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BDO SEIDMAN, LLP’S October 26, 2005 FINANCIAL REPORTING UPDATE

BDO SEIDMAN, LLP’S October 26, 2005 FINANCIAL REPORTING UPDATE. Speakers and Replay Information. Speakers Ben Neuhausen – National Director – Accounting Standards Jeff Lenz – National SEC Department Replay Access www.bdo.com/about/publications/assurance. GAAP Update October 2005.

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BDO SEIDMAN, LLP’S October 26, 2005 FINANCIAL REPORTING UPDATE

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  1. BDO SEIDMAN, LLP’SOctober 26, 2005FINANCIAL REPORTING UPDATE

  2. Speakers and Replay Information • Speakers • Ben Neuhausen – National Director – Accounting Standards • Jeff Lenz – National SEC Department • Replay Access • www.bdo.com/about/publications/assurance

  3. GAAP UpdateOctober 2005

  4. FASB Statements • No new Statements since the last quarterly update call

  5. FASB Exposure Drafts • Revised Exposure Draft on earnings per share • Three Exposure Drafts amending FASB Statements 133 and 140 • Amendments to sale accounting guidance in Statement 140 • Servicing rights—record all at fair value at closing; option to mark to fair value • Hybrid financial instruments—option to mark entire instrument to fair value rather than bifurcating

  6. FASB Staff Positions--Final • FAS 13-1: Rent incurred during construction charged to expense as incurred; not eligible for capitalization • FAS 123R-1: Classification of employee awards as liability or equity follows Statement 123R guidance until expiration or exercise • FAS 123R-2: Practical guidance on definition of grant date

  7. FASB Staff Positions--Proposed • FAS 123R-c: Shortcut approach to compute “APIC pool” • FAS 133-a: Instant gains (losses) on derivatives • SOP 94-6-a: Disclosure of nontraditional loans • FIN 46R-c: What variability should be considered in defining variable interests

  8. FASB Staff Positions--Proposed • AAG INV-a: Fully benefit responsive investment contracts (GICs, etc.) • FAS 140-c: Narrow clarification • FTB 85-4-a: Investments in life insurance contracts • FIN 45-b: Minimum revenue guarantees • FIN 13-a: Tax contingencies and leverage leases

  9. EITF Update SELECTED JUNE 2005 EITF ISSUES DISCUSSED or EFFECTIVE

  10. EITF Issues Discussed in Sept. 2005 • 04-13, Inventory Exchanges (Consensus reached) • Exchanges of inventory in contemplation of one another are nonmonetary exchanges under APB Opinion No. 29 and FASB Statement No. 153. • Generally should be measured at carryover basis (historical cost) • Exception—measure at fair value if: • Finished goods exchanged for raw materials or WIP (transferor of finished goods only) • Fair value is objectively measurable • Transaction has commercial substance

  11. EITF Issues Discussed in Sept. 2005 • 05-1, Accounting for the Conversion of an Instrument That Becomes Convertible upon the Issuer's Exercise of a Call Option (No conclusion reached) • EITF rejected previous tentative conclusions, asked FASB Staff to do further research

  12. EITF Issues Discussed in Sept. 2005 • 05-07, Accounting for Modifications to Conversion Options Embedded in Debt Instruments(Consensus reached) • Change in fair value of a conversion option should be treated the same as a change in cash flows • If transaction is a modification, change in fair value creates discount or premium, affects future interest expense

  13. EITF Issues Discussed in Sept. 2005 • 05-08, Income Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature(Consensus reached) • Basis difference on the debt is a temporary difference; record a deferred tax liability • Debit side of journal entry is shareholders’ equity • As debt discount is amortized to interest expense, basis difference shrinks and deferred tax liability is reversed to deferred tax benefit (P/L) • Retrospective application

  14. EITF Issue 05-08 • On January 1, 2005, an entity issues an in-the-money convertible debt instrument

  15. EITF Issue 05-08 • Journal entries at issuance

  16. EITF Issue 05-08 • 2005 Results

  17. EITF Issue 05-08 • 2005 Income tax provision • Current tax provision $24 ($60 x 40%) • Deferred tax benefit $1.20 ($3 x 40%) • Total income tax provision $22,80 • Effective tax rate 40% ($22.80/$57)

