Issues In-Depth 2014 AICPA National Conference on Current ... · 2014 AICPA National Conference on Current SEC and PCAOB ... that they have received issues that fall in four broad

Issues In-Depth

2014 AICPA National Conference on Current SEC and PCAOB Developments

December 2014

kpmg.com

IFRS in the United States 2

Implementing the New Revenue Recognition Standard 2

Management’s Responsibilities over Internal Control

over Financial Reporting (ICFR) 4

Risk Assessment 4

Control Deficiencies 4

ICFR Disclosures 5

Implementation of COSO 2013 5

Disclosure Effectiveness Initiative 6

Disclosure Best Practices 7

Division of Corporation Finance Focus Areas 8

Income Taxes 8

Fair Value 9

IPO Financial Statement Requirements 9

Oil and Gas Industry Disclosures 10

International Reporting Matters 10

Current Accounting Practice Issues 10

Segment Identification and Aggregation 11

Gross versus Net Revenue Recognition 11

Business Combinations and Goodwill Impairment 12

Consolidation and Joint Ventures 13

Financial Instruments 14

Pensions 15

Statement of Cash Flows 15

Accounting Standard Setting 16

IFRS and U.S. GAAP Convergence 16

FASB Initiative to Reduce Complexity 16

Audit Quality 17

Auditor Independence 17

The Role of the Audit Committee 18

PCAOB Standard-Setting Activities 19

PCAOB Inspection Trends and Focus Areas 20

Enforcement, Rulemaking, and Other Initiatives 21

SEC Enforcement Update 21

Conflict Minerals Reporting 21

Other Rulemaking Activities 22

Integrated Reporting 22

Appendix: Index of Published Speeches 22

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Issues In-Depth / December 2014

2014 AICPA Conference Highlights

The AICPA’s National Conference on Current SEC and PCAOB Developments on December 8-10

featured speakers from the SEC, PCAOB, FASB, IASB, Center for Audit Quality (CAQ), AICPA,

preparers, auditors, and others who discussed recent developments and initiatives in accounting,

auditing, and financial reporting.

IFRS in the United States. James Schnurr, the SEC’s recently appointed Chief Accountant,

Office of the Chief Accountant (OCA), announced that making a recommendation to the

Commission regarding the possible incorporation of IFRS into the financial reporting regime for

U.S. issuers is one of his near-term priorities. He acknowledged that the continued uncertainty

related to IFRS has caused uneasiness among some investors as well as the international

financial reporting community, and that bringing a recommendation to the Commission in the

near term will hopefully address these concerns. In addition to approaches previously considered

by SEC staff, Mr. Schnurr described the possibility of giving domestic issuers an option to

provide supplemental IFRS-based financial information in addition to the U.S. GAAP financial

information currently required.

Implementing the New Revenue Standard. Mr. Schnurr emphasized the importance of a

successful implementation of the new converged revenue standard and focused on the need for

consistent application by U.S. issuers so that there is comparability of financial information

among entities. FASB and IASB Board members and their staff provided an overview of ongoing

implementation efforts, including consideration of additional standard setting on certain

questions and FASB’s consideration of whether to delay the effective date of the standard.

Preparers and auditors expressed their concerns about the extent and nature of unresolved

implementation questions and the timeline for their resolution.

Management’s Responsibility over ICFR. The SEC staff emphasized the need for registrants to

ensure that their responsibilities related to Internal Control over Financial Reporting (ICFR) are

fulfilled. Representatives from the SEC staff stated that they have been and will continue to be

focused on registrants’ assessments of ICFR. Additionally, the DCF staff reminded registrants

that they have a quarterly responsibility to report material changes to ICFR, as well as material

weaknesses.

Disclosure Effectiveness Initiative. Keith Higgins, Director, SEC Division of Corporation Finance

(DCF) and other members of the DCF staff discussed the initiative undertaken by the DCF staff

to evaluate the effectiveness of disclosures required under Regulations S-X and S-K. The

evaluation is underway and they expect to issue a concept release with recommendations for

updates and improvements as a next step.

Audit Quality. Auditor independence and the role of the audit committee were highlighted as

focus areas for improving audit quality. SEC and PCAOB representatives commented on recent

independence issues, and questioned whether registrants and audit committees have the

appropriate policies and procedures to evaluate and monitor auditor independence. Both the

PCAOB and the CAQ have active projects to provide audit quality indicators as a tool to assist

audit committees in discharging their oversight responsibilities. The SEC staff are considering a

concept release on changes to existing audit committee disclosure requirements.



IFRS in the United States

Mr. Schnurr provided an update on the SEC staff’s consideration of incorporation of IFRS into the

financial reporting regime for domestic issuers. He indicated that both he and SEC Chair Mary Jo

White recognize that continued uncertainty around whether, and if so, how IFRS might be

incorporated into the financial reporting regime for domestic issuers results in uneasiness for

some investors and the global financial reporting community. Accordingly, Mr. Schnurr

expressed his intent and desire to bring a recommendation to the Commission on this question

in the near future.

Mr. Schnurr referenced the various alternatives that have been considered previously by the SEC

staff but also discussed another possible alternative to be considered.1 This new alternative

would give domestic registrants an option to provide supplemental IFRS-based financial

information in addition to the U.S. GAAP financial information currently required. Mr. Schnurr

explained that under this alternative the supplemental IFRS-based financial information would not

be considered “non-GAAP” financial information.

Daniel Gallagher, SEC Commissioner, commented that issuers have not communicated to him

their desire to adopt or even converge with IFRS. Mr. Gallagher also noted that arguments have

been made to maintain the primacy of U.S. GAAP. Mr. Gallagher stated that he has not received

a formal proposal, but expressed support for Mr. Schnurr’s new alternative as a way to maintain

the primacy of U.S. GAAP while gauging preparers’ and users’ desire for U.S. issuers to provide

IFRS financial information.

Implementing the New Revenue Recognition Standard

Mr. Schnurr emphasized that successful implementation of the new revenue recognition

standard will be critical, and that he is particularly focused on consistent application by U.S.

registrants to ensure comparability. On this point, Mr. Schnurr commented: “Comparability is a

hallmark of U.S. financial reporting, and I believe that it is in the best interests of all parties to

identify and address potential diversity in practice on the front end of the implementation effort,

as doing so should avoid significant costs of narrowing practice after adoption for preparers and

avoids the lack of comparability for users.”

Mr. Schnurr noted that the SEC staff are aware of the numerous questions related to accounting

for transactions under the new revenue standard, and characterized these questions as ranging

from those that may require standard setting to those that are more “educational” in nature. Mr.

Schnurr described the educational questions as relating to current practices that the standard

setters’ did not intend to change, which he believed could be quickly resolved with some

clarification. With regard to those questions that may require standard setting, Mr. Schnurr

referenced the Transition Resource Group (TRG), which is considering issues that could have a

widespread and significant impact on implementation.2 To support the independent standard-

setting process, the SEC staff are monitoring implementation and will work closely with the

FASB to identify issues that may require additional guidance or standard setting. Mr. Schnurr also

indicated that the SEC staff are considering whether any existing SEC disclosure or reporting

requirements will be affected by the new revenue standard.

1 SEC Office of the Chief Accountant, Final Staff Report, Work Plan for the Consideration of Incorporating International

Financial Reporting Standards into the Financial Reporting System for U.S. Issuers, available at

www.sec.gov/spotlight/globalaccountingstandards/ifrs-work-plan-final-report.pdf.

2 For more information about the TRG, see KPMG’s Defining Issues Nos. 14-33, Revenue Transition Resource Group

Holds First Meeting, and 14-49, Revenue Transition Resource Group Discusses Five New Issues, both available at

www.kpmg-institutes.com.



The SEC staff emphasized the need for issuers to focus on internal controls, systems, and

processes when implementing the revenue standard, in particular with respect to variable

consideration and disclosures. The SEC staff also reminded registrants of the requirement to

disclose material changes in ICFR as the new revenue standard is implemented.

