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FASB & EITF UPDATE Financial Reporting Update October 21, 2004

FASB & EITF UPDATE Financial Reporting Update October 21, 2004. Ben Neuhausen BDO Seidman, LLP. Overview. FASB Projects FASB Staff Positions EITF Update Mining and Oil and Gas Industries Questions and Answers. FASB Projects. FASB Projects – 2004 or Early 2005.

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FASB & EITF UPDATE Financial Reporting Update October 21, 2004

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  1. FASB & EITF UPDATEFinancial Reporting UpdateOctober 21, 2004 Ben Neuhausen BDO Seidman, LLP

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

  3. FASB Projects

  4. 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

  5. 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

  6. 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

  7. 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

  8. FASB Staff Positions

  9. 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 employer’s 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

  10. 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

  11. 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)

  12. EITF Update SELECTED EITF ISSUES DISCUSSED or EFFECTIVE 2004

  13. 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

  14. 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

  15. 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 entity’s common stock Subordination Risks and rewards of ownership Obligation to transfer value Effective for periods beginning after 9/15/04 Significant Influence – No vote

  16. 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

  17. 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

  18. 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

  19. 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 investment’s cost fair value

  20. 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)

  21. 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 investment’s carrying amount is recoverable within a reasonable period of time outweighs negative evidence to contrary

  22. 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

  23. 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

  24. 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 investment’s cost and fair value

  25. 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.

  26. 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

  27. New! EITF Consensus Effective in 2004Issue 03-1 Disclose, for cost method investments:a. 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

  28. FSPs – Final FSP EITF 03-1-1 • Delays the effective date for the measurement and recognition guidance contained in paragraphs 10–20 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

  29. 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 entity’s 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 entity’s ability or intent to hold other securities to recovery

  30. 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

  31. 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

  32. 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

  33. 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

  34. 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

  35. New! EITF Consensus Effective in 2004 Issue 03-16 “Accounting for Investments in Limited Liability Companies”

  36. 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

  37. 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

  38. 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 entity’s assets and liabilities that were settled • Amount of settlement gain or loss

  39. 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”

  40. 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

  41. 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

  42. 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

  43. EITF Issues Under Consideration Issue 03-13 Applying the Conditions in Para. 42 of FASB Statement 144in Determining Whether to Report Discontinued Operations

  44. 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

  45. 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

  46. 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

  47. Questions and Answers

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