Current Accounting Initiatives and Topics

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Current Accounting Current Accounting Initiatives and TopicsInitiatives and Topics

May 3, 2007May 3, 2007Jim KroekerJim Kroeker

Current Accounting Current Accounting Initiatives and TopicsInitiatives and Topics

May 3, 2007May 3, 2007Jim KroekerJim Kroeker

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

DisclaimerDisclaimer

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Accounting Group ActivitiesAccounting Group Activities

Oversight of standard settingOversight of standard setting• FASB, EITF

• Coordination with other US and non-US regulators

Accounting consultationsAccounting consultations• Pre-filing requests from registrants

• Internal consultations from Divisions of Corporation Finance and Enforcement

Rulemaking, interpretive guidance and reportsRulemaking, interpretive guidance and reports• Staff Accounting Bulletins

• Reports to Congress

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OverviewOverview

Complexity in AccountingComplexity in Accounting

XBRL ActivityXBRL Activity

MaterialityMateriality

Recent Accounting IssuesRecent Accounting Issues

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Unnecessary ComplexityUnnecessary Complexity

One View of Unnecessary ComplexityOne View of Unnecessary Complexity• Unnecessary complexity is viewed as the overly detailed Unnecessary complexity is viewed as the overly detailed

rules, bright lines, and safe harbors in financial reporting rules, bright lines, and safe harbors in financial reporting standards that may cause or enable a company’s standards that may cause or enable a company’s transactions and events to be accounted for in a manner transactions and events to be accounted for in a manner that does not reflect their economic substancethat does not reflect their economic substance

• Not necessarily things that are difficult to do; for example:

• Application of fair value measurement may be difficult but not necessarily complex to present or understand

• Accounting for complex business arrangements may sometimes be complex because of the underlying economics

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Unnecessary ComplexityUnnecessary Complexity

Potential Causes/Drivers Potential Causes/Drivers

• Volume of interpretive literature

– Example: DIG process related to Statement 133

• Fear of being second guessed

– Example: Recent EITF request to deal with software revenue

Potential Dangers/ProblemsPotential Dangers/Problems• Complexity creates the potential for investors to receive

financial reports that are difficult to understand and that may not transparently portray a company’s financial condition and results of operations.

• Complexity also imposes increased costs on preparers Complexity also imposes increased costs on preparers and auditors of financial statements.and auditors of financial statements.

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Improving Financial Reporting –Improving Financial Reporting –Standard-SettersStandard-Setters

Reconsider Complex StandardsReconsider Complex Standards

• Leasing

Make Sure Standards are Principles-basedMake Sure Standards are Principles-based

• Recent standards have moved in this direction

Reconsider Standards to Produce Reconsider Standards to Produce Information That is More TransparentInformation That is More Transparent

• Pensions

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Improving Financial Reporting –Improving Financial Reporting –RegulatorsRegulators

Accept reasonable differences in judgment Accept reasonable differences in judgment

• Reasonable people can have different views

• Disclosure can explain treatment used

Discourage accounting motivated Discourage accounting motivated transactionstransactions

• These often are not consistent with the principles of a standard

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Objectives-Oriented StandardsObjectives-Oriented Standards

What We’re Striving ForWhat We’re Striving For

• Standards grounded in conceptual framework with few alternatives or exceptions

• Guidance still to be provided, but principles/ objectives govern

• More professional judgment

• Expedite standard setting process

• Facilitate international convergence

• Emphasis on substance over form

• Fewer structuring possibilities

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Improving Financial Reporting –Improving Financial Reporting –PreparersPreparers

Use professional judgmentUse professional judgment

• Unbiased, neutral judgments

• Consider all available information

• Focus on the objective(s)

• Seek the most transparent treatment

Enhance disclosureEnhance disclosure

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Structured TransactionsStructured Transactions

• Problems arise when transactions are designed around accounting literature

– Transactions undertaken or redesigned to obtain particular accounting treatment

– Transactions that don’t appear to make economic sense on their own

– Look for a true (non-accounting) purpose

• At issue in many enforcement cases

• Evident in many “off-balance sheet” areas

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Improving Financial Reporting –Improving Financial Reporting –AuditorsAuditors

Don’t be afraid to use professional Don’t be afraid to use professional judgmentjudgment

Don’t ask for every issue to be covered in Don’t ask for every issue to be covered in a standard or by the SECa standard or by the SEC

• We’ve gone from “Where does it say this is wrong?” to “Where does it say this is OK?”

Don’t get involved with accounting-Don’t get involved with accounting-motivated transactionsmotivated transactions

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Interactive Data & XBRLInteractive Data & XBRL

Potential BenefitsPotential Benefits Investors, analysts & other users 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

Registrants and preparers of reportsRegistrants 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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Current Issues and ActivitiesCurrent Issues and Activities Voluntary filer program with expedited review Voluntary filer program with expedited review

New products being launched to ease use of dataNew products being launched to ease use of data

XBRL-enabled Interactive Financial Report Viewer XBRL-enabled Interactive Financial Report Viewer available on SEC websiteavailable on SEC website

Proposed rule to expand XBRL voluntary program to Proposed rule to expand XBRL voluntary program to cover mutual fund risk/return datacover mutual fund risk/return data

SEC to provide XBRL data covering executive SEC to provide XBRL data covering executive compensation summary information for several hundred compensation summary information for several hundred companies this summercompanies this summer

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Taxonomy Development ProjectTaxonomy Development Project

$5.5M contract with XBRL US, Inc. towards the $5.5M contract with XBRL US, Inc. towards the development of a full suite of US GAAP taxonomies.development of a full suite of US GAAP taxonomies.