Russell Golden, Chairman of the FASB, commented that implementation of the new revenue

standard is critical to its effectiveness and that the FASB and IASB are evaluating the following:

Application issues with respect to the guidance on recognition of revenue from licenses of

intellectual property;

Clarification of the guidance on identification of performance obligations; and

Further development of guidance on gross versus net reporting of revenue.

Mr. Golden and Ian Mackintosh, Vice-Chairman of the IASB, indicated that both the FASB and

IASB are working hard to maintain convergence with respect to any additional guidance. Mr.

Mackintosh observed that the IASB is not being pushed to defer the effective date of the

standard. Mr. Golden said that companies in the United States that are considering retrospective

adoption are required to present an additional year of financial information compared to

companies reporting under IFRS outside the United States where, generally, only one

comparative period is required to be reported. Mr. Golden believes this is resulting in a push in

the United States for the FASB to consider deferring the effective date.

Susan Cosper, FASB Technical Director, discussed the TRG and, in particular, the volume of

issues that the FASB staff has received, which has not been significant. Ms. Cosper indicated

that they have received issues that fall in four broad categories:

Ms. Cosper noted that substantially all of the issues that the FASB staff has received for TRG

consideration to date would be discussed by the TRG in the near term.

James Dolinar, AICPA’s Financial Reporting Executive Committee (FinREC) Chairman, gave an

overview of the AICPA’s process related to the new revenue standard. He pointed out that the

AICPA’s process is non-authoritative and would not provide interpretive guidance. However, the

AICPA will publish a guide that discusses issues raised by 16 industry task forces currently

reviewing the standard, highlights relevant paragraphs in the standard, and includes examples to

lead preparers to the appropriate considerations in evaluating a company’s fact patterns.3

3 See KPMG’s Defining Issues No. 14-9, Implementing the Forthcoming Revenue Recognition Standard, available at

www.kpmg-institutes.com, for more information on the industry task forces.

Judgmental

Items

Items that

standard

setting will

not resolve

Audit

Issues

Questions

about internal

controls, etc.

SEC Topics

Questions

about the 5-

year table of

selected

financial data,

Staff

Accounting

Bulletin (SAB)

104, etc.

Standard

Setting

Items that

may require

additional

standard

setting

http://www.kpmg-institutes.com/



Management’s Responsibilities over Internal Control

Over Financial Reporting

Brian Croteau, Deputy Chief Accountant, OCA, highlighted that efforts throughout the SEC

pertaining to management’s ICFR requirements are “ongoing, coordinated, and increasingly

integrated into our routine consultation, disclosure review, and enforcement efforts." He

continues to question whether material weaknesses are being properly identified, evaluated, and

disclosed by registrants. This message was echoed by Nili Shah, Deputy Chief Accountant, DCF,

who expressed concerns over the timely identification of material weaknesses, in light of the

DCF staff’s experience that disclosures of material weaknesses stem primarily from the

identification of material errors.

Risk Assessment

As part of an entity’s ongoing assessment of "what could go wrong" with financial reporting,

Kevin Stout, Senior Associate Chief Accountant, OCA, emphasized that it is critical to consider

the nature and extent of any changes in the risks to reliable financial reporting (e.g., company

reorganization, nature of transactions, overall business environment, accounting requirements,

etc.).

Recent examples of such events discussed with registrants during the SEC comment letter

process include:

Expansion into a new foreign location;

Growth in operations through the use of variable interest entities (VIEs);

Reaching a sales agreement with a new customer under terms different from those with any

existing customers; and

Increases in expenditures for environmental clean-up of existing remediation sites.

Control Deficiencies

Mr. Stout believes that following the top-down, risk-based approach described in the SEC’s 2007

Commission Guidance Regarding Management’s Report on Internal Control over Financial

Reporting is a reasonable basis for determining whether a material weakness exists, because it

helps to ensure that sufficient considerations are being made when identifying and describing a

deficiency.4

Understand the Control Deficiency. Mr. Stout emphasized the importance of understanding

the cause of all control deficiencies, because otherwise, “management is more likely to overlook

the possibility that there is a deficiency in another COSO [Committee of Sponsoring

Organizations of the Treadway Commission] component that may already represent, or could

otherwise be developing into, a material weakness.” While it is possible that process-level

control deficiencies are isolated within the Control Activities component of internal control, he

believes that the root cause often stems from a broader control breakdown. For example, a

registrant that describes a deficiency in the design of one or more Control Activities controls may

receive a request from the SEC staff for information about how management considered the

effectiveness of the Risk Assessment component. Similarly, a deficiency in the operating

effectiveness of a control within the Control Activities component might prompt a request for

information on management’s assessment of the effectiveness of the Monitoring Activities

component.

4 17 CFR Part 241 (Release No. 33-8810), Commission Guidance Regarding Management’s Report on Internal Control

Over Financial Reporting Under Section 13(a) or 15(d) of the Securities Exchange Act of 1934.

… efforts throughout

the SEC pertaining to

management’s ICFR

requirements are

“ongoing,

coordinated, and

increasingly

integrated into our

routine consultation,

disclosure review, and

enforcement efforts."



Define the Control Deficiency. In emphasizing the importance of a fully- and accurately-defined

control deficiency, Mr. Stout stated that “describing the accounting error is not the same as

describing the control deficiency” and recommended the following factors to consider:

What is the nature of the control deficiency?

What is the impact on financial reporting and ICFR?

What is the root cause of the deficiency?

How was the deficiency identified, and who identified the deficiency?

What remediation efforts are necessary?

He noted that SEC comment letter responses and material weakness disclosures that focus on

the accounting error may raise questions about management's understanding of the implications

of the control deficiency and whether its severity was appropriately evaluated. Additionally, Ms.

Shah noted that a material weakness may exist prior to the identification of an accounting error.

The SEC staff also observed that if a registrant’s basis for its accounting conclusion continues to

change during the SEC comment letter process, it might be indicative of a lack of sufficient

controls.

Evaluate the Control Deficiency. In evaluating the severity of a control deficiency, Mr. Stout

emphasized that careful consideration is required when evaluating “the could factor,” which is

the magnitude of the potential misstatement that could result from the deficiency. Determining

the magnitude of the potential misstatement requires considering the nature of the transactions

and the amounts or total transactions exposed to the deficiency. This includes the current

volume of activity exposed to the deficiency and the volume of activity that is expected in future

periods, as well as whether the deficiency could reasonably be expected to affect other

accounts. Mr. Stout noted that the could factor was a common discussion point in many of the

recent ICFR comment processes stemming from immaterial error corrections.

ICFR Disclosures

Ms. Shah and other SEC staff representatives reminded registrants that they are required to

disclose changes in the registrant's ICFR that occurred during the registrant’s last fiscal quarter

that has materially affected, or is reasonably likely to materially affect, the registrant's ICFR.5

Implementation of COSO 2013

In May 2013, the COSO released its updated Internal Control – Integrated Framework (2013

Framework).6 The 2013 Framework updates the original COSO Framework released in 1992.

Panelists shared feedback from registrants on their transition efforts, noting that the 2013

Framework is prompting management to take a fresh look at the design and operating

effectiveness of entity-level controls in the Control Environment, Risk Assessment, Information

& Communication, and Monitoring components. The level of effort required to evaluate entity-

level controls in these four components as part of the transition depends on how well the COSO

1992 Framework was applied.

5 SEC Regulation S-K, Item 308, Internal Control over Financial Reporting, paragraph (c), available at www.sec.gov.

6 COSO 2013 Internal Control – Integrated Framework, available at www.coso.org

In evaluating the

severity of a control

deficiency, careful

consideration is

required when

evaluating “the could

factor.”



COSO announced that the 1992 Framework will no longer be supported as of December 15,

2014. In response to a question, Mr. Croteau stated that the SEC has not set a deadline for

transition to the 2013 Framework. Both he and Ms. Shah stated that the SEC staff will not object

to nor question registrants that do not transition to COSO 2013 this year, but reiterated that the

SEC staff are more likely to question the use of an outdated framework with the passage of

time. Both Mr. Croteau and Ms. Shah indicated, however, that registrants should disclose which

framework they are using.

