CFO Newsletter - December 2012

December 2012

RISKSINTERNALCONTROLS

I.T.MANAGEMENT

FINANCIALREPORTING

TECHNICALACCOUNTING

REGULATORYREPORTING

M&A

TAX

RESOURCEMANAGEMENT

CASHFLOW

FINANCIAL REPORTING____________________________________________________________

Proposed Financial Statement Framework for Small and Medium-Sized Private Companies

CASH FLOW____________________________________________________________

Raising Money Under the JOBS Act

Essential BriefingsCOSO PROPOSED CHANGES

1 | SingerLewak December 2012

Contents

______________________________________________________________________________________________________________________________________________________

ESSENTIAL BRIEFINGS2 COSO PROPOSED CHANGES

The original Committee of Sponsoring Organizations of the Treadway Commission (COSO) was published in 1992. Due to the changes in the economic environment, increased complexity within organizations, technological advances, and globalization, COSO announced in November 2010 they would review and update the original framework.

______________________________________________________________________________________________________________________________________________________

FINANCIAL REPORTING4 PROPOSED F INANCIAL S TATEMENT FR AME WORK FOR SMALL

AND MEDIUM-SIZED PRIVATE COMPANIES The American Institute of Certified Public Accountants (AICPA) has issued an Exposure Draft, Proposed Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs), which, if adopted, would represent a self-contained, special purpose framework intended for use by privately-held small- to medium-sized entities in preparing their financial statements.

______________________________________________________________________________________________________________________________________________________

CASH FLOW4 R AISING MONE Y UNDER THE JOBS ACT

Everybody knows that there’s no such thing as a free lunch. Raising money on the market costs money; but how much? As usual, the answer is: it depends.

December 2012

December 2012 SingerLewak | 2

E S S E N T I A L B R I E F I N G S

COSO PROPOSED CHANGESBY HARMEET SINGH | NORTHERN CALIFORNIA REGIONAL MANAGING [email protected] | 408.294.3924

The original Committee of Sponsoring Organizations of the Treadway Commission (COSO) was published in 1992. Due to the changes in the economic en-vironment, increased complexity within organizations, technologi-cal advances, and globalization, COSO announced in November 2010 they would review and up-date the original framework.

COSO issued an exposure draft of the proposed changes on December 19, 2011 with pub-lic comments due by March 31, 2012. The revised version of the previously exposed up-dated Framework was released on September 18, 2012. This public comment period ended on December 4, 2012.

The updated Framework will eventually replace the existing 1992 Framework for all compa-nies currently using the Origi-nal Framework as the basis for designing, implementing, and maintaining systems of internal control.

COSO has indicated that the final version of the updated Framework will be issued in the first quarter of 2013. COSO has

not specified an effective date or a transition period for adopting the updated Framework.

The following are the highlights of the proposed changes:

•The updated Framework does not alter the basic concepts in the Original Framework

•Formalizes fundamental con-cepts embedded within the five components into 17 principles

•Considers changes in business, operating, and regulatory envi-ronments

•Expands the financial reporting objective

•The financial reporting objec-tive has been expanded to include other important forms of reporting. Now includes internal and external, financial

and non-financial reporting sub-categories to accommodate user and stakeholder require-ments and expectations.

•Modifies the classification of internal control deficiencies into two tiers: (i) major defi-ciency and (ii) internal control deficiency.

•An entity may not conclude that it has met the require-ments for effective internal control when a major deficiency exists.

Public companies should begin to assess how the 17 principles are applied and how the components operate together in their circum-stances. The updated Framework is intended to expand application of the original Framework.

HARMEET SINGH CAN BE REACHED AT

[email protected] OR 408.294.3924

F I N A N C I A L R E P O R T I N G

PROPOSED FINANCIAL STATEMENT FRAMEWORK FOR SMALL AND MEDIUM-SIZED PRIVATE COMPANIESBY CONNIE KWONG, CPA | SENIOR [email protected] | 310.477.3924

The American Institute of Certi-fied Public Accountants (AICPA) has issued an Exposure Draft, Proposed Financial Report-ing Framework for Small- and Medium-Sized Entities (FRF for SMEs), which, if adopted, would represent a self-contained, special purpose framework in-tended for use by privately-held small- to medium-sized enti-ties in preparing their financial statements. The FRF for SMEs is a less complicated and less costly framework of accounting for SMEs that does not require financial statements based on accounting principles generally accepted in the United States of America (GAAP). The account-ing principles comprising the FRF for SMEs are intended to be the most appropriate for the preparation of SME financial statements based on the needs of the financial statement users and cost-benefit considerations. Key features of the FRF for SMEs make it especially suited and rel-evant to SMEs and highly useful and responsive to the financial reporting needs of lenders and

other financial statement users. The FRF for SMEs is intended to be a stable framework that will not undergo frequent changes. Its use is premised on the view that a majority of owners and manage-ment have no intention of going public.