When complete will provide the basis for any When complete will provide the basis for any company in any industry to prepare their financials & company in any industry to prepare their financials & notes to the financial statements in XBRLnotes to the financial statements in XBRL

Project include public comment period (summer Project include public comment period (summer 2007) where all parties in the financial reporting 2007) where all parties in the financial reporting supply chain should review the taxonomies supply chain should review the taxonomies

This is an important opportunity to get involved in This is an important opportunity to get involved in the development of the taxonomies and ensure they the development of the taxonomies and ensure they meet financial reporting and analysis needsmeet financial reporting and analysis needs

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SAB 108 - Quantifying MisstatementsSAB 108 - Quantifying Misstatements

The ConceptsThe Concepts• Quantification of the effect of prior period

misstatements

• Weaknesses perceived in both the iron curtain and rollover approaches on a stand alone basis

• Registrants should quantify errors using both a balance sheet (iron curtain) and income statement (rollover) approach

– Importance of qualitative considerations

– Does not amend SAB 99

• Not a general amnesty for prior period misstatements

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Other Materiality TopicsOther Materiality Topics

Considering thoughts on:Considering thoughts on:

Interim Period Materiality: Interim Period Materiality:

• Securities law considers interim periods as discrete financial statements;

• APB 28 may be interpreted as considering interim periods as only a part of the annuals, however…

• …Investors do react to quarterly results;

• Should originating errors and carry-over errors be considered and assessed separately under SAB 99?

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Other Materiality TopicsOther Materiality Topics

Also considering thoughts on:Also considering thoughts on:

Other aspects of SAB 99: Other aspects of SAB 99:

• What other quantitative and qualitative metrics impact the SAB 99 analysis (for example, EPS)?

• How are similar errors aggregated?

• Can quantitatively material errors be deemed qualitatively immaterial? In what circumstances is that likely to occur?

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Recent Accounting Topics Recent Accounting Topics

Subprime LoansSubprime Loans Allowance for loan losses Allowance for loan losses

• Consider impact on credit trends

• May require adjustments to historical loss rates

FAS 140 impact of restructuring loansFAS 140 impact of restructuring loans

Disclosures Disclosures

• FSP SOP 94-6-1 discusses relevant disclosures for uncertainties, credit concentrations, and significant estimates

• Item 303 of Regulation S-K Item 303, Management’s Discussion & Analysis

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APB Opinion No. 25APB Opinion No. 25 Views of the Office of the Chief

Accountant are expressed in its September 19, 2006 letter, which can be accessed at: http://www.sec.gov/info/accountants/staffletters.shtml

http://www.sec.gov/info/accountants/staffletters.shtml

http://www.sec.gov/info/accountants/staffletters.shtml

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Market InstrumentsMarket Instruments• A market instrument is an instrument that is designed to

be sold into the market at a value intended to be reasonably equivalent to the fair value of employee share options

• A statement providing the Office of the Chief Accountant’s current views on market instruments is available at http://www.sec.gov/news/speech/spch090905dtn.htmhttp://www.sec.gov/news/speech/spch090905dtn.htm

• The Office of the Chief Accountant’s response to the The Office of the Chief Accountant’s response to the Zions Bancorporation proposal is available at Zions Bancorporation proposal is available at http://www.sec.gov/info/accountants/staffletters/zions012507.pdfhttp://www.sec.gov/info/accountants/staffletters/zions012507.pdf

http://www.sec.gov/news/speech/spch090905dtn.htm

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Recent Accounting TopicsRecent Accounting Topics

Statement 133 – “Critical Terms Match” Statement 133 – “Critical Terms Match”

• Foreign currency or commodity transactions hedged with in a narrowly defined period (but not perfectly matched)

• Registrant’s applied the “critical terms matched”

• If critical terms did not match due to payment date or settlement date differences the SEC staff will not object to continued application of hedge accounting provided:

– All other provisions in paragraph 65 were met

– Registrant evaluates and supports the reasonableness of its conclusion that the critical terms of the derivative and hedged item matched (e.g., settlement of derivative and hedged item occurred within same month on different days)

– A quantitative analysis confirms hedge was highly effective and that unrecorded ineffectiveness was deminimus

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Consultations with OCAConsultations with OCA

Guidance for Consulting with OCAGuidance for Consulting with OCA• Take advantage of it!

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

• Perhaps easier than the comment letter process• Guidance for resolving ‘pre-filing’ questions is posted on

the SEC’s website– http://www.sec.gov/info/accountants/ocasubguidance.htm

• Companies should provide OCA with a written submission (commonly referred to as a “pre-clearance” submission)– Auditor participation– Audit committee participation

• Registrants can request their SEC reviewer to consult on specific matters during a Corp. Fin review process

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Consultations with OCAConsultations with OCA

Consulting with OCA Consulting with OCA

• Recommended form and content of correspondence to expedite the process

• What to expect from OCA– Team leader will contact the company within 3 days

of receipt of submission; entire process usually takes 2 – 4 weeks but depends on nature of the issue

– Team, Senior Associate and Deputy Chief Accountants may be involved

– Company may request Chief Accountant review of conclusion reached by OCA staff

Current Accounting Current Accounting Initiatives and TopicsInitiatives and TopicsCurrent Accounting Current Accounting Initiatives and TopicsInitiatives and Topics

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Current Accounting Initiatives and Topics