September 8, 2009 NDS 2009-29
This bulletin summarizes topics discussed at the EITF meeting on June 18, 2009, focusing particularly on three Issues that were subsequently ratified by the FASB on July 1:

The final consensus on EITF Issue 09-1, “Accounting for Own-Share Lending Arrangements in
Contemplation of Convertible Debt Issuance or Other Financing”

A consensus-for-exposure on EITF Issue 08-1, “Revenue Arrangements with Multiple Deliverables”

A
That Include Software Elements”
The FASB has posted on its website two Draft Abstracts on the consensuses-for-exposure to solicit comments. The Task Force will consider all comments received up until August 14 before reaching a final consensus on each Issue, which the FASB must then ratify before they become effective.
This bulletin also covers other topics discussed by the Task Force in June, as follows:

The milestone method of revenue recognition

Research and development assets

Accounting for contingent consideration
In addition, an SEC Observer clarified the SEC staff’s views on overcoming the presumption of compensation for certain shareholders in an escrowed share arrangement.
This bulletin is not a substitute for reading and applying the specific authoritative guidance for each Issue.
The June 18, 2009 EITF meeting minutes are available on the FASB website.
FASB Codification
On June 30, 2009, the FASB issued Statement 168, The FASB Accounting Standards
Codification TM and the Hierarchy of Generally Accepted Accounting Principles, which establishes the FASB Accounting Standards Codification TM (Codification or ASC) as the sole source of authoritative GAAP recognized by the FASB, excluding SEC guidance, for

New Developments Summary 2 nongovernmental entities.
Ongoing standard-setting process
With the establishment of the Codification as the sole source of authoritative GAAP, the results of ongoing standard-setting activity (including that of the EITF) will be an
Accounting Standards Update (ASU) comprising the background, basis for conclusions, and an appendix of Accounting Standards Update Instructions. The contents of the
Accounting Standards Update Instructions will include marked changes to the ASC. The
FASB does not consider ASUs as authoritative in their own right, but have indicated that they serve only to provide background information about the issue, update the
Codification, and provide the basis for conclusions on changes in the Codification.
Although an ASU has not yet been prepared for EITF Issue 09-1, draft codification instructions are included in the June 18, 2009 EITF meeting minutes available on the
FASB website.
A.
Consensus .............................................................................................................................................. 2
EITF Issue 09-1: Own-share lending arrangements in contemplation of issuing convertible debt ........ 2
B.
Consensuses-for-exposure .................................................................................................................... 4
EITF Issue 08-1: Revenue arrangements with multiple deliverables ..................................................... 4
EITF Issue 09-3: Applicability of SOP 97-2 to certain software-element arrangements ........................ 6
C.
Other EITF Issues discussed ................................................................................................................. 7
EITF Issue 08-9: Milestone method of revenue recognition ................................................................... 7
EITF Issue 09-2: Research and development assets ............................................................................ 7
EITF Issue 09-4: Seller accounting for contingent consideration ........................................................... 8
D.
SEC staff announcement ........................................................................................................................ 8
EITF Topic D-110: Escrowed share arrangements and the presumption of compensation .................. 8
EITF Issue 09-1, “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt
Issuance or Other Financing,” addresses how an issuer accounts for an arrangement to lend its own shares in contemplation of a convertible debt issuance or other financing. The Task Force reached a consensus on this Issue stipulating that an issuer must (1) recognize the fair value of a share-lending arrangement as an issuance cost, and (2) exclude shares loaned under such an arrangement when calculating basic and diluted earnings per share, unless default of the arrangement occurs.
In connection with convertible debt offerings, an entity may enter into an arrangement to lend its own shares to the investment bank that markets the entity’s convertible debt to investors. The borrowed shares enable the investment bank to provide the convertible-debt investors an opportunity to hedge the conversion option in that debt. The investment bank typically pays the issuer a nominal fee that is well below the shares’ fair market value (usually the par value of the stock) for the share lending.