Disclosure Effectiveness Initiative

Mr. Higgins and other DCF staff discussed the SEC’s disclosure effectiveness project. Prompted

in part by a study required by the Jumpstart Our Business Startups (JOBS) Act, the DCF staff

have started a comprehensive review of SEC reporting requirements under Regulation S-X and S-

K and related guidance to provide specific recommendations for updates and improvements.

Initially, the review will focus on the business and financial disclosures required in periodic and

current reports, including Forms 10-K, 10-Q, and 8-K. Subsequent phases of the project will likely

include compensation and governance information included in proxy statements.

The SEC staff’s objective is to develop recommendations to reduce the costs and burdens on

companies while continuing to provide effective and meaningful disclosures to investors. As an

example of the type of update contemplated, Mr. Higgins referred to updates made by the SEC

staff to the SEC’s Financial Reporting Manual in February 2014 related to critical accounting

estimate disclosures for share-based compensation in initial public offerings (IPOs).7 These

updates allowed registrants to scale back disclosures relating to events and developments that

affect fair value-based estimates of share-based payments before an IPO.

To ensure that the needs and desires of constituents are considered in developing specific

recommendations, the DCF staff are conducting outreach with investors and preparers. The DCF

staff are also seeking input and feedback internally from OCA, and meets quarterly with

representatives of the FASB to discuss coordination with the FASB’s Disclosure Framework

project.

While the project is still in the early stages, the DCF staff shared the following themes:

Regulation S-K is a mixture of bright line rules and principles, and includes outdated disclosure

requirements;

There are redundancies within the SEC disclosure requirements and the U.S. GAAP disclosure

requirements; and

Some of the scaled disclosure requirements are not always intuitive. For example, the SEC

staff created scaled disclosures for Emerging Growth Companies (EGCs) similar to scaled

disclosure requirements for Smaller Reporting Companies (SRCs); however some of the EGCs

are much larger than SRCs.

Mark Kronforst, Chief Accountant, DCF, noted that one focus area in considering recommended

updates to Regulation S-X is the separate financial statement requirements of Rules 3-05, 3-09,

3-10, and 3-16. Mr. Kronforst noted that in many cases the rationale for adopting these rules still

applies; however targeted improvements may be warranted.

7 SEC Financial Reporting Manual, Section 9520, available at sec.gov.

The SEC staff will

not object to nor

question registrants

that do not transition

to COSO 2013 this

year.



Rule 3-05, Financial statements of businesses acquired or to be acquired – The SEC staff are

considering whether enhanced pro forma financial information may provide more useful

information to investors, and reduce the need for the pre-acquisition financial statements. Mr.

Kronforst also observed that compliance with Rule 3-05 tends to be more burdensome for

smaller registrants, which is a fact the SEC staff will take into consideration in evaluating the

rule.

Rule 3-10, Financial statements of guarantors and issuers of guaranteed securities registered

or being registered – The SEC staff observed that the condensed consolidating financial

information that registrants often disclose to comply with the rule is difficult to prepare and

understand. Therefore, improvements to this reporting model may be warranted.

The SEC staff expect to issue a concept release on these initiatives for public comment when

the initial phase of their review is complete.

Disclosure Best Practices

Mr. Higgins, Mr. Kronforst, and other DCF staff members discussed a number of actions that

registrants can take to improve the effectiveness of their current disclosures:

Known trends and uncertainties – Mr. Higgins remarked that these disclosures required by

Item 303 of Regulation S-K are “among the most important disclosures in the MD&A.” Item

303 requires disclosure of trends and uncertainties that have had or are likely to have an

impact on future performance. Mr. Higgins highlighted that when a known trend or uncertainty

is likely to come to fruition, it should be assumed that the uncertainty comes to pass in its

entirety (i.e., the impact of the uncertainty should not be probability weighted). Mr. Higgins

observed that it is not necessary to disclose “how you made it through the [Item 303 two-

prong] test.”

Critical accounting estimates – These are not intended, and should not be, a repeat of the

registrant’s significant accounting policies from the financial statement footnotes. Rather, the

critical accounting estimates should:

Address the variability of the underlying estimate and the sensitivity of those judgments

to different circumstances;

Be tailored to the identification of the material assumptions and uncertainties as well as

the expectation underlying the key assumptions and how they relate to past experience;

Address the known trends and assumptions that have had, or are reasonably likely to

have a material favorable or unfavorable impact on the estimate; and

Provide an understanding of how management forms its judgments about future events.

As an example of the kind of disclosure that should be included in the critical accounting

estimates, the DCF staff indicated that if the recoverability of goodwill were dependent on an

assumption that the entity returned to sales growth, that fact should be disclosed.

Additional recommendations made by the DCF staff included:

Cross-referencing of information within the filing to eliminate redundancies. The DCF staff

noted that discrete sections of the 10-K and 10-Q other than the financial statements do not

need to “stand alone” and that the DCF staff encourage the elimination of redundancy.

Critical accounting

estimates are not

intended, and should

not be, a repeat of the

registrant’s significant

accounting policies

from the financial

statement footnotes.



Eliminate boilerplate disclosures in the results of operations in the MD&A, risk factors, and

significant accounting estimates. The DCF staff encouraged registrants to tailor disclosures to

registrant-specific facts and circumstances;

Reevaluate existing disclosures regularly. The DCF staff encouraged updates and

improvements, including eliminating disclosures that are no longer relevant. The DCF staff are

open to discussing potential changes in disclosures with registrants but will not formally pre-

clear disclosures.

Division of Corporation Finance Focus Areas

A panel of DCF staff highlighted the following areas of focus and frequent comment in the filing

review process.

Income Taxes

The DCF staff noted that the trend of frequent comments on income taxes has continued,

specifically with respect to valuation allowances, overseas cash, and indefinitely re-invested

earnings. The DCF staff discussed circumstances where there could be improvements in income

tax disclosures including situations in which there are:

Significant differences between the expected income tax expense and the actual income tax

expense;

Significant changes in the annual effective income tax rate or materially volatile but offsetting

components;

Material components in the rate reconciliation that significantly impact the effective income

tax rate; and

Foreign earnings that are a significant component of a registrant’s total pre-tax earnings.

Foreign Taxes. The DCF staff commented that investors have a desire for enhanced disclosures

on foreign income and related taxes, and that foreign taxes often drive volatility of the total

reported taxes of an entity. As a result, the DCF staff have been and will continue to be focused

on this area. The DCF staff observed that they continue to see registrants making generic

disclosures about changes in foreign taxes that are not sufficient for investors to understand the

material risks and uncertainties associated with the entity’s foreign taxes. Furthermore, the DCF

staff noted that an individual country may have unique risks and uncertainties that warrant

disclosure. Where foreign pre-tax earnings are significant, the DCF staff recommended

disclosing the following:

A description of what is included in the foreign earnings line of the rate reconciliation;

The material jurisdictions that are included in the foreign earnings, and for those jurisdictions

consider disclosing (a) the pre-tax earnings, (b) the statutory and effective tax rates, and (c)

material reconciling items between the statutory and effective tax rates; and

Trends, uncertainties, and expectations associated with the specific jurisdictions in which the

company operates.

… the trend of

frequent comments

on income taxes has

continued, specifically

with respect to

valuation allowances,

overseas cash, and

indefinitely re-

invested earnings.



Fair Value

The DCF staff continue to focus on fair value measurements and disclosures that affect initial

recognition, particularly as they relate to business combinations and impairments, and disclosure

requirements associated with nonrecurring fair value measurements.

The DCF staff reminded registrants to consider the following related to fair value measurements

and disclosures:

Situations in which material impairment indicators have been disclosed or are known to exist,

but no impairment charge has been recorded;

Required disclosures for nonrecurring fair value measurements; and

Careful selection of the proper fair value hierarchy classifications.

IPO Financial Statement Requirements

Predecessor Financial Statements. The DCF staff noted an increase in IPO and spinoff activity

where a newly formed registrant results from complex reorganization transactions, making it

challenging to determine the proper set of financial statements to include for a predecessor

business. The DCF staff encourage pre-clearance in this situation. There is limited authoritative

guidance for determining the predecessor other than the definition in Rule 405 of Regulation C,

and the DCF staff observed that identifying the predecessor entity in many scenarios requires

careful analysis of all relevant facts and circumstances.8 The DCF staff specifically mentioned a

newly formed master limited partnership to which a company may contribute an internal service

function (for example petroleum terminal activities or well water disposal facilities), that

historically has not had a revenue stream, noting that there might be no predecessor financial

statements required, depending on the facts and circumstances.

