XBRL-US FEI Top Challenges for financial executives for 2005

1. XBRL-USFEI Top Challenges for financial executives for 2005 Colleen Cunningham President and CEO Financial Executives International July 2005

2. Who Is FEI? • The professional association of choice for senior-level corporate financial executives • Over 15,000 members from companies both public and private, crossing all industry sectors • CFOs, VPs of Finance, Controllers, Treasurers and Tax Executives • The definitive voice of corporate finance • Advocating for the interests of our members before the SEC, FASB, IASB, PCAOB and Congress • A member-service-oriented organization • Dedicated to the professional development of our members • Peer networking, information, career planning, conferences, publications, research

3. FEI NationalTechnical Committees • Benefits Finance (CBF) • Corporate Finance (CCF) • Corporate Reporting (CCR) • Finance & Information Technology (CFIT) • Government Business (CGB) • Private Companies (CPC) • Taxation (COT)

4. Top Challenges for financial executives for 2005 • Internal Controls • Stock Options • Revenue Recognition • Principles vs. rules • Business Combinations • International Convergence • Off-balance-sheet financial disclosures • MD&A/Drive for more transparency • XBRL

5. #1- Internal Controls • SOX 404 reporting on internal controls was effective for the 2004 year end for accelerated files. • Extensions for certain filers • Requires management to assess their internal control environment and for their auditors to attest to that assessment. • Survey of our private company members shows that many are adopting 404 for their companies as well, both voluntarily and because of other external forces, such as lenders and state requirements.

6. #1- Internal Controls • As auditors create more integrated audit processes going forward - integrating the financial statement and the internal control assessment into one audit process – could result in trickle down effect on non-public companies. • FERF Report on Practices from Leading companies in implementing 404 and sustainability – standardization makes implementation easier

7. How linked to XBRL? • Section 404/internal controls • A reporting format such as XBRL could enable easier documentation of internal controls – less manual intervention and massaging • Can enable the integration of disparate systems to optimize the internal control process • Can be a critical tool for enabling compliance with 404 – monitoring can occur real time

8. #2 – Stock Options • FASB received over 13,000 comment letter on the initial proposal. • FASB has now mandated that all stock options be expensed for periods beginning after June 15, 2005. • Companies will be evaluating potential changes to their compensation practices, focusing on valuation methodologies for fair value expensing. • Standard does not specify a preferred valuation model.

9. How linked to XBRL? • Concern about inconsistency among companies regarding the choice of valuation model • A lot of concern regarding the reliability (verifiability) of determining appropriate fair value – if assumption disclosures were tagged – management’s choices would be more transparent to users and easily compared with others

10. #3 - Revenue Recognition • FASB has had a revenue recognition agenda item for quite some time. • SEC still notes that revenue recognition continues to be one of the top areas for comment letters. • Currently over 180 different pieces of accounting literature and about 60 different models that address revenue recognition. • Objective of FASB project is to move to a single approach to revenue recognition. • To develop a conceptual model that would apply to all industries and transaction types around the world. • Convergence project with IASB.

11. #3 - Revenue Recognition • FASB current thinking on project creates dramatic changes to revenue recognition • Look at it based on changes to assets and liabilities rather than traditional earnings process methodology. • Basically means looking at a transaction and determining what is the “performance obligation” at fair value and recording revenue accordingly. • FASB Chairman has indicated that this is a “R&D” project intended to make revenue recognition more consistent • Long-term project • Preliminary views document for public comment expected in late 2005. (This is issued prior to an Exposure Draft.)

12. How linked to XBRL? • Project is in early stages but… • Concern about the reliability (verifiability) of determining appropriate fair value of performance obligation – if assumption disclosures were tagged – management’s choices would be more transparent to users and easily compared with others • Concern about current proliferation of literature could be overcome if applicable literature was linked to the revenue recognition accounting policy footnote – would clearly articulate which literature management felt was most relevant

13. #4 – Principles vs. rules • SEC report supports a move towards more “objectives-oriented” standards • All constituents want to move towards less rules • However, it is very difficult to do in our current litigious environment • No one wants to be second-guessed

14. How linked to XBRL? • Principles-based accounting standards • If information is tagged – much easier to determine judgments made by management – analysts could easily adjust for their own analysis • Comparability is enhanced across companies – makes management’s financial reporting choices more transparent – search facilitating technology

15. #5 - Business Combinations • Joint project with IASB, which will significantly impact the accounting for business combinations. EDs issued in June 2005. • Among the many changes are the following: • contingent assets and liabilities associated with an acquisition would be recognized at the date of acquisition at FV, with any subsequent changes reflected in earnings. This is very different from current accounting, which allows you to adjust the purchase price, and therefore, the goodwill associated with an acquisition, rather than recording any of the contingency in earnings. • In process R&D would be capitalized at the date of acquisition – not written off upon acquisition. • Acquired accounts receivable would be recognized at FV – that is no separate allowance for doubtful accounts • All acquisition related costs paid to third parties would be expensed as incurred, rather than capitalized as part of the purchase price.

