Emerging Issues Task Force (EITF)

Description and Status of Current Issues

The following Issues described below are currently on the Task Force's list of Open Issues or have been resolved over the past year.

[08-E] [08-5] [08-4] [08-3] [08-2] [08-1] [07-6] [07-5] [07-4] [07-3] [07-2] [07-1] [06-11] [05-4] [03-15] [02-D] [00-27] [98-5]

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Issue No. 08-5, "Issuer's Accounting for Liabilities Measured at Fair Value with a Third-Party Credit Enhancement." Debt securities are often issued with a financial guarantee from an unrelated third party that guarantees the issuer's payment obligations. That guarantee is generally purchased by the issuer who then combines it with the debt and issues the combined security to an investor. By issuing debt combined with the guarantee, the issuer is able to obtain a lower interest rate and/or receive higher proceeds. The guarantee fee could be paid prior to the debt issuance, at the time of the debt issuance, or over the life of the liability. Generally, a guarantee is incorporated into the terms of the debt security and will transfer with the debt security. The guarantee provides the investor with additional assurance that the obligation will be paid (either by the guarantor or the issuer). Current accounting literature does not address whether the issuer should view guaranteed debt as one unit of accounting (the guaranteed liability) or two units of accounting (the unguaranteed debt and a third-party guarantee). The Issue is whether an issuer of debt with a third-party guarantee that is inseparable from the debt instrument should treat the debt and the guarantee as one unit of accounting when the measurement attribute for that debt is fair value.
Status: The Task Force reached a consensus-for-exposure that the scope of this Issue should apply to an issuer’s accounting for all third-party credit enhancements that are issued with and inseparable from a debt instrument and measured at fair value. Consideration of this Issue will be necessary when the fair value of a debt instrument must be disclosed by an issuer even if it is measured on a different basis in the financial statements.
The Task Force reached a consensus-for-exposure that the issuer should not include the effect of the third-party guarantee in the fair value measurement of the liability. Thus, the fair value measurement is determined considering the issuer’s credit standing (without regard to the third-party guarantor’s credit standing). The Task Force concluded that the unit of accounting for the debt does not include the guarantee and that the guarantee does not represent an asset of the issuer. That guarantee is obtained for the benefit of the investor.
The Task Force reached a consensus-for-exposure that an entity that has outstanding debt within the scope of this Issue should disclose the existence of the credit enhancement.
The Task Force reached a consensus-for-exposure that this Issue should be effective on a prospective basis in the first reporting period beginning after the date the final consensus is posted to the FASB website, including interim periods. The effect of initially applying the guidance in this Issue shall be included in the change in fair value in the period of adoption. Earlier application is not permitted.
The Task Force reached a consensus-for-exposure that in the period of adoption an entity should disclose the valuation techniques used to measure liabilities within the scope of this Issue and include a discussion of changes, if any, from the valuation techniques used to measure those liabilities in prior periods.
The Board ratified the consensuses-for-exposure in this Issue at its June 25, 2008 meeting. A draft abstract will be posted to the FASB website for public comment on July 1, 2008. This Issue will be discussed further at a future meeting.
Dates discussed: March 12, 2008, June 12, 2008

Issue No. 08-4, "Transition Guidance for Conforming Changes to EITF Issue No. 98-5, 'Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios.'" The Task Force did not object to conforming changes being made to Issue 98-5 that are the result of the consensus on EITF Issue No. 00-27, "Application of Issue No. 98-5 to Certain Convertible Instruments," and the issuance of FASB Statement No. 150, Accounting for Certain Financial Liabilities with Characteristics of both Liabilities and Equity. The Task Force also decided to provide transition guidance for those conforming changes and reached a consensus-for-exposure that those conforming changes should be effective for financial statements issued for fiscal years ending after December 15, 2008, and interim periods within those fiscal years, with earlier application permitted. The effect of applying the conforming changes, if any, should be presented retrospectively with the cumulative effect of the change being reported in retained earnings in the statement of financial position as of the beginning of the first period presented (retrospective application).
Status: The Board ratified the consensuses in this Issue at its June 25, 2008 meeting. No further EITF discussion is planned.
Dates discussed: March 12, 2008, June 12, 2008

