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Q1 2009 Financial Accounting and Reporting Reminders

Q1 2009 Financial Accounting and Reporting Reminders. BDO Financial Reporting Update. April 2009. Purpose of Session.

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Q1 2009 Financial Accounting and Reporting Reminders

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  1. Q1 2009 Financial Accounting and Reporting Reminders BDO Financial Reporting Update April 2009

  2. Purpose of Session • Goal: The objective of today’s call is to provide participants with reminders specific to Q1 2009 financial accounting and reporting considerations with regard to newly effective standards, as well as to other matters of continuing or evolving importance

  3. Discussion Outline • Fair Value – FAS 157 • Business Combinations – FAS 141R • Minority Interests – FAS 160 • Derivative Instrument Disclosures – FAS 161 • Securities – Select Practice Issues • Convertible Securities – FSP APB 14-1; EITF 07-5 • Participating Securities – FSP EITF 03-6-1 • Redeemable Securities – EITF Topic D-98 • Impairment Considerations • Interim Disclosures under FAS 107 • Internal Control Over Financial Reporting (ICFR) • Required Interim Communications • SAB 74 Disclosures • Private Company Reminder • Effective Dates Reminders

  4. Fair Value – FAS 157 • FAS 157 now effective for nonfinancial assets & liabilities recognized or disclosed at FV on a nonrecurring basis • FYs beginning after 11/15/2008, and interim periods w/in those FYs (1/1/2009 for calendar year companies) • Use for any measure of FV required by GAAP for which the scope exception of FAS 157 does not apply • Examples of new situations where FAS 157 will now be applicable: • Accounting for business combinations under FAS 141R • First and second steps of GW impairment testing under FAS 142 • Long-lived asset impairment testing under FAS 144 • Determination of asset retirement obligations under FAS 143 • Measurement of exit liabilities under FAS 146 • Reminder: Consider need for valuation experts’ involvement early in the reporting process!

  5. Fair Value – FAS 157 • Reminder: Additional 10-Q disclosures suggested by: • SEC's “Dear CFO” letter to registrants, which relate to: • Level 3 assets and liabilities • All assets and liabilities measured at FV • Paragraph 33 of FAS 157 (Sample disclosure in paragraph A36) • Disclose information which allows users to assess the inputs used to develop measurements • FV measurements recorded during the period • Level within FV Hierarchy • Description of inputs for significant Level 3 measurements • Description of valuation technique used to measure FV

  6. Fair Value – FSP FAS 157-4 • FSP FAS 157-4, Determining Whether a Market Is Not Active and a Transaction Is Not Distressed, approved April 3, 2009 • Issued due to lack of sufficient guidance in FSP FAS 157-3 and the SEC’s mandated mark-to-market accounting study conclusions on how to determine (a) when markets become inactive and (b) if a transaction or group of transactions is not orderly • Effective for interim and annual periods ending after 6/15/2009, applied prospectively with early adoption for periods ending after 3/15/2009*. Retrospective application to a prior interim or annual reporting period is not permitted. • Revisions from change in valuation technique or its application shall be accounted for as a change in accounting estimate under FAS 154 • *if early adopt, must early adopt all 3 FSPs.

  7. Fair Value – FSP FAS 157-4 (cont’d) • Two-step process: • Step 1 – FSP provides factors used to determine whether market is active/inactive If inactive, proceed to Step 2 • Step 2 – Entities must base conclusions about whether the transaction is not orderly on the weight of all evidence. The final FSP will further include circumstances that indicate that a transaction is not orderly (e.g., being in or near bankruptcy; or selling only to or marketing the asset to a single buyer) • Note: Management should consider other factors required to adjust quoted price per FAS 157 para. 29 • If not orderly transaction, use valuation technique other than one using quoted price w/o significant adjustment • E.g., PV technique to estimate FV  Inputs should reflect orderly transaction b/t market participants at measurement date. Reflect all risks inherent in the asset, including a reasonable risk premium for bearing uncertainty that would be considered by willing buyers/sellers in pricing the asset in a nondistressed transaction at measurement date

