Financial Accounting Standards Board

1. 1 Financial Accounting Standards Board National Association of Regulatory Utility Commissioners September 19, 2005 New Standards, Staff Positions, Proposals, and Projects at the FASB Robert C. Wilkins Senior Project Manager

2. 2 Disclaimer The views expressed in this presentation are my own and do not represent positions of the Financial Accounting Standards Board. Official positions of the FASB Board are arrived at only after extensive due process and deliberations.

3. 3 Organization of Topics Recent Pronouncements FIN 47, Conditional Asset Retirement Obligations (March 2005) FAS 154, Accounting Changes & Error Corrections (May 2005) Recent Exposure Drafts Current Major Projects Other Project Activities

4. 4 Being addressed by the next speaker.

5. 5 A voluntary change in accounting principle should be accounted for retrospectively and all prior periods should be restated as if the newly adopted accounting policy had always been used, except when retroactive application is impracticable. Statement 154 effective for fiscal years beginning after December 15, 2005 .

6. 6 Organization of Topics Recent Pronouncements Recent Exposure Drafts Business Combinations�Acquisition Method Noncontrolling Interests Uncertain Tax Positions Statement 140 Amendments Current Major Projects Other Project Activities

7. 7 Applying the Acquisition Method and Noncontrolling Interests Joint project with IASB Timetable Exposure Drafts ? 2nd Quarter 2005 Final Statement ? 3rd Quarter 2006 Scope Replacement of FAS 141 & IASB�s IFRS 3

8. 8 Applying the Acquisition Method Overall Principle Business combinations are exchange transactions in which knowledgeable, unrelated willing parties exchange equal values The acquirer obtains control of the acquiree at the acquisition date and becomes responsible and accountable for all of the acquiree�s assets, liabilities, and activities, regardless of the percentage of its ownership in the acquiree

9. 9 Applying the Acquisition Method and Noncontrolling Interests 3 categories that affect the accounting: Acquisition of 100% of the ownership of another business Acquisition of partial interests, including step-acquisitions Noncontrolling interests � classification and transactions

10. 10 Applying the Acquisition Method Acquisition of 100% Equity securities issued as consideration Measured at their fair value as of the acquisition date (not the agreement date) Acquisition-related costs paid to third parties Expensed as incurred

11. 11 Applying the Acquisition Method Acquisition of 100% (continued) Contingent Consideration Arrangements Determine whether the obligation is a liability or equity. Follow Statement 133 if arrangement is a derivative. If a liability, changes in fair value are recognized in income. If equity, no subsequent remeasurement.

12. 12 Applying the Acquisition Method Acquisition of 100% (continued) Preacquisition contingencies (asset & liab) Recognized at fair value as of the acquisition date Elimination of the FAS 5 approach to recognition Restructuring reserves (EITF 95-3) Only items that meet the definition of a liability at the acquisition date will be recognized as part of the business combination (EITF 95-3 will be nullified)

13. 13 Applying the Acquisition Method Acquisition of 100% (continued) IPR&D assets acquired Recognized as an asset (not expensed) and measured at fair value. The recognized asset will be accounted for under FAS 142. Subsequent R&D efforts to complete the IPR&D asset will be expensed.

14. 14 Applying the Acquisition Method Partial Acquisition � Identifiable net asset Reported at 100% of their fair values rather than the current mixture of fair value and historical carry over value for the outstanding noncontrolling interest portion Amount reported for noncontrolling interest will be its ownership interest in the fair value of the business acquired

15. 15 Applying the Acquisition Method Partial Acquisition � Goodwill Based on 100% of the acquired entity�s goodwill rather than the goodwill related to the controlling interest only. Fair value of 100% of the acquired entity will need to be determined and the amount reported for noncontrolling interests will reflect their portion of the goodwill.

16. 16 Applying the Acquisition Method Step Acquisition If an acquirer obtains control of an acquiree through a step acquisition, preacquisition equity investments held by the acquirer at the date control is obtained will be remeasured at their fair value Any unrealized holding gains or losses on those preacquisition investments will be recognized in consolidated net income for the period

17. 17 Noncontrolling Interests Classification Noncontrolling interests reported as part of equity rather than as a liability or a �mezzanine� item. Changes in controlling ownership interests Subsequent increases or decreases in the ownership interests of the subsidiary by the consolidating entity while that entity controls the subsidiary will be accounted for as capital transactions.