New Developments Summary 3
Generally, upon conversion or maturity of the debt, the investment bank is required to return the borrowed shares to the issuer for no additional consideration. Shares loaned under share-lending arrangements are legally outstanding, and the holders of these shares are entitled to vote on shareholder matters and to receive dividends. However, the terms of share-lending arrangements typically require the investment bank to reimburse the issuer for dividends paid on loaned shares and preclude it from voting any shares.
EITF Issue 09-1 applies to an equity-classified, share-lending arrangement on an entity’s own shares that is executed in contemplation of a convertible debt offering or other financing arrangement.
The consensus requires an entity to recognize the fair value of a share-lending arrangement within the scope of this Issue as an issuance cost at the inception of the arrangement with the offset to additional paid-in capital.
If it becomes probable that the counterparty to the arrangement will default, the issuer is required to recognize an expense for the fair value of the unreturned shares, net of the fair value of probable recoveries with the offset to additional paid-in capital. The issuer is also required to remeasure the fair value of the unreturned shares, net of the fair value of probable recoveries, for each period until the arrangement consideration payable by the counterparty becomes fixed. The remeasurement amount is recognized in earnings.
Shares loaned in a share-lending arrangement are excluded from the issuer’s calculation of basic and diluted earnings per share, unless default of the arrangement occurs. Upon default, the loaned shares would be included in the calculation of basic and diluted earnings per share.
If dividends on the loaned shares are not reimbursed to the entity, any contractual dividends and participation rights in undistributed earnings attributable to the loaned shares shall be deducted in computing income available to common shareholders consistent with the two-class method.
The consensus requires the following disclosures on an annual and interim basis for share-lending arrangements, in addition to the disclosures required under the existing provisions of FASB Statement
129, Disclosure of Information about Capital Structure (ASC 505, Equity ).

A description of outstanding share-lending arrangements, including all significant terms

The reason why the entity entered into the arrangement

The fair value of the outstanding loaned shares at the balance-sheet date

The treatment of the arrangement in calculating earnings per share

The unamortized amount and classification of related issuance costs at the balance-sheet date

The amount of interest cost recognized for the amortization of the related issuance costs

Amounts of dividends paid related to loaned shares that will not be reimbursed
Additional disclosures are also required if it becomes probable that the counterparty to the share-lending arrangement will default.

New Developments Summary 4
This Issue is effective for fiscal years beginning on or after December 15, 2009 and for interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years.
Retrospective application is required for arrangements outstanding as of the beginning of the fiscal year in which this Issue is initially applied. The Issue is effective for interim or annual periods beginning on or after June 15, 2009 for share-lending arrangements entered into in those periods.
Share-lending arrangements that have been terminated because of counterparty default before the effective date of this Issue, but for which a final settlement has not been reached as of the effective date, are within the scope of this Issue.
After completing its redeliberation of the consensus-for-exposure on EITF Issue 08-1, “Revenue
Arrangements with Multiple Deliverables,” the Task Force decided to reexpose this Issue for comment due to significant changes that were proposed both at the March and June meetings.
The consensus-for-exposure would amend the criteria in EITF Issue 00-21, “Revenue Arrangements with
Multiple Deliverables” (ASC 605, Revenue Recognition , 25, “Multiple-Element Arrangements”), for evaluating whether a delivered item in a multiple-element arrangement would be considered as a separate unit of accounting. It would also require that arrangement consideration be allocated to separate units of accounting based on their relative selling prices, and would establish a hierarchy of evidence for determining each unit’s selling price.
In November 2008, the EITF reached a consensus-for-exposure on EITF Issue 08-1 that would amend the criteria in EITF Issue 00-21 for determining whether revenue arrangements with multiple deliverables consist of more than one unit of accounting and the guidance for measuring and allocating consideration among separate units of accounting. In March 2009, the Task Force tentatively decided to revise the proposed consensus by eliminating the use of the residual method and instead requiring a relative selling price method to allocate the arrangement consideration. Furthermore, at the June meeting, the Task
Force tentatively decided to expand the disclosure requirements and to change the transition and effective date in the consensus-for-exposure. As a result, the following description of the consensus-forexposure reflects the changes proposed at both the March and June 2009 meetings.
The scope of EITF Issue 08-1 would remain the same as the scope of EITF Issue 00-21.
EITF Issue 00-21 precludes an entity from considering a delivered item in an arrangement with multiple deliverables as a separate unit of accounting if the entity does not have objective and reliable evidence of the fair value of any undelivered item(s). The consensus-for-exposure on EITF Issue 08-1 would eliminate the criterion for objective and reliable evidence of fair value from EITF Issue 00-21. Therefore a delivered item would be treated as a separate unit of accounting only if both of the following criteria are met:

The delivered item(s) has value to the customer on a stand-alone basis.