  8. Fair Value – Employee Benefit Plans • Reminder: FAS 157 also applies to 2008 Employee Benefit Plan financial statements

  9. Business Combinations – FAS 141R Reminders • Effective for FYs beginning after December 15, 2008; prospective application • Measurement Period – Subsequent adjustments to preliminary (“provisional”) purchase price allocations are recognized as if completed at acquisition date (i.e., not included in earnings) • Must reflect new info about facts & circumstances existing at acquisition date • Not to exceed 1 year from acquisition date • Reflect in GW • Prior period F/S revised in subsequent filings for changes

  10. Business Combinations – FSP FAS 141R-1 • FSP FAS 141R-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arises from Contingencies, issued April 2009. • Scope: Applies to all assets acquired and liabilities assumed in a business combination that arise from contingencies that would be w/in the scope of FAS 5 (except for assets/liabilities subject to specific guidance in FAS 141R – e.g., indemnification of assets; contingent consideration; valuation allowances) • Carries forward general requirements under FAS 141 • Exception: Warranties, whose obligation at FV can often be determined! • Effective for FYs beginning after December 15, 2008; prospective application

  11. Business Combinations – FSP FAS 141R-1 (cont’d) • Initial Measurement: Acquirer is required to recognize at FV an asset acquired or liability assumed in a biz com that arises from a contingency if the acquisition-date FV can be determined during the measurement period • If can’t be determined Follow FAS 5 and FIN 14 • If criteria are not met, then acquirer would not record an asset or liability as of acquisition date and instead would account for contingency under other GAAP • Subsequent Measurement: Acquirer shall develop a “systemic and rational basis depending on nature of the asset/liability” • Disclosures: Enhanced disclosures are required

  12. Business Combinations – FAS 141R Reminders • S-X 3-05 Significance Tests • Investment test – new determination for numerator • Include: FV of any contingent consideration • Exclude: Transaction costs

  13. Business Combinations – Transition Issues • Acquisition-related transaction costs • Expensed as incurred, typically as part of operations • Determine whether any costs previously deferred at January 1, 2009 for pending deals have been written off either in the current period or through retrospective application of FAS 141R to prior periods • Income taxes • Changes in income tax valuation allowance and income tax uncertainty accruals resulting from business combination transactions, regardless of when they occurred, are now reflected as adjustments to income tax expense

  14. FAS 160 – Reminders and Transition Issues • Presentation and disclosure requirements are applied retrospectively • Revise PY (i.e., Q1 2008) disclosures as if FAS 160 had been applied • Reclassify NCI to separate section within equity for all periods presented • Recast net income/loss and comprehensive income/loss to show amounts attributable to NCI • Other disclosures as required by paragraphs 38 and 39 of ARB 51 • Impact on future registration statements • Attention should be given to any impact on covenants and other contractual arrangements (e.g., compensation arrangements, etc.)

  15. FAS 160 – Reminders and Transition Issues • Parent company will no longer absorb losses attributed to NCI in excess of the NCI’s investment in the subsidiary • Upon adoption of FAS 160, prior excess losses absorbed by the parent are not adjusted; prospective future losses are attributed to the NCI • If 2009 net income reported by the parent is significantly different under FAS 160 than what it would have been under old rules, disclosure of pro forma income and EPS should be made

  16. FAS 161 – Disclosures about Derivatives • Interim disclosures required • Comparative information for periods prior to adoption encouraged, not required • What’s required to be disclosed? • Objectives for holding and using derivatives • Level of activity in derivatives (e.g., Total notional amount of contracts outstanding) • Minimum of two tables • Location and FV of derivatives in the B/S • Location and amount of gains/losses on derivatives in P&L or OCI • Existence of credit-risk-related contingent features (e.g., Material adverse change clauses) • Illustrative examples included in FAS 161 • Impact on future registration statements