Issue No. 08-3, "Accounting by Lessees for Maintenance Deposits." Under the terms of an equipment lease agreement, a lessee is generally legally and contractually responsible for repair and maintenance of the leased asset throughout the lease term. Some agreements include provisions requiring the lessee to make deposits to the lessor in order to financially protect the lessor in the event the lessee does not properly maintain the leased asset. Those deposits may be calculated based on a performance measure and are contractually required under the term of the lease to be used to reimburse the lessee for maintenance of the leased asset. The maintenance deposits do not transfer either the obligation to maintain the asset or the cost or quality risk associated with the maintenance activities to the lessor. In some situations the total cost of cumulative maintenance events over the term of the lease is less than the cumulative deposits, resulting in excess amounts on deposit at the expiration of the lease. In those cases, some lease agreements provide that the lessor is entitled to retain such excess amounts; whereas other agreements specifically provide that at the expiration of the lease agreement, such excess amounts are returned to the lessee. The issue is whether lessees should account for those payments as a deposit or as contingent rental expense.
Status: The Task Force reached a consensus-for-exposure that all nonrefundable maintenance deposits should be accounted for as a deposit. When the underlying maintenance is performed, the deposit is expensed or capitalized in accordance with the lessee’s maintenance accounting policy. Once it is determined that an amount on deposit is not probable of being used to fund future maintenance expense, it is recognized as additional rent expense at the time such determination is made.
The Task Force also reached a consensus-for-exposure that this Issue should be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Earlier application is not permitted.
The Task Force reached a consensus-for-exposure that entities should recognize the effect of the change as a change in accounting principle as of the beginning of the fiscal year in which this consensus is initially applied for all arrangements existing at the effective date. The cumulative effect of the change in accounting principle should be recognized as an adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that fiscal year, presented separately.
At the June 12, 2008 meeting, the Task Force affirmed the consensus-for-exposure reached at the March 12, 2008 EITF meeting as a consensus with certain amendments. Specifically, a reference to a lessee's potential obligation to return the leased asset to the lessor in a certain condition, a clarification that payments made that are less than probable of being refunded by the lessor at inception of the lease are not considered nonrefundable maintenance deposits considered by this Issue, and a clarification that when a lessee subsequently determines that the deposit is less than probable of being returned because the lessee no longer expects to incur the underlying maintenance cost, it shall be recognized as additional expense. In addition, the Task Force clarified that the term "probable" is intended to be consistent with the definition in paragraph 25 of Concepts Statement 6. The Task Force agreed that this Issue should not provide revenue recognition guidance for the lessor.
The Board ratified the consensus-for-exposure in this Issue at its June 25, 2008 meeting. No further EITF discussion is planned.
Dates discussed: March 12, 2008, June 12, 2008

Issue No. 08-2, "Lessor Revenue Recognition for Maintenance Services." Some contracts to provide goods or perform services may convey to the purchaser the right to use the underlying property, plant, and equipment. If those contracts meet certain criteria described in EITF Issue No. 01-8, "Determining Whether an Arrangement Contains a Lease," they include a lease that should be accounted for in accordance with FASB Statement No. 13, Accounting for Leases. These contracts also generally require the supplier (lessor) to maintain the underlying property, plant, and equipment, and these maintenance services may be substantial to the contract. In some of these arrangements, the supplier (lessor) is reimbursed for maintenance services, but these reimbursements may not coincide with the performance of the maintenance services. The issue is how the lessor (regional airline) should account for revenue related to planned major maintenance when it has concluded that a capacity purchase agreement contains a lease under Issue 01-8.
Status: The Task Force considered whether the scope of this Issue should include all payments for maintenance services in an arrangement accounted for as a lease, but it did not reach a tentative conclusion. The Task Force requested that the FASB staff perform additional research on the types of arrangements to which this Issue may apply and provide further analysis of when payments for maintenance in those arrangements would be considered executory costs, other service provided by the lessor, or part of the lease payment for the leased item. The Task Force also asked the staff to perform further research on the effect of this Issue on the conclusions reached in FSP AUG AIR-1, Accounting for Planned Major Maintenance Activities.
The Task Force reached a tentative conclusion that revenue related to maintenance services should be recognized into income as those services are performed utilizing a proportional performance method that is determined to be the most appropriate method under the circumstances.
At the June 12, 2008 EITF meeting, the Task Force discussed whether additional standard setting related to maintenance services provided in connection with a lease would result in improved financial reporting. Certain Task Force members and an EITF Observer who represent the user constituency noted that such standard setting could create additional complexity and would not provide users with better information. Based on that discussion, the Task Force decided to recommend to the FASB Chairman that this project be removed from the EITF’s agenda.
At the June 25, 2008 Board meeting, the FASB Chairman decided to drop this Issue from the EITF agenda. No further EITF discussion is planned.
Dates discussed: March 12, 2008, June 12, 2008

