1 U.S. Securities and Exchange Commission Current Accounting Initiatives and Topics Presentation to NARUC Douglas T. Parker Professional Accounting Fellow

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U.S. Securities and Exchange U.S. Securities and Exchange CommissionCommission

CurrentCurrent Accounting Accounting Initiatives and TopicsInitiatives and Topics

Presentation to NARUCPresentation to NARUC

Douglas T. ParkerDouglas T. ParkerProfessional Accounting FellowProfessional Accounting FellowOffice of the Chief AccountantOffice of the Chief Accountant

U.S. Securities and Exchange CommissionU.S. Securities and Exchange Commission

October 13, 2008October 13, 2008

U.S. Securities and Exchange U.S. Securities and Exchange CommissionCommission

CurrentCurrent Accounting Accounting Initiatives and TopicsInitiatives and Topics

Presentation to NARUCPresentation to NARUC

Douglas T. ParkerDouglas T. ParkerProfessional Accounting FellowProfessional Accounting FellowOffice of the Chief AccountantOffice of the Chief Accountant

U.S. Securities and Exchange CommissionU.S. Securities and Exchange Commission

October 13, 2008October 13, 2008

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The Securities and Exchange Commission, The Securities and Exchange Commission, as a matter of policy, disclaims as a matter of policy, disclaims responsibility for any private publication or responsibility for any private publication or statement by any of its employees. statement by any of its employees. Therefore, the views expressed today are my Therefore, the views expressed today are my own, and do not necessarily reflect the own, and do not necessarily reflect the views of the Commission or the other views of the Commission or the other members of the staff of the Commission.members of the staff of the Commission.

DisclaimerDisclaimer

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Discussion TopicsDiscussion Topics

• Interacting with the SECInteracting with the SEC

• IFRS in the U.S.IFRS in the U.S.

• Advisory Committee on Improvements to Advisory Committee on Improvements to Financial ReportingFinancial Reporting

• Materiality and Correction of ErrorsMateriality and Correction of Errors

• Use of JudgmentUse of Judgment

• Interactive DataInteractive Data

• Fair ValueFair Value

• Other InitiativesOther Initiatives

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Interacting with the SECInteracting with the SEC

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Who We AreWho We Are

SEC registrants and their auditors may interact SEC registrants and their auditors may interact with the agency through the:with the agency through the:

• Division of Corporation FinanceDivision of Corporation Finance

• Office of the Chief AccountantOffice of the Chief Accountant

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Division of Corporation FinanceDivision of Corporation Finance

• Mission is to see that investors are provided Mission is to see that investors are provided with material information in order to make with material information in order to make informed investment decisions informed investment decisions

• Mandated to review SEC filings at least once Mandated to review SEC filings at least once every three yearsevery three years

• Responding to comment lettersResponding to comment letters

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Office of the Chief AccountantOffice of the Chief Accountant

Chief AccountantChief Accountant• Principal advisor to the Commission on accounting and Principal advisor to the Commission on accounting and

auditing mattersauditing matters

Main groups in OCAMain groups in OCA• AccountingAccounting• Professional Practice (Audit and Independence)Professional Practice (Audit and Independence)• International AffairsInternational Affairs• Interactive Disclosure (XBRL)Interactive Disclosure (XBRL)

ResponsibilitiesResponsibilities• Rulemaking, interpretive guidance and reportsRulemaking, interpretive guidance and reports• Oversight of standard settingOversight of standard setting• ConsultationsConsultations

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ConsultationsConsultations

Whom to ContactWhom to Contact

• Division of Corporation FinanceDivision of Corporation Finance

• Reporting questions Reporting questions

• E.g., application of regulation S-XE.g., application of regulation S-X

• Requests for waivers / accommodations from reporting Requests for waivers / accommodations from reporting requirementsrequirements

• Contact: 202-551-3400 or [email protected]: 202-551-3400 or [email protected]

• Office of the Chief AccountantOffice of the Chief Accountant

• Accounting or auditor independence questionsAccounting or auditor independence questions

• Contact: 202-551-5300 or [email protected]: 202-551-5300 or [email protected]

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ConsultationsConsultations

Consultations with OCAConsultations with OCA

• Discussion with OCA staff membersDiscussion with OCA staff members

• Pre-filing basis – requests from registrantsPre-filing basis – requests from registrants

• Post-filing basis – Post-filing basis –

• Internal consultations from Divisions of Internal consultations from Divisions of Corporation Finance and EnforcementCorporation Finance and Enforcement

• Requests from registrantsRequests from registrants

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Consultations with OCAConsultations with OCA

Guidance for Pre-Filing ConsultationsGuidance for Pre-Filing Consultations

• Take advantage of it! Take advantage of it!

