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FASB
Developments |
Emerging Issues Task
Force (EITF)
Description and Status
of Current Issues
Since June of 2002, the
Task Force has met six times and discussed or plans to discuss the following Issues
described below. Background materials (issue summaries, minutes, comment
letters, etc.) for all EITF Issues (since inception in 1984) are available on
an individual basis (order by Issue number) from the FASB Order Department at
203-847-0700, extension 10. Minutes of each EITF meeting are also available
separately (order by meeting date). If the Status of an Issue is that A
consensus was reached (that is, when no more than three of the voting
members present object to a proposed position), the minutes of the meeting at
which that Issue was Last discussed will also provide the final
consensus position for the Issue (beginning with the January 23, 2003
meeting, consensuses are subject to the approval of the FASB at a public
Board meeting held prior to the distribution of the final minutes); however,
in some cases the meeting at which the Issue was Last discussed will
not include the final consensus if the Status indicates that the consensus
has been revised or modified at a subsequent meeting (in those cases, order
background materials for the particular Issue or order multiple meeting
minutes). The cost for the background material (which includes the minutes
for that Issue) varies with each Issue (however, there is a $5.00 minimum per
order), and the cost of separately ordered minutes of any particular meeting
is $5.00. [98-4] [00-18] [00-20] [00-21] [00-22] [00-24] [00-26] [00-27] [01-4] [01-8] [01-11] [02-1] [02-2] [02-3] [02-9] [02-10] [02-11] [02-12] [02-13] [02-14] [02-15] [02-16] [02-17] [02-18] [03-1] [03-2] [03-3] [03-4] [03-5] [03-6] [03-7] [03-8] [03-9] [03-10] [03-11] [99-V] [00-N] [01-J] [02-D] [02-G] [02-J] [03-F] [03-K] [03-L] [00-x1] [00-x2] [00-x3] [00-x4] Issue No. 98-4,
"Accounting by a Joint Venture for Businesses Received at Its
Formation." Current practice generally has been to report the assets
that a business contributes to a joint venture at historical cost unless
certain conditions are met. APB Opinion No. 18, The Equity Method of
Accounting for Investments in Common Stock, describes the characteristics
of a "corporate joint venture." The issue is if two or more parties
contribute businesses to a newly formed entity, whether the characteristics
from Opinion 18, or some other characteristics, must exist in order for the
entity to qualify for historical cost accounting. Transactions that are
considered business combinations would require acquisition accounting. Issue No. 00-18,
"Accounting Recognition for Certain Transactions involving Equity
Instruments Granted to Other Than Employees." EITF Issue No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or
Services," addresses the measurement date from the standpoint of the
entity granting equity instruments (the grantor). EITF Issue No. 00-8,
"Accounting by a Grantee for an Equity Instrument to Be Received in
Conjunction with Providing Goods or Services," addresses the measurement
date from the standpoint of the entity providing goods or services (the
grantee). The issues are (a) the grantor's accounting for a contingent obligation
to issue equity instruments (subject to vesting requirements) when a grantee
performance commitment exists but the equity instrument has not yet been
issued, (b) the grantee's accounting for the contingent right to receive an
equity instrument when a grantee performance commitment exists prior to the
receipt (vesting) of the equity instrument, and (c) for equity instruments
that are fully vested and nonforfeitable on the date the parties enter into
an agreement, the manner in which the issuer should recognize the fair value
of the equity instruments. Issue No. 00-20,
"Accounting for Costs Incurred to Acquire or Originate Information for
Database Content and Other Collections of Information." Some companies
derive revenues from making databases and other collections of information
available to users. Those collections of information may be made available
electronically or otherwise. The Issue is how the costs of developing or
acquiring those collections of information should be accounted for (that is,
capitalized and amortized or charged to expense as incurred). Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables." Many companies
offer complete solutions to their customers' needs. Those solutions may
involve the delivery or performance of multiple products, services, and/or
rights to use assets, and performance may occur at different points in time
or over different periods of time. The arrangements are often accompanied by
initial installation, initiation, or activation services and generally
involve either a fixed fee or a fixed fee coupled with a continuing payment
stream. The continuing payment stream generally corresponds to the continuing
performance and may be fixed, variable based on future performance, or
composed of a combination of fixed and variable payments. The issue is how to
account for those arrangements. [Updated
Information] The
consensus was reached, however, with the proviso that certain clarifications
be made with respect to the scope provisions in paragraph 4(a) of that Issue.