Issue No. 08-1, "Revenue Recognition for a Single Unit of Accounting." Companies often enter into arrangements that provide for multiple payment streams for a single deliverable or a single unit of accounting (that is, multiple deliverables that cannot be separated for revenue recognition purposes). To recognize revenue in these arrangements, a company needs to determine how to attribute the multiple payment streams (customer consideration) to the single deliverable or unit of accounting (assuming multiple deliverables cannot be separated under EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables"). The issues are (a) whether it is acceptable to use multiple methods to attribute multiple payment streams to a single deliverable, and (b) depending on the facts and circumstances of an arrangement, whether it is acceptable to use multiple methods to attribute multiple payment streams to a single unit of accounting (multiple deliverables that cannot be separated), as determined under Issue 00-21.
Status: The Task Force considered whether, under certain facts and circumstances, it may be acceptable to use a multiple attribution model to account for a single unit of accounting. The Task Force discussed this Issue and requested that the FASB staff perform more research for Task Force consideration.
At the June 12, 2008 EITF meeting, the Task Force was informed that a Working Group had been formed to provide recommendations to the Task Force on this Issue. The Task Force discussed the initial findings of the Working Group but was not asked to reach a conclusion. The Task Force instructed the staff to continue to develop this Issue with the assistance of the Working Group for discussion at a future Task Force meeting. This Issue will be discussed further at a future meeting.
Dates discussed: March 12, 2008, June 12, 2008

Issue No. 07-6, "Accounting for the Sale of Real Estate Subject to the Requirements of FASB Statement No. 66, Accounting for Sales of Real Estate, When the Agreement Includes a Buy-Sell Clause." When two investors enter into an arrangement to create a jointly-owned entity and one investor sells real estate to that entity, it is common to include a buy-sell clause in the agreement between the two investors. The buy-sell clause provides that either investor may request a buy-out of the other investor's interest by providing notice (the Purchase Notice) to the other investor. The Purchase Notice constitutes an irrevocable offer by the Offeror to buy the Offeree's entire interest in the entity. In the Purchase Notice, the Offeror names a price for the Offeree's equity at its discretion (the Named Price). However, upon receipt of the Purchase Notice, the Offeree can elect to either sell its interest in the entity to the Offeror or buy the Offeror's interest at the Named Price. Once the Purchase Notice is invoked, the Offeror is contractually obligated to either purchase the Offeree's interest or sell its interest at the Named Price.
The buy-sell clause is designed to incorporate into the transaction price the natural tension between the interests of both investors in a buy-sell situation and thereby achieve an acceptable outcome for both investors without protracted negotiations over fair value and the need for binding arbitration to resolve disputes. Furthermore, the buy-sell clause provides investors with an exit strategy for closely held investments. The issue is whether an irrevocable buy-sell clause represents a prohibited form of continuing involvement that would preclude partial sale and profit recognition pursuant to Statement 66.
Status: The Task Force affirmed as a consensus the consensuses-for-exposure reached at the September 11, 2007 EITF meeting with certain amendments. At its December 12, 2007 meeting, the Board ratified that consensus. No further EITF discussion is planned.
Dates discussed: September 11, 2007, November 29, 2007

