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What’s going on at the FASBSpring 2003

Prepared for the Southern Gas Association Executive Conference on April 28, 2002. Robert E. Jensen, Trinity University, San Antonio, TX 78212

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Topics Selected for Discussion• Who is the FASB?

– Our Mission– Impact of Sarbanes-Oxley

• Certain Documents Effective 2002/2003– Statements 143, 146, 147 and 148– FINs 45 and 46

• Next Documents to be Issued– Statements 149 and 150

• Projects on the Agenda• Other Items

– FASB Staff Positions (FSPs)– Improving Standards (Principle-based Standards)– Convergence

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Who is the FASB?• Private-sector standard setter that provides guidance for

accounting and financial reporting by public and non-public entities.

• Not an Oversight Body — no enforcement power.

• Formed in 1973 and recognized by the SEC and the AICPA as the creator of GAAP.

– Public Companies

– Private Companies

– Not-for-Profit Entities

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Our Mission• To establish and improve standards of financial

accounting and reporting for the guidance and education of the public, including issuers, auditors and users of financial information.

• Accounting standards are essential to the efficient functioning of the economy because decisions about the allocation of resources rely heavily on credible, concise, transparent and understandable financial information.

• Good financial and business reporting reduces the uncertainty premium charged by investors and lenders.

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Impact of Sarbanes-Oxley

• FASB expects to be Recognized as Private Sector Accounting Standard Setting Body.

• FAF selects members of FASB (unlike PCAOB).

• FASB is separate from the PCAOB and neither reports to the other.

• Public companies will be billed for the cost to operate the FASB and the PCAOB.

• SEC to Report to Congress on Principle-Based Standards and Off-Balance Sheet Entities.

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Certain Documents Effective2002/2003

• Statement 143, Accounting for Asset Retirement Obligations

• Statement 146, Accounting for Costs Associated with Exit or Disposal Activities

• Statement 147, Acquisition of Certain Financial Institutions

• Statement 148, Accounting for Stock-Based Compensation – Transition and Disclosure

• FIN 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees

• FIN 46, Consolidation of Variable Interest Entities

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Statement 143, Accounting for AssetRetirement Obligations

• Reason issued – to recognize a liability when it is incurred that previously was not recognized until later.

• Issued June 01; Effective – fiscal year beginning after 6-15-02.

• Initial application results in recognition of:

– a liability (initially at fair value)

– higher cost and accumulated depreciation amounts

– cumulative effect of accounting change.

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Statement 146, Accounting for CostsAssociated with Exit or

Disposal Activities• Reason issued – to replace Issue 94-3 and to recognize

liabilities when they have been incurred and not before.

• Issued June 02; Effective for activities initiated after 12-31-02.

• Specific guidance for: – One-time Termination Benefits (usually a stay-

bonus) – Contract Termination Costs (lease termination) – Other associated costs.

• Extensive disclosure requirements.

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Statement 147, Acquisition ofCertain Financial Institutions

• Reason issued – to remove all but mutual combinations from Statement 72 and FIN 9 and put certain customer-relationship intangibles into the scope of Statement 144 (impairment of long-lived assets).

• Issued October 02; Effective October 1, 2002.

• The Statement 72 intangible asset is treated as goodwill under Statement 142. Branch acquisitions are discussed.

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Statement 148, Accounting forStock-Based Compensation –

Transition and Disclosure

• Reason issued – to provide additional transition alternatives for switching from the intrinsic method to the fair value method for stock-based employee compensation and to improve disclosures.

• Issued December 02; Alternatives and annual disclosures are effective for fiscal years ending after 12-15-02; interim disclosures are effective for interim periods beginning after 12-15-02.

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FIN 45, Guarantor’s Accounting andDisclosure Requirements for

Guarantees• Reason issued – to improve disclosures with respect to

information about guarantees, the identification of what is a guarantee and to improve accounting by requiring recognition of a liability when incurred.