At the Issue No. 00-22,
"Accounting for 'Points' and Certain Other Time-Based or Volume-Based
Sales Incentive Offers, and Offers for Free Products or Services to Be
Delivered in the Future." There is a growing number of "point"
and other loyalty programs being developed in Internet businesses, in
addition to similar programs in the airline and hotel industries. There are
companies whose business models involve building a membership list through
this kind of program. In some cases, the program operator may sell points to
its business partners, who then issue those points to their customers based
on purchases or other actions. In other cases, the program operator awards
the points in order to encourage its members to take actions that will
generate payments from business partners to the program operator. The Issue
is how point and other loyalty programs should be accounted for. The Issue is
scoped broadly to include all industries that utilize point or other loyalty
programs, including the airline and hospitality industries. Issue No. 00-24, "Revenue
Recognition: Sales Arrangements That Include Specified-Price Trade-in
Rights." When a manufacturer sells large scale equipment, such as
aircraft, the manufacturer often gives the customer the right to trade in the
equipment at a fixed trade-in price toward the purchase of a new piece of
equipment from the manufacturer. The trade-in right is solely at the
customer's option and is effective only if the customer trades in toward the
purchase of new equipment. The issue is how the manufacturer should recognize
the original sale to the customer. Issue No. 00-26,
"Recognition by a Seller of Losses on Firmly Committed Executory
Contracts." The Agenda Committee observed that when Issue 99-14 was
initially discussed by the Task Force, the Issue addressed the accounting by
a purchaser under a firmly committed executory contract. However, the
discussion of Issue 99-14 at the Issue No. 00-27,
"Application of EITF Issue No. 98-5, 'Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios,' to Certain Convertible Instruments." Issue 98-5
addresses the accounting for convertible securities with a nondetachable
conversion feature that is in-the-money at the commitment date. That Issue
also addresses certain convertible securities that have a conversion price
that is variable based on future events. Subsequent to the final consensus, a
number of practical issues regarding the application of the guidance in Issue
98-5 have been raised. Issue No. 01-4,
"Accounting for Sales of Fractional Interests in Equipment."
Certain types of equipment, particularly corporate/private airplanes and
occasionally helicopters, yachts, and automobiles, are sometimes sold under
fractional interest programs. Along with the purchase of the fractional
interest (which is usually sold at a price equal to the fair value of the
equipment multiplied by the fractional interest), most fractional interest programs
require the fractional interest holder to enter into a management agreement
with the seller under which the seller manages, operates, and maintains the
equipment on behalf of the fractional interest holder for a pre-determined
period of time. The issue is when to recognize and how to measure revenue
from sales of fractional interests in equipment. Issue No. 01-8,
"Determining Whether an Arrangement Contains a Lease." Paragraph 1
of FASB Statement No. 13, Accounting for Leases, defines a lease as
"an agreement conveying the right to use property, plant, or equipment
(land and/or depreciable assets) usually for a stated period of time."
It goes on to state that agreements that transfer the right to use property,
plant, or equipment meet the definition of a lease even though substantial
services by the contractor (lessor) may be called for in connection with the
operation or maintenance of such assets. There are divergent views and
practices as to how to identify a lease in an arrangement that also provides
for delivery of other goods or services by the seller (lessor). This Issue
was originally raised by the Task Force during its deliberations on the
accounting for energy trading activities. However, the issue of whether an
arrangement contains a lease is not unique to energy-related contracts. The
same issue may arise in outsourcing arrangements, such as the outsourcing of
the data processing functions of an enterprise (it may be a significant
element, particularly in those arrangements that require a substantial
investment in computer hardware and terminals devoted solely to the use of a
single customer); in the telecommunications industry where providers of
network capacity (primarily in the form of conduit, fiber optic cables, and
related equipment) often grant rights to capacity on the basis of an
indefeasible right of use; and in some take-or-pay contracts involving
certain commodities. The Issue is how to determine whether an arrangement
contains a lease that is within the scope of Statement 13. Issue No. 01-11, "Application
of EITF Issue No. 00-19, 'Accounting for Derivative Financial Instruments
Indexed to, and Potentially Settled in, a Company's Own Stock,' to a
Contemporaneous Forward Purchase Contract and Written Put Option."
Companies may contemporaneously enter into multiple contracts under Issue
00-19. Assume that a combined contract with economic characteristics that are
substantially the same as the characteristics of the separate contracts would
not meet the conditions for permanent equity classification in Issue 00-19.