Issue No. 07-5, "Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock." Paragraph 11(a) of FAS 133 specifies that a contract issued or held by the reporting entity that is both (a) indexed to its own stock and (b) classified in stockholders' equity in its statement of financial position shall not be considered a derivative financial instrument for purposes of applying that Statement. If a freestanding financial instrument (for example, a stock purchase warrant) meets the scope exception in paragraph 11(a) of FAS 133, it is classified as an equity instrument and is not accounted for as a derivative instrument.
Paragraph 12 of FAS 133 requires that an embedded derivative instrument be separated from the host contract and accounted for as a derivative instrument pursuant to that Statement if certain criteria are met. One of those criteria, set forth in paragraph 12(c), is that a separate instrument with the same terms as the embedded derivative instrument would, pursuant to paragraphs 6–11 of that Statement, be a derivative instrument subject to the requirements of FAS 133. Consequently, if an embedded feature (for example, the conversion option embedded in a convertible debt instrument) meets the scope exception in paragraph 11(a) of FAS 133, it would not be separated from the host contract and accounted for as a derivative by the issuer.
This Issue addresses the determination of whether an instrument (or an embedded feature) is indexed to an entity's own stock, which is the first part of the scope exception in paragraph 11(a) of FAS 133. If an instrument (or an embedded feature) that has the characteristics of a derivative instrument under paragraphs 6–9 of FAS 133 is indexed to an entity's own stock, it is still necessary to evaluate whether it is classified in stockholders' equity (or would be classified in stockholders' equity if it were a freestanding instrument). For example, a net-cash-settled stock purchase warrant may be indexed to an entity's own stock, but it is not classified in stockholders' equity. Other applicable U.S. generally accepted accounting principles (U.S. GAAP), including Issues 00-19 and 05-2, provide guidance for determining whether an instrument (or an embedded feature) is classified in stockholders' equity (or would be classified in stockholders' equity if it were a freestanding instrument). This Issue does not address that second part of the scope exception in paragraph 11(a) of FAS 133.
Status: The Task Force reached a consensus-for-exposure that an entity should determine whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock first by evaluating the instrument’s contingent exercise provisions, if any, and then by evaluating the instrument’s settlement provisions. An exercise contingency would not preclude an instrument (or embedded feature) from being considered indexed to an entity’s own stock provided that it is not based on (a) an observable market, other than the market for the issuer’s stock (if applicable), or (b) an observable index, other than an index calculated or measured solely by reference to the issuer’s own operations. If the evaluation of any potential exercise contingency does not preclude an instrument from being considered indexed to the entity's own stock, then the second evaluation would be performed. An instrument (or embedded feature) would be considered indexed to an entity's own stock if its settlement amount will equal the difference between the fair value of a fixed number of the entity's equity shares and a fixed amount of cash or another financial asset. An issued share option that gives the counterparty a right to buy a fixed number of the entity's shares for a fixed price or for a fixed stated principal amount of a bond would be considered indexed to an entity's own stock. An instrument's strike price or the number of shares used to calculate the settlement amount are not fixed if its terms provide for any potential adjustment, regardless of the probability of such adjustment(s) or whether such adjustments are in the entity's control. In cases in which the instrument's strike price or the number of shares used to calculate the settlement amount are not fixed, the Task Force reached a consensus-for-exposure that the instrument would not be considered indexed to an entity's own stock unless the only variables that could affect the settlement amount would be inputs to the fair value of a "fixed-for-fixed" forward or option on equity shares.
The Task Force reached a consensus-for-exposure that an equity-linked financial instrument (or embedded feature) would not be considered indexed to the entity's own stock if the strike price is denominated in a currency other than the issuer's functional currency (including a conversion option embedded in a convertible debt instrument that is denominated in a currency other than the issuer's functional currency). The determination of whether an equity-linked financial instrument is indexed to an entity's own stock is not affected by the currency (or currencies) in which the underlying shares trade.
The Task Force reached a consensus-for-exposure that market-based employee stock option valuation instruments are not considered indexed to the entity's own stock under the guidance in this Issue and that an exception should not be provided. Consequently, those instruments do not qualify for the scope exception in paragraph 11(a) of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
The Task Force reached a consensus-for-exposure that this Issue should be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early application is not permitted.
The Task Force reached a consensus-for-exposure that this Issue should be applied to outstanding instruments as of the beginning of the fiscal year in which this Issue is initially applied.
The Board ratified the consensus-for-exposure in this Issue at its March 26, 2008 meeting. A draft abstract will be posted to the FASB website for public comment on April 1, 2008. This Issue will be discussed further at a future meeting.
At the June 12, 2008 EITF meeting, the Task Force affirmed as a consensus the consensuses-for-exposure reached at the March 12, 2008 EITF meeting on Issues 4(a), 4(b), and 4(c), and added three more illustrative examples and made certain clarifications. Those clarifications include: that an exercise contingency is a provision that entitles the entity (or the counterparty) to exercise an equity-linked financial instrument (or embedded feature) based on changes in an underlying; that provisions that accelerate the ability to exercise or extend the length of time that an instrument is exercisable are examples of exercise contingencies; and that an instrument with a settlement amount that will equal the difference between a fixed monetary amount and a fixed quantity of a financial instrument issued by a third-party would not be considered indexed to the entity’s own stock.
The Board ratified the consensuses-for-exposure in this Issue at its June 25, 2008 meeting.
As a result of this consensus and its ratification, the FASB Chairman announced the removal of Issue No. 02-D, “The Effect of Dual-Indexation both to a Company's Own Stock and to Interest Rates and the Company's Credit Risk in Evaluating the Exception under Paragraph 11(a)(1) of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities,” from the EITF agenda and the removal of proposed Statement 133 Implementation Issue No. C21, “Whether Options (Including Embedded Conversion Options) Are Indexed to both an Entity’s Own Stock and Currency Exchange Rates,” (proposed DIG Issue C21) from the FASB agenda.
No further EITF discussion is planned.
Dates discussed: September 11, 2007, November 29, 2007, March 12, 2008, June 12, 2008

