FASB Update; FEI Comment Letter Filed; New Articles on Fair Value

Below are highlights from this week's FASB board meeting. Noted further below is a comment letter filed by FEI's Committee on Benefits Finance and Committee on Corporate Reporting on FASB's proposed FSP 132(R)-a, Employers’ Disclosures about Pensions and Other Postretirement Benefits. We also provide links to some recent publications from FASB and the AICPA Journal of Accountancy (JofA) on the topic of fair value reporting.

FASB Finalizing FSP on Share-Based Payments as Participating Securities
At its May 7 board meeting, FASB redeliberated certain decisions and agreed to move to a ballot draft to finalize FSP EITF 03-6-a, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.”

Staff noted that comments were received from constituents following decisions reached at the board’s March 5 meeting, in which commenters stated that share-based payment awards not expected to vest should not be considered participating securities and, as a result, should not be included in the calculation of earnings per share (EPS) under the two-class method. To address these comments, the board agreed to new wording shown under “issue 1 – staff recommendation’ on page 27 of the board handout.

Additionally, the board agreed that the final FSP should be issued with a current effective date, for example, effective for the first fiscal year after the final FSP is posted to the FASB website. There was some discussion about whether to tie the effective date to the anticipated proposed EPS Convergence Standard to minimize the number of retrospective applications of new EPS standards, but the board agreed with the staff’s recommendation (shown as “View C” in the board handout) to have the earliest effective date possible (as of the beginning of the first fiscal year after issuance of the FSP).

FASB Discusses Definition of Liabilities in Conceptual Framework (CF)
Also at the May 7 board meeting, FASB discussed the definition of liabilities in its joint conceptual framework (CF) project with the IASB, and agreed that “the existence of a present economic obligation distinguishes a liability from merely a business risk.” (The term ‘merely’ was added to the staff’s recommended wording in the board handout.)

Generally, the board agreed to retain the term ‘stand-ready obligation’ (although some members asked if another term like 'performance obligation' could be used) and agreed it can be applied to noncontractual situations. The board also generally agreed with the staff’s recommendation (shown in paragraph 13 in the board handout) that two things denote when a present obligation exists: (a) the capability of cash outflows (one board member suggested inserting ‘net’ cash outflows) and (b) a mechanism to enforce the economic obligation. However, some board members noted they were not comfortable with the principle when applied to examples they were shown. The board also engaged in a lengthy discussion about conditional and unconditional obligations and enforceability, and the need for clear communication in the conceptual framework on these points.

FEI Responds To FASB Proposal On Pension, Post-Retirement Benefit Disclosures

Earlier this week, a joint comment letter was filed by FEI’s Committee on Benefits Finance (CBF) and Committee on Corporate Reporting (CCR) on Proposed FASB Staff Position (FSP) No. 132(R)-a, Employers’ Disclosures about Pensions and Other Postretirement Benefits. The letter, co-signed by Elliott Friedman, CBF chair, and Arnold Hanish, CCR chair, stated support for FASB’s objective to improve disclosures, but noted, “we are not aware of a demand from either the investment community or other financial statement users for the expanded disclosures required by the [proposed] FSP.” Additionally, the FEI letter noted certain practical and conceptual issues with the proposed FSP that should be addressed if FASB decides to finalize the FSP. Read the comment letter for full details. Fair Value Reporting Discussed in New FASB Publication, AICPA JofA Article

FASB also posted a new article on May 7, “Understanding the Issues: Some Facts About Fair Value.” The publication was authored by FASB Chairman Robert Herz and FASB Director Linda A. MacDonald.

Additional points of view on this topic are provided in the "In My Opinion" section in the May 2008 edition of the AICPA's Journal of Accountancy. The article, “The Role of Fair Value Accounting in the Subprime Meltdown,” includes views from attorney Michael Young of Willkie, Farr and Gallagher, University of Colorado Professor Paul B.W. Miller, and Eugene H. Flegm, retired director of accounting, assistant comptroller-chief ­accountant, and Auditor General of General Motors Corp. Young's commentary "Both Sides Make Good Points" takes somewhat of a middle-ground view between Miller and Flegm, much as his earlier commentary to us in our Q&A with Michael Young on this subject.

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