One such structure occurs when a company enters into a forward equity
purchase contract on its own common stock and contemporaneously with the
issuance of that forward equity purchase contract, but in a separate
agreement with the same counterparty, enters into a written put option on its
own common stock with a strike price equal to the "changeover
price." The issue is whether the company should account for the two
contracts separately or whether the contracts should be combined for accounting
purposes. Issue 02-1, "Balance
Sheet Classification of Assets Received in Exchange for Equity
Instruments." An evaluation of the consensuses in EITF Issues No. 85-1,
"Classifying Notes Received for Capital Stock," and No. 00-18,
"Accounting Recognition for Certain Transactions Involving Equity
Instruments Granted to Other Than Employees," reveals that they differ
regarding whether the type of asset received in exchange for fully vested,
nonforfeitable equity instruments should affect whether the asset is
displayed in the balance sheet as an asset or as contra-equity. The FASB
recommends that the Issues be codified to clarify the scope of Issue 85-1 and
to change the consensus to make it more consistent with the guidance in Issue
1(a) of Issue 00-18. The Task Force will also consider the effect of EITF
Abstracts, Topic No. D-90, "Grantor Balance Sheet Presentation of
Unvested, Forfeitable Equity Instruments Granted to a Nonemployee." This
Issue addresses (a) whether a grantor of fully vested, nonforfeitable equity
instruments should classify assets received in exchange for those equity
instruments as contra-equity in its balance sheet and (b) grantor balance
sheet classification of unvested, forfeitable equity instruments issued. The
scope of this Issue is limited to transactions in which equity instruments
are granted to other than employees. Issue No. 02-2,
"When Certain Separate Contracts That Meet the Definition of Financial
Instruments Should Be Combined for Accounting Purposes." Companies may,
for various reasons, contemporaneously enter into multiple contracts that
individually meet the definition of a financial instrument in paragraph 540
of FASB Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities. The financial reporting impact of recording those
contracts separately may be different from the financial reporting impact of
recording those contracts on a combined basis. The issue is how to determine
when separate contracts that meet the definition of financial instruments
should be combined for accounting purposes. Issue 02-3, "Issues
Related to Accounting for Contracts Involved in Energy Trading and Risk
Management Activities." EITF Issues No. 98-10, "Accounting for
Contracts Involved in Energy Trading and Risk Management Activities,"
and No. 00-17, "Measuring the Fair Value of Energy-Related Contracts in
Applying Issue No. 98-10," and EITF Abstracts, Topic No. D-105,
"Accounting in Consolidation for Energy Trading Contracts between
Affiliated Entities When the Activities of One but Not Both Affiliates Are
within the Scope of Issue No. 98-10," address various aspects of the
accounting for contracts involved in energy trading and risk management
activities. The purpose of this Issue is to codify and reconcile the Task
Force consensuses on those Issues, and identify other related interpretive
issues that have not yet been addressed by the Task Force. Issue No. 02-9,
"Accounting for Changes That Result in a Transferor Regaining Control of
Financial Assets Sold." Paragraph 55 of Statement 140 requires a
transferor to recognize in its financial statements assets previously accounted
for appropriately as having been sold when one or more of the conditions in
paragraph 9 (regarding control of the assets) are no longer met. The
transferor recognizes those assets together with liabilities to the former
transferee(s) or BIHs in those assets and initially measures the assets and
liabilities at fair value on the date of the change, as if the transferor
purchased them on that date. The issue is how to apply the accounting
requirements of paragraph 55 with respect to beneficial interests held by the
transferor and loans that do not meet the definition of security,
including whether the transferor should recognize a gain or loss when
paragraph 55 is applied. Issue No. 02-10,
"Determining Whether a Debtor Is Legally Released as Primary Obligor
When the Debtor Becomes Secondarily Liable under the Original
Obligation." A debtor may be "released" from its obligation by
a creditor on the condition that a third party (which may be a
special-purpose entity) assumes the obligation. Those transactions are
sometimes referred to as payment undertaking arrangements (PUAs). In a PUA,
the debtor transfers to a third party assets that the creditor agrees are sufficient
to satisfy the scheduled principal and interest payments under the
obligation. The original debtor guarantees the third party's obligation to
the creditor. The issue is whether paragraph 16(b) of FASB Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, has been met for PUAs (or similar
arrangements) in which the original debtor guarantees the payment undertaking
entity's obligation to the creditor. Paragraph 16(b) of Statement 140
requires the debtor to be legally released from being the primary obligor
under the liability, either judicially or by the creditor in order to
consider a liability to be extinguished. Issue No. 02-11,
"Accounting for Reverse Spinoffs." One method of restructuring a
business is for a company to spin off certain consolidated businesses to its
shareholders. In some of these transactions, a consolidated entity splits
into two separate companies through a spinoff of a business that represented
more than half of the consolidated entity prior to the spinoff. For example,
assume Oldco distributes the stock of a subsidiary, ABC Company, to its
shareholders. As part of a planned transaction, immediately following the
spinoff, Oldco is acquired by another entity. The intent of the series of
transactions is for Oldco to dispose of all of its operations except ABC
Company. The issue is how to determine whether to account for a spinoff
transaction as a reverse spinoff based on its substance instead of its legal
form. Issue No. 02-12,
"Permitted Activities of a Qualifying Special-Purpose Entity in Issuing
Beneficial Interests under FASB Statement No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities." Paragraph 35 of Statement 140 specifies certain
restrictive conditions that must be met in order for an SPE to be considered
qualifying. Those conditions include a requirement that the SPE's permitted
activities (1) are significantly limited, (2) were entirely specified in the
legal documents that established the SPE or created the beneficial interests
in the transferred assets that it holds, and (3) may be significantly changed
only with the approval of the holders of at least a majority of the
beneficial interests held by entities other than any transferor, its
affiliates, and its agents. The issue is whether a qualifying SPE (or its
designee or agent) may determine the terms of beneficial interests issued to
third parties after inception of the qualifying SPE either prior to or after
the derecognition by the transferor of the assets that the beneficial
interests represent. Issue No. 02-13,
"Deferred Income Tax Considerations in Applying the Goodwill Impairment
Test in FASB Statement No. 142, Goodwill and Other Intangible Assets."