Issue No. 07-4, "Application of the Two-Class Method under FASB Statement No. 128, Earnings per Share, to Master Limited Partnerships." Publicly traded master limited partnerships (MLPs) often issue multiple classes of securities that may participate in partnership distributions according to a formula specified in the partnership agreement. A typical MLP consists of publicly-traded common units held by limited partners (the Common Units), a general partner interest (the GP Interest), and incentive distribution rights (the IDRs). It is not uncommon for MLPs to encounter substantial timing differences between the distribution of cash and the recognition of income. These partnerships often will distribute cash in excess of their reported earnings. Alternatively, the partnership may operate in a seasonal industry, such that earnings are generated primarily in one quarter, but cash distributions are made over the course of a year. In periods during which earnings are not sufficient to cover distributions to the various partnership interests, the capital accounts of the remaining classes of partnership interests will absorb the "debit" created by the allocation of earnings to IDR holders. The issue is when applying the two-class method under FAS 128, whether current period earnings of an MLP should be allocated to holders of IDRs.
Status: The Task Force affirmed as a consensus the consensus-for-exposure reached at the November 29, 2007 EITF meeting. The Task Force also considered an additional issue about determining when the master limited partnership (MLP) should reflect its contractual obligation to make distributions to the general partner (GP), limited partners (LPs), and incentive distribution rights (IDR) holder. The Task Force reached a consensus that for application of the two-class method, the MLP should reflect its contractual obligation to make distributions as of the end of the current reporting period. Therefore, an MLP would reduce (increase) income (loss) from continuing operations (or net income or loss) for the current reporting period by the amount of available cash that has been or will be distributed to the GP, LPs, and IDR holder (or GP with respect to an embedded IDR) for that current reporting period. If distributions to the IDR holder (or GP with respect to an embedded IDR) are contractually limited to available cash as defined in the partnership agreement, then the specified threshold for the current reporting period would be the holder’s share of available cash that has been or will be distributed to the IDR holder (or GP with respect to an embedded IDR) for that current reporting period.
This Issue should be effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Earlier application is not permitted. The guidance in this Issue should be applied retrospectively for all financial statements presented.
The Board ratified the consensuses in this Issue at its March 26, 2008 meeting. No further EITF discussion is planned.
Dates discussed: June 14, 2007, September 11, 2007, November 29, 2007, March 12, 2008

Issue No. 07-3, "Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities." Companies involved in research and development activities may make prepayments for goods or services that will be used in future research and development activities. These fees generally relate to a variety of activities, and the business purpose of these payments varies. In these types of arrangements, a portion of the advanced payment may be refundable; however, it is common for at least a portion of the fees to be non-refundable. The issue is whether non-refundable advance payments for goods that will be used or for services that will be performed in future research and development activities should be accounted for pursuant to FASB Statement No. 2, Accounting for Research and Development Costs.
Status: The Task Force affirmed as a consensus the tentative conclusion that nonrefundable advance payments for future research and development activities should be deferred and capitalized. Such amounts should be recognized as an expense as the goods are delivered or the related services are performed. Entities should continue to evaluate whether they expect the goods to be delivered or services to be rendered. If an entity does not expect the goods to be delivered or services to be rendered, the capitalized advance payment should be charged to expense.
The Task Force also reached a consensus that this Issue is effective for financial statements issued for fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. Earlier application is not permitted. Entities should report the effects of applying the consensus in this Issue prospectively for new contracts entered into after the effective date of this Issue. The Board ratified the consensuses at its June 27, 2007 meeting. No further EITF discussion is planned.
Dates discussed: March 15, 2007, June 14, 2007