The DCF staff also discussed the provision of the JOBS Act that states that the SEC staff must

review all EGC IPO registration statements confidentially, if an EGC chooses to submit a draft

registration statement to the SEC staff. They reminded registrants that while an EGC may

confidentially submit a draft registration statement for an IPO for nonpublic review, the initial

confidential submission and all amendments must be publicly filed with the SEC no later than 21

days prior to the issuer’s commencement of a “road show” (as defined in Securities Act Rule

433(h)(4)).

Incomplete Filing Documents. The DCF staff discussed common requests from pre-IPO

entities that they be allowed to omit, from their initial submission or filing, audited financial

statements for the earliest fiscal year.9 The DCF staff reminded registrants that a review would

generally not begin until they submit a registration statement that includes all required

information.

Recent Developments. The DCF staff observed that some registrants are opting to include a

Recent Developments section that includes financial information related to a subsequent period

(commonly referred to as capsule financial information). The DCF staff noted that while this

capsule financial information may be useful to investors, registrants should consider the

guidance in Exchange Act Rule 12b-20 that requires additional information to be provided if it is

8 Rule 405 of Regulation C defines predecessor as “a person the major portion of the business and assets of which

another person acquired in a single succession, or in a series of related successions in each of which the acquiring

person acquired the major portion of the business and assets of the acquired person.” In evaluating the definition,

companies and auditors have historically looked to one or more pieces of staff interpretive guidance including, to varying

degrees, staff speeches, Section 2065 of the Financial Reporting Manual, and analogies to SAB Topic 5.Z.7. 9 This request occurs when the registrant expects that by the time the registration statement is declared effective that

year will no longer be required.



necessary to make other disclosures “in the light of the circumstances under which they are

made not misleading.”

Oil and Gas Industry Disclosures

The DCF staff indicated that registrants should consider the following points related to

disclosures required under Rule 4-10 of Regulation S-X:

Whether the recent changes in oil prices and related potential changes in exploration,

development, and production levels represent a known trend or uncertainty that should be

discussed in the MD&A or considered in risk factors;

The impact of decreasing oil prices on oil and gas reserve estimates;

The definition of "undeveloped oil and gas reserves" requires that the registrant have adopted a

development plan for the reserves (an intent to develop does not qualify as a plan); and

The schedule of drilling activity reflected in the company’s year-end estimate should align with

the investment decisions approved by management for 2015 and beyond.

International Reporting Matters

Craig Olinger, Deputy Chief Accountant for DCF, highlighted reporting issues that could impact

foreign private issuers (FPI), including the following:

If a registrant has significant operations in Venezuela (whether the company is a foreign or

domestic issuer), consideration should be given to disclosure of known trends and

uncertainties related to the economic turmoil in the region.

There is little guidance on reorganization transactions such as carveouts, common control

reorganizations, and drop downs for entities applying IFRS, which has caused challenges for

registrants undertaking IPOs, spinoffs, etc.

When performing the significance tests for complying with Rules 3-05 and 3-09 of Regulation

S-X, a registrant should use the same basis of accounting used by the registrant (e.g., U.S.

GAAP for a domestic registrant or IFRS for an FPI) for the acquired business or investee. If

financial statements of the acquired business or investee are required because they are

significant, the financial statements should be presented based on the status of the acquired

business or investee (e.g., IFRS, U.S. GAAP, or reconciliation to U.S. GAAP for a foreign

business that prepares its financial statements in accordance with an accounting framework

other than U.S. GAAP or IFRS).

Current Accounting Practice Issues

Dan Murdock, Deputy Chief Accountant, OCA, discussed the resumption of OCA staff speeches

with the intent to provide transparency into the OCA consultation process. Mr. Murdock

cautioned against excessive reliance on OCA staff speeches as a basis for accounting

conclusions, because the facts and circumstances are often unique and the speeches are not

authoritative. In addition, Mr. Murdock noted that OCA’s views on issues tend to evolve over

time, and as a result speeches tend to become less relevant and less reflective of the current

OCA staff’s view over time.



Segment Identification and Aggregation

Mr. Murdock indicated that OCA staff will be taking a refreshed approach when evaluating

operating segment disclosures and he encouraged registrants to adopt a similar refreshed

mindset. Mr. Murdock highlighted the following segment identification steps.

Identifying the CODM. The OCA staff noted that they have seen companies default to the CEO

as the chief operating decision maker (CODM) and urged registrants to take a fresh look at those

determinations and consider what the key operating decisions are and who is actually making the

key decisions. The OCA staff will continue to ask questions to obtain a better understanding of a

registrant’s management structure and determine whether that structure supports the individual

or individuals identified as the CODM.

Identifying the Operating Segments. The OCA staff referenced the statement in ASC Topic

280 that an operating segment is often evident from the structure of a company’s internal

organization, but cautioned that this does not mean that “simply looking at the entity’s

organization chart” would provide a sufficient basis to identify its operating segments.10

The

OCA staff also cautioned against over-relying on the information package provided to, and

regularly reviewed by, the CODM noting that this is only one factor to consider, and it is not

necessarily determinative. Additionally, the OCA staff encouraged registrants to consider the

basis on which budgets and forecasts are prepared and the basis on which executive

compensation is determined when identifying its operating segments.

Identifying the Reportable Segments. The OCA staff consider aggregation of identified

operating segments appropriate only when all of the criteria in ASC Topic 280 are met. Given that

a core objective of the standard is to provide disaggregated information, meeting the aggregation

criteria is intended to be a “high hurdle.” The OCA staff discussed an example scenario in which

a registrant had two segments with similar products, production processes, and distribution, and

shared a similar customer base. However, one of the operating segments had a second

incremental customer base from which it had a material revenue stream. The OCA staff

concluded in this scenario that the “type or class of customers” criterion had not been met, and

as a result that the two operating segments should not be aggregated.

Representatives from DCF referred to Mr. Murdock’s speech and commented that, in cases

where the SEC staff disagree with a registrant’s segment reporting, they are open to future

reporting of a change but a registrant may need to revise previous filings if the change affects

reporting units that give rise to goodwill impairment.

Gross versus Net Revenue Recognition

The OCA staff commented on questions they have received about applying the guidance in ASC

Subtopic 605-45 to emerging business models such as internet advertising, online gaming, and

virtual goods in determining whether to report revenue on a gross or net basis.11

The OCA staff

noted that their evaluation of gross versus net presentation for these emerging business models

is based on the guidance in ASC Subtopic 605-45, and is consistent with their historical views.

Specifically, the OCA staff highlighted that the analysis begins with identification of the

deliverables in the arrangement, followed by an evaluation of which party in the arrangement is

the primary obligor with respect to those deliverables. The OCA staff’s view is that the

determination of both the deliverables in the arrangement and the primary obligor for those

deliverables should be supported by evidence such as contracts and marketing materials,

including an entity’s external Web site.

10

FASB ASC Topic 280, Segment Reporting, available at www.fasb.org.

11 FASB ASC Subtopic 605-45, Revenue Recognition, Principal Agent Considerations, available at www.fasb.org.

Dan Murdock, Deputy

Chief Accountant,

OCA: “… consider

this your notice – the

Staff will be taking a

refreshed approach

when reviewing

operating segment

disclosures.”



In some circumstances the primary obligor may not be clear, and in those situations the OCA

staff believe the inventory risk and pricing latitude indicators take on greater importance,

consistent with examples in ASC Subtopic 605-45. The OCA staff highlighted that the inventory

risk indicator does apply to service transactions and that the pricing latitude indicator should be

considered in the context of economic and contractual restraints on pricing.

The OCA staff also cautioned that the examples in ASC Subtopic 605-45 may not be consistent

with emerging business models. To illustrate this point, the OCA staff highlighted the internet-

based advertising example in ASC Subtopic 605-45, which contemplates advance purchases of

advertising impressions. In a fact pattern where advertising impressions are purchased through a

real-time auction process instead of being purchased in advance, this fact “has led some to

pause in applying the indicators.”