18. 18 Noncontrolling Interests Loss of control A transaction that causes the subsidiary to cease being consolidated results in recognition of a gain or loss in the income statement. Any investment in the previously consolidated subsidiary that is retained by the reporting entity initially is measured at its fair value.

19. 19 Noncontrolling Interests Allocation of net income and losses Net income or loss and each component of other comprehensive income is attributed to the controlling and noncontrolling interests based on their relative ownership interests.

20. 20 Uncertain Tax Positions Amendment of FAS 109 Exposure Draft ? July 2005 Final Statement ? 4th Quarter 2005 Also issued a related Proposed FSP FAS 13-a on the interaction of income tax changes and leveraged lease accounting

21. 21 Uncertain Tax Positions Recognition Guidance Whenever the FAS 5 probable threshold is met, the tax position shall be recognized Assumes tax positions will be examined. When it is more likely than not that the position will not be sustained, the benefit of the tax position must be derecognized Use of a valuation allowance or valuation account for derecognition is not appropriate

22. 22 Uncertain Tax Positions Measurement Guidance Record the financial statement benefit of an uncertain tax position based on the �best estimate� of the amount that will be ultimately sustained Two step model � first determine if probable threshold is met, then recognize best estimate for positions that meet the probable criterion

23. 23 Uncertain Tax Positions Transition Applies if statute of limitations is open Account for the impact of adopting the new pronouncement as a cumulative effect of a change in accounting principle Effective Date Annual fiscal periods ending after December 15, 2005

24. 24 Three Separate Exposure Drafts Transfers of Financial Assets Servicing of Financial Assets Certain Hybrid Financial Instruments Each ED presents FAS 140 as amended for all three proposed amendments Statement 140 Amendments

25. 25 Certain Hybrid Financial Instruments Eliminates the DIG Issue D-1 deferral of the need to look for embedded derivatives in beneficial interests (and provides guidance on how to look for the derivatives). Statement 140 Amendments

26. 26 Certain Hybrid Financial Instruments (continued) It would amend Statement 133 to permit fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation Statement 140 Amendments

27. 27 Certain Hybrid Financial Instruments (continued) The fair value subsequent measurement election would be made on an instrument-by-instrument basis at inception in lieu of bifurcation. Fair value changes would be included in earnings. Statement 140 Amendments

28. 28 Organization of Topics Recent Pronouncements Recent Exposure Drafts Current Major Projects with Exposure Drafts or Final Pronouncements due in the Near Term Fair Value Measurement Fair Value Option Financial Performance Reporting Other Project Activities

29. 29 Fair Value Measurement Timetable Exposure Draft ? 2nd Quarter 2004 Final Statement ? 4th Quarter 2005 Scope Guidance to determine fair value when GAAP requires No new items required to be measured at fair value Establish consistent definition of �fair value� Terms understood by both accountants and valuation experts Hierarchy of approaches to determining fair value Maximum use of market data

30. 30 Fair Value Measurement Fair Value Definition An estimate of the price that would be received for an asset or paid for a liability in a current transaction between marketplace participants in the reference market for the asset or liability.

31. 31 Fair Value Measurement Current Transaction An orderly transaction that reflects market conditions at measurement date, not a forced or liquidation transaction or distress sale.

32. 32 Fair Value Measurement Marketplace Participants Buyers and sellers for the asset or liability that are independent of the entity (unrelated), knowledgeable, able to transact, and willing to transact.