• Issued November 02; Disclosure requirements effective for interim or annual periods ending after 12-15-02; recognition effective for guarantees issued or modified after 12-31-02.

• Guarantees are initially recognized at their fair value. Discussion of subsequent accounting and what in the debit is provided.

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FIN 46, Consolidation of VariableInterest Entities

• Reason issued – to identify entities where applying the majority of voting interest approach is not effective (VIEs) and providing an approach to use for those entities.

• Issued January 03; Effective for new VIEs upon issuance and for existing VIEs at the beginning of the first interim or annual period beginning after 6-15-03. For nonpublic entities it is effective for existing VIEs at the end of the annual period beginning after 6-15-03.

• VIEs do not have sufficient equity investment at risk to permit the entity to finance its activities without additional financial support or the holders of the equity investment lack any one of the the 3 characteristics of a controlling financial interest.

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FIN 46, Consolidation of VariableInterest Entities (cont’d.)

• An enterprise that has variable interests that will :– absorb a majority of the VIE’s variability in its expected

losses (tie breaker),– receive a majority of the variability in its expected residual return, or– bothis the VIE’s Primary Beneficiary and must consolidate.

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Next Documents to be Issued

• SFAS 149, Amendments to Statement 133

– Incorporates various DIG issues into the Statement.

– Clarifies the definition of a derivative (paragraph 66).

– Effective 6-30-03.

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Next Documents to be Issued (cont’d.)

• SFAS 150, Liability and Equity Instruments

– The following instruments that have been treated as equity will be treated as liabilities:

(1) Instruments that are mandatorily redeemable on a fixed or determinable date or upon an event certain to occur.

(2) Obligations to repurchase an issuer’s equity shares (forward purchase contract or written puts) that must be physically or net cash settled.

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Next Documents to be Issued (cont’d.)(3) Obligations that the issuer must or could settle by

issuing a variable number of its equity shares when the obligation’s monetary value is fixed or varies on something other than equity values (accounts payable or accrued expense) or the variation is not in the same direction as equity values (written puts with net share settlement.

– For public companies SFAS 150 probably will be effective for annual or interim periods beginning after6-15-03. For nonpublic companies mandatorily redeemable instrument probably will be effective for annual periods beginning after 12-15-03.

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Projects on the FASB’s Agenda

• Stock-Based Compensation• Pension Disclosures• Disclosures about Fair Value of Financial Instruments• Liabilities and Equity (Phase II)• Financial Performance Reporting• Revenue Recognition• Short-term International Convergence• Purchase Method Procedures• Combinations of Not-for-Profit Organizations• Combinations of Mutuals• Consolidation• What can a QSPE do with respect to Reissuance of BI• What does “legally released from being the primary

obligator” mean?

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Selected Projects

• Share-Based Compensation – working with IASB; goal is to get the same approach and have it effective as of 1-1-04.

• Pension Disclosures – will focus on information about plan assets and the population of persons to receive pension payments. Also, some quarterly information and where the expense is recorded in the I/S.

• Liabilities and Equity (Phase II) – how to treat instruments with both liability and equity elements; try to get convergence.

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FASB Staff Positions (FSPs)

• New way to provide guidance on applying GAAP.

• Provides for due process and access.

• Look for FSPs website and get notice of posting from the e-mail Action Alert.

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Improving Standards

• Document on Principles-Based Standards issued fall 2002; Roundtables held and comment letters received.

• Shifting focus to “how to improve standards” by addressing issues raised by our constituents.

• SEC doing a study.

• Changing relationship of FASB with EITF and AcSEC.

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Convergence• Working with the IASB on the following joint projects

and parallel projects.

– Revenue Recognition– Purchase Method Procedures– Stock-Based Compensation– Reporting Financial Performance.

• Both the FASB and IASB have a short-term convergence project to focus on matters not otherwise covered in a major project.

• All FASB projects and EITF issues consider convergence.