Business Combinations and Goodwill Impairment

Spinoff Accounting. The OCA staff commented that they had received numerous questions on

spinoff accounting, primarily focused on whether a transaction should be recorded as a forward

spinoff or reverse spinoff and the related financial reporting considerations. In determining

whether a transaction should be accounted for as a forward spinoff or reverse spinoff, the OCA

staff pointed to the indicators in ASC Subtopic 505-60 and the rebuttable presumption that the

spinoff be accounted for based on its legal form.12

The OCA staff noted that an old SEC staff

speech about the tax planning consequences of a transaction is no longer relevant given

subsequent standard setting (ASC Subtopic 505-60).13

The OCA staff also noted that some entities have assumed that a reverse spinoff accounting

conclusion would dictate the required financial statements for SEC reporting purposes.

Specifically, these entities assumed that in a reverse spinoff the historical financial statements of

the existing registrant would be presented as the historical financial statements of the

accounting spinnor with the accounting spinnee (legal spinnor) reflected as a discontinued

operation. The OCA staff observed that carveout financial statements for the accounting spinnor

(legal spinnee) could be required, but that this conclusion is fact-and-circumstances specific.

Pushdown Accounting. The OCA staff noted that they have received questions about the

presentation of expenses that are incurred contingent upon a business combination when

financial statements reflect pushdown accounting. The presentation of pushdown accounting

financial statements typically includes predecessor and successor income statement periods

with a black line separating the periods. The OCA staff acknowledged that there are instances

when the contingent expenses may not be included in either the predecessor or successor

periods, which are commonly referred to as being presented “on the line.” In these instances,

the OCA staff expect disclosure of the nature and amount of the expenses presented “on the

line.”

Goodwill Impairment Testing Date. Historically, the SEC staff have required a preferability

letter for changes in an entity’s goodwill impairment testing date because this is considered a

change in the method of applying an accounting principle. The SEC staff indicated that a

preferability letter would no longer be required if:

An entity determines that a change in its goodwill impairment testing date does not result in a

material change in the method of applying the accounting principle, which may be the case

even if goodwill is material to the financial statements; and

The change in the goodwill impairment testing date is prominently disclosed.

12

FASB ASC Subtopic 505-60, Equity – Spinoffs and Reverse Spinoffs, available at www.fasb.org.

13 From a speech by R. Scott Blackley, OCA staff, at the December 2000 Twenty-Eighth Annual AICPA National

Conference on Current SEC Developments.



Consolidation and Joint Ventures

Shared Power. If power is shared by multiple unrelated entities to direct the activities of a VIE

that most significantly impact its economic performance, then no party is the primary beneficiary

and no party consolidates the VIE. The OCA staff commented that for shared power to exist, all

the decisions related to the significant activities of the VIE must require the consent of each of

the parties sharing power. The OCA staff illustrated the challenges in implementing the guidance

using an example where an entity is equally owned by two unrelated parties. The entity has

three significant activities. For two of the activities, shared consent is required from both

owners; however, the third activity requires only the consent of one of the owners.

To conclude that there is shared power, it must be present for all significant activities, including

significant activities that do not have the same impact on economic performance as other

significant activities. If multiple parties direct the different significant activities, then one of those

parties will meet the power criterion in identifying the primary beneficiary. The OCA staff

acknowledged that the determination of what constitutes a significant activity is a significant

judgment that should consider the design and purpose of the VIE.

Decision Maker Acting as an Agent. The OCA staff discussed instances in which a decision

maker is not a variable interest holder (i.e., is acting as an agent on behalf of another party) and

whether it would be appropriate for other parties to stop their consolidation analysis upon that

determination. When the decision maker is determined to not be a variable interest holder, the

other parties should further consider the substance of the arrangement to determine if any of the

parties would be considered the party with power. Though not determinative, the OCA staff

noted that in performing this analysis the level of a party’s economic interest in the VIE may be

indicative of the power it holds.

Related Parties. The OCA staff discussed the use of related-party tie-breaker guidance in

determining which entity in a common control group would be considered the primary

beneficiary of a VIE. The OCA staff commented that the use of related-party tie-breaker guidance

is not required nor is it determinative in determining the primary beneficiary in a circumstance

when a member of the common control group individually meets both characteristics of a

primary beneficiary.

Joint Ventures. The OCA staff discussed the lack of guidance in U.S. GAAP related to the

accounting for the formation of joint ventures in the stand-alone financial statements of those

entities. There has been diversity in practice in accounting for the assets and businesses

contributed to the joint venture with some recognizing a full or partial step-up in basis, while

others recognize the assets using the predecessors’ bases. The OCA staff specifically discussed

instances in which two businesses are contributed to a venture in an effort to generate synergies

and the significant judgment required in determining whether this type of transaction meets the

definition of a joint venture under ASC Topic 323.14

The OCA staff encourage registrants to

consider pre-clearing joint venture formation transactions with the OCA staff in light of the lack of

U.S. GAAP guidance and the related complexity.

14

FASB ASC Topic 323, Investments—Equity Method and Joint Ventures, available at www.fasb.org.



Financial Instruments

Preferred Shares. The OCA staff commented on the lack of U.S. GAAP guidance for

determining whether an amendment to equity classified preferred shares represents an

extinguishment or modification, and referenced four methods used by registrants to make this

determination.

The qualitative approach – the entity evaluates the terms added, removed, and changes

made to the preferred shares. If the changes are deemed to be significant, the amendment is

considered an extinguishment.

The fair value approach – the fair value of the preferred shares immediately before and after

the amendment is compared. If the change in fair value is greater than 10 percent, the

amendment is considered an extinguishment.

The cash flow approach – the contractual cash flows of the preferred shares before and after

the amendment are compared. If the change in the cash flows is greater than 10 percent, the

amendment is considered to be an extinguishment. This approach is only appropriate when

the nature of the preferred shares is such that cash flows are regular and periodic.

The legal form approach -- any legal exchange that resulted in the issuance of new preferred

shares would be considered an extinguishment. The OCA staff cautioned that the

consideration of legal form is a data point but is not determinative when evaluating whether an

amendment to preferred shares would be a modification or an extinguishment.

In situations where the conclusion is reached that an amendment to a preferred instrument is a

modification, the OCA staff indicated that analogy to the guidance in ASC Subtopic ASC 718-20

related to the modification of equity classified share-based payment awards is an appropriate

method to measure the impact of the modification.15

With respect to recognition, the OCA staff

indicated that they have accepted reflecting the impact of the modification as a deemed

dividend, or, in limited circumstances, as a charge to earnings “as a form of compensation for

agreeing to restructure.”

Derivative Novations. The OCA staff discussed instances where the novation of a derivative

instrument may not have an impact on an existing hedging relationship. A novation of a derivative

instrument is when one counterparty is replaced with another and is typically viewed as a legal

termination and therefore would generally have an impact on hedging conclusions reached under

ASC Topic 815.16

In 2012, the OCA staff provided guidance that they would not object to

continuation of existing hedging relationships in situations where novations occurred as a result

of reforms made to the over-the-counter derivative market as part of the Dodd-Frank Act.17

The OCA staff noted that they have received questions related to the impact of novations on

hedging relationships in other fact patterns, including:

The merger of an entity’s derivative counterparty into a surviving entity that assumes the same

rights and obligations that existed under the derivative instrument prior to the merger;

The novation of an entity’s derivative counterparty to an entity under common control of the

derivative counterparty; and

Instances where an entity is aware of and documents contemporaneously the novation of a

derivative counterparty that will occur in the future.

15

FASB Subtopic 718-20, Compensation---Stock Compensation–Awards Classified as Equity, available at www.fasb.org.

16 FASB Topic 815, Derivatives and Hedging, available at www.fasb.org.

17 The Dodd-Frank Wall Street Reform and Consumer Protection Act.

http://www.fasb.org/

http://www.fasb.org/



In the instances above, the OCA staff did not object to the continuation of hedge accounting by

the entity. The OCA staff indicated that the conclusions on the above fact patterns should not be

applied by analogy.