Under Statement 142, goodwill must be tested for impairment at the reporting
unit level at least annually. That goodwill impairment test involves two
steps. Step 1 is a screen for potential impairment that compares a reporting
unit’s fair value with its carrying value. If the reporting unit’s carrying
amount exceeds its fair value, Step 2 must be completed to measure the amount
of impairment, if any. The issues are (1) whether deferred income taxes
should be included in the carrying amount of a reporting unit for purposes of
Step 1 of the Statement 142 goodwill impairment test, (2) in determining the
implied fair value of a reporting unit’s goodwill in Step 2, what income tax
bases an entity should use for a reporting unit’s assets and liabilities
(that is, whether an entity should use the existing income tax bases or
assume new income tax bases for the unit's assets and liabilities), and (3)
when it is appropriate to estimate the fair value of a reporting unit by
assuming that the unit could be bought or sold in a non-taxable transaction
versus a taxable transaction. Issue No. 02-14,
"Whether the Equity Method of Accounting Applies When an Investor Does
Not Have an Investment in Voting Stock of an Investee but Exercises
Significant Influence through Other Means." Companies sometimes acquire
the right to significantly influence the operations of another entity and/or
share in a substantial portion of the economic risks and rewards of another
entity without owning a voting interest in that entity. Often, under such
arrangements, an entity may have some risk of ownership with respect to
another entity without holding a voting ownership interest. The issue is
when, if ever, a company should apply the equity method of accounting if it
does not have an investment in the common stock of another entity, yet is
able to exercise significant influence over the operating activities of that
entity. Issue No. 02-15,
"Determining Whether Certain Conversions of Convertible Debt to Equity
Securities Are within the Scope of FASB Statement No. 84, Induced
Conversions of Convertible Debt." Statement 84 was issued to amend
APB Opinion No. 26, Early Extinguishment of Debt, to exclude from its
scope convertible debt that is converted to equity securities of the debtor
pursuant to changes in conversion privileges that differ from those included
in the terms of the debt at issuance, that are effective for a limited period
of time, that involve additional consideration, and that are made to induce
conversion. Statement 84 applies only to conversions that both (a) occur
pursuant to changed conversion privileges that are exercisable only for a
limited period of time and (b) include the issuance of all of the equity
securities issuable pursuant to conversion privileges included in the terms
of the debt at issuance for each debt instrument that is converted. When
convertible debt is converted to equity securities of the debtor pursuant to
an inducement offer, the debtor shall recognize an expense equal to the
excess of the fair value of all securities and other consideration
transferred in the transaction over the fair value of securities issuable
pursuant to the original conversion terms. The issue is whether Statement 84
applies when the "offer" for consideration in excess of the
original conversion terms was made by the bondholder rather than the debtor,
including (a) circumstances in which an investment bank had purchased the
bonds in the open market (at a significant discount from face value) and
approached the debtor to increase the conversion terms of the notes and (b)
circumstances in which an offer to induce conversion is not extended all
bondholders. Issue No. 02-16,
"Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor." EITF Issue No. 01-9, "Accounting
for Consideration Given by a Vendor to a Customer (Including a Reseller of
the Vendor’s Products)," requires consideration given by a vendor to a
customer to be characterized as a reduction of revenue unless certain
conditions are met. However, the customer's accounting for consideration
received from a vendor is not addressed by Issue 01-9 or other authoritative
literature. The issue is how the customer should account for consideration
received from a vendor. Issue No. 02-17,
"Recognition of Customer Relationship Intangible Assets Acquired in a
Business Combination." In accounting for a business combination,
Statement 141 requires that an acquiring entity recognize an acquired
intangible asset as an asset apart from goodwill if that asset meets either
one of the following two separate recognition criteria: (1) the intangible
asset arises from contractual or other legal rights or (2) the intangible
asset is capable of being separated or divided from the acquired entity and sold,
transferred, licensed, rented or exchanged either individually or in
combination with a related contract, asset or liability. One category of
intangible assets that is typically acquired in business combinations is
customer-related intangible assets . Paragraphs A18-A21 of Statement 141
provide certain guidance on applying the separate recognition criteria to
customer-related intangible assets including (a) order or production backlog,
(b) customer contracts and related customer relationships, and (c) noncontractual
customer relationships. Questions have arisen regarding the application of
paragraphs A19-A21 to customer relationships with respect to determining the
composition of related intangible assets. Issue No. 02-18,
"Accounting for Subsequent Investments in an Investee after Suspension
of Equity Method Loss Recognition." APB Opinion No. 18, The Equity
Method of Accounting for Investments in Common Stock, indicates in paragraph
19(i) that an "investor ordinarily should discontinue applying the