New Developments Summary 5

If the arrangement includes a general right of return relative to the delivered item(s), the delivery or performance of the undelivered item(s) is considered probable and is substantially in the control of the vendor.
The consensus-for-exposure on EITF Issue 08-1 indicates that consideration paid under an arrangement that falls within the scope of EITF Issue 00-21 would be allocated to separate units of accounting based on their relative selling prices, except as noted below. EITF Issue 08-1 would establish a hierarchy of evidence for determining each unit’s selling price based on vendor-specific objective evidence (VSOE) or, in the absence of VSOE, third-party evidence (TPE). If neither VSOE nor TPE exists, the vendor would use its best estimate of the selling price. Consistent with the objective of determining VSOE, a vendor’s best estimate of selling price would be the price at which the vendor would transact if the deliverable were sold by the vendor on a stand-alone basis. To determine the best estimate of a selling price, the vendor would consider market conditions in addition to entity-specific factors.
If U.S. GAAP requires that a separate unit of accounting in an arrangement must be recorded at fair value and marked-to-market each period, the amount of consideration allocated to that separate unit of accounting would be its fair value. The remainder of the arrangement’s consideration would be allocated based on each unit’s selling price in accordance with this proposed consensus.
The consensus-for-exposure includes a disclosure objective that would require vendors to disclose information about significant judgments made about the application of EITF Issue 08-1, as well as changes in judgment or in the application of this Issue that might significantly affect either the timing or the amount of revenue recognition. The expanded disclosures would include both qualitative and quantitative information and would be more extensive than the disclosures currently required by EITF
Issue 00-21.
In addition to information about the nature of multiple-deliverable arrangements, significant deliverables within those arrangements, and relevant provisions of those arrangements, entities would also be required to disclose the following:

The significant factors, inputs, assumptions, and methods used to determine the selling price of significant deliverables

Whether significant deliverables in multiple-element arrangements qualify as separate units of accounting and, if not, the reasons why

General timing of revenue recognition for significant units of accounting

The effect of changes in either the selling price or in the assumptions or methods used to determine the selling price for a specific unit of accounting if those changes have a significant effect on the allocation of arrangement consideration
The Task Force tentatively concluded that if a final consensus on this Issue is reached and ratified by the
FASB, it would be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. In addition, early application would be permitted as of the beginning of a fiscal year, provided that the entity did not previously issue financial statements for any period within that year.

New Developments Summary 6
For each reporting period in the initial year of adoption, a vendor would be required to disclose the amount of revenue recognized subject to the measurement requirements of EITF Issue 08-1, as well as the amount of revenue that would have been recognized if the related transactions were subject to the measurement requirements of EITF Issue 00-21.
EITF Issue 09-3, “Applicability of AICPA Statement of Position 97-2 to Certain Arrangements That Include
Software Elements,” considers changes to the scope of arrangements under AICPA Statement of
Position (SOP) 97-2, Software Revenue Recognition (ASC 985, Software , 605, “Revenue Recognition”).
In June, the Task Force reached a consensus-for-exposure, stipulating that tangible products containing software components and nonsoftware components that function together to deliver a product’s essential functionality would be excluded from the scope of SOP 97-2. The consensus-for-exposure also includes factors that an entity should consider in making that determination, as well as examples illustrating the evaluation criteria.
The scope of SOP 97-2 includes products or services that contain software that is more than incidental to the product or service as a whole. Consequently, certain software-enabled devices that are sold with other deliverables fall within the scope of SOP 97-2. To separate deliverables in a multiple-element arrangement, SOP 97-2 requires the use of VSOE of fair value. However, vendors of software-enabled devices are seldom able to determine VSOE, so revenue is not always recognized in a pattern that is consistent with the economic substance of the arrangement.
EITF Issue 09-3 would apply to arrangements that include the sale of tangible products that are within the scope of SOP 97-2.
Under the consensus-for-exposure, tangible products containing both software components and nonsoftware components that function together to deliver a product’s essential functionality would be excluded from the scope of SOP 97-2. To make that determination, an entity would be required to consider the following factors:

If a tangible product always contains the software component when the product is sold, the software component would be considered essential to the functionality of the product.

If an entity sells products with similar functionality, such as different models, and the only substantive difference is that only one model includes software that the other product does not, the products would be considered the same for purposes of evaluating the item in the first bullet.

If an entity sells a product with software that it also sells on a stand-alone basis, the separate sale of the software would not affect the evaluation.

Software components would not have to be embedded within a product to be considered essential to the product’s functionality.
The consensus-for-exposure also includes several examples to illustrate the application of its provisions, including the evaluation of the factors above to specific fact patterns.

