Agenda. SEC Hot TopicsFAS 141RXBRLIFRSCommittee on Reducing Financial Reporting ComplexityQuestions. SEC Hot Topics. Credit MarketsUse of ExpertsStealth RestatementsSignificant Acquisitions and Rule 3-05. While recent efforts of the FASB to remedy shortcomings in financial reporting for off
1. SEC and Accounting Hot Topics June 6, 2008 Presenter: Stephen Sommerville, PricewaterhouseCoopers LLP
2. Agenda SEC Hot Topics
Committee on Reducing Financial Reporting Complexity
3. SEC Hot Topics Credit Markets
Use of Experts
Significant Acquisitions and Rule 3-05
7. FAS 157 – Background on the standard Part of the convergence roadmap between US GAAP and IFRS
FAS 157 is part 1 of a two-part process
Issued in US in September 2006
IFRS exposure draft on fair value expected in 2009
8. FAS 157 – Scope of the standard FAS 157 amends definition of Fair Value throughout GAAP with limited exceptions
For example, FAS 123R is excluded from scope, as are some revenue recognition measurements based on vendor based payments
Two scoping exceptions
Practicability exceptions are preserved
Measures similar to fair value
9. FAS 157 – Fair value
The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
An exit price concept – the price an entity would receive to sell an asset or pay to transfer a liability
One company’s fair value may differ from another’s based on market access
10. FAS 157 – Fair value hierarchy Level 1 – Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets
Level 2 – Include other inputs that are directly or indirectly observable in the marketplace
Level 3 – Unobservable inputs (e.g., internal projections)
11. FAS 157 – Disclosures Driven by level within the hierarchy
12. Recurring Measurements
Amount of FV measurement at reporting date
Level within hierarchy
For Level 3 a roll-forward must be prepared and include total unrealized gains/losses in earnings due to assets and liabilities held at reporting date
Discussion of changes to techniques FAS 157 – Disclosures
13. FAS 157 – Disclosures
14. FAS 157 – Considerations Required adoption in first quarter of 2008 for calendar year-end companies.
Deferral for nonfinancial assets and liabilities recognized and measured on a recurring basis (FSP FAS 157-2).
Proposed FSP on measuring fair value of liabilities.
Annual financial statement disclosures are required in period of adoption.
15. Impact of Credit Market Events Credit market conditions continued to deteriorate during the first quarter of 2008.
Growing instances of failed auction rate securities, increasing credit spreads and margin calls.
Increasing situations where businesses are experiencing significant financial distress.
Current market has resulted in increased risk relating to companies or funds that may be highly leveraged.
Often, these companies may be financed by pledging certain assets as collateral.
As market events unfold, value of underlying collateral has decreased, which increases risk that creditors may request additional capital to collateralize debt.
16. Disclosure Considerations SEC focusing on adequacy of management’s disclosures surrounding credit market issues.
Significant changes to previous disclosures.
Material judgments and estimates.
Exposure of assets and impact on financial statements.
Disclosures surrounding sensitivity and risks.
Debt Covenant impacts and going concern considerations.
17. Disclosure Considerations SEC focusing on adequacy of management’s disclosures surrounding credit market issues.
Transparency surrounding timing of writedowns.
Why Q1 and not year end?
Why does this represent a change in estimate?
SEC intends to issue “Dear CFO” letters to encourage transparent disclosure.
18. SEC Topics – Use of Experts For filings under the 1933 Act, Rule 436 of Regulation C requires that registrants include a consent as an exhibit when any reference is made to a third-party valuation report.
A consent is required even if management’s disclosure references “consideration of” as opposed to “reliance on” the third-party report.
No consent is required if management accepts responsibility for the third-party’s work and does not reference the expert.
In filings under the 1934 Act, consents do not need to be obtained, unless the 1934 Act filing that references a third-party expert is incorporated by reference into a 1933 Act filing.
If a 1934 Act filing makes reference to a valuation firm or other expert, the registrant must provide the name of that expert.
19. SEC Topics – Restatements The requirements of Item 4.02 require that a Form 8-K be filed within four business days of the determination that past financial statements should no longer be relied upon because of an error.
In interpreting this requirement, the SEC staff, through existing SEC staff FAQ, has clarified that a separate Form 8-K is required even if the company discloses in a Form 10-Q or Form 10-K filed within the same four business day period that the prior statements cannot be relied upon.
The Government Accountability Office has recommended that the SEC staff codify its interpretation in order to reduce the opportunity for what some refer to as “stealth” restatements.
