Fireworks at the EITF Meeting? Deloitte & Touche LLP July 6, 2004

Fireworks at the EITF Meeting? Deloitte & Touche LLP July 6, 2004

Agenda Application of the Equity Method to Interests Other Than Common Stock Accounting Issues and EPS Impact of Contingently Convertible Debt Consolidation of Limited Partnerships by the General Partner Determining Whether an Interest is a Variable Interest Determining Whether to Report Discontinued Operations Determining Useful Life of Renewable Intangible Assets Pre-existing Contracts Between Parties to a Purchase Business Combination Accounting for Post-Production Stripping Costs in the Mining Industry Agenda Committee Report Brandon Coleman Bob Uhl Bob Uhl Brandon Coleman Brandon Coleman Bob Uhl Bob Uhl Brandon Coleman Brandon Coleman Copyright 2004 Deloitte Development LLC. All rights reserved. 1

Disclaimer This webcast is based on the observations of Deloitte & Touche representatives. Although we believe these slides to be accurate, we cannot represent that it is complete or without error Official meeting minutes are prepared by the FASB staff and are available approximately two weeks after each meeting Consensuses reached are not effective until ratified by the FASB Board, typically two weeks after the EITF meeting Tentative conclusions may be changed or modified at future meetings The webcast does not provide official D&T interpretive accounting guidance Copyright 2004 Deloitte Development LLC. All rights reserved. 2

Application of the Equity Method to Interests Other Than Common Stock

Issue 02-14 Why this Issue? Type and form of investments vehicles have proliferated beyond voting common stock In-substance common stock investments developed Other arrangements may allow an investor the ability to exercise significant influence Copyright 2004 Deloitte Development LLC. All rights reserved. 4

Issue 02-14 (continued) Consensus Reached Equity method applies to Common stock and In-substance common stock Only if investor has the ability to exercise significant influence over the operating and financial policies of the investee Voting rights Board members Contracts Copyright 2004 Deloitte Development LLC. All rights reserved. 5

Issue 02-14 (continued) In-substance common stock defined: Principal: Risk and reward characteristics substantially similar to common stock Investor should consider the following: Similar subordination to common Similar risks and rewards of ownership as common No obligation for investee to transfer value Copyright 2004 Deloitte Development LLC. All rights reserved. 6

Issue 02-14 (continued) Similar subordination to common No substantive liquidation preference Little or no common stock Example Investor A acquires all of common stock in 2003 Investor B acquires $10M preferred ($100 par and liquidation preference of $100/share) in 2004 Fair value of common in 2004 is $100,000 Liquidation preference = fair value of preferred However, common stock is small on a fair value basis making preference non-substantive Copyright 2004 Deloitte Development LLC. All rights reserved. 7

Issue 02-14 (continued) Similar risks and rewards of ownership as common Participation in earnings (and losses) and capital appreciation (and depreciation) in a similar manner Participation in dividends Ability to convert without significant restrictions or contingencies Copyright 2004 Deloitte Development LLC. All rights reserved. 8

Issue 02-14 (continued) No obligation for investee to transfer value No redemption provision other than in liquidation or Other transfer of substantive value to investor that the common does not similarly participate Copyright 2004 Deloitte Development LLC. All rights reserved. 9

Issue 02-14 (continued) If all three characteristics met Investment is in-substance common stock Apply the equity method If all three characteristics are not met Determine whether the changes in fair value of investment are expected to be highly correlated with the fair value of common stock If expected to be highly correlated Apply the equity method if can exercise significant influence If NOT expected to be highly correlated NOT in-substance common stock Copyright 2004 Deloitte Development LLC. All rights reserved. 10

Issue 02-14 (continued) Consider whether in-substance As of the date on which investment is obtained Reconsider whether in-substance Relevant contractual terms of the investment or the capital structure are changed Investor obtains an additional interest in an investment in which the investor has an existing interest Investor obtains the ability to exercise significant influence Copyright 2004 Deloitte Development LLC. All rights reserved. 11

Issue 02-14 (continued) Effective for reporting periods beginning after September 15, 2004 (assuming ratification) Initial determination made by investments existing as of the effective date of this Issue should be made on the date the Issue is first applied Cumulative effect (assuming information is available) Cumulative effect investors percentage of GAAP net assets (information is not available) Copyright 2004 Deloitte Development LLC. All rights reserved. 12