  17. Securities – Select Practice Issues • Convertible Securities – FSP APB 14-1; EITF 07-5 • Participating Securities – FSP EITF 03-6-1 • Redeemable Securities – EITF Topic D-98

  18. Convertible Securities – FSP APB 14-1 • FSP APB 14-1, Accounting forConvertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement) • Effective for F/S issued for FYs beginning after 12/15/2008, and interim periods w/in those FYs • Applies to: • Convertible debt instruments that may be settled, either partially or entirely, in cash (or other assets) upon conversion • E.g., Issuer must settle entire obligation in cash or stock at time of conversion • E.g., Issuer may pay accreted value of obligation in cash and has option of settling conversion spread in cash or shares • Convertible preferred shares that are mandatorily redeemable financial instruments and are classified as liabilities under FAS 150 because they require a cash settlement at maturity or upon conversion • Apply retrospectively

  19. Convertible Securities – FSP APB 14-1Sample Wording (a) Subject to the Company’s right to irrevocably elect to make a cash payment of principle upon conversion pursuant to Section 12.12(f), in lieu of delivery of shares of Common Stock in satisfaction of its obligation upon conversion of Securities, the Company may elect to deliver cash or a combination of cash and shares of Common Stock. Except to the extent that the Company has irrevocably elected to make a cash payment of principal upon conversion pursuant to Section 12.12(f), the Company shall inform the Holders through the Trustee of the method it elects to satisfy its obligation upon conversion date.

  20. Convertible Securities – FSP APB 14-1 Before effectiveness of the FSP: • Instrument is accounted for entirely as a liability of the issuer under APB Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants After effectiveness of the FSP: • Separately account for liability and equity components • Resulting debt discount (i.e., difference between principal amount of debt and amount allocated to liability component) is subsequently amortized to earnings over instrument’s expected life using effective interest method (i.e., discount is charged to interest expense) • These changes may have following impacts on company’s F/S: • Reduce Net Income and EPS, as a result of increase in interest expense • Increase in equity due to allocation of part of proceeds to equity • Decrease in debt as debt discount reduces carrying amount of debt

  21. Convertible Securities – FSP APB 14-1 Transition matters • Retroactively applied to all periods presented for impacted instruments outstanding during any of those periods • Cum. effect as of the beginning of first period presented in comparative statements • Determined based on: • Which periods will be presented in its Form 10-K • Which instruments were outstanding during those years • Consider impact on prior FAS 34 capitalized interest, depreciation, income taxes • Impact on future registration statements and selected data tables

  22. Warrants and Convertible Securities – EITF 07-5 • EITF Issue 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock • Common provision to look for  Reset provision upon issuance of securities at a lower price (“down-round protection”) • Standard antidilution provisions (i.e., stock splits) do not typically present a problem with guidance • Impact: Upon adoption, fewer instruments classified as equity and more as derivatives and as liabilities • Effective for F/S issued for FYs beginning after December 15, 2008 • Applies to outstanding financial instruments • Cum. effect adjustment to R/E as of the beginning of the FY • Tainted warrants reclassified as a liability; marked to FV through earnings in subsequent periods • Tainted embedded conversion options bifurcated from host and recorded as a liability; marked to FV through earnings in subsequent periods Refer to BDO Client Advisory 2009-2 at http://www.bdo.com./publications/assurance/

  23. Warrants and Convertible Securities – EITF 07-5 Sample Wording Conversion Option If XYZ Co., at any time or from time to time while any of the Securities are outstanding, issues or sells (i) any Common Stock at a price per share that is less than the Applicable Conversion Price then in effect or (ii) any Common Stock Equivalents that entitle the holder thereof to subscribe for, purchase or exercise a conversion or exchange right for, shares of Common Stock at price per share of Common Stock that is less than the Applicable Conversion Price then in effect, (in each case, such price per share of Common Stock, the “New Issue Price”) then, and in each such case, the Applicable Conversion Rate then in effect shall be adjusted to equal the “Adjusted Conversion Rate