equity method when the investment (and net advances) is reduced to zero and
should not provide for additional losses unless the investor has guaranteed
obligations of the investee or is otherwise committed to provide further
financial support for the investee." The issue is how an investor should
account for a subsequent investment in an investee after the suspension of
equity method losses has occurred. Issue 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." In connection with its discussion of EITF Issue No. 02-14,
"Whether the Equity Method of Accounting Applies When an Investor Does
Not Have an Investment in Voting Stock of an Investee but Exercises
Significant Influence through Other Means," at the November 21, 2002
meeting, the Task Force discussed the meaning of other-than-temporary
impairment and its application to certain investments carried at cost. The
Task Force requested that the FASB staff consider other impairment models
within U.S. GAAP when developing its views. The Task Force also requested
that the scope of the impairment issue be expanded to include equity
investments and investments subject to FASB Statement No. 115, Accounting
for Certain Investments in Debt and Equity Securities, and that that
issue be addressed by the Task Force as a separate EITF issue. Issue 03-2,
"Accounting for the Transfer to the Japanese Government of the Substitutional
Portion of Employee Pension Fund Liabilities." In Issue No. 03-3,
"Applicability of EITF Abstracts, Topic No. D-79, 'Accounting for
Retroactive Insurance Contracts Purchased by Entities Other Than Insurance
Enterprises,' to Claims-Made Insurance Policies." A claims-made
insurance policy is one in which an entity is insured for any claims reported
during the effective period of the policy. The claims may occur after the
effective date of the policy and are reported while the policy is in force,
or they may occur prior to the effective date of the policy and are reported
while the policy is in force. EITF Abstracts, Topic No. D-79,
"Accounting for Retroactive Insurance Contracts Purchased by Entities
Other Than Insurance Enterprises," states that entities other than
insurance enterprises should account for the purchase of retroactive
insurance policies in a manner similar to the one in which reinsurance
contracts are accounted for under FASB Statement No. 113, Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts.
When a claims-made policy is purchased with its prospective and retroactive
components, the issue is whether an insured entity must apply Topic D-79 in
all cases and, thus, always use the retroactive policy method of accounting
described in Statement 113. Issue 03-4,
"Determining the Classification and Benefit Attribution Method for a
'Cash Balance' Pension Plan." Cash balance plans are similar to defined
contribution plans, however, most are hybrid arrangements with features of
both defined contribution plans and defined benefit plans. The defined
contribution features include the provision for lump sum distributions in the
future based on stipulated contributions and interest credits. The defined
benefit features include the provision of a life annuity, interest credits in
excess of what may be obtainable in the market, joint and survivor options,
and grandfathered or transitional defined benefit formulae. In addition,
contributions and trust earnings are unrelated to contribution and interest
credits. The presence of the defined benefit features, in general, makes it
impractical to account for such arrangements as defined contribution plans
because there is no way to segregate assets into defined contribution and
defined benefit components and there are prior service costs and deferred
gains or losses related to the defined benefit arrangement. In addition, most
employers have chosen to classify plans as defined benefit or defined
contribution based on the strict IRS definition that a defined contribution
plan requires specific individual account balances, a condition that is not
present in many "cash balance" arrangements. The issues are whether
a cash balance plan should be accounted for as a defined benefit plan or a
defined contribution plan, and if a cash balance plan should be accounted for
as a defined benefit plan, what the appropriate pattern of benefit accruals
is for a cash balance plan. Issue 03-5,
"Applicability of AICPA Statement of Position 97-2, Software Revenue
Recognition, to Non-Software Deliverables in an Arrangement Containing
More-Than-Incidental Software." Task Force consideration of the
interaction between EITF Issue No. 00-21, "Revenue Arrangements with
Multiple Deliverables," and higher-level literature resulted in concern
about apparent diversity in practice with respect to the application of the
provisions of AICPA Statement of Position 97-2, Software Revenue
Recognition, to arrangements containing software deliverables and
non-software deliverables (for example, computer hardware). A similar Issue
had been removed from the EITF agenda in November of 2002 (along with eight
other revenue recognition issues) in light of the Board's project on revenue
recognition. This Issue will consider the narrower issue of whether the
provisions of SOP 97-2—particularly the VSOE requirements—apply to (a) all
deliverables in an arrangement containing more-than-incidental software or
(b) only software elements (as defined in SOP 97-2). The Issue is whether
non-software deliverables included in an arrangement that contains software
that is more than incidental to the products or services as a whole are
included within the scope of SOP 97-2. Issue No. 03-6,
"Participating Securities and the Two-Class Method under FASB Statement
No. 128, Earnings per Share." Statement 128 indicates that