33. 33 Fair Value Measurement Reference Market The most advantageous market for the asset or liability from the perspective of the entity For an asset, the market with the price that maximizes the amount that would be received for the asset For a liability, the market with the price that minimizes the amount that would be paid to transfer the liability to a marketplace participant

34. 34 Fair Value Measurement Hierarchy Level 1�Quoted price for identical asset in an active market Level 2�Quoted market price for identical asset in an inactive market or for similar asset adjusted Level 3�Market inputs other than quoted prices Level 4�Market-corroborated inputs Level 5�Entity inputs not corroborated by other market data

35. 35 Fair Value Measurement Disclosures Fair value estimates for each major category of assets/liabilities remeasured at fair value and the key inputs (value drivers) used to develop the estimates Valuation techniques (annual only) Unrealized gains or losses for the current reporting period that relate to estimates that fall within Level 5

36. 36 Fair Value Measurement Disclosures (continued) Total gains or losses relating to fair value remeasurements during the current reporting, segregating gains or losses included in OCI Combine all fair value disclosures, including fair value disclosures under FAS 107, if practicable

37. 37 Fair Value Measurement Creditworthiness of the Debtor Board affirmed that the most relevant measure of a liability always reflects the creditworthiness of the entity obligated to pay, as appropriate. Conceptually creditworthiness is an essential component of a fair value measurement. A measurement that does not consider credit standing is not a fair value measurement.

38. 38 Fair Value Option Project Permit entities a one-time irrevocable election, at the initial recognition of each contract, to report financial instruments, and perhaps certain nonfinancial instruments, at fair value with the changes in fair value included in earnings. Emphasis on �to consider whether� -- board wants its constituents to know that it will consider a fair value option more broadly that just in the servicing rights and beneficial interests project. The reference to �and perhaps certain nonfinancial instruments� is reminiscent of the project objective for Statement 115, which was to report all debt securities and market equity securities, �and perhaps related liabilities,� at fair value. Board wants to let constituents know that the scope may be larger than the instruments included in Statement 107�s definition of financial instruments. (Could even include real estate?) Emphasis on �to consider whether� -- board wants its constituents to know that it will consider a fair value option more broadly that just in the servicing rights and beneficial interests project. The reference to �and perhaps certain nonfinancial instruments� is reminiscent of the project objective for Statement 115, which was to report all debt securities and market equity securities, �and perhaps related liabilities,� at fair value. Board wants to let constituents know that the scope may be larger than the instruments included in Statement 107�s definition of financial instruments. (Could even include real estate?)

39. 39 Fair Value Option Project Reasons for Adding the Project Entities will be able to avoid reporting volatility in earnings that results from using different measurement attributes in reporting various assets and liabilities. Entities will be able to avoid some of the problems and effort required to apply Statement 133. International convergence�the IASB has incorporated a fair value option for financial instruments in IAS 39, Financial Instrument: Recognition and Measurement.

40. 40 Fair Value Option Project Board Decisions to Date Not to expand the project to permit entities to elect (outside of the hedge accounting) to recognize in earnings the change in an asset�s or liability�s fair value attributable to only certain selected risks (rather than the total change in fair value)

41. 41 Fair Value Option Project Board Decisions to Date (continued) No eligibility criteria should be imposed on the election of the Fair Value Option Three scope exceptions are needed: An investment that would otherwise be consolidated Obligations for employee benefits and deferred compensation Financial liabilities recognized under lease contracts

42. 42 Fair Value Option Project Issues to Be Addressed What nonfinancial instruments should be included in project scope? Does the Board wish to curtail the debtor�s recognizing in earnings the effect of changes in its creditworthiness in valuing liabilities ? What disclosures should be required to compensate for the lack of comparability created by the fair value option

43. 43 Fair Value Option Project Timetable An Exposure Draft is expected in the 1st quarter 2006 A final Statement is expected in the 2nd quarter 2006

44. 44 Financial Performance Reporting Will propose that a �complete� set of financial statements include: Beginning and end of period statements of financial position. Statement of earnings and comprehensive income (eliminates two of the presentation alternatives in Statement 130). Cash Flow Statement. Statement in changes in equity.

45. 45 Financial Performance Reporting Will propose that comparative statements be required. EPS not changed (required for earnings but not for comprehensive income). Exposure Draft expected by year end.

46. 46 Organization of Topics Recent Pronouncements Recent Exposure Drafts Current Major Projects Other Project Activities Other Than Temporary Impairment

47. 47 Other Than Temporary Impairment FSP FAS 115, �Other- than-Temporary Impairments,� to be issued in 4th quarter 2005. Amends EITF 03-1 to replace the detailed guidance that was developed for 03-1 with references to previously existing guidance. The disclosure requirements in 03-1 continue.

48. 48 Questions?