  24. Warrants and Convertible Securities – EITF 07-5 Sample Wording Warrant (d) Adjustment for Issuance of Shares of Common Stock Below Warrant Price. If the Company shall issue, or be deemed to issue (as provided below), any additional shares of Common Stock other then Excluded Stock, as defined below (“Additional Shares of Common Stock”), for a consideration per share less than $1.16 (excluding subdivisions, stock dividends, combinations, reclassifications and reorganizations which are covered in Sections 2(a), 2(b) and 2(c) above), the Warrant Price shall be reduced concurrently with each such issuance to the price per share for which such Additional Shares of Common Stock were issued.

  25. Warrants and Convertible Securities – Reminders • Companies should be focused on the following: • Existing financial instruments outstanding • Consider for issuance of any new financial instruments avoiding features that would cause new instruments to be classified as derivatives or liabilities (EITF 07-5) or cause new instruments to be under scope of FSP APB 14-1 • Consider renegotiating terms for existing financial instruments classified in equity • E.g., Remove features that will cause instruments to be reclassified as derivatives or liabilities under EITF 07-5 • E.g. Change terms of existing cash-settled convertible debt instruments under FSP APB 14-1

  26. Warrants and Convertible Securities – Reminders • Recommended Q1 procedures: • Identify warrants and convertible securities which may potentially be impacted by new guidance • Review all agreements related to those instruments • Assess impact of any special provisions identified • Determine the appropriateness of accounting • Consider impact on covenants and other contracts

  27. Participating Securities – FSP EITF 03-6-1 • FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities • Reminder: FAS 128 requires use of two-class method of computing EPS for companies w/ participating securities or multiple classes of C/S. Participating securities are those that may participate in undistributed earnings with C/S whether that participation is conditioned upon occurrence of a specified event or not. • Issue: What about unvested awards? • The FSP clarifies that instruments granted in share-based payment transactions can be participating securities prior to the requisite service having been rendered • E.g., Restricted stock with nonforfeitable dividend rights

  28. Participating Securities – FSP EITF 03-6-1 • Impact: FSP requires all undistributed earnings to be allocated to all o/s awards, including those expected to be forfeited • Companies will need to consider use of forfeiture estimates in retrospective application • Basic and diluted EPS are only required for C/S – A company may decide to disclose EPS amounts for its unvested participating awards, though this may be more confusing in practice • Diluted EPS – The dilutive effect of each participating security or second class of C/S should be calculated using the more dilutive of following methods: • T/S Method; Reverse T/S Method; If-Converted Method or Contingently Issuable Share Method OR • Two-Class Method • Effective for F/S issued for FYs beginning after 12/15/2008, and interim periods within those FYs. All prior-period EPS data presented shall be adjusted retrospectively(including interim F/S, summaries of earnings, and selected financial data); early application is not permitted • Impact on future registration statements

  29. Redeemable Securities – EITF Topic D-98 Revisions • EITF Topic D-98, Classification and Measurement of Redeemable Securities • Reminder:SEC Staff will no longer accept liability classification for financial instruments (or host contracts) that meet conditions for temporary equity classification under ASR 268 and Topic D-98 but are not liabilities under GAAP • 2008 Revisions: Redeemable noncontrolling interests (under FAS 160) should be classified outside of permanent equity under Regulation S-X (i.e., temporary equity or mezzanine) • Revisions include additional guidance on (1) situations requiring reclassification to permanent equity; and (2) gains or losses to be recorded upon deconsolidation of a sub by a parent • Depending on nature of a redemption feature, (e.g., whether issued or guaranteed by parent), application of Topic D-98 could affect the parent’s EPS! • If equity-classified component of an instrument that falls under FSP APB 14-1 is considered redeemable, then portion would be classified as temporary equity • Revisions are applicable no later than first FY beginning on or after 12/15/2008 (effective date of FAS 160) Refer to BDO Client Advisory 2009-2 at: http://www.bdo.com./publications/assurance/