participating securities should be included in basic earnings per share
(EPS), if the effect is dilutive, using either the two-class method or the
if-converted method. Paragraph 60 of Statement 128 more fully describes
participating securities through certain broad examples. Some convertible
debt instruments have been issued with features that result in those
securities being considered participating. For example, a convertible debt
instrument that entitles the holder to participate in all dividends declared
on common stock would result in that security being considered a
participating security. However, some convertible debt instruments have been
issued with certain other features and it is uncertain based on the
characteristics described in Statement 128 whether those securities should be
considered to be participating securities. The issue is how to determine
whether a security should be considered a "participating security"
for purposes of computing EPS and how earnings should be allocated to a
participating security when using the two-class method for computing basic
EPS. Issue No. 03-7,
"Accounting for the Settlement of the Equity-Settled Portion of a
Convertible Debt Instrument That Permits or Requires the Conversion Spread to
Be Settled in Stock (Instrument C of Issue 90-19)." The Task Force
revised the consensus in EITF Issue No. 90-19, "Convertible Bonds with
Issuer Option to Settle for Cash upon Conversion," regarding the
accounting for Instrument C. The revision was agreed to so as to reflect the
effect of the consensus guidance in EITF Issue No. 00-19, "Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in,
a Company's Own Stock." Instrument C is described in Issue 90-19 as a
debt instrument that is convertible into a fixed number of common shares.
Upon conversion, the issuer must satisfy the accreted value of the obligation
in cash and may satisfy the conversion spread in either cash or stock. The
issue is how the issuer should account for the partial cash-based and partial
stock-based settlement of a debt instrument structured in the form of
Instrument C as described in Issue 90-19. Note that any guidance developed in
this Issue could be temporary pending the completion of Phase Two of the
FASB's Liabilities and Equity project which is expected to address the issue
of bifurcation of instruments containing both debt and equity features.
Issue No. 03-9,
"Evaluating the Criteria in Paragraph 11(d) of FASB Statement No. 142, Goodwill
and Other Intangible Assets, Regarding Renewal or Extension When
Determining the Useful Life of an Intangible Asset." Paragraph 11 of
FASB Statement 142 provides that the estimate of the useful life of an
intangible asset to an entity shall be based on an analysis of all pertinent
factors. When analyzing the pertinent factors contained in sub-paragraph
11(d) for determining the useful life of an intangible asset, the issues to
be considered are: The expenditures that should be considered to be a
"cost" of the renewal or extension, and the "existing terms
and conditions" that are subject to the "material modifications"
considerations. In particular, if the rights of a counterparty (such as a
regulatory body) enable it to impose a substantial cost in connection with a
renewal or extension, whether the useful life is limited to the contractual
term, and, if the counterparty must consent to the renewal or extension such
that material modifications could occur, whether the useful life is limited
to the contractual term. When evaluating the expectation of future contract
renewals for purposes of estimating the fair value of customer relationship
intangible assets, the issue is whether the guidance in sub-paragraph 11(d)
of Statement 142 should be considered. Issue No. 03-10,
"Application of EITF Issue No. 02-16, 'Accounting by a Customer
(Including a Reseller) for Certain Consideration Received from a Vendor,' by
Resellers to Sales Incentives Offered to Consumers by Manufacturers."
Under Issue 1 of Issue 02-16, cash consideration received by a customer from
a vendor is presumed to be a price reduction of the vendor's products or
services and should therefore be characterized as a reduction of cost of
sales when recognized in the income statement of the customer. That
presumption may be overcome if the cash received represents (1) a payment for
assets or services delivered to the vendor (in which case the cash received
would be characterized as revenue) or (2) a reimbursement of a specific,
incremental, identifiable cost incurred by the customer in selling the
vendor's products or services (in which case the cash would be characterized
as a reduction of that cost). The issue is whether consideration received by
a reseller in the form of a reimbursement by the vendor for honoring the
vendor's sales incentives offered directly to consumers (for example,
coupons) should be recorded as revenue or as a reduction of the cost of the
reseller's purchases from the vendor under the guidance in Issue 02-16. The
Issue will also consider whether any aspects of EITF Issue No. 01-9,
"Accounting for Consideration Given by a Vendor to a Customer (Including
a Reseller of the Vendor's Products)," will be affected. Issue No. 03-11,
"Reporting Gains and Losses on Derivative Instruments That Are Subject
to FASB Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities, and Not Held for Trading Purposes." In Issue
02-3, the Task Force reached a consensus to rescind Issue 98-10. In doing so,
however, they reached a consensus that all gains and losses (realized and
unrealized) on derivative instruments within the scope of Statement 133
should be shown net in the income statement, whether or not settled
physically, if the derivative instruments are held for trading purposes.