Issue No. 07-2, "Accounting for Convertible Debt Instruments That Are Not Subject to the Guidance in Paragraph 12 of APB Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants." Issuances of convertible instruments with the characteristics of Instrument C of EITF Issue No. 90-19, "Convertible Bonds with Issuer Option to Settle for Cash upon Conversion," have proliferated in periods subsequent to the modification of Issue 90-19 and the consensus in EITF Issue No. 03-7, "Accounting for the Settlement of the Equity-Settled Portion of a Convertible Debt Instrument That Permits or Requires the Conversion Spread to Be Settled in Stock (Instrument C of Issue No. 90-19)." Additionally, the issuance of convertible instruments with the characteristics of Instrument C became even more prevalent after EITF Issue No. 04-8, "The Effect of Contingently Convertible Instruments on Diluted Earnings per Share," eliminated the diluted earnings-per-share benefits associated with contingently convertible instruments ("Co-Cos") that contain a market price trigger. A number of issuers amended the terms of Co-Cos that were outstanding prior to the consensus in Issue 04-8 to incorporate the characteristics of Instrument C. Such amendments enabled those issuers to continue to avail themselves of favorable diluted earnings-per-share treatment after adoption of Issue 04-8. Some entities have issued instruments with characteristics similar to Instrument C and have analogized to the guidance in Issue 90-19, as modified, to determine the appropriate accounting and earnings-per-share guidance. After observing the activities in the marketplace that have occurred since the consensus in Issue 90-19 was modified to provide more favorable accounting and earnings-per-share treatment for convertible instruments structured as Instrument C, questions have been raised as to whether the accounting guidance in Issue 90-19, as modified, appropriately reflects the economics of those instruments. The issue is how a company should account for a convertible instrument that requires or permits partial cash settlement upon conversion if the embedded conversion option is not required to be separately accounted for as a derivative under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
Status: The Task Force discussed this Issue but was unable to reach a conclusion. The Task Force agreed to discontinue discussion of this Issue and, accordingly, to remove it from the EITF’s agenda. The FASB Board members in attendance indicated that they would consider adding a project to the Board’s agenda to address the issue. (Expected to be discussed at the July 25, 2007 Board Meeting.) No further EITF discussion is planned.
Dates discussed: March 15, 2007, June 14, 2007

Issue No. 07-1, "Accounting for Collaborative Arrangements." A considerable amount of resources are required to develop a product and the financial risks involved are high. Therefore, companies in the biotechnology or pharmaceutical industries may enter into agreements with other companies to collaboratively develop, manufacture, and market a drug candidate (Collaboration Agreements). In some cases, Collaboration Agreements are entered into between a smaller biotechnology or pharmaceutical company that is conducting research and development activities on a particular drug candidate and a large, established pharmaceutical company. In other cases, two large established pharmaceutical companies will enter into a Collaboration Agreement to mitigate the risk or combine two existing drugs into a new single dose drug. The issues are how to determine whether a Collaborative Agreement is within the scope of this Issue; how costs incurred and revenue generated on sales to third parties should be reported by the partners to joint development agreements in each of their respective income statements; how sharing payments made to, or received by, a partner pursuant to a Collaboration Agreement should be presented in the income statement; and, the disclosures that should be required, if any, related to the combined sales and expenses of the partners to a Collaboration Agreement that are used to compute the payments made/received.
Status: The Task Force affirmed as a consensus the consensuses-for-exposure reached at the September 11, 2007 EITF meeting with certain amendments. At its December 12, 2007 meeting, the Board ratified that consensus. The Task Force also decided to change the effective date of this Issue to be effective for fiscal years beginning after December 15, 2008. No further EITF discussion is planned.
Dates discussed: March 15, 2007, June 14, 2007, September 11, 2007, November 29, 2007