  18. EITF Issue 05-08 • If issuer is in a NOL carryforward position, consensus does not affect balance sheet or income statement, but does affect • Valuation allowance against deferred tax asset • Footnote disclosure of valuation allowance • Footnote disclosure of effective tax rate

  19. PCAOB Update October 2005

  20. PCAOB Update • Chairman McDonough resignation • Interpretive Guidance – Applying COSO to smaller companies (ED coming soon) • PCAOB standards pending SEC exposure and approval: • Auditing elimination of a material weakness • Tax services and independence

  21. SEC UPDATEOctober 2005

  22. SEC Update • Small Business Advisory Committee activities • Rulemaking – Deferral of 404 reporting for non-accelerated filers • Proposed rulemaking – Changes in accelerated filing dates • Miscellaneous developments • Expected future activities

  23. Small Business Advisory Committee Deliberations • More info. at: http://www.sec.gov/info/smallbus/acspc.shtml • Definitions (where and how to draw lines to scale regulations based on size: • “Small” companies – Smallest 6% of market capitalization (under $700 million) • “Microcap” companies – Smallest 1% of market capitalization (under $100 million)

  24. Small Business Advisory Committee Recommendations • August recommendations to SEC: • Give non-accelerated filers one more year to comply with 404 reporting • Freeze filing date requirements for “small” companies that are accelerated filers (at 75/40 days) • Commission should look to Committee’s definition of “small” company in implementing this suggestion

  25. Rulemaking – Deferral of 404 Reporting for Non-Accelerated Filers • Release 33-8618 (http://www.sec.gov/rules/final/33-8618.pdf) • 404 reporting now required in years ending on or after 7/15/07 • No relief for new accelerated filers • No 2006 relief for FPIs that meet definition • Comments requested (due 10/31) on issues re 404 reporting by smaller companies • Different reporting requirements (management, auditors)? • At what size threshold? • Cost estimates

  26. Proposed Rulemaking – Changes in Accelerated Filing Dates • Release 33-8617 (http://www.sec.gov/rules/proposed/33-8617.pdf) • Would create three categories of issuers and revise filing dates (this year):

  27. Proposed Rulemaking – Changes in Accelerated Filing Dates (cont’d) • Form 10-Q due date would remain at 40 days permanently • Would make it easier to change to a less accelerated status • Change to the lower status in the same year as Q2 float drops below $25M / $75M • Comments due 10/31

  28. Miscellaneous Developments • Chairman Christopher Cox has replaced Chairman Donaldson • Commissioner Annette Nazareth has replaced Commissioner Goldschmid • Chief Accountant Don Nicolaisen has resigned (effective 10/31)

  29. Miscellaneous Developments (cont’d) • Securities offering reform • FAQ on transition issues (http://www.sec.gov/divisions/corpfin/transitionfaq.htm) • Disclosure of risk factors, unresolved comments, WKSI status, and voluntary filer status applies to fiscal years ending on or after 12/1/05 (not reports filed on or after 12/1/05) • Risk factor disclosures required in 10-Qs only after an issuer is first required to include in Form 10-K • Additional FAQ expected

  30. Miscellaneous Developments (cont’d) • IRS Rev. Proc. 2005-51 • Available at: http://www.irs.gov/irb/2005-33_IRB/ar14.html • Requires disclosures regarding certain tax penalties in Form 10-K (Item 3) • Requirement is not reflected in the 10-K instructions • Disclose in 10-K covering period of IRS demand for payment (or year paid, if paid first) • Subject to additional penalties if fail to disclose • Applies to penalties related to returns due after 10/22/04

  31. Miscellaneous Developments (cont’d) • Relief for hurricane Katrina victims • http://www.sec.gov/news/press/2005-142.htm • http://www.sec.gov/news/press/2005-132.htm

  32. Expected Future Activities • Materiality/PAJEs project • New SAB still expected very soon • Revisit executive comp. proxy disclosures • Not in time for this proxy season • Revisit auditor independence rules • Audit committee is the audience

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