Issue 02-14 (continued) What is the impact? Additional instruments accounted for under the equity method of accounting Some instruments will no longer be accounted for under the equity method Previously recognized equity method earnings and losses should not be reversed Prospectively account for under FAS 115 or APB 18 Copyright 2004 Deloitte Development LLC. All rights reserved. 13

Accounting Issues and EPS Impact of Contingently Convertible Debt

Issue 04-8 Why this Issue? Contingently convertible debt instruments (Co- Cos) market has grown since 2000 Complex features Market price contingency, parity features, issuer call options, etc. Impact on an issuer s diluted EPS debated Generally receives more favorable diluted EPS treatment than conventional convertibles Copyright 2004 Deloitte Development LLC. All rights reserved. 15

Issue 04-8 (continued) Threshold question must a market price contingency be substantive? Generally, practice evolved to require at least 110% of conversion price to be excluded from diluted EPS Example Co-Co issued on 1/1/2004 (stock price $100) Conversion price $100 Market price trigger $110 Copyright 2004 Deloitte Development LLC. All rights reserved. 16

Issue 04-8 (continued) Tentative conclusion Co-Cos should be included in diluted EPS in ALL periods regardless of whether the contingency is met or substantive Co-Co is contingently convertible, not contingently issuable Therefore, no different than conventional convertible Valid interpretation vs. technical amendment? Would require retroactive restatement Posted for public comment Task Force to consider comments from constituents at September 29-30 meeting Copyright 2004 Deloitte Development LLC. All rights reserved. 17

Consolidation of Limited Partnerships by the General Partner

Issue 04-5 Why this Issue? Originally discussed in EITF Issue 98-6 (consensus never reached) Subsequent consolidation guidance never resolved the issue Little guidance exists for determining when a general partner is precluded from consolidating a limited partnership Diversity in practice Guidance on substantive kick-out rights in FIN 46R renewed the debate Copyright 2004 Deloitte Development LLC. All rights reserved. 19

Issue 04-5 (continued) Scope of Issue Limited partnership that is a voting interest entity Sole general partner or Related party general partners Use Issue 98-6 framework as starting point Consolidation by the general partner is presumed unless: Step 1 (updated for FIN 46R): Limited partners have substantive kick-out rights as described in FIN 46R? Step 2: Apply the guidance in Issue 96-16 (i.e., substantive participating rights)? Copyright 2004 Deloitte Development LLC. All rights reserved. 20

Issue 04-5 (continued) Additional considerations for future discussion Liquidation rights or withdrawal rights Additional rights not included in Issue 96-16 Rights in Issue 96-16 not appropriate for application to general partnerships General partners that can only operate within the restricted confines of the agreed upon partnership agreement Consistency with SOP 78-9 Transition Copyright 2004 Deloitte Development LLC. All rights reserved. 21

Determining Whether an Interest is a Variable Interest

Issue 04-7 Why this Issue? Significant issue for derivatives and forward contracts Contracts that create variability not a variable interest Contracts that absorb variability variable interest Many derivatives and forwards both create and absorb Four general approaches developed Choice of different approaches may result in drastically different consolidation conclusions for identical economic transactions Diversity in practice Copyright 2004 Deloitte Development LLC. All rights reserved. 23

Issue 04-7 (continued) View A Fair Value Whether the interest absorbs variability in the fair value of the net assets of an entity View B Cash Flow Whether the interest absorbs variability in the cash flow of the net assets of an entity View C Combination Whether the interest absorbs variability in either the fair value or cash flow of the net assets of an entity View D By Design Depends on the role of the interest Copyright 2004 Deloitte Development LLC. All rights reserved. 24

Issue 04-7 (continued) No consensus was reached May be variations of fair value and cash flow approach Some Task Force members felt that cash flows had to be a subset to fair value (i.e., fair value is linked to cash flows) Little support for by design approach Approaches to be further developed Further discussion expected at September 29-30 meeting Copyright 2004 Deloitte Development LLC. All rights reserved. 25

Determining Whether to Report Discontinued Operations

Issue 03-13 Why this Issue? FAS 144 intended to broaden the reporting of discontinued operations (vs. APB 30 segment approach) Paragraph 42 of FAS 144 Operations and cash flows of component are eliminated, and No significant continuing involvement Are these consistent with the Board s objective? Copyright 2004 Deloitte Development LLC. All rights reserved. 27