However, there may be contracts within the scope of Statement 133, not held
for trading purposes, that warrant further consideration as to the
appropriate income statement classification of the gains and losses. Although
a derivative instrument may be physically settled (settled by delivering or
receiving the underlying to the contract) and may qualify for
"gross" reporting pursuant to Issue 99-19, a question arises as to
whether the revenues and costs of sales should be reported on a gross basis
or netted in the income statement. The issue is when, if ever, gains and losses
on derivative contracts not held for trading purposes should be reported on a
net basis. Issue No. 00-N,
"Measuring Fair Value of Equity Securities with Restrictions in a
Nonmonetary Exchange." A company may receive equity securities in a
nonmonetary exchange that must be accounted for at fair value (for example,
an exchange of equity securities subject to EITF Issue No. 91-5,
"Nonmonetary Exchange of Cost-Method Investments." While similar
equity securities may be publicly traded, the securities received by a
company may be subject to restrictions on their subsequent resale. The issue
is how to measure the fair value of those restricted securities (that is, how
to measure the discount from the fair value of the similar publicly traded
securities). Issue No. 01-J,
"Accounting for the Deconsolidation of a Majority-Owned
Subsidiary." Paragraph 2 of FASB Statement No. 94, Consolidation of
All Majority-Owned Subsidiaries, states that "the usual condition
for a controlling financial interest is ownership of a majority voting
interest, and, therefore, as a general rule ownership by one company,
directly or indirectly, of over fifty percent of the outstanding voting shares
of another company is a condition pointing toward consolidation." The
issue is whether a company that surrenders voting control of a majority-owned
subsidiary but retains a majority of the risks and rewards of ownership
should deconsolidate that subsidiary. Issue No. 02-D, "The
Effect of Dual-Indexation both to a Company's Own Stock and to Interest Rates
and the Company's Credit Risk in Evaluating the Exception under Paragraph
11(a)(1) of FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities." Paragraph 11(a) of Statement 133 provides
that contracts issued or held by a reporting entity that are both (1) indexed
to its own stock, and (2) classified in stockholders' equity in its statement
of financial position are not derivatives for purposes of applying Statement
133. EITF Issue No. 01-6, "The Meaning of 'Indexed to a Company's Own
Stock,'" addressed a number of common contractual provisions in which it
was not clear whether the instrument met the condition of paragraph 11(a)(1)
of Statement 133. However, some believe the guidance in that Issue does not
apply with respect to dual-indexation to a company's own stock and interest
rates/credit risk given the provisions of Statement 133 with respect to
convertible debt. The issue is whether instruments, other than convertible
debt, that are indexed both to a company's own stock and to interest rates
and the company's credit risk meet the condition in paragraph 11(a)(1) of FAS
133. Issue No. 02-G, "Recognition
of Revenue from Licensing Arrangements on Intellectual Property."
Licensing arrangements can take many forms, such as arrangements with a
specific term or those with an unlimited term. The accounting for licensing
arrangements varies in practice. Some may view the licensing of intellectual
property as indistinguishable from a lease of a physical asset in which the
total arrangement fee should be recognized over the contract term, while
others may view such licensing arrangements as indistinguishable from the
licensing of software or motion picture rights in which revenue is recognized
once the license has been conveyed and the seller has no further obligations.
The latter group believes their approach is fully consistent with the
guidance in AICPA Statements of Position 97-2, Software Revenue
Recognition, and 00-2, Accounting by Producers or Distributors of
Films. The issue is when to recognize revenue from licensing arrangements
on intellectual property. Issue No. 02-J,
"Interpretation of an 'Unconstrained Right to Pledge or Exchange'
Transferred Assets in a Collateralized Bond Obligation." Collateralized
bond obligations (CBOs) are securitizations of high-yield debt, bank loan participations,
or similar financial assets. The CBO issuing vehicle is a special-purpose
entity (SPE), typically a corporation domiciled (for security law and tax
reasons) in the Cayman Islands. The SPE is not a qualifying SPE (QSPE)
because the conditions under which it can sell assets violate the provisions
of EITF Abstracts, Topic No. D-66, "Effect of a Special-Purpose
Entity's Powers to Sell, Repledge, or Distribute Transferred Financial Assets
under FASB Statement No. 125." The SPE has, at all times, the discretion
to hold or sell defaulted assets or assets deemed to be "credit
risk" or "credit improved" assets. The SPE also can sell up to
between 20 percent and 30 percent annually of the aggregate principal balance
of collateral (as of the beginning of each year) (known in the industry as
the "free trade basket") during the reinvestment period. The free
trade basket is in addition to the SPE's ability to trade defaulted credit
risk and credit improved securities so that if the collateral manager decided
that 50 percent of the SPE's assets were "credit improved," the
collateral manager would be able to trade 70 percent of the SPE's assets
(assuming a 20 percent free trade basket) in that year. Paragraph 9(b) of
Statement 140 provides that with respect to a transferee that is not a QSPE,
no condition both constrains the transferee (or holder) from taking advantage
of right to pledge or exchange the transferred assets and provides more than
a trivial benefit to the transferor. If the constraint is not imposed by the
transferor, as would be the case in a typical CBO structure, then that
constraint may or may not provide more than a trivial benefit to the
transferor. The issue is whether the "free trade basket" violates
paragraph 9(b) of Statement 140 and therefore precludes sale treatment by the
transferor. Issue No. 03-F,
"Accounting Treatment of Emission Allowances Administered under the U.K.
