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SEC Update Charlie Muha Deloitte & Touche LLP AGA/EEI Accounting Leadership Conference—June 26, 2005

SEC Update

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Page 1: SEC Update

SEC Update

Charlie MuhaDeloitte & Touche LLP

AGA/EEI Accounting Leadership Conference—June 26, 2005

Page 2: SEC Update

SEC Update

•Review Process

•Off-Balance Sheet Arrangements, Special Purpose Entities, and Transparency of Filings by Issuers

•Frequent Staff Comments

Page 3: SEC Update

Review Process

•Office of the Chief Accountant–Top priorities:

•Reducing complexity of financial reporting

•Internal control requirements (SOX 404)•Stock compensation (SAB No. 107)•International convergence

Page 4: SEC Update

Review Process

•Division of Corporation Finance–Staffing increases and changes–Proactive and early identification of

potential problem areas–Staff Focus

•Exchange Act reports, largest issuers and “riskiest” offerings

•More limited reviews

Page 5: SEC Update

Review Process

•Public availability of SEC comment letters and issuer responses –Selected letters and responses currently

available at www.livedgar.com –SEC to publicly release comment letters

and responses•Applicable to filings after August 1, 2004•Posted on SEC website not less than 45 days

after completion of review•Notification of completion of review•Confidential treatment requests

Page 6: SEC Update

Off-Balance Sheet Arrangements, Special Purpose Entities, and Transparency of Filings by Issuers

•Initiatives to Improve Transparency–Discourage transactions and transaction

structures primarily motivated by accounting and reporting concerns, rather than economics.

–Expand the use of objectives-oriented standards, which would have the desirable effect of reducing complexity in accounting standards.

Page 7: SEC Update

Off-Balance Sheet Arrangements, Special Purpose Entities, and Transparency of Filings by Issuers

– Improve the consistency and relevance of disclosures that supplement the basic financial statements.

– Improve communication focus in financial reporting.

Page 8: SEC Update

Off-Balance Sheet Arrangements, Special Purpose Entities, and Transparency of Filings by Issuers

•Standard Setting Recommendations–Continue work on consolidation

accounting–Reconsider accounting guidance for

defined benefit pension plans and OPEB’s–Reconsider accounting for leases–Continued exploration of feasibility of

reporting all financial investments at fair value

–Disclosures need to be better organized and integrated

Page 9: SEC Update

Staff Alert – Annual Report

•Disclosure of previously unreported Form 8-K Events

•Certification Requirements•Placement of ICFR reports•Auditor Consents

Page 10: SEC Update

Frequent Staff Comments

•MD&A•Financial statement classification•Intangible assets and goodwill•Reserves •Revenue recognition•Segment reporting•Pension disclosures•Fair value determination

Page 11: SEC Update

MD&A

•Executive Overview

•Results of Operations–Trend analysis–Uncertainties, risks,

commitments, events–Forward-looking–Aggregation of reasons

for changes

Page 12: SEC Update

MD&A

•Liquidity & Capital Resources–Direct method of statement of cash flows–Sources and uses of cash–Forward-looking–Dividend payments

•Contractual Obligation Table– Interest payments–Other liabilities–Footnote disclosure

Page 13: SEC Update

MD&A

•Critical Accounting Policies– Identification & qualification of

assumptions/estimates–Sensitivity analysis–Historical analysis

Page 14: SEC Update

Financial Statement Classification

•Income statement– Components of revenues, O&M, and operating

and non-operating income (i.e. equity method income)

– Discontinued operations versus continuing operations (EITF 03-13 & other reporting issues)

•Balance sheet– Current versus long term classification– Cash equivalents – “Auction rate securities”

Page 15: SEC Update

Financial Statement Classification

•Statement of cash flows– Classification between operating, investing

and financing activities

– Presentation on a gross versus net basis

•Sample letter sent to registrants related to Statement of Cash Flows– “…presentation of items in the cash flow

statement cannot be overstated.”

– Cash collection from long-term receivables and sale of receivables

Page 16: SEC Update

Intangible Assets and Goodwill

•Purchase price allocation•Indefinite life•Valuation issues•Impairment methodologies•Disclosures

“We note that you have allocated $35 million and $7 million to non-amortized trademarks for the X and Y acquisitions. Provide us with sufficient information to understand how you concluded that these assets have indefinite useful lives.”

Page 17: SEC Update

Reserves

•Loss contingencies–Nature of loss contingency –Amount accrued and material changes in

accrual–Estimated range of reasonably possible loss–Significant assumptions

Page 18: SEC Update

Reserves – SEC Comment

“You indicate that the company has accrued an environmental liability of $40.8 million. You further indicate that the costs could be significantly higher, but do not provide a range, as required by FIN 14, "Reasonable Estimation of the Amount of a Loss - An Interpretation of FASB Statement No. 5." Prospectively, please provide a range of loss in your filings, including an assessment of the most likely outcome of a probability assessment of the relative likelihood of a given point estimate.”

Page 19: SEC Update

Reserves

•Impairment and restructuring charges–Early-warning disclosures–Analyze in MD&A what happened, why,

and the current and future effects of the charge

•Income taxes–Complete and full disclosure of income

tax matters –Deferred tax asset valuation allowance

Page 20: SEC Update

Revenue, Segments and Pensions

•Revenue recognition accounting policy disclosure

•Segment reporting– Identification of segments and aggregation–Product/service revenues, geographic

information and other required disclosures –Changes in segments

•Pension –Basis for, reasonableness of, and changes

to significant assumptions

Page 21: SEC Update

Fair Value Determination

•Examples of valuation issues include– Barter and non-monetary transactions– Cheap stock and equity transactions– Investments and long-lived assets

•Transparent accounting policy and MD&A •Reference to independent appraisals

Page 22: SEC Update

OTT Impairments – SEC Comment

We did not see any mention of EITF 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” in your Form 10-K. Please be aware of the disclosure requirements, which were effective December 31, 2003, relative to your decommissioning trust fund and your available for sale securities.

Page 23: SEC Update

Copyright © 2005 Deloitte Development LLC. All rights reserved.