KEY FEATURES OF THE FRF FOR SMES:

•The framework is built upon a foundation of reliable and comprehensive accounting principles.

•Historical cost is the primary measurement basis.

•Disclosures are reduced, while still providing users with the relevant information they need.

•Familiar and traditional ac-counting methods are em-ployed.

•Adjustments needed to rec-oncile tax return income with book income are reduced.

•The framework is a principles-based framework, usable across industries by incorporated and unincorporated entities.

•The framework contains less complicated, leaner, relevant financial reporting principles for SMEs.

•Only financial statement mat-ters that are typically encoun-tered by SMEs are addressed in the framework.


Key features of the FRF for SMEs make it especially suited and relevant to

SMEs and highly useful and responsive to the

financial reporting needs of lenders and other financial

statement users


KEY DIFFERENCES FROM GAAP:

•A statement of comprehensive income is not required, and the concept of “other comprehen-sive income” is not addressed.

•For business combination, al-though the acquisition method of accounting would be re-quired, any non-controlling interest in an acquiree on the date of acquisition would be measured as the non-control-ling interest’s proportionate share of the acquiree’s identifi-able net assets as opposed to fair value as required under GAAP.

•A push-down accounting would be required when an acquirer holds 80% or more of the equity interests in the acquiree following the ac-quisition. Under push-down accounting, the assets and liabilities of the acquired company are comprehensively revalued based on amounts

used in recording the business combination.

•An accounting policy choice could be made by a parent company either to (1) consoli-date its subsidiaries, or (2) ac-count for its subsidiaries under the equity method. In either case, all subsidiaries would have to be accounted for in the same way. Control of a subsid-iary would be based entirely on the ownership of more than 50% of the subsidiary’s equity interests.

• Inventories would be measured at the lower of cost or market, as is the case under GAAP. However, “market” would be defined as net realizable value, or the estimated selling price in the ordinary course of busi-ness, less the estimated costs of completion and of sale, without an upper or lower bound as defined in GAAP.

•An impairment loss on a long-lived asset would be recog-

nized when the asset’s carrying amount is not recoverable (i.e., it exceeds the sum of undis-counted cash flows expected to result from use and eventual disposition of the asset) and exceeds its fair value. However, fair value would be defined as the fair value of the consid-eration that would be agreed upon in an arm’s-length trans-action between knowledgeable, willing parties who are under no compulsion to act as op-posed to among market partici-pants in GAAP.

•While research costs would have to be expensed, as is the case under GAAP, an account-ing policy choice would be al-lowed regarding the treatment of development expenditures. Thus, all such expenditures could either be expensed as incurred or capitalized as in-tangible asset provided certain conditions are met.

•All long-term non-cancellable leases, including operating leases, would be recognized by the lessee in the balance sheet as (1) a “right-of-use” asset, and (2) a corresponding liability for the lessee’s obligation to make lease payments.

•An accounting policy choice could be made to account for defined benefit plans using either (1) the “current contribu-tion payable” method, under which only the contribution attributable to the current year would be expensed, or (2) the “accrued benefit obligation” method, which would require recognition of a liability rep-resenting the actuarial present value of benefits attributed to employee services rendered to date.

•An accounting policy choice could be made to account for income taxes under either (1) the “taxes payable” method, pursuant to which only current income tax assets and income tax liabilities are recognized, or (2) the “deferred” method, under which recognition is re-quired of a deferred tax liability representing deferred income tax outflows.

•All financial assets and finan-cial liabilities would be initially measured at fair value, which presumably is equal to the transaction price. Subsequently, (1) investments in equity in-struments would be measured at cost, less any impairment, (2) all other financial assets would be measured at amortized cost, less impairment, and (3) all

financial liabilities would be measured at amortized cost.