Issue No. 06-11, "Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards.'" Employees may receive, as part of a share-based payment arrangement, dividends or dividend equivalents on (a) nonvested share awards and nonvested equity share unit awards during the vesting period or (b) share option awards until they are exercised. Such "dividend protection" provisions for share-based payment arrangements may entitle employees to receive (a) dividends or dividend equivalents on a nonvested equity share or a nonvested share unit, (b) payments equal to dividends on the underlying equity shares while a share option is outstanding, or (c) reductions to the exercise price of a share option based on the dividends paid on the underlying equity shares while the option is outstanding. In some cases, the payment of dividends on nonvested equity shares, nonvested equity share units, and outstanding share options is treated as deductible compensation for tax purposes, even though the payment of such dividends is charged to retained earnings for awards that vest in the employer's financial statements. The issue is how a company should recognize the tax benefit received on dividends that are (a) paid to employees holding equity-classified nonvested shares, equity-classified nonvested share units, or equity-classified outstanding share options and (b) charged to retained earnings under FASB Statement No. 123 (revised 2004), Share-Based Payment (FAS 123(R)).
Status: The Task Force affirmed as a consensus its tentative conclusion that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and paid to employees for equity classified nonvested equity shares, nonvested equity share units, and outstanding equity share options should be recognized as an increase to additional paid-in capital. The amount recognized in additional paid-in capital for the realized income tax benefit from dividends on those awards should be included in the pool of excess tax benefits available to absorb tax deficiencies on share-based payment awards. The Task Force also discussed how the consensus on this Issue interacts with the guidance in footnote 61 of FASB Statement No. 123 (revised 2004), Share-Based Payment, which requires dividends on equity-classified share-based payment awards to be reallocated between retained earnings (for awards expected to vest) and compensation cost (for awards not expected to vest) each reporting period to reflect current forfeiture estimates. The Task Force reached a consensus that adjustments to additional paid-in capital for reclassifications of the tax benefits from dividends on those awards in subsequent periods (that is, when the entity’s estimate of forfeitures changes and the related dividends are reclassified between retained earnings and compensation expense) would increase or decrease the entity’s pool of excess tax benefits available to absorb tax deficiencies by a corresponding amount. Additionally, the amount of tax benefits from dividends that are reclassified from additional paid-in capital to the income statement (that is, as a reduction of income tax expense or an increase of income tax benefit) when an entity’s estimate of forfeitures increases (or actual forfeitures exceed the entity’s estimates) should be limited to the entity’s pool of excess tax benefits available to absorb tax deficiencies on the date of the reclassification.
The Task Force reached a consensus that this Issue should be applied prospectively to the income tax benefits of dividends on equity-classified employee share-based payment awards that are declared in fiscal years beginning after December 15, 2007, and interim periods within those fiscal years. Early application is permitted as of the beginning of a fiscal year for which interim or annual financial statements have not yet been issued. Retrospective application to previously issued financial statements is prohibited. Entities shall disclose the nature of any change in their accounting policy for income tax benefits of dividends on share-based payment awards resulting from the adoption of this guidance. The Board ratified the consensuses at its June 27, 2007 meeting. No further EITF discussion is planned.
Dates discussed: March 15, 2007, June 14, 2007

Issue No. 05-4, "The Effect of a Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF Issue No. 00-19, ‘Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock.’" Issuance of a registration rights agreement with a liquidated damages clause is common when equity instruments, stock purchase warrants, and financial instruments that are convertible into equity securities are issued. The agreement requires the issuer to use its "best efforts" to file a registration statement for the resale of the equity instruments or the shares of stock underlying the stock purchase warrant or convertible financial instrument and have it declared effective by the end of a specified grace period. The issuer may also be required to maintain the effectiveness of the registration statement for a period of time or pay a liquidated damage penalty to the investor each month until the registration statement is declared effective. Given the potential significance of the penalty, a question arises as to the effect, if any, this feature has on the related financial instruments if they are subject to the scope of Issue 00-19.
Status: This Issue was last discussed by the Task Force at the September 15, 2005 EITF meeting, at which time the Task Force decided to postpone further deliberations until after the Board addressed whether a separate registration rights agreement was a derivative.
In December 2006, the Board issued FSP EITF 00-19-2, "Accounting for Registration Payment Arrangements." That FSP specifies that the contingent obligation to make future payments or otherwise transfer consideration under a registration payment arrangement, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement, should be separately recognized and measured in accordance with FASB Statement No. 5, Accounting for Contingencies. The guidance in FSP EITF 00-19-2 amends FASB Statements No. 133, Accounting for Derivative Instruments and Hedging Activities, and No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, and FASB Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, to include scope exceptions for registration payment arrangements.
With the issuance of FSP EITF 00-19-2, the FASB staff recommended that the Task Force remove Issue 05-4 from the EITF agenda. The Task Force did not object to the FASB staff's recommendation and removed Issue 05-4 from the EITF agenda. No further EITF discussion is planned.
Last discussed: June 15-16, 2005, September 15, 2005, June 14, 2007