Issue 03-13 (continued) Issues Which cash flows are to be considered in determining whether cash flows have been or will be eliminated What types of continuing involvement constitute significant continuing involvement The appropriate (re)assessment period In November 2003, the Task Force tentatively concluded that the assessment period is the range: The point the component is classified as held for sale, and One year after disposal of the component Copyright 2004 Deloitte Development LLC. All rights reserved. 28

Issue 03-13 (continued) Example to illustrate the Issue Retailer Closes stores (each a component under FAS 144) in one region Some customers will continue to buy via the retailer s website or catalog Are the closed stores a discontinued operation? Copyright 2004 Deloitte Development LLC. All rights reserved. 29

Issue 03-13 (continued) Current discussion - eliminate cash flows Distinction between direct or indirect cash flows and passive versus active cash flows Generally supported a consideration of both: Migration of costs and revenues Continuation of activities with disposed component (e.g., vertical integration) Did not support bright line (e.g., 10%) threshold in determining whether continuing cash flows are significant Certain disclosures, such as revenue, costs, and activities of the disposed component that continue may be useful Copyright 2004 Deloitte Development LLC. All rights reserved. 30

Issue 03-13 (continued) General support of the direction of the model Significant continuing involvement not discussed Direction of the Issue Continue to develop the model Clarify what is meant by selling in the same market Consider additional disclosures Develop examples that articulate the underlying reasoning for conclusions Further discussion is expected at the September 29-30, 2004 meeting Copyright 2004 Deloitte Development LLC. All rights reserved. 31

Determining Useful Life of Renewable Intangible Assets

Issue 03-9 Why this Issue? Diversity in practice interpreting substantial cost and material modification in paragraph 11(d) of FAS 142 Conflicts with valuation under FAS 141 SEC concerned with practice classifying many intangibles as indefinite Copyright 2004 Deloitte Development LLC. All rights reserved. 33

Issue 03-9 (continued) Current discussion how substantial renewal costs and material modifications should impact whether a renewal intangible asset is in substance a single intangible asset View A Only if an entity is substantially indifferent to acquiring the renewable asset than a hypothetically identical asset with no renewal required Consider probability of renewal, substantial costs, and material modifications View B Only if renewal is reasonable assured Surrogate for evaluating substantial costs and material modifications (i.e., correlation with probability of renewal) Copyright 2004 Deloitte Development LLC. All rights reserved. 34

Issue 03-9 (continued) No consensus was reached Confusion with whether substantial costs and/or material modifications can be ignored under View B Define what are substantial costs and material modifications? FASB staff to refine views Further discussion expected at September 29-30 meeting Copyright 2004 Deloitte Development LLC. All rights reserved. 35

Pre-existing Contracts Between Parties to a Purchase Business Combination

Issue 04-1 Pre-existing Contractual Relationships between the Parties to a Purchase Business Combination Should this be accounted for as: A multiple-element transaction a purchase and a settlement of a pre-existing contractual relationship or As one transaction part of the business combination If a multiple-element transaction, measurement of the settlement If part of the business combination, should the acquiring entity separate those assets as intangibles apart from goodwill Copyright 2004 Deloitte Development LLC. All rights reserved. 37

Issue 04-1 (continued) Prior discussion March 2004 Partial tentative conclusion: account for as a purchase and a settlement of a pre-existing contractual relationship Account as if settlement occurred outside business combination Copyright 2004 Deloitte Development LLC. All rights reserved. 38

Issue 04-1 (continued) Measurement proposed model Step 1: Allocate the cost of the acquired entity in accordance with FAS 141 Step 2: Segregate identifiable assets and liabilities related to the preexisting relationship Step 3: For those identified in Step 2, determine how the amount allocated in Step 1 would be recognized absent the business combination Task Force questioned Why expense more than termination of a contract would have actually cost the acquirer? Marketplace or entity specific consideration? Recording of a gain upon acquisition Copyright 2004 Deloitte Development LLC. All rights reserved. 39

Issue 04-1 (continued) No consensus reached on measurement Classification not discussed FASB staff to redraft Issue Summary Consider whether the settlement should be based on entity specific vs. marketplace participant Consider termination clauses Customer relationship intangibles between acquirer and acquiree Additional examples Further discussion expected at September 29-30, 2004 meeting Copyright 2004 Deloitte Development LLC. All rights reserved. 40