Emissions Trading Scheme." The U.K. Emissions Trading Scheme (U.K. Scheme)
has been introduced by the U.K. Government as a market mechanism designed to
achieve Kyoto Protocol CO2 reductions. Direct Participants in the U.K. Scheme
are eligible for an Incentive Payment (Incentive Payment) at the end of each
year of the U.K. Scheme. A Direct Participant can receive its yearly
Incentive Payment if its emissions are below yearly Baseline targets
(Baseline) set by the U.K. Government. The Incentive Payment is divided into
equal yearly tranches. If the Direct Participant emits less than its Baseline
for any given year, it receives the full yearly amount. If the Direct
Participant emits above the Baseline in a given year, it does not receive an
Incentive Payment in that year. Baseline targets for each year have been set
through a competitive bidding process, where the Direct Participants agreed
to a specific decrease in emissions as compared with the actual emissions in
a period. Each Direct Participant is provided with tradeable CO2 Allowances
("Allowances") for the upcoming year equal to the determined
Baseline for that Direct Participant. At the end of each year, each Direct
Participant must transfer Allowances to the ETA equal to the volume of its
CO2 emissions equivalent for that year. If the Direct Participant emits less
than the Baseline, it will have surplus Allowances that can be either carried
forward or sold into the market for Allowances. A Direct Participant can buy
or sell Allowances at any point in time but must have sufficient allowances
at the end of the year to support its transfer of credits to the ETA. The
issue is whether those Allowances (or allowances under similar programs in
other countries) are derivatives within the scope of FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities. Issue No. 03-K,
"Applying the Conditions in Paragraph 42 of FASB Statement No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, in Determining
Whether to Report Discontinued Operations." A number of issues have
arisen in practice in applying the criteria in paragraph 42, and the
following broad categories of issues related to the application of both
criteria in that paragraph have been identified: (a) whether the intent of
the paragraph is that all operations and cash flows of the disposal component
be eliminated from the ongoing operations of the entity or whether some minor
level of operations or cash flows may remain; (b) if some insignificant level
of operations or cash flows of the disposal component can continue without
precluding discontinued operations reporting, the level at which
"significance" should be measured; and (c) in applying the
paragraph, the factors to consider in determining whether the selling entity
has retained "significant continuing involvement" in the disposal
component based on the structure of the disposal transaction. Issue No. 03-L,
"Subsequent Accounting for Executory Contracts Recorded on an Entity's
Balance Sheet." When an acquiring enterprise acquires energy contracts
in a purchase business combination that meet the normal purchase and sales
criteria described in paragraph 10 of FASB Statement No. 133, Accounting
for Derivative Instruments and Hedging Activities, as amended by FASB
Statement No. 138, Accounting for Certain Derivative Instruments and
Certain Hedging Activities, and interpreted by various DIG conclusions,
questions arise as to the appropriate amortization methodology with respect
to the asset or liability recorded at fair value at the date of acquisition.
The scope of the Issue will be limited to the subsequent accounting for
energy contracts that have been recognized on a company's balance sheet and
will not address the initial recognition or measurement of those contracts.
The Issue will address all situations in which energy contracts may be
recognized on a company's balance sheet not just those related to purchase
business combinations. Issue No. 99-V,
"Remaining Issues from the SEC's October 18, 1999 Letter to the
EITF." At the November 17-18, 1999 EITF meeting, Task Force members
agreed that the issues identified in the SEC's October 18, 1999 letter to the
Task Force should be addressed by the Task Force. This Issue is a place
holder for those issues that have not specifically been given an EITF Issue
number. Issue No. 00-x1,
"Accounting for the Costs of Computer Files That Are Essentially Films,
Music, or Other Content." A description for this Issue is not available
at this time. Issue No. 00-x2,
"Accounting for Front-End and Back-End Fees." A description for
this Issue is not available at this time. Issue No. 00-x3,
"Accounting for Access, Maintenance, and Publication Fees." A
description for this Issue is not available at this time. Issue No. 00-x4,
"Accounting for Advertising or Other Arrangements Where the Service
Provider Guarantees a Specified Amount of Activity." A description for
this Issue is not available at this time. |
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Copyright © 1999 - 2009 Regalia & Associates |
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