Audit Committee Issues - Foley & Lardner print a copy of this presentation: ... Q2008 Exposure Draft...

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©2009 Foley & Lardner LLP • Attorney Advertising • Prior results do not guarantee a similar outcome • Models used are not clients but may be representative of clients • 321 N. Clark Street, Suite 2800, Chicago, IL 60654 • 312.832.4500

Audit Committee Issues

January 13, 2010

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Today’s Presenters

Mark PlichtaPartnerFoley & Lardner LLP

Richard HerlinPartnerDeloitte & Touche LLP

John K. WozniakCorporate Vice President & Chief Accounting OfficerMotorola Inc.

Isaac KaufmanDirectorHanger Orthopedic GroupKindred Healthcare, Inc. Trans World Entertainment

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FASB Rulemaking Projects

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Consolidation (including Securitizations and SPEs)

Generally, more vehicles “on balance sheet”Reasons for the changes– Companies were “stretching the use of off-

balance sheet entities to the detriment of investors”

– “Provide better transparency to investors” by enhancing disclosure requirements

– Some large banks moved SIVs back on balance sheet when they failed, suggesting they should have been on balance sheet all along

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Consolidation – Key ChangesElimination of “qualified special purpose entities”and additional disclosure requirements (FAS 166)Determination of whether a variable interest entity should be consolidated is now made on a more “principles-based” judgment, considering, among other things– The entity’s purpose and design– A company’s ability to direct the activities of the entity that

most significantly impact the entity’s economic performance

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Lessee AccountingCurrent operating v. capital approach is flawed– Difficulty in drawing the line between operating and capital

leases in a principled way, given the mixture of subjective judgments and “bright-line” tests

– Opportunity to structure transactions to achieve a particular lease classification

– Lack of comparability between companies– Lack of sufficient disclosure relating to operating leases

necessary to allow investors to determine “pro forma”leased assets and liabilities

Joint discussion paper essentially would require lessees to treat all leases as capital leases, using the “right to use method”

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More Liabilities on Balance Sheet -- Impact

Not just financial firms are affectedRelatively high risk of misstatement in the consolidation area– Complex area of accounting– More principles-based means more judgment involved

Potential to “gross up” balance sheet and materially impact financial ratios– Could impact financial covenants and ability to borrow– Potential to affect executive compensation metrics

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Fair Value Accounting

The fair value debate - fair value is here to stay– SEC recommended to Congress that FV

accounting be improved, not suspended– Critics (most notably financial institutions) are

vocal but are in the minorityRegulators and investors generally favor the use of fair value

– “Don’t shoot the messenger”

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Fair Value Accounting

Improvements to fair value– Valuing assets and liabilities in inactive markets– Determining whether sales of “comparable”

assets are distressed or orderly– Increasing and improving disclosure of how fair

value is measured

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Fair Value AccountingWhat is next for fair value?– Likely that additional assets and liabilities will be

measured at fair value– Increased used of judgment in determining fair values – Increased use of judgment requires a more vigilant audit

committee– Joint IASB/FASB project likely to result in new accounting

pronouncements being issued by the end of 2010– Potential for splitting regulatory accounting from financial

accounting

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ContingenciesSFAS 5 – record contingencies if probable and estimable2008 Exposure Draft and SFAS 141(R) would have increased required disclosure and recognitionIssuers and attorneys objected – U.S. legal system unique– Difficult to predict outcomes– Factual information can be misleading– Privilege and attorney work product issues– ABA – AICPA “treaty”

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Contingencies

FASB now only considering changes to disclosuresTemporary fix for 141(R): FSP 141R-1– Criteria if liability cannot be determined during

measurement periodInformation before the end of the measurement period indicates that it is probable that a liability had been incurred at the acquisition dateThe amount of the liability can be reasonably estimated

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ContingenciesFASB decided on the following broad principles for disclosures about loss contingencies:– Should focus on the contentions of the parties, rather than

predictions about the future outcome– Should be more robust as the likelihood and magnitude of

loss increase and as the contingency progresses toward resolution

– Should provide a summary of information that is publicly available about a case and indicate where users can obtain more information

Final rules are scheduled to be released the first quarter of 2010

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Recent SEC Developments

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Internal Controls (SOX 404)

Management assessment of internal control over financial reporting required for all companiesAuditors’ attestation report on internal controls required for most companies– Exception for non-accelerated filers (companies

with less than $75 million market cap)Will expire for companies with FYE after June 15, 2010The SEC has said no more extensions

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Conversion to IFRSSEC set forth a proposed “roadmap” for conversion from US GAAP to International Financial Reporting Standards– Would have required three years of IFRS financial

statements as early as 2014 for some issuers– Perceived benefits include:

Comparability with foreign peer companiesIncreased opportunity for global investmentPotential reduced costs and efficienciesMore “principles based” IFRS could better reflect economic reality

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Conversion to IFRS

Comment period for the roadmap ended April 20, 2009SEC was quiet for many months – other prioritiesRecently the SEC has started to talk about IFRS again

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Conversion to IFRS –ImpactConversion, when it comes, will be a very large undertaking for many companies– Will require coordination among accounting, legal, tax, IT and others

Strain on companies resources will be exacerbated by material FASB projects– Convergence– Revenue recognition

Companies should try to get ahead of these processes to the extent possible– Communicate with FASB– Consider when making material changes like new credit facilities and

new IT systems or software

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The Audit Committee is Responsible for That Too?

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Other Audit Committee Considerations

Risk– Biggest governance buzzword of 2009– Audit committees are sometimes viewed as a

board’s risk experts– Potential for overlap

Compensation committeeRisk committees

– Risk profile is very company/industry specific

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Securities offerings– Important in the current financial environment– May need restated financial statements for any

number of “innocent” reasons (discontinued ops, guarantor footnote, etc.)

– Auditor consents– Comfort letters– May need consents and comfort letters from prior

auditors or auditors of acquired companies

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According to the IRS: Transfer pricing?– IRS Commissioner Shulman said that boards

should “specifically address [the] relative profit allocated to low tax jurisdictions, and make sure they reflect the real economic contributions made in those jurisdictions.”

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Questions & Answers

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Save the date for upcoming NDI Web Conference Series programs:

January 27, 2010Corporate Governance Developments

February 10, 2010Risk Management in the Boardroom

February 24, 2010Investor Relations Issues

March 10, 2010General Counsel Evolving Trends

March 24, 2010Nonprofit Corporate Governance

April 7, 2010Sustainability in the Boardroom

April 21, 2010Trends in the Recruitment and Selection of Directors

May 5, 2010SEC Enforcement Update

May 19, 2010M&A in the Boardroom

Visit Foley.com/ndi to register and for more details.

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Audit Committee Issues - Foley & Lardner print a copy of this presentation: ... Q2008 Exposure Draft...

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