20. SEC Topics – Rule 3-05 Rule 3-05 governs the financial statement requirements for acquired businesses.
Number of audited years required is governed by the significance of the acquisition:
>50% – 3 years income statement/cash flow, 2 years balance sheet
>40% – 2 years income statement/cash flow, 2 years balance sheet
>20% – 1 year income statement/cash flow, 2 years balance sheet
Previously relief from 3 year requirement if revenues of acquiree less than $25 million.
In January 2008 the SEC increased the threshold under Rule 3-05(b)(2)(iv) to $50 million.
21. FAS 141(R)
22. FAS 141(R) Audio 10-04Audio 10-04
23. FAS 141(R) Fundamental principal: An acquired business should be recorded at fair value on acquisition date
More assets and liabilities will be recorded at fair value
Will create challenges for preparers and auditors Audio 10-05Audio 10-05
24. FAS 160 Changes the accounting for minority interests (“noncontrolling interests”)
Recorded as part of equity
Creates a new financial reporting relationship between majority and minority shareholders Audio 10-06Audio 10-06
25. Key area of change FAS 141
Recording acquisition driven in large part by total costs incurred by acquirer FAS 141(R)
Record acquired entity at fair value at acquisition date
Audio 10-08Audio 10-08
26. Transaction and restructuring costs Audio 10-09Audio 10-09
27. Valuation of equity securities issued as part of the purchase price Audio 10-10Audio 10-10
28. Earn-Outs (contingent considerations) Audio 10-11Audio 10-11
29. Recorded regardless of the likelihood of payment
Uncertainty of payment will be factored into determination of fair value
Will need to be remeasured at fair value in subsequent periods Earn-Outs (contingent considerations) Audio 10-12Audio 10-12
30. Accounting for In-process Research and Development (IPR&D) Continue to measure at fair value at acquisition date
Record as indefinite lived intangible assets and subject to impairment testing
After completion of project, amortize asset through earnings
Audio 10-15Audio 10-15
31. Adjustments to purchase accounting Audio 10-16Audio 10-16
32. Tax adjustments Audio 10-17Audio 10-17
33. FAS 141(R) Considerations Legal: involvement of legal counsel to assist in ensuring complete identification of contingencies, determining if they are contractual or noncontractual and whether specific thresholds are met.
Due Diligence: companies may want to consider earlier and more extensive due diligence procedures.
Existing acquisitions: even companies with no merger activity on the horizon may be affected (e.g., deferred tax valuation allowance, tax uncertainties and NCI related to prior acquisitions).
34. XBRL – Regulatory Update On May 14, the SEC proposed rule amendments that would mandate the use of interactive data in financial reporting.
Require XBRL (eXtensible Business Reporting Language), over a three-year phase-in period.
The largest filers would begin to submit financial statements in XBRL format as early as next spring.
Once released, the proposed rule amendments are expected to have a 60-day comment period. The SEC has indicated its intention to issue a final rule this fall.
35. XBRL – Regulatory Update
Summary of SEC’s Expected Proposed Rule Amendments
US GAAP Domestic and foreign large accelerated filers with a worldwide public float > $5 billion, would begin submitting financial statements in XBRL format for fiscal periods ending on or after December 15, 2008.
All other domestic and foreign large accelerated filers (i.e., issuers with a worldwide public float of $700 million or more) that use US GAAP would submit financial statements in XBRL format for fiscal periods ending on or after December 15, 2009.
All remaining smaller domestic filers as well as those foreign private issuers using IFRS would begin submitting financial statements in XBRL format for fiscal periods ending on or after December 15, 2010.
The proposal is not expected to require that auditors provide assurance on the exhibit that includes the XBRL-formatted financial statements.
36. IFRS – US Regulatory Update Foreign Private Issuers
Elimination of US GAAP reconciliation for FPIs effective March 2008.
SEC proposed rulemaking expected in the near future.
Will likely allow a certain subset of the domestic registrant population the option of using IFRS.
May be allowed as early as 2009.
Concurrent with proposed rulemaking, it’s expected that SEC will also issue a roadmap for moving to mandatory use of IFRS.
Timing of rule mandating use of IFRS still to be determined.
37. Advisory Committee on Improvements to Financial Reporting The Committee’s objective is to examine the US financial reporting system in order to make recommendations intended to increase the usefulness of financial information to investors while reducing the complexity of the financial reporting system to investors, companies and auditors.
Five subcommittees have been established:
Audit process and compliance
Delivering financial information