• Most companies just “want to get the accounting Most companies just “want to get the accounting right.” We want to help.right.” We want to help.

• Perhaps easier than post-filing basis (e.g., comment Perhaps easier than post-filing basis (e.g., comment letter process)letter process)

• Guidance for resolving ‘pre-filing’ questions is posted on Guidance for resolving ‘pre-filing’ questions is posted on the SEC’s websitethe SEC’s website

• http://www.sec.gov/info/accountants/ocasubguidance.htmhttp://www.sec.gov/info/accountants/ocasubguidance.htm

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IFRS in the U.S.IFRS in the U.S.

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BackgroundBackground

IFRS has become more prevalent over the past several IFRS has become more prevalent over the past several yearsyears

• Over 100 countries permit or require the use of IFRSOver 100 countries permit or require the use of IFRS

• Since 2002, the FASB and IASB agreed to work together Since 2002, the FASB and IASB agreed to work together to converge U.S. GAAP and IFRSto converge U.S. GAAP and IFRS• Business combinationsBusiness combinations• Financial statement presentationFinancial statement presentation• Conceptual frameworkConceptual framework• Revenue recognitionRevenue recognition• LeasesLeases

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Foreign Private IssuersForeign Private Issuers

FPIs are now permitted to file without a reconciliation to U.S. FPIs are now permitted to file without a reconciliation to U.S. GAAP in certain casesGAAP in certain cases

• Adopting release issued in December 2007 – available at Adopting release issued in December 2007 – available at http://www.sec.gov/rules/final/2007/33-8879.pdfhttp://www.sec.gov/rules/final/2007/33-8879.pdf

• Effective for fiscal years ended after December 15, 2007Effective for fiscal years ended after December 15, 2007

• Only applies to FPIs reporting under IFRS as issued by the Only applies to FPIs reporting under IFRS as issued by the IASBIASB

• Currently, more than 100 FPIs report under IFRS without a Currently, more than 100 FPIs report under IFRS without a reconciliationreconciliation

• Estimated to increase to approximately 500 by 2011Estimated to increase to approximately 500 by 2011

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U.S. IssuersU.S. Issuers

SEC considering use of IFRS as issued by the IASB by U.S. SEC considering use of IFRS as issued by the IASB by U.S. issuersissuers

• Concept release issued in August 2007Concept release issued in August 2007

• Roundtables held in December 2007 and August 2008Roundtables held in December 2007 and August 2008

• Proposing releaseProposing release• Comments due 60 days from publication in Federal Comments due 60 days from publication in Federal

RegisterRegister• Main proposed provisionsMain proposed provisions

• Roadmap to possible Commission decision on Roadmap to possible Commission decision on mandatory adoptionmandatory adoption

• Optional IFRS adoptionOptional IFRS adoption

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U.S. Issuers – IFRS Proposing U.S. Issuers – IFRS Proposing ReleaseRelease

Roadmap to possible Commission Roadmap to possible Commission decision on mandatory adoptiondecision on mandatory adoption

• Identifies milestones to achieve prior to possible Identifies milestones to achieve prior to possible Commission decisionCommission decision

• IFRS’s continued improvementIFRS’s continued improvement

• Greater accountability and more stable funding of Greater accountability and more stable funding of IASB’s governing bodyIASB’s governing body

• IFRS XBRL taxonomyIFRS XBRL taxonomy

• Education and trainingEducation and training

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Roadmap to possible Commission Roadmap to possible Commission decision on mandatory adoptiondecision on mandatory adoption

• Expects decision regarding mandatory IFRS adoption in Expects decision regarding mandatory IFRS adoption in 2011, effective for fiscal years ending on or after 2011, effective for fiscal years ending on or after December 15, December 15,