EFFECTIVE DATE:

The FRF for SMEs is not pro-posed as an authoritative docu-ment, and the AICPA would have no authority to require the use of the FRF for SMEs for any entity. Use of the FRF for SMEs is a choice made by the manage-ment of an entity. Therefore, the FRF for SMEs will have no effec-tive date, and management can decide to use the FRF for SMEs once it is released.

COMMENT DEADLINE:

The comment deadline is January 30, 2013.


CONNIE KWONG CAN BE REACHED AT

[email protected] OR 310.477.3924

Database Overview:

The Audit Analytics auditor fee database contains all fee data disclosed by SEC registrants in electronic filings since January 1, 2001. The data has been extracted primarily from the following form types: DEF 14A, DEF 14C, DEFM 14A, PRE 14A, 10-K, 10KSB, 20-F, 40-F and N-CSRs. In cases where two disclosures filed by the same registrant within the same year provide inconsistent fee information (i.e., the PRE 14A discloses different numbers than the DEF 14A), the DEF 14A is given pre-cedence over other forms. The definitions of the audit fee categories contained in the database are provided at the end of the report. For further information regarding the auditor fee categories, see SEC Final Rule 33-8183 (corrected version), with an effective date of May 6, 2003, and its predecessor rule, SEC Final Rule 33-7919.

Research Population:

This audit fee and non-audit fee analysis concentrates on those fees paid and disclosed by accelerated filers (including large). The initial population comprised all accelerated filers as identified on June 20, 2012.1 Audit Analytics reviewed this initial population of 3,826 filers to determine which companies disclosed auditor fees for each and every year from 2002 to 2011, inclusive. This historical data requirement distilled the population to a total of 2,507 filers.

Executive Summary – Audit Fee and Non-Audit Fee Trends from 2002 to 2011

1. In 2002, non-audit fees were 51% of the total fees paid by accelerated filers, but after three years of steady de-cline non-audit fees appear to have leveled off at about 20% of total fees.

During calendar year 2002, non-audit fees represented 50.90% of the total fees paid to independent auditors by the 2,507 accelerated filers that comprise the research population of this analysis. For the next three years, non-audit fees declined as a per-centage of total fees reaching a low of 19.35% in 2006. At this point, the percentage lev-eled off at about 20% for the following five years. In 2011, the non-audit fees equaled about 20.67% of total fees. (See graph above and the table on : Audit Fees and Non-Audit Fees Over Revenue).

Audit Fees & Non-Audit Feesas a Percentage of Total Fees

73.33%

26.67%

Audit Fees79.33%79.44%81.20%80.55%79.77%80.65%79.09%

58.76%49.10%

20.67%Non-Audit Fees

20.56%18.80%19.45%20.23%19.35%20.91%

41.24%50.90%

0.00%10.00%20.00%30.00%40.00%50.00%60.00%70.00%80.00%90.00%

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Audit Fees Non-Audit Fees

1

9 Main Street 2F | Sutton, MA 01590 | 508.476.7007

Ten Year Review of Audit Fee and Non-Audit Fee Trends(Experienced by Accelerated and Large Accelerated Filers)

1 An accelerated filer is a company whose Public Float (as opposed to Market Capitalization) exceeds $75 million as of the last day of their second quarter. Once a registrant becomes an accelerated filer, it will not lose this status unless its float drops below $50 million. (See Rule 12b-2 of the Securities Exchange Act of 1934.) In this research a large accelerated filer is included in the accelerated filer population. Notwithstanding the defini-tion, the Audit Analytics database maintains the filing status as disclosed by the registrant to the SEC in its last periodic report.

FOR THE FULL REPORT, CONTACT DAVID FALCUCCI AT AUDIT ANALYTICS

(508)476-7007 x249 [email protected]

C A S H F L O W

RAISING MONEY UNDER THE JOBS ACT

Everybody knows that there’s no such thing as a free lunch. Rais-ing money on the market costs money; but how much? As usual, the answer is: it depends.

According to Fusion-io’s (FIO) S-1 prospectus, they estimated that it would cost them $1.2M to raise $120M for their IPO. Similarly, HomeAway (AWAY) estimated that their cost for rais-ing $140.7M was $3.5M. Simple math gives us a figure of about 1-2% for estimated costs, as a percentage of expected amount raised — and that only includes the direct costs.

