Leisenring, Bielstein, Smith, Petrone, Golden, Westerlund, Mahoney, Gabriele, Polley, Swift, Richter, Sutay, Thompson, Getz, FASB Intranet ( )

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1 MINUTES To: Board Members From: Hamilton (ext. 330) Subject: Minutes of the September 8, 2004 Board Meeting Date: September 17, 2004 cc: Leisenring, Bielstein, Smith, Petrone, Golden, Westerlund, Mahoney, Gabriele, Polley, Swift, Richter, Sutay, Thompson, Getz, FASB Intranet ( ) The Board meeting minutes are provided for the information and convenience of constituents who want to follow the Board s deliberations. All of the conclusions reported are tentative and may be changed at future Board meetings. Decisions become final only after a formal written ballot to issue a final Statement or Interpretation. Topic: FASB Staff Position No. FAS 142-c Application of FASB Statement No. 142, Goodwill and Other Intangible Assets, to Exchange Memberships Basis for Discussion: Board memorandum dated August 30, 2004 Length of Discussion: 11:20 a.m. to 12:05 p.m. Attendance: Board members present: IASB Board/Staff present: Board members absent: Staff in charge of topic: Other staff at Board table Herz, Crooch, Schieneman, Schipper, Seidman,and Trott (by phone) Leisenring Batavick Westerlund Smith

2 Outside participants: Page 2 None

3 Page 3 Summary of Decisions Reached (Action Alert): The Board directed the staff not to post to the FASB website as final Proposed FSP FAS 142-c, Application of FASB Statement No. 142, Goodwill and Other Intangible Assets, to Exchange Memberships, and the Board directed the staff to work with the AICPA staff to modify existing language about exchange memberships in the AICPA Audit and Accounting Guide for brokers and dealers. Objective of the Meeting: The objective of the meeting was to determine whether to post as final FSP FAS 142-c Application of FASB Statement No. 142, Goodwill and Other Intangible Assets, to Exchange Memberships. Matters Discussed and Decisions Reached: Mr. Westerlund asked the Board to approve the issuance of FSP FAS 142-c, Application of FAS 142, Goodwill and Other Intangible Assets, to Exchange Memberships. Mr. Westerlund stated that the AICPA Audit and Accounting Guide for brokers and dealers in securities (Broker-Dealer Guide) currently provides guidance on the accounting for exchange memberships. He stated that questions were raised during the conforming changes process for Statement 142 on whether exchange memberships are intangible assets. The Broker-Dealer Guide indicates that the AICPA staff and the FASB staff will provide guidance on this issue. Accordingly, Mr. Westerlund stated that the staff strongly believes that the Board should approve the issuance of the FSP, which provides guidance on this issue. Mr. Westerlund introduced the FSP by discussing its scope and conclusions. Mr. Westerlund noted that the comment period for the FSP ended August 20 and the staff received comments from five respondents. Three of the respondents supported the FSP; two disagreed with the conclusions reached in the FSP. Mr. Westerlund highlighted the two primary concerns raised in the comments. He stated that some respondents believe that exchange memberships that represent ownership interests should be accounted for as financial assets. The staff considered this alternative and determined that the substance of the exchange membership, not the form of the membership, should determine how

4 Page 4 to account for the membership. The staff concluded that the substance of most exchange memberships is derived from the right to do business on an exchange and, as a result, most exchange memberships should be accounted for as intangible assets. Mr. Westerlund stated that some respondents expressed concern that most exchange memberships will be accounted for as intangible assets and subject to the asset impairment guidance in Statement 142. Specifically, those respondents were concerned that an exchange membership determined to be an indefinite-lived intangible asset will be subject to a fair value impairment test effectively resulting in a lower-of-cost-or-market carrying amount. Mr. Westerlund clarified that the objective of the FSP is to provide guidance on the nature of the asset, not the accounting model for the asset. The FASB staff recommended that the Board approve the FSP. Ms. Schipper supported issuance of the FSP. She stated that she would not have supported issuance without the explicit reference in the Broker-Dealer Guide that states the FASB will provide additional guidance on how to classify exchange memberships. Ms. Seidman did not support the issuance of the FSP and expressed concern that the FSP contradicts existing guidance for the classification of financial assets by allowing exchange memberships to be classified as intangible assets depending on the objective of the holder of the exchange membership. She recommended that the FASB staff work with the AICPA staff to modify the language about exchange memberships in the Broker-Dealer Guide. Mr. Crooch and Ms. Schipper asked the staff to clarify whether the determinative factor for classification of exchange memberships is the intent of management or how the value of the exchange membership is derived. In other words, is the value of the exchange membership derived from the rights to do business on the exchange or based on the returns that the exchange membership will provide to an investor. Mr. Westerlund clarified that the objective of the FSP was to classify an exchange membership based on how the value of the exchange membership

5 Page 5 is derived and not on management s intent. Mr. Crooch supported the issuance of the FSP, contingent upon editorial revisions. Mr. Schieneman did not support the issuance of the FSP. Mr. Trott supported the issuance of the FSP because he agrees with the proposed guidance and it addresses the issue that was raised in the Broker- Dealer Guide. Ms. Seidman expressed concern that classification of exchange memberships in the FSP is dependent upon whether the membership is held to earn a return for an investor. She stated that this scenario is not unique to exchange memberships and could be analogized to other ownership interests (for example, servicing rights and core deposit intangibles). Mr. Batavick, by proxy, indicated that he does not support the issuance of the FSP. He believes that exchange memberships meet the definition of a financial asset if they represent an ownership in an entity. He indicated that ownership interest, not intent of the holder, should be the determinative factor for classification of an exchange membership. He indicated that in the event an exchange membership does not represent an ownership interest (per a review of the contractual terms) existing guidance for intangible assets should be followed. Mr. Herz did not support the issuance of the FSP for the reasons presented by Ms. Seidman. He also disagreed with the subsequent accounting for exchange memberships classified as intangible assets. That is, he does not believe that the fair value impairment evaluation for indefinite-lived intangible assets is appropriate for exchange memberships. Ms. Seidman proposed that the FSP not be issued. She proposed that the staff work with the AICPA staff to modify the language about exchange memberships in the Broker-Dealer Guide. Mr. Herz asked if any Board members objected to Ms. Seidman s proposal. No Board members objected.

6 Page 6 Follow-up Items: The staff will work with the AICPA staff to modify the language about exchange memberships in the Broker-Dealer Guide. General Announcements: None.