  30. Impairment Considerations – FSP FAS 115-2, FAS 124-2, and EITF 99-20-2 • FSP FAS 115-2, FAS 124-2, and EITF 99-20-2, Recognition and Presentation of Other-Than-Temporary Impairments, approved April 3, 2009, provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities • Would apply to OTTI of debt securities only (both A-F-S and H-T-M) • Existing OTTI models for equity securities would continue to apply • Would require market-related losses to be recorded in OCI if it is not likely that the investor will have to sell the security prior to recovery • I.e., Impairment would be considered temporary if, among other things, entity does not intend to sell security and it is more likely than not that it will not sell before a recovery in FV

  31. Impairment Considerations – FSP FAS 115-2, FAS 124-2, and EITF 99-20-2 (cont’d) • For debt securities with OTTI, would split impairment loss between credit loss in I/S and remaining loss in OCI • Credit losses should be measured based on an entity’s estimate of the decrease in expected cash flows, including those that result from an increase in expected prepayments. • Would be effective for interim and annual periods ending after June 15, 2009, applied prospectively with early adoption permitted for periods ending after March 15, 2009.* • Will be a cumulative effective adjustment to R/E at beginning of period of adoption. • *If early adopt must early adopt all three FSPs.

  32. Interim Disclosures under FAS 107 • FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, approved April 2009 • Expands FVdisclosures required for all financial instruments within the scope of Statement 107 to interim periods. • Requires entities to disclose the method(s) and significant assumptions used to estimate FV of financial instruments in F/S on an interim and annual basis and to highlight any changes from prior periods. • The disclosure requirements of this FSP will only affect public companies • Effective for interim and annual periods ending after June 15, 2009 with early adoption permitted for periods ending after March 15, 2009*. • *If early adopted must adopt all three FSPs

  33. Impairment Considerations – FAS 144 Reminders • A long-lived asset or asset group shall be tested for impairment whenever events indicate that carrying amount may not be recoverable. For example: • Significant decrease in market price of a long-lived asset • Significant adverse change in extent or manner in which a long-lived asset is being used or in its physical condition • Significant adverse change in legal factors or in business climate that could affect value of a long-lived asset including an adverse action or assessment by a regulator • Accumulation of costs significantly in excess of amount originally expected for acquisition or construction of a long-lived asset • Current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with use of a long-lived asset • Current expectation that, more likely than not, a long-lived asset will be sold or otherwise disposed of significantly before end of its useful life

  34. Impairment Considerations – FAS 144 Reminders • Step 1 – Recoverability is determined by comparing carrying value of asset (asset group) to undiscounted cash flows • Step 2 – If determined not recoverable in Step 1, then measure FV to determine whether asset (asset group) is impaired • Testing and impairment under FAS 144 may also be a triggering event for interim GW impairment testing under FAS 142!

  35. Internal Control Over Financial Reporting (ICFR) • Reminder: For non-accelerated filers, auditor reporting on ICFR is currently required for FYs ending on or after December 15, 2009

  36. SAB 74 Disclosures – Public Company Reminder • Reminder: Public companies are required to make disclosures about any potential material effects of adopting an accounting standard that has been issued but not yet adopted. (Source: SEC Staff Accounting Bulletin No. 74, SAB Topic 11-M). • If the impact is not expected to be material, SEC registrants are encouraged to disclose that fact. SAB 74 disclosures typically appear w/in notes to F/S and MD&A. Even if a company has already adopted a portion of a new accounting standard, it may still need to make SAB 74 disclosures for the portion of the standard that is subject to a delayed effective date.

  37. Private Company Reminder • Many private companies have contractual requirements (e.g., loan agreements) to present interim F/S prepared in accordance with GAAP • Pronouncements that take effect in Q1 2009 should be applied in those interim F/S • Consider risk of contractual default as a result of applying new standards!

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