Public companies also incur additional costs to stay public, such as costs related to annual reporting, compliance, etc. But these costs do not scale down well enough. That is, the $1.2M for FIO included fixed costs, and so did the $3.5M for HomeAway. So, for companies that are on the market for a smaller amount, it is not always feasible to go public.

One of the most popular ways to accomplish non-IPO money-rais-

ing today is a private placement under Rule 506 of Regulation D. Rule 506 permits the sale of se-curities to an unlimited number of accredited investors and up to 35 unaccredited investors. Unlike with an IPO, under Regulation D investors get restricted securi-ties which cannot be freely resold in a secondary market.

Another way of offering securities is through Regulation A. Regula-tion A permits the issuance of liquid, unrestricted securities to unaccredited investors. How-ever, there is a $5M limit on the amount of the offering under this regulation.

The JOBS Act passed recently by Congress is intended to help

companies that are in need of ex-tra capital. The act creates a new category of company, the “emerg-ing growth company,” which is defined as a company that had less than $1B in revenues during its most recently completed fiscal year, and that completed its IPO after December 8th, 2011. To qualify as an emerging growth company — and therefore to qualify for the reduced regulatory burden mandated by the JOBS Act — the company must meet these criteria, and must declare itself as an emerging growth company in its SEC filings.

To date, 608 companies have identified themselves as “emerg-ing growth companies”.

The JOBS act removes some disclosure requirements for these companies, thus potentially reducing the costs associated with regulatory compliance and capi-tal-raising activities. In particu-lar, it gives a company more time (up to 5 years instead of just 2) to become compliant with Section 404 of the Sarbanes-Oxley Act. Companies that fall under the


act are also exempt from certain provisions of Section 14A of the Securities Exchange Act of 1934.

But being an “emerging growth company” has consequences be-yond those outlined in the JOBS Act. It may also expose the com-pany to additional risks, includ-ing the risk that investors may not accept such limited disclo-sures. Also, if a company decides to elect an extended adoption period for new accounting rules and regulations, as is permitted under the act, its financial state-ments may not be comparable to those of other public companies. These risks should be clearly disclosed in financial statements. Since April 2012, the SEC issued comments to 84 companies ask-ing them to provide additional disclosure about risks that the

emerging growth election might pose.

The act also brings changes to the rules of sale of unregistered securities. For the Regulation A election, the JOBS Act lifts the ceiling to $50M (up from the

current ceiling of $5M), which may make such sales much more attractive for some businesses.

A recently released GAO report shows that, between years 2008-2011, 12 Regulation A offerings, 15,711 Regulation D offerings, and 1,289 Registered Public Of-ferings under $5M were filed. Yet the report indicates that there is a major impediment that is not related to the total amount re-striction. GAO lists the state blue sky laws and lengthy state regis-tration requirements as the main reasons for choosing not to use Regulation A. In other words, registration under Regulation A is costly.

The increased offering amount may sweeten the deal for some, since the fixed costs related to


But being an “emerging growth company” has

consequences beyond those outlined in the JOBS Act.

It may also expose the company to additional

risks, including the risk that investors may not accept such limited disclosures.

reporting would now constitute a smaller portion of the money-raising costs. The practical implication of the GAO report is that unless states change the Regulation A registration process, the $500M exemption under the JOBS Act may not significantly increase the number of Regula-tion A offerings — and Regula-tion D will remain the primary way for small companies to raise capital.

What about companies that need to raise seed money — the initial funding needed to start a new business? Until recently, options were limited to traditional angel investors or a circle of fam-ily members and friends. The crowdfunding provision of the JOBS Act may open new ways of raising initial investments.

Under that provision, companies would be permitted to raise up to $1M without registering shares with the SEC. To qualify for the exemption, the issuance must be executed through a broker (which may prove to be costly for such a small offering) or a fund-ing portal. It is not yet clear how those portals would operate. The

SEC is currently soliciting com-ments on the implementation of the crowdfunding provision, with the final regulation expected in January 2013.

FOR THE FULL REPORT, CONTACT DAVID FALCUCCI AT AUDIT ANALYTICS

(508)476-7007 x249 [email protected]

Until recently, options were limited to traditional angel investors or a circle of family members and friends. The crowdfunding provision

of the JOBS Act may open new ways of raising initial

investments.


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CFO Newsletter - December 2012

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