16. #5 – Business Combinations • Rationale for proposed changes is to measure the FV of the business acquired rather than the accumulated costs incurred, what you paid. This is another step that IASB/FASB is taking towards FV accounting. • Some of the early concerns include the feasibility of measuring fair value of contingent consideration, there would obviously be a bias towards more conservative valuations, and expensing the costs of transaction does not make intuitive sense as they generally reduce uncertainty and add value to the transaction. • ED issued June 2005, final statement possible by the end of 2005.

17. How linked to XBRL? • Concern about the reliability (verifiability) of determining appropriate fair value of assets/liabilities acquired – if assumption disclosures were tagged – management’s choices would be more transparent to users and easily compared with others • Tracking of changes in contingencies that may impact earnings by acquisition may be enabled • Integration of acquisitions may be easier if all companies are reporting in the same language

18. #6 – International Convergence • Drive towards converging accounting standards internationally • Most FASB projects are now joint projects with IASB • SEC committed to convergence

19. How linked to XBRL? • Convergence • May be less important in an XBRL environment. Could adapt to country reporting regimes much more easily. • Comparability is enhanced • Complimentary toward objective of a single set of high quality, understandable and enforceable global accounting standards

20. #7 - Off-Balance Sheet Arrangements Disclosures • In accordance with SOX, SEC recently issued on a paper on off-balance-sheet disclosures. • Report is wide-ranging and has rulemaking implications for FASB. • Covers consolidations policy, improvements to pension accounting as well as lease accounting.

21. How linked to XBRL? • Too early to tell • But, many of the same implications that recent we noted in previous issues may apply.

22. #8 – MD&A/Drive for more transparency • MD&A continues to be a focus of the SEC. • Key is to be transparent and to communicate your story in the MD&A so that an investor can take that information and have a better understanding of your business than they would with just looking at the financials. • Focus on Plain English and communication. • At the end of 2003, the SEC issued guidance on MD&A focused on 3 principal objectives: • through the eyes of management • enhance overall financial disclosure and provide context • discuss the likelihood that past performance is indicative of the future

23. #8 – MD&A Guidance • Liquidity, cash flow and capital continue to be an area of focus for the SEC this year. • Discuss cash requirements, sources of cash, known trends, uncertainties, demands and commitments. Provide information on the underlying drivers. • The SEC has also stated that they believe the Critical Accounting Policy descriptions still need work. They are not happy with simply restating the CAP footnote in MD&A. The goal is to ensure that your disclosures of CAP are robust enough for a user to understand your business model. • MD&A should not just be a repeat of footnote disclosures.

24. How linked to XBRL initiative? • Move towards transparency • If items were tagged and identified more information could be made available for investors and analysts to analyze in the manner that chose to do so • Enhances information acquisition, evaluation and combination • Improves transparency without additional disclosures • Newfound discovery capabilities • Can benefit nonprofessional users

25. How linked to XBRL initiative? • Timeliness • Capital markets rely on timely and reliable information for the allocation of capital resources • Access information more quickly • Faster processing • Accelerated filing deadlines can be easier to accomplish

26. #9 - eXtensible Business Reporting LanguageXBRL • Companies will be hearing more and more about XBRL this year. • Not a current requirement to report using this format, but SEC has asked for voluntary reporting by companies using XBRL in 2004. • SEC, IASB and FASB both have staff dedicated to this reporting standard. • XBRL is a powerful tool that can offer better decision-making and an enhanced, more integrated internal control environment.

27. #9 - XBRL • Works like a barcode, similar to how items are coded at the supermarket. • The barcoding made checking out at the supermarket a much less time-consuming task • Similarly, financial information would be “tagged” and would have consistent definition that could be understandable by various software applications. • This could make financial information easier to communicate to users. • Not expecting many companies to voluntarily report in XBRL in 2004 given other priority items, but expect to see more and more companies voluntarily adopting in 2005, as companies recognize the efficiency that it can bring to the process and as tools are developed to help companies do this more easily.

28. Transformation of Financial Reporting • Verge of a fundamental transformation of financial reporting practices • Trend towards transparency driven by increased public scrutiny, increased regulatory oversight and the emergence of new technology • Driving a need for new standards for information integrity, reporting transparency and system integration

29. XBRL: Cheaper, Better, Faster • Reduces the cost of preparing, publishing and analyzing information (CHEAPER) • Increases efficiency of business decisions, real-time reporting, deeper analysis capability, reduces margin for human error, more accessible and easier to use, enhances comparability (BETTER) • Automates the migration of information from systems to financial statements, increases the speed of data use and related decisions, easier to transfer data (FASTER)

30. Financial Executives • Have a critical responsibility to communicate operational results to stakeholders • Growing demand for efficient delivery in an interactive medium • Better decision making • Internal control environment enhanced through less retyping, more system integration, etc.