Allocation of Proceeds Received for the Issuance of a Hybrid Instrument. The OCA staff

discussed the allocation of proceeds when an entity issues a hybrid instrument and the fair value

of the recognized financial liabilities required to be measured at fair value exceeds the net

proceeds received. The OCA staff noted certain instances where entities may enter into these

types of arrangements for purposes of aligning themselves with a certain investor or when the

entity is in financial distress and requires financing.

In situations where no other rights or privileges that require separate recognition are identified,

the recognized financial liabilities required to be measured at fair value should be recorded with

the difference between the fair value recorded and proceeds received recognized as a loss in

earnings. Entities should also include disclosure related to the nature of the transaction including

the reasons the transaction was entered into and the benefits received.

Pensions

Mortality. The OCA staff commented on the recent update to both mortality tables and the

related improvement scale by the Society of Actuaries (SOA). Historically, the SOA’s mortality

data has been used by many registrants as their best estimate of mortality in the measurement

of a defined benefit plan’s cost and obligation under ASC Topic 715.18

The OCA staff indicated it

would not be appropriate for such a registrant to now disregard the SOA’s revised mortality data

in determining the best estimate of mortality. Registrants should disclose any significant impact

of the revised mortality assumption on the benefit obligation.

Statement of Cash Flows

The OCA staff commented that statement of cash flow restatements continue to increase each

year and noted that many of the restatements were in areas that are considered to be less

complex in nature. The OCA staff provided an example of the treatment of capital expenditures

purchased on credit in the cash flow statement, which some registrants incorrectly reflected in

investing cash flows before cash payment for the assets rather than as a non-cash activity. The

OCA staff commented that entities should consider the following information when evaluating

their processes and controls related to the statement of cash flows.

Information – Entities should evaluate how they collect the data necessary to prepare the

statement of cash flows and further identify what controls they have to ensure the data is

complete and accurate.

Professionals – Entities should determine whether the professionals responsible for the

preparation of the statement of cash flows have the appropriate understanding and requisite

training to apply ASC Topic 230.19

Timing – Entities should consider ways in which the preparation of the statement of cash

flows could be accelerated, which could allow additional review time.

18

FASB ASC Topic 715, Compensation—Retirement Benefits, available at www.fasb.org.

19 FASB ASC Topic 230, Statement of Cash Flows, available at www.fasb.org.

The OCA staff

indicated it would not

be appropriate for a

registrant to disregard

the SOA’s revised

mortality data in

determining the best

estimate of mortality.



Accounting Standard Setting

IFRS and U.S. GAAP Convergence

Mr. Golden indicated that he believes “continuing to work toward the development of more

comparable global accounting standards is an important way to help reduce complexity.” Mr.

Mackintosh believes that the relationship between the FASB and the IASB needs to remain

strong because they have a joint responsibility to protect the body of convergence that has been

reached and to minimize future differences. However, Mr. Golden also stated, “Even as we

remain committed to the ideal of global convergence, we—and other national standard setters—

must address the pressing needs of users, preparers, and practitioners in our individual capital

markets.”

Leasing Project. Mr. Schnurr remarked that he believes the IASB and FASB currently have the

same basic model for leasing and it would be a missed opportunity not to remain converged in

the leasing project. Mr. Mackintosh observed that the Boards have not reached agreement on

every aspect of the leasing project, but they are converged on the fundamental issue, which is

that leases are present obligations that need to be recognized as liabilities on lessee balance

sheets.

FASB Initiative to Reduce Complexity

Mr. Golden addressed the FASB’s efforts to improve U.S. GAAP by reducing complexity while

maintaining the relevance of the reported information, which he hopes will have a beneficial

effect on all the FASB’s standard-setting activities. Mr. Golden noted that the FASB’s effort to

reduce accounting complexities is through a combination of foundational and simplification

projects.

Foundational Projects

The foundational projects are “long-term standard-setting goals that over time will help keep [the

FASB] focused on the critical issues most important to stakeholders.” These projects include

further developing its conceptual framework to provide conceptual guidance for measurement

and presentation as well as developing a disclosure framework.

Ms. Cosper provided additional details about the disclosure framework project, which has been

separated into two components. One component is the Board’s decision-making process that

focuses on consistent considerations by the Board in developing disclosure requirements in each

standard‐setting activity. The second component is other entities’ decision-making processes

that aims to address how the FASB can help other entities appropriately exercise discretion

when assessing disclosure requirements. She said that the Board is actively reviewing the

disclosure requirements on defined benefit plans, fair value measurements, income taxes, and

inventory to determine if there would be any changes related to the Board’s decision-making

process, which could result in an exposure draft to amend these areas. The feedback the FASB

has received is that there is generally too much disclosure required for benefit plans and fair

value measurements, and not enough meaningful disclosure on income taxes and inventory.

Simplification Initiatives

Mr. Golden explained that one reason he believes there is complexity in accounting is the

“clutter within our accounting standards.” He said that the simplification projects are short-term

“narrow-scope agenda projects” to reduce cost and accounting complexities in existing U.S.

Russell Golden, FASB

Chairman: “Even as

we remain committed

to the ideal of global

convergence, we—

and other national

standard setters—

must address the

pressing needs of

users, preparers, and

practitioners in our

individual capital

markets.”



GAAP while retaining useful information. The FASB has issued final standards intended to

simplify accounting in discontinued operations, development-stage entities, and VIEs.20

Ms. Cosper discussed current simplification projects on the measurement of inventory,

extraordinary items, balance-sheet classification of debt, classification of deferred taxes, tax

effects from intercompany transfer of assets, and share-based payments; and noted that there

are more in the pipeline.

For a full discussion of the simplification initiatives see these publications, which are

available on KPMG’s Financial Reporting Network.

Presentation of debt issuance cost – KPMG’s Defining Issues 14-45

Measurement date of employers’ defined benefit obligations and plan assets –

KPMG’s Defining Issues 14-45

Simplifying the measurement of inventory – KPMG’s Defining Issues 14-32

Extraordinary items – KPMG’s Defining Issues 14-32

Income Taxes – intercompany transfer of assets – KPMG’s Defining Issues 14-47

Income Taxes – presentation of deferred taxes – KPMG’s Defining Issues 14-47

Audit Quality

Auditor Independence

Mr. Croteau emphasized that independence in both fact and appearance is the foundation of an

audit and necessary to reduce threats to auditor objectivity and to promote credibility. In light of

recent auditor independence violations, as well as recent SEC enforcement actions, he

questioned whether management and audit committees have appropriate policies and

procedures in place to evaluate non-audit services provided by the company’s auditor.

Mr. Croteau believes this evaluation should include monitoring non-audit services for risk of

“scope creep” that could result in a service becoming impermissible and impairing the auditor’s

independence. In response to a question, he provided some examples of “scope creep,”

including situations where the registrant’s auditor provided tax compliance work that evolved into

the preparation of the tax provision, accounting discussions that resulted in the creation of

management’s accounting documentation, and valuation advice where management was not

sufficiently involved in the conclusions.

Mr. Croteau reminded management and audit committees to always consider whether a

relationship or service provided by an auditor:

Creates a mutual or conflicting interest with their audit client;

Places them in a position of auditing their own work;

Results in acting as management or an employee of the audit client; or

20

FASB Accounting Standards Update Nos. 2014-08, Presentation of Financial Statements (Topic 205) and Property,

Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an

Entity; and 2014-10, Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements,

Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation, both available at

www.fasb.org.

http://www.kpmg-institutes.com/institutes/financial-reporting-network.html



Places them in a position of being an advocate for the audit client.

He emphasized that audit committees “should be vigilant in carefully considering risks when

fulfilling their pre-approval responsibilities and, where appropriate, should establish ongoing

monitoring” to avoid these types of issues.

James Doty, Chairman, PCAOB, and Claudius Modesti, Director, PCAOB Division of

Enforcement and Investigations, highlighted the continued growth of consulting practices at

audit firms. Mr. Doty stated that “the difference between consultants and auditors is not

expertise but independence” and that auditors “must demonstrate to the public that an auditor's

opinion is indeed more reliable than a consultant's.”

