregate operating segments that
  do not meet the quantitative thresholds to
  produce a reportable segment if
• Aggregation is consistent with the basic
  principles of Statement 131
• The segments have similar economic
  characteristics
• The segments share a majority of the following
  criteria
• Products and services
• Production processes
• Type of customer
• Distribution methods
• Regulatory environment

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Waiting in the Wings

• Emerging Issues
• Clients may be affected by other accounting
  subjects now being discussed by the FASB and the
  EITF. Watch for breaking news on the following
  issues.

Emerging Accounting Issues
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EITF Issues Under Consideration

• Issue 03-13
• Applying the Conditions in Para. 42 of FASB
  Statement 144 in Determining Whether to Report
  Discontinued Operations

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EITF Issues Under Consideration

• Issue 03-13
• Which cash flows of the discontinued component
  should be considered in the determination of
  paragraph 42(a)
• What types of continuing involvement constitute
  significant continuing involvement under
  paragraph 42(b)
• What is the appropriate period for
  
  reassessing whether the conditions
  of
  paragraph 42 are met

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EITF Issues Under Consideration
Issue 04-5, Investor's Accounting for an
Investment in a Limited Partnership When the
Investor Is the Sole General Partner and the
Limited Partners Have Certain Rights Issue
04-7, Determining Whether an Interest Is a
Variable Interest in a Variable Interest Entity
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Mining and Oil and Gas Industries

• FSP FAS 141-1 FAS 142-1-- Mineral rights are
  tangible, not intangible, assets
• FSP FAS 142-2 -- Oil and gas mineral and drilling
  rights are governed by Statement 19, not
  Statement 142
• EITF Issue 04-2 -- Mineral rights are tangible,
  not intangible, assets
• EITF Issue 04-3 -- Mining Assets Impairment and
  Business Combinations
• Pending EITF Issue 04-6 -- Mining costs

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Questions and Answers