New Developments Summary 7
If a product contains software that is not essential to the product’s functionality, the Task Force tentatively concluded that the nonessential software and any deliverables related to that software would be within the scope of SOP 97-2. If an undelivered element relates to deliverables both within and outside the scope of SOP 97-2, the undelivered element would be separated into a software deliverable and a nonsoftware deliverable under the proposed consensus.
In an arrangement that includes deliverables that are both within and outside the scope of SOP 97-2, the consensus-for-exposure would require an entity to allocate arrangement consideration to each separate unit of accounting following the guidance in EITF Issue 08-1.
Under the consensus-for-exposure, an entity would provide the disclosures prescribed in EITF Issue 08-1 for multiple-elements arrangements that would be affected by EITF Issue 09-3.
The Task Force tentatively concluded that if a final consensus on this Issue is reached and ratified by the
FASB, it would be applied prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Early application would be permitted as of the beginning of a fiscal year, provided that the entity did not previously issue financial statements for any period within that year. An entity would be allowed to elect early application of this Issue only if it also elects to early apply EITF Issue 08-1.
For each reporting period in the initial year of adoption, an entity would be required to disclose the amount of revenue recognized subject to the measurement requirements of EITF Issue 09-3, as well as the amount of revenue that would have been recognized if the related transactions were subject to the measurement requirements of SOP 97-2. The disclosures in paragraphs 17 and 18 of FASB Statement
154, Accounting Changes and Error Corrections (ASC 250, Accounting Changes and Error Corrections ), would also be required.
The Task Force redelilberated EITF Issue 08-9, “Milestone Method of Revenue Recognition,” at the
June meeting, but did not reach a consensus.
Under the Issue’s consensus-for-exposure, the milestone method would be an acceptable method of revenue attribution if the milestone is deemed to be substantive. Although the Task Force affirmed this view in its redeliberations, it could not conclude whether to require the milestone method described in this
Issue if an entity chooses to recognize arrangement consideration that is contingent on achieving a substantive milestone entirely in the period the milestone is achieved.
Further discussion is expected at a future meeting.
The Task Force discussed EITF Issue 09-2, “Research and Development Assets Acquired in an Asset
Acquisition,” but reached no conclusions. EITF Issue 09-2 would address the recognition of tangible and intangible assets acquired in a transaction other than a business combination that either are used in, or result from, research and development activities.

New Developments Summary 8
This Issue was added to the Task Force’s agenda to address concerns about the different accounting treatment for similar research and development assets, depending on how those assets were acquired.
FASB Statement 141 (revised 2007), Business Combinations (ASC 805, Business Combinations ), requires capitalizing research and development assets acquired in a business combination, while FASB
Statement 2, Accounting for Research and Development Costs (ASC 730, Research and Development ), requires expensing research and development assets acquired outside of a business combination if they have no alternative future use.
Further discussion is expected at a future meeting.
EITF Issue 09-4, “Seller Accounting for Contingent Consideration,” was added to the EITF agenda to address questions on the subsequent measurement requirements for the seller’s right to additional consideration received in the deconsolidation of a subsidiary.
The Task Force discussed Issue 09-4 on the premise that guidance in FASB Statement 160,
Noncontrolling Interests in Consolidated Financial Statements (ASC 810-10, Consolidation ), on the calculation of gain or loss on deconsolidation, would include the fair value of contingent consideration.
However, some Task Force members questioned whether that guidance should apply to the seller’s initial recognition and measurement of contingent consideration, or whether the guidance on gain contingencies in FASB Statement 5, Accounting for Contingencies (ASC 450, Contingencies ), would be more appropriate. The FASB Chairman, who was present at the meeting, agreed that this Issue could be expanded to consider seller accounting for contingent consideration at initial measurement in addition to subsequent measurement.
The Task Force did not reach any tentative conclusions at the meeting other than tentatively deciding to limit the scope of Issue 09-4 to transactions within the scope of Statement 160.
Further discussion is expected at a future meeting.
In June, the SEC Observer clarified the SEC staff’s views on overcoming the presumption of compensation for certain shareholders in an escrowed share arrangement.
Historically, the staff has presumed that escrow share arrangements involving the release of shares to certain shareholders based on performance criteria are compensatory. In EITF Topic D-110, “Escrowed
Share Arrangements and the Presumption of Compensation,” the staff clarified that entities should consider the substance of the transaction in evaluating whether the presumption of compensation may be overcome, including whether the transaction was entered into for a reason unrelated to employment, such as to facilitate a financing transaction. In that situation, the staff generally believes that the escrowed shares should be reflected as a discount in the allocation of proceeds.
In an escrowed share arrangement in which the shares are automatically forfeited if employment terminates, the staff believes the arrangement is compensatory. This position is consistent with the guidance in paragraph A87 (a) of Statement 141R (ASC 805-10-55-25).
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New Developments Summary 9
This Grant Thornton LLP bulletin provides information and comments on current accounting issues and developments. It is not a comprehensive analysis of the subject matter covered and is not intended to provide accounting or other advice or guidance with respect to the matters addressed in the bulletin. All relevant facts and circumstances, including the pertinent authoritative literature, need to be considered to arrive at conclusions that comply with matters addressed in this bulletin.
For additional information on topics covered in this bulletin, contact your Grant Thornton LLP adviser.