• 2014 for large accelerated filers2014 for large accelerated filers

• 2015 for accelerated filers2015 for accelerated filers

• 2016 for non-accelerated filers2016 for non-accelerated filers

• May consider early adoption for those companies not May consider early adoption for those companies not eligible in 2009eligible in 2009

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Optional IFRS AdoptionOptional IFRS Adoption

• Certain U.S. issuers may file under IFRS for years ending Certain U.S. issuers may file under IFRS for years ending on or after December 15, 2009on or after December 15, 2009

• Eligible companiesEligible companies• Must meet two criteriaMust meet two criteria

• Among the 20 largest companies in their industryAmong the 20 largest companies in their industry• IFRS must be used more than any other GAAP IFRS must be used more than any other GAAP

amongst the 20 largest companies in that industry amongst the 20 largest companies in that industry • Receive a no-objection letter from SEC staff in Receive a no-objection letter from SEC staff in

response to their justification of their eligibilityresponse to their justification of their eligibility• At least ~110 companies in ~34 industries estimated to At least ~110 companies in ~34 industries estimated to

be eligible, representing ~14% of U.S. market be eligible, representing ~14% of U.S. market capitalizationcapitalization

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Optional IFRS AdoptionOptional IFRS Adoption

• Seeks comments on U.S. GAAP reconciliationSeeks comments on U.S. GAAP reconciliation

• Option A: disclose an audited reconciliation of U.S. Option A: disclose an audited reconciliation of U.S. GAAP to IFRS only in the first year of reporting under GAAP to IFRS only in the first year of reporting under IFRS (consistent with IFRS 1)IFRS (consistent with IFRS 1)

• Option B: Option A AND disclose unaudited Option B: Option A AND disclose unaudited reconciliation of IFRS to U.S. GAAP on an ongoing reconciliation of IFRS to U.S. GAAP on an ongoing basis for all periods presentedbasis for all periods presented

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U.S. Issuers – Application of IFRS to U.S. Issuers – Application of IFRS to Energy & Utility CompaniesEnergy & Utility Companies

Potentially significant differences from Potentially significant differences from U.S. GAAP:U.S. GAAP:

• Accounting for the effects of regulationAccounting for the effects of regulation

• ImpairmentImpairment

• Financial instruments Financial instruments

• InventoriesInventories

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Advisory Committee on Advisory Committee on Improvements to Financial Improvements to Financial

Reporting (CIFiR)Reporting (CIFiR)

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Advisory Committee on Improvements Advisory Committee on Improvements to Financial Reporting (CIFiR)to Financial Reporting (CIFiR)

• Emanated from concerns about complexity of financial Emanated from concerns about complexity of financial reportingreporting

• Examined the U.S. financial reporting system to Examined the U.S. financial reporting system to

• increase usefulness to investors and increase usefulness to investors and

• reduce complexity reduce complexity

• Chaired by Robert PozenChaired by Robert Pozen

• Composed of preparers, investors, audit committee Composed of preparers, investors, audit committee representatives, auditors, attorneys and regulatorsrepresentatives, auditors, attorneys and regulators

• Observers from the FASB, PCAOB, IASC, Federal Observers from the FASB, PCAOB, IASC, Federal Reserve Board and Department of TreasuryReserve Board and Department of Treasury

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• 12-month duration concluded with issuance of final 12-month duration concluded with issuance of final report on August 1, 2008report on August 1, 2008

• Final report includes 25 recommendations in four areas:Final report includes 25 recommendations in four areas:

• Substantive complexitySubstantive complexity

• Standards-setting processStandards-setting process

• Audit process and complianceAudit process and compliance

• Delivering financial informationDelivering financial information

• SEC staff studying recommendations for possible future SEC staff studying recommendations for possible future actionaction

• Materials available at Materials available at http://www.sec.gov/about/offices/oca/acifr.shtmlhttp://www.sec.gov/about/offices/oca/acifr.shtml

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Substantive ComplexitySubstantive Complexity

• Judicious expansion of fair value Judicious expansion of fair value • Improved financial statement presentationImproved financial statement presentation• Development of a disclosure frameworkDevelopment of a disclosure framework• Coordination of SEC and FASB to regularly assess Coordination of SEC and FASB to regularly assess

continued relevance of disclosure guidancecontinued relevance of disclosure guidance• Reduction of bright lines in accounting guidanceReduction of bright lines in accounting guidance• Reduction in exceptions to general principles, such as:Reduction in exceptions to general principles, such as:

• Industry-specific guidanceIndustry-specific guidance• Alternative accounting policiesAlternative accounting policies• Scope exceptionsScope exceptions• Competing modelsCompeting models

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Standards-Setting ProcessStandards-Setting Process

• Afford investor perspectives pre-eminence in standards-Afford investor perspectives pre-eminence in standards-settingsetting

• Continue to enhance governance of the FASBContinue to enhance governance of the FASB

• Create a Financial Reporting Forum Create a Financial Reporting Forum

• Enhance FASB’s field work prior to adoptionEnhance FASB’s field work prior to adoption

• Formalize post-adoption reviews of new standards and Formalize post-adoption reviews of new standards and periodic assessments of existing standardsperiodic assessments of existing standards

• Clarify authoritative vs. non-authoritative guidance Clarify authoritative vs. non-authoritative guidance

• Improve understandability of accounting standardsImprove understandability of accounting standards

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Audit Process and ComplianceAudit Process and Compliance

• MaterialityMateriality

• Error CorrectionError Correction

• Reasonableness of accounting judgmentsReasonableness of accounting judgments

These areas will be discussed later.These areas will be discussed later.

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Delivering Financial informationDelivering Financial information

• Mandate use of XBRL - to be discussed laterMandate use of XBRL - to be discussed later

• Provide guidance on the use of corporate websitesProvide guidance on the use of corporate websites

• Interpretative release available at Interpretative release available at http://www.sec.gov/rules/interp/2008/34-58288.pdfhttp://www.sec.gov/rules/interp/2008/34-58288.pdf

• Comments due November 5, 2008Comments due November 5, 2008

• Encourage development of key performance indicatorsEncourage development of key performance indicators

• Encourage issuance of updated guidance on best practices Encourage issuance of updated guidance on best practices for earnings releasesfor earnings releases

• Mandate inclusion of executive summary in filingsMandate inclusion of executive summary in filings

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Materiality and Materiality and

Corrections of ErrorsCorrections of Errors

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BackgroundBackground

• Existing guidanceExisting guidance

• Additional issuesAdditional issues

• SEC staff studying CIFiR recommendationsSEC staff studying CIFiR recommendations

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CIFiR’s RecommendationsCIFiR’s Recommendations

• MaterialityMateriality• Based on perspective of reasonable investorBased on perspective of reasonable investor• Consider total mix of informationConsider total mix of information

• Error correctionError correction• All errors, except clearly insignificant ones, should All errors, except clearly insignificant ones, should

be corrected promptlybe corrected promptly• HOWEVER, do not always restate and amendHOWEVER, do not always restate and amend

• DisclosureDisclosure

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CIFiR’s RecommendationsCIFiR’s Recommendations

• Interim periodsInterim periods• Same principles applySame principles apply• Restatement of interim period does not always Restatement of interim period does not always

require restatement of annual periodrequire restatement of annual period

• Dark period disclosuresDark period disclosures• Nature of errorNature of error• Impact of errorImpact of error• Management responseManagement response

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Use of JudgmentUse of Judgment

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Use of JudgmentUse of Judgment

• Why importantWhy important

• ExamplesExamples

• CIFiR recommendationCIFiR recommendation• SEC should articulate how it evaluates the SEC should articulate how it evaluates the

reasonableness of accounting judgmentsreasonableness of accounting judgments

• SEC staff studying recommendationSEC staff studying recommendation

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CIFiR’s Suggested FactorsCIFiR’s Suggested Factors

When evaluating reasonableness of judgments, SEC should When evaluating reasonableness of judgments, SEC should consider preparer’s consideration of:consider preparer’s consideration of:

• Facts, including substance of transactionFacts, including substance of transaction• Accounting literatureAccounting literature• Alternative viewsAlternative views• Investors’ information needsInvestors’ information needs• Input from those with professional expertiseInput from those with professional expertise• Known diversity in practiceKnown diversity in practice• Consistency with application to other similar Consistency with application to other similar

transactionstransactions• Appropriateness and reliability of assumptions and dataAppropriateness and reliability of assumptions and data

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Interactive DataInteractive Data

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Potential BenefitsPotential Benefits

• What is interactive data?What is interactive data?