Accounting for Post- Production Stripping Costs in the Mining Industry

Issue 04-6 Why this Issue? Mining companies remove overburden and other mine wasting materials when accessing minerals ( stripping costs ) During development capitalize During production expense, defer and amortize, capitalize as inventory? Diversity in practice Production stripping costs may benefit both current (extracted minerals) and future periods (gain access to additional minerals) Copyright 2004 Deloitte Development LLC. All rights reserved. 42

Issue 04-6 (continued) Potential options to account for postproduction stripping costs View A expense as incurred View B defer and recognize in earning using a life-of-mine stripping ratio (recognition of liability not allowed) View C capitalize as mineral inventory cost View D presumed to be mineral inventory cost unless clearly incurred solely to access additional reserves without benefit to current production Copyright 2004 Deloitte Development LLC. All rights reserved. 43

Issue 04-6 (continued) Copyright 2004 Deloitte Development LLC. All rights reserved. 44

Issue 04-6 (continued) No consensus was reached View D was removed SEC objects to costs capitalized as a separate asset ( deferred stripping costs ) Working Group to consider Views A, B, and C and make a recommendation Further discussion expected at September 29-30, 2004 EITF meeting Copyright 2004 Deloitte Development LLC. All rights reserved. 45

Agenda Committee Report

Removal of Issue 03-S Application of FAS 142 to Oil and Gas Companies Removed from the agenda Exception in paragraph 8(b) of FAS 142 includes balance sheet classification and disclosures for drilling and mineral rights FSP will be announced on July 7th Copyright 2004 Deloitte Development LLC. All rights reserved. 47

Segment Reporting Additions Issues added to the agenda The Meaning of Similar Economic Characteristics (paragraph 17 of FAS 131) Significant diversity exists Whether long-term and future expected financial results must be similar Aggregation of Operating Segments That Do Not Meet the Quantitative Thresholds Whether similar economic characteristics and a majority of listed criteria in paragraph 17 is required Copyright 2004 Deloitte Development LLC. All rights reserved. 48

Issue Not Added Accounting for Distribution Fees by Distributors of Mutual Funds That Do Not Have Front End Sales Charges and the Distributors Transfer the Rights to Such Fees Distributors exchange right to future distribution fees for cash payment Some distributors have not recorded a liability under Issue 88-18, Sales of Future Revenues Not added to the agenda Board s pending project on revenue recognition Potential FSP to clarify Copyright 2004 Deloitte Development LLC. All rights reserved. 49

Contact Information and Other Resources

Other Resources Contact Information Brandon Coleman brcoleman@deloitte.com Bob Uhl ruhl@deloitte.com Jim Johnson jamjohnson@deloitte.com Other D&T Publications and FASB Resources EITF Roundup July 9, 2004 Webcast Playback Until August 5, 2004 Final FASB Minutes Description and Status of Current EITF Issues EITF Meeting Materials Week of July 19, 2004 www.fasb.org/eitf/eitfissu.shtml http://www.fasb.org/eitf/eitf_mee ting_materials.shtml Copyright 2004 Deloitte Development LLC. All rights reserved. 51

Questions and Answers

Listing of Issues Discussed

Issues Discussed Issue 02-14, Whether an Investor Should Apply the Equity Method of Accounting to Investments Other Than Common Stock If the Investor Has the Ability to Exercise Significant Influence Over the Operating and Financial Policies of the Investee Issue 03-9, Determination of the Useful Life of Renewable Intangible Assets under FASB Statement No. 142, Goodwill and Other Intangible Assets Issue 03-13, Applying the Condition in Paragraph 42 of FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, in Determining Whether to Report Discontinued Operations Issue 04-1, Accounting for Pre-existing Contractual Relationships between the Parties to a Purchase Combination Consensus Reached Further Discussion Expected Further Discussion Expected Further Discussion Expected Copyright 2004 Deloitte Development LLC. All rights reserved. 54

Issues Discussed (continued) 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 04-6, Accounting for Post-Production Stripping Costs in the Mining Industry Issue 04-7, Determining Whether an Interest Is a Variable Interest in a Variable Interest Entity Issue 04-8, Accounting Issues Related to Certain Features of Contingently Convertible Debt and the Effect on Diluted Earnings Per Share Further Discussion Expected Further Discussion Expected Further Discussion Expected Further Discussion Expected Copyright 2004 Deloitte Development LLC. All rights reserved. 55