Issue No. 03-15, "Interpretation of Constraining Conditions of a Transferee in a CBO Structure." Collateralized bond obligations (CBOs) are securitizations of high-yield debt, bank loan participations, or similar financial assets. The CBO issuing vehicle is a special-purpose entity (SPE), typically a corporation domiciled (for security law and tax reasons) in the Cayman Islands. The SPE is not a qualifying SPE (QSPE) because the conditions under which it can sell assets violate the provisions of EITF Abstracts, Topic No. D-66, "Effect of a Special-Purpose Entity's Powers to Sell, Repledge, or Distribute Transferred Financial Assets under FASB Statement No. 125." The SPE has, at all times, the discretion to hold or sell defaulted assets or assets deemed to be "credit risk" or "credit improved" assets. The SPE also can sell up to between 20 percent and 30 percent annually of the aggregate principal balance of collateral (as of the beginning of each year) (known in the industry as the "free trade basket") during the reinvestment period. The free trade basket is in addition to the SPE's ability to trade defaulted credit risk and credit improved securities so that if the collateral manager decided that 50 percent of the SPE's assets were "credit improved," the collateral manager would be able to trade 70 percent of the SPE's assets (assuming a 20 percent free trade basket) in that year. Paragraph 9(b) of Statement 140 provides that with respect to a transferee that is not a QSPE, no condition both constrains the transferee (or holder) from taking advantage of right to pledge or exchange the transferred assets and provides more than a trivial benefit to the transferor. If the constraint is not imposed by the transferor, as would be the case in a typical CBO structure, then that constraint may or may not provide more than a trivial benefit to the transferor. The issue is whether the "free trade basket" violates paragraph 9(b) of Statement 140 and therefore precludes sale treatment by the transferor.
Status: To be discussed at a future meeting.

Issue No. 02-D, "The Effect of Dual-Indexation both to a Company's Own Stock and to Interest Rates and the Company's Credit Risk in Evaluating the Exception under Paragraph 11(a)(1) of FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities." Paragraph 11(a) of Statement 133 provides that contracts issued or held by a reporting entity that are both (1) indexed to its own stock, and (2) classified in stockholders' equity in its statement of financial position are not derivatives for purposes of applying Statement 133. EITF Issue No. 01-6, "The Meaning of 'Indexed to a Company's Own Stock,'" addressed a number of common contractual provisions in which it was not clear whether the instrument met the condition of paragraph 11(a)(1) of Statement 133. However, some believe the guidance in that Issue does not apply with respect to dual-indexation to a company's own stock and interest rates/credit risk given the provisions of Statement 133 with respect to convertible debt. The issue is whether instruments, other than convertible debt, that are indexed both to a company's own stock and to interest rates and the company's credit risk meet the condition in paragraph 11(a)(1) of FAS 133.
Status: At the June 12, 2008 EITF meeting, the Task Force reached a consensus on Issue 07-5, "Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock," that was ratified by the Board at its June 25, 2008 Board meeting. As a result of that consensus and its ratification, the FASB Chairman announced the removal of this Issue from the EITF agenda. No further EITF discussion is planned.

Issue No. 00-27, "Application of EITF Issue No. 98-5, 'Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios,' to Certain Convertible Instruments." Issue 98-5 addresses the accounting for convertible securities with a nondetachable conversion feature that is in-the-money at the commitment date. That Issue also addresses certain convertible securities that have a conversion price that is variable based on future events. Subsequent to the final consensus, a number of practical issues regarding the application of the guidance in Issue 98-5 have been raised. The Task Force reached consensuses on certain issues before suspending deliberations on Issue 00-27.
Status: The Task Force discussed the Agenda Committee decision to add consideration of conforming changes to EITF Issue No. 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios," and transition guidance for those conforming changes to the EITF agenda. See the discussion of Issue 98-5 and EITF Issue No. 08-4, “Transition Guidance for Conforming Changes to Issue No. 98-5.” The Agenda Committee also recommended that the Task Force not finalize the remaining tentative conclusions in Issue 00-27, and the Task Force agreed. The Task Force also decided not to codify Issues 98-5 and 00-27 in a single abstract. No further EITF discussion is planned.
Dates discussed: January 17-18, 2001, November 29, 2007, March 12, 2008

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