• Benefits to investors, analysts & other users Benefits to investors, analysts & other users • Direct, real-time access to instantly consumable dataDirect, real-time access to instantly consumable data

• Interactive, personalized analysisInteractive, personalized analysis

• Lower cost of more complete data setLower cost of more complete data set

• Benefits to registrants and preparers of reportsBenefits to registrants and preparers of reports• Efficient preparation, internal data collection, Efficient preparation, internal data collection,

analysis and release of informationanalysis and release of information

• Direct communication channel with investors and Direct communication channel with investors and stakeholdersstakeholders

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Interactive Data TimelineInteractive Data Timeline

2008-Analysis of

public comment on proposed

rules

- Credit rating proposed rule

- Proposed rule on oil and gas disclosures in interactive data

2004Early SEC Analysis of XBRL

7/2006Roundtables,

field work

2005SEC Establishes Voluntary Filing

Program

2005Chairman Cox

identifies XBRL as strategic priority

12/2006First SEC

XBRL Viewer

9/2006$54mm investment in XBRL, EDGAR

modernization

12/2007Release of Draft

US GAAP Taxonomy

7/2007VFP Expands

to Mutual Fund Risk/Return

10/2007Creation of new SEC Office of

Interactive Disclosure

4/2008Release of Final US GAAP

Taxonomy

5/2008Release of Draft Rule

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Proposed RuleProposed Rule

• Requires companies to provide to the Requires companies to provide to the Commission financial statements in interactive Commission financial statements in interactive data format using eXtensible Business data format using eXtensible Business Reporting Language, or XBRL.Reporting Language, or XBRL.

• Covers:Covers:

• Annual and quarterly reportsAnnual and quarterly reports

• Transition reports Transition reports

• Securities Act registration statementsSecurities Act registration statements

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Proposed phase-in scheduleProposed phase-in schedule

• Year 1 - domestic and foreign large accelerated filers Year 1 - domestic and foreign large accelerated filers that use U.S. GAAP and have a worldwide public float that use U.S. GAAP and have a worldwide public float above $5 billion.above $5 billion.

• Year 2 - all other domestic and foreign large accelerated Year 2 - all other domestic and foreign large accelerated filers using U.S. GAAP would be subject to interactive filers using U.S. GAAP would be subject to interactive data reporting.data reporting.

• Year 3 - all remaining filers using U.S. GAAP and all Year 3 - all remaining filers using U.S. GAAP and all foreign private issuers that prepare their financial foreign private issuers that prepare their financial statements in accordance with IFRS as issued by the statements in accordance with IFRS as issued by the IASB.IASB.

If proposed rules are adopted, the first phase would begin If proposed rules are adopted, the first phase would begin with fiscal periods ending on or after December 15, 2008 with fiscal periods ending on or after December 15, 2008

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Data tagging detailsData tagging details

For each phase of implementation:For each phase of implementation:

• The face of the financial statements would be tagged in The face of the financial statements would be tagged in each filer's first year of interactive data reporting. each filer's first year of interactive data reporting.

• The financial statement footnotes and financial statement The financial statement footnotes and financial statement schedules also would be tagged in each filer's first year, schedules also would be tagged in each filer's first year, but in block text only. but in block text only.

• After the first year of such tagging, a filer also would be After the first year of such tagging, a filer also would be required to tag the detailed disclosures within the required to tag the detailed disclosures within the footnotes and schedules.footnotes and schedules.

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What can I do now?What can I do now?

Use available resources to get smart on XBRLUse available resources to get smart on XBRL

• http://www.sec.gov/spotlight/xbrl.shtmlhttp://www.sec.gov/spotlight/xbrl.shtml

• http://www.xbrl.us http://www.xbrl.us

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Fair ValueFair Value

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Other InitiativesOther Initiatives

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Other InitiativesOther Initiatives

• Sarbanes-Oxley Act – section 404Sarbanes-Oxley Act – section 404

• Modernization of oil and gas reporting Modernization of oil and gas reporting requirementsrequirements

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QuestionsQuestions

Documents

1 U.S. Securities and Exchange Commission Current Accounting Initiatives and Topics Presentation to NARUC Douglas T. Parker Professional Accounting Fellow