Accounting Issues Panel

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Transcript of Accounting Issues Panel

  • 1. SEC and Accounting Hot Topics June 6, 2008 Presenter:Stephen Sommerville, PricewaterhouseCoopers LLP

2. Agenda

  • SEC Hot Topics
  • FAS 141R
  • XBRL
  • IFRS
  • Committee on Reducing Financial Reporting Complexity
  • Questions

3. SEC Hot Topics

  • Credit Markets
  • Use of Experts
  • Stealth Restatements
  • Significant Acquisitions and Rule 3-05

4. While recent efforts of the FASB to remedy shortcomings in financial reporting for off balance sheet transactions are to be applauded, they appear so far to have fallen short of what investors need. Letter to FASB Senator Jack Reed February 12, 2008 Market Reaction to Credit Markets and Fair Value 5. Havent we seen this movie before, involving a company called Enron?Didnt Congress pass a law requiring that the problem of off-balance sheet mysteries be solved?Should we blame the accountants?...If the accountants had forced better disclosures, it is at least possible that managements would have spent more time evaluating the risks they were taking, and then made wiser business decisions.Floyd Norris New York Times February 29, 2008 Market Reaction to Credit Markets and Fair Value 6. mark to market, an accounting and regulatory innovation of the early 1990s, has proved another of Washingtons fabulous failures -- that is, if the goal were curing market uncertainty through improved accounting practices.Wall Street Journal, March 5, 2008 the introduction of accounting rules that required companies to state assets at the latest market prices had helped contribute to global financial market volatility. Claude Bebear, Chairman, Axa Group Financial Times, February 29, 2008 Market Reaction to Credit Markets and Fair Value 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

  • Definition
    • The price that would be receivedto sell an assetor paidto transfer a liabilityin an orderly transaction between market participants at the measurement date
  • Anexit priceconcept the price an entity would receive to sell an asset or pay to transfer a liability
  • One companys fair value may differ from anothers 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)

Distinguishes between observable and unobservable inputs in 3 levels 11. FAS 157 Disclosures

  • Driven by level within the hierarchy
  • Two categories:
    • Recurring
    • Nonrecurring


  • 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
  • Annually
    • Valuation techniques
    • Discussion of changes to techniques

FAS 157 Disclosures 13. FAS 157 Disclosures

  • Nonrecurring Measurements
  • Amount of FV measurement at reporting date
  • Level within hierarchy
    • For Level 3 description of the inputs and information used to develop inputs
  • Annually
    • Valuation techniques
    • Discussion of changes to techniques

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 managements 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 managements 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 managements disclosure references consideration of as opposed to reliance on the third-party report.
    • No consent is required if management accepts responsibility for the third-partys 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.


  • FAS 141(R)

22. FAS 141(R) Provides new guidance on accounting for business combinations FAS 160 Provides new guidance on accounting for minority interests in consolidated financial statements Both standards effective January 1, 2009 for calendar year-end companies 23. FAS 141(R)