(The news featured below is a selection from the news covered in the Federal Securities Report Letter, which is distributed to subscribers of the Federal Securities Law Reports.)

Chairman Gives Views to House Subcommittee

The Financial Accounting Standards Board is moving ahead on a number of important issues, including accounting for special-purpose entities, or SPEs, guarantees, energy trading contracts, stock-based compensation and the broad area of revenue recognition, declared FASB Chairman Robert H. Herz to the House commerce subcommittee. He also outlined internal FASB changes designed to increase investor involvement in FASB activities. On the ongoing effort to achieve convergent international accounting standards, Mr. Herz said that, realistically, this effort will still be ongoing well beyond 2005 when Europe adopts international standards.

Enron-Related Issues

With respect to SPEs, FASB issued new requirements earlier this year providing that enterprises with investments or other relationships with SPEs must carefully assess their involvement to determine whether they receive a majority of the risks or rewards of those SPEs. If so, the enterprises are required to report the assets, liabilities and gains and losses of those SPEs within their own financial statements. According to Mr. Herz, FASB expects that under the new requirements many of the SPEs that currently are not reported by any enterprise will be reported in the future. The new requirements also significantly improve the disclosures related to an enterprise's use of, and involvement with, SPEs.

In a related project on accounting and disclosure of guarantees, FASB issued new requirements providing that all enterprises recognize a liability at fair value for the obligations they undertake when issuing a guarantee and that those enterprises make additional disclosures about the guarantees. FASB believes the new requirements will result in a more faithful depiction of an enterprise's liabilities and improve the transparency of obligations and liquidity risks related to the guarantees.

In October 2002, the Emerging Issues Task Force and FASB staff addressed practice issues related to the accounting for energy trading contracts. The EITF decided to preclude mark-to-market accounting for certain difficult-to-value energy trading contracts. The EITF also decided to require that gains on certain energy trading contracts be shown net, rather than gross, in financial reports. At the same time, the FASB staff observed that no enterprise should recognize an upfront gain at the inception of entering into certain financial contracts, unless the fair value of those contracts are clearly evidenced by observable market transactions or market data.

Stock-Based Compensation

In December 2002, FASB issued new requirements relating to the accounting for stock-based compensation allowing the more than 170 enterprises that are voluntarily changing to the preferable fair value approach of accounting for stock-based compensation to effect that change in several alternative manners. The new requirements provide for clearer and more prominent disclosures about the costs of stock-based compensation, emphasized Chairman Herz, who added that they also increase the frequency of key stock-based compensation disclosures from annually to quarterly.

FASB has issued a preliminary document for public comment about accounting for stock-based compensation, explaining the similarities and differences between recent proposed requirements by the International Accounting Standards Board and the preferable fair value approach under existing U.S. standards. FASB has been reviewing the input received on that document and other input from investors, analysts, enterprises, and some members of Congress about a variety of issues relating to the accounting for stock-based compensation. Mr. Herz related that FASB will soon publicly deliberate whether it should add a new project to its agenda to pursue further improvements in this area, including whether the board should mandate the preferable fair value approach.

Revenue Recognition

The EITF has issued new requirements addressing revenue recognition issues arising from revenue arrangements with multiple deliverables. In the FASB chairman's view, those requirements should improve the comparability and transparency of the reporting of revenue from the delivery or performance of multiple products, services or rights to use assets. Examples of those types of arrangements include the sale of a cellular telephone with related telephone service, or the sale of medical equipment with related installation service. Moreover, as a longer-term solution to the many issues surrounding the accounting for revenue recognition, FASB added a major project to its agenda broadly addressing the whole area. According to Mr. Herz,the objective is to develop, jointly with the IASB, a coherent and consistent model for revenue recognition replacing much of the existing literature and serving as a principles-based source for developing future accounting guidance as new types of transactions emerge in the marketplace.

Global Issues

Late last year, FASB reached an historic agreement with the IASB to use its best-efforts to align agendas and undertake a specific project, with the help of SEC staff, aimed at accelerating the convergence process by trying to eliminate or narrow the differences between domestic and international standards. Because there are literally hundreds of such differences, noted Mr. Herz, realistically this effort will still be ongoing well beyond 2005 when Europe adopts international standards. The overall objective of international convergence is not convergence just for the sake of convergence, he explained, but rather to arrive at high-quality accounting solutions that improve the transparency of financial reporting in the United States and abroad.

The chairman also noted several recent changes designed to control the proliferation and consistency of U.S. accounting requirements. FASB decided that the role of the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants as a second senior-level accounting standard setter in the United States will be discontinued in one year. In the future, the maintenance and development of any industry-based standards would reside with FASB. With regard to the EITF, two FASB members will become members of the EITF agenda committee and the FASB members will more actively participate at all EITF meetings. Moreover, all future EITF decisions will be subject to FASB review and ratification. Finally, FASB broadened the composition of the EITF to include a user representative to ensure that the user perspective is properly considered in EITF deliberations.

User Advisory Council

In order to increase the involvement of investors and other users of financial reports in FASB activities, the board established the User Advisory Council, which includes representatives from mutual fund groups, major investment and commercial banks, rating agencies, and other groups that represent investors and other key users. The first public meeting of the UAC was held in February 2003. Mr. Herz pledged to use the advisory council as a source of input on FASB agenda decisions and on specific issues within ongoing projects.