Auditors of Broker-Dealers

Mr. Croteau reminded auditors of SEC-registered broker-dealers that they are required to comply

with the independence requirements in Rule 2-01 of Regulation S-X and cannot prepare any part

of the audited financial statements. He and other representatives of the SEC and PCAOB

highlighted recent enforcement actions against audit firms involving the preparation of financial

statements in violation of SEC independence rules.21

In addition, Mr. Croteau reminded

management and auditors that several PCAOB independence rules began to apply to audits of

broker-dealers for the first time in June 2014.

The Role of the Audit Committee

A consistent theme throughout the conference was the importance of audit quality and the role

audit committees play in enhancing audit quality through their oversight of auditors. Mr. Schnurr

emphasized that, “Audit committees play a critical role in providing oversight over, and serving

as a check and balance on, a company's financial reporting system.” Mr. Doty highlighted the

PCAOB’s initiatives to support audit committee oversight of audits, and stated that the “PCAOB

aims to better equip them with information about the audit, our inspection reports, and the

auditor’s strengths and weaknesses.” He said that, in the future, audit committees may also

obtain objective and comparative audit quality indicators.

Audit Committee Disclosures

At the request of SEC Chair White, Mr. Schnurr indicated that the SEC staff are considering

existing audit committee disclosure requirements, current disclosure practices, and publicly

available observations and commentary. He noted that while the Sarbanes-Oxley Act resulted in

significant changes to the role and responsibilities of audit committees, SEC disclosure

requirements for audit committees have not changed in 15 years.22

He referenced the

suggestions on how to improve existing audit committee disclosure requirements provided by

stakeholders in comment letters to the PCAOB on its audit transparency and auditor’s reporting

model projects.

21

SEC Release 2014-272, “SEC Sanctions Eight Audit Firms for Violating Auditor Independence Rules,” available at

www.sec.gov, and PCAOB Announces Settled Disciplinary Orders Against Seven Audit Firms for Independence

Violations When Auditing Broker-Dealers, PCAOB press release, 2014, available at www.pcaobus.org.

22 Sarbanes-Oxley Act of 2002.

Mr. Schnurr

emphasized that,

“Audit committees

play a critical role in

providing oversight

over, and serving as a

check and balance on,

a company's financial

reporting system.”

http://www.sec.gov/



Audit Quality Indicators

Panelists, including Greg Jonas, Director of the Office of Research and Analysis, PCAOB,

discussed the use of audit quality indicators (AQIs) as a tool to assist audit committees in their

oversight role and promote audit quality. Mr. Jonas indicated that the PCAOB staff are

proceeding with caution on its AQI project to avoid unintended consequences, and will focus on

AQIs that are reliable and comparable across audit firms. He indicated that the PCAOB’s concept

release on AQIs is planned for the first quarter of 2015. A CAQ representative discussed the

“CAQ Approach to Audit Quality Indicators,” published in April 2014, which emphasizes that

communications of AQIs should be directed at audit committees and focused largely on

engagement-level indicators.

Other Information Relevant to Audit Committees

Both Jay Hanson, PCAOB Board Member, and Helen Munter, Director of the Division of

Registration and Inspections, PCAOB, emphasized the PCAOB’s focus on improving its process

to communicate inspection findings. In an effort to promote meaningful discussions between

audit committees and audit firms, recent changes to inspection reports have included direct

references to specific paragraphs of PCAOB standards that were the subject of auditor

performance criticisms in inspection findings, as well as a new appendix included in reports of

annual inspected firms that summarizes auditing standards referenced within the inspection

reports.

PCAOB Standard-Setting Activities

Martin Baumann, Chief Auditor, PCAOB, updated participants on key standard-setting projects

aimed at advancing the quality of, and transparency about, public company audits.

Related Parties. In October 2014, the SEC approved PCAOB Auditing Standard No. 18, Related

Parties.23

The new standard is intended to strengthen auditor performance requirements in three

critical areas of the audit by requiring risk-based procedures for related-party transactions,

significant unusual transactions, and a company’s financial relationships and transactions with its

executive officers. The new related-party standard is effective for audits of fiscal years beginning

on or after December 15, 2014, including reviews of interim financial information within those

fiscal years.

Broker-Dealer Requirements. In July 2013, the SEC finalized amendments to broker-dealer

financial responsibility requirements and financial reporting rules. Mr. Baumann reminded

participants that the amendments require, among other things, that audits of broker-dealers be

conducted using PCAOB standards for fiscal years beginning on or after June 1, 2014. In October

2013, the PCAOB adopted two new attestation standards and a new auditing standard related to

these amendments that have the same effective date.24

23

PCAOB Auditing Standard No. 18, Related Parties, available at www.pcaobus.org.

24 PCAOB Attestation Standard No. 1, Examination Engagements Regarding Compliance Reports of Brokers and Dealers,

PCAOB Attestation Standard No. 2, Review Engagements Regarding Exemption Reports of Brokers and Dealers, and

PCAOB Auditing Standard No. 17, Auditing Supplemental Information Accompanying Audited Financial Statements,

available at www.pcaobus.org.



Proposed Auditor’s Reporting Model. In August 2013, the PCAOB proposed an auditing

standard on changes to the auditor’s reporting model and amendments to the auditor’s

responsibilities about other information in a company’s annual report filed with the SEC.25

Mr.

Baumann stated that a key aspect of this proposal is a requirement for the auditor to

communicate critical audit matters, which would be those matters the auditor addressed that

were the most difficult to obtain sufficient, appropriate audit evidence, or posed the most

difficulty in forming an opinion on the financial statements. Mr. Baumann discussed some of the

challenges highlighted in feedback received in response to the proposal and indicated that he

plans to suggest that the PCAOB re-propose certain aspects of the proposal in the first quarter of

2015.

Transparency. In December 2013, the PCAOB re-proposed an auditing standard on audit

transparency that would require audit firms to disclose the name of the engagement partner as

well as the names of other firms and persons that participated in the audit.26

Taking into account

comments received on the re-proposal, including concerns related to liability and suggestions for

an alternative location for disclosure, Mr. Baumann expects that there will be a supplemental

request for comment about creating a new form to report the name of the engagement partner

and other firms participating in the audit that would be separately filed with the PCAOB.

Auditing Accounting Estimates and Fair Value Measurements. In August 2014, the PCAOB

issued for public comment a staff consultation paper on auditing accounting estimates and fair

value measurements. The PCAOB staff consultation paper discusses certain issues related to

auditing accounting estimates and fair value measurements. Mr. Baumann indicated that the

PCAOB staff are currently evaluating comments.

Other PCAOB Auditing Standards. Consistent with comments made by SEC staff in prior

years, Mr. Schnurr and Mr. Croteau expressed concerns over the pace of PCAOB standard

setting, particularly with respect to important auditor performance standards. Mr. Doty indicated

the need to be alert to opportunities to improve audit performance but expressed reluctance in

setting “uniform procedural requirements that could be performed in an unthinking, mechanistic,

and wasteful way.”

PCAOB Inspection Trends and Focus Areas

Ms. Munter discussed recent inspection findings, noting that 2014 inspections have shown

some promising improvements, especially when audit firms are performing root cause analyses

and proactively monitoring and measuring the effectiveness of remedial actions on a real-time

basis. Ms. Munter indicated that ICFR continues to be the area with the highest number of

inspection findings, particularly with respect to an auditor’s understanding of the flow of

transactions to identify and select appropriate controls to test, and the precision of management

review controls. Ms. Munter encouraged participants to read the PCAOB’s report on inspection

findings related to ICFR issued in 2012 as well as the PCAOB Staff Audit Practice Alert on

ICFR.27

25

PCAOB Release No. 2013-005, Proposed Auditing Standards – The Auditor’s Report on an Audit of the Financial

Statements when the Auditor Expresses an Unqualified Opinion; the Auditor’s Responsibilities Regarding Other

Information in Certain Documents Containing Audited Financial Statements and the Related Auditor’s Report; and

Related Amendments to PCAOB Standards, available at www.pcaobus.org.

26 PCAOB Release No. 2013-009, Improving the Transparency of Audits: Proposed Amendments to PCAOB Auditing

Standards to Provide Disclosure in the Auditor’s Report of Certain Participants in the Audit, available at

www.pcaobus.org.

27 PCAOB Release No. 2012-006, Observations from 2010 Inspections of Domestic Annually Inspected Firms Regarding

Deficiencies in Audits of Internal Control over Financial Reporting, and PCAOB Staff Audit Practice Alert No. 11,

Considerations for Audits of Internal Control over Financial Reporting, both available at www.pcaobus.org.



With respect to 2015 inspections, she highlighted a number of new focus areas including

business combinations, income taxes, valuation of financial instruments, risk assessment in light

of business risks (e.g., falling oil prices), and the statement of cash flows.

Enforcement, Rulemaking, and Other Initiatives

SEC Enforcement Update

Andrew Ceresney, Director, and Michael Maloney, Chief Accountant, for the Division of

Enforcement of the SEC, discussed recent trends in enforcement actions and new approaches

and tools that the Division of Enforcement uses.

Recent Enforcement Focus and Trends. The Division of Enforcement continues to focus on

accounting and disclosure violations related to off-balance-sheet transactions, valuation of assets,

related-party transactions, and revenue recognition. They also have brought several cases

associated with internal control failures. They found issues related to, and will continue to focus

on, accounting by companies in the financial services industry (such as allowance for loan losses

and complex financial instruments), U.S. publicly-traded companies with significant operations in

China, microcap fraud (e.g., “pump-and-dump” schemes for penny stocks), pyramid schemes,

and auditor independence. Looking ahead, they also expect to have a considerable caseload

associated with investment advisors and insider trading.

New Developments. Mr. Ceresney discussed these new developments:

The Division of Enforcement is now using big data and other analytical tools to help identify

anomalies in financial reporting, trading activity, and other unusual activity, which has been

very effective.

The whistleblower protections in the Dodd-Frank Act are transforming the way that the

Division receives information and tips on potential cases.

The Division of Enforcement’s 2014 fiscal year was the first time it used its new approach in

case settlement where the admission of guilt was required for certain cases. They intend to

increase this approach in the future.

Conflict Minerals Reporting

In 2012, the SEC issued a final rule on conflict minerals to comply with the Dodd-Frank Act.

Companies using certain minerals in the functionality or production of a product manufactured or

contracted to be manufactured must annually disclose information about the origin of those

minerals, specifically if the origin is from the Democratic Republic of the Congo (DRC) and

surrounding countries.

Shortly after the SEC issued its rule on conflict minerals, certain industry groups filed a lawsuit

alleging that the rule infringed on their First Amendment rights. The appellate court ruled in April

2014 that parts of the legislation were unconstitutional and the SEC subsequently issued a partial

stay of the rule. Under this relief, affected parties are still required to file Form SD and a conflict

minerals report, if applicable. However, they are not required to identify their products as either

being “not DRC conflict free” or “DRC conflict undeterminable.” Companies could disclose that

their products are DRC conflict free; however, the conflict minerals report would then be subject

to an Independent Private Sector Audit (IPSA) requirement. The SEC is pursuing reconsideration

of its rule.



Because the IPSA requirement for conflict minerals reports does not go into effect until the 2015

reporting year, its use has been very limited. Mr. Higgins discussed his thoughts on the recent

conflict minerals reports, noting that there were fewer reports issued than expected and that the

DCF did not have extensive observations on those filed. The DCF staff suggested that the

reporting companies could be more “crisp” in documenting their due diligence, and to avoid the

suggestion of DRC conflict-free products if they are not labeling them as such. He also reminded

those reporting under the conflict minerals rule that if the origin is known, that must be

disclosed.

A panel of preparers and auditors also urged those impacted by the rule to focus on the

auditability of their conflict minerals reports. Panelists noted that the form and content of the

conflict minerals report is critical to the auditability of the information and that the audited

sections should be separated from the unaudited information.

Other Rulemaking Activities

Mr. Higgins discussed the status of several SEC rule-making activities, many of which are

requirements under the Dodd-Frank Act. The rulemaking agenda includes rules on executive

compensation, pay ratio, pay versus performance, clawbacks, and hedging. Other items such as

crowdfunding, exempt offerings, and resource extraction remain on the agenda.

Integrated Reporting

Paul Druckman, CEO of the International Integrated Reporting Council (IIRC) and Amy Pawlicki,

the Director of Business Reporting, Assurance and Advisory Services for the AICPA, discussed

the future of financial reporting, primarily in the context of integrated reporting.

The IIRC released its International Integrated Reporting Framework in December of 2013.28

The

framework provides a structure for a company to report on all value-creating aspects of its

business, as opposed to focusing only on financial performance.

The introduction of the new framework raises the question of what level of assurance is

necessary to make the output both credible and meaningful. The AICPA is exploring audit

methodology options that provide assurance over integrated reports issued under the

framework.

Appendix: Index of Published Speeches29

The text of speeches can be accessed using the links below.

SEC

James Schnurr, Chief Accountant, SEC Office of the Chief Accountant

Brian T. Croteau, Deputy Chief Accountant, SEC Office of the Chief Accountant

Julie A. Erhardt, Deputy Chief Accountant, SEC Office of the Chief Accountant

Dan Murdock, Deputy Chief Accountant, SEC Office of the Chief Accountant

28

The Framework is available at www.theiirc.org.

29 Speeches published as of December 18, 2014.

http://www.sec.gov/servlet/Satellite/News/Speech/Detail/Speech/1370543609306






SEC OCA Staff Speaker Topics

Kevin M. Stout, Senior Associate Chief Accountant ICFR

Hillary H. Salo, Professional Accounting Fellow Financial instruments

T. Kirk Crews, Professional Accounting Fellow Financial instruments, pensions, and

statement of cash flows

Steve Mack, Professional Accounting Fellow Gross versus net revenue recognition,

new revenue standard

Christopher F. Rogers, Professional Accounting

Fellow

Consolidation and joint ventures

Carlton E. Tartar, Associate Chief Accountant Business combinations and goodwill

impairment

AICPA / CAQ

Tommye E. Barie, Chairman, AICPA

Cynthia Fornelli, Executive Director, CAQ

FASB / IASB

Russell G. Golden, Chairman, FASB

Ian Mackintosh, Vice-Chairman, IASB

PCAOB

James R. Doty, Chairman, PCAOB

Jay D. Hanson, Board Member, PCAOB

Helen A. Munter, Director, Registrations and Inspections, PCAOB

Contact us: This is a publication of KPMG’s Department of Professional Practice 212-909-5600

Contributing authors: David W. Barr, Catherine M. Creps, Glen L. Davison, Melanie F. Dolan,

Jon G. Fehleison, Victoria M. Ferrigno, Keisha T. Hutchinson, Cecil Mak, Robert B. Malhotra, Paul

H. Munter, Benjamin B. Reinhardt, James D. Simon, and Billy Williams

Earlier editions are available at: http://www.kpmg-institutes.com

Legal–The descriptive and summary statements in this newsletter are not intended to be a substitute for the potential requirements of any proposed or final standards or any other potential or applicable requirements of the accounting literature or SEC regulations. Companies applying U.S. GAAP or filing with the SEC should apply the texts of the relevant laws, regulations, and accounting requirements, consider their particular circumstances, and consult their accounting and legal advisors.







http://www.aicpa.org/About/Leadership/DownloadableDocuments/Tommye_Barie_SEC-PCAOB_2014_Final_web.pdf

http://www.thecaq.org/docs/speeches-and-commentary/fornelli_aicpa_sec_2014.pdf?sfvrsn=2

http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176164636259

http://www.ifrs.org/Alerts/Conference/Documents/2014/Ian-Mackintosh-Washington-remarks-December-2014.pdf

http://pcaobus.org/News/Speech/Pages/12082014_Doty_AICPA.aspx

http://pcaobus.org/News/Speech/Pages/12092014_Hanson_AICPA.aspx

http://pcaobus.org/News/Speech/Pages/12102014_Munter_AICPA.aspx

http://www.kpmg-institutes.com/institutes/financial-reporting-network.html