™ finance practice controllers’ leadership roundtable tm a collection of discussion group...

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FINANCE PRACTICE

CONTROLLERS’ LEADERSHIP ROUNDTABLETM

A COLLECTION OF DISCUSSION GROUP RESPONSES

10 June 2009

© 2009 The Corporate Executive Board Company. All Rights Reserved. 2

Controllers’ Leadership Roundtable, Finance Practice

INDEX OF DISCUSSIONS

Discussion Subject Key Issue Slide

Fixed Asset Impairment

Whether to include non-cash items as a separate line added back to net income in arriving at “net cash provided by operating activities”

Slide 6

Control Waiver PolicyProhibitive policy on control waiver

Slide 7

Responsibility for Corporate-wide SOX Compliance

Designation held by the Head of Corporate-wide SOX compliance

Slide 8

Grouping of low value assets together for capitalization

Do companies group low value assets together for capitalization? Slide 9

Number of key controlsHow are companies planning to reduce the number of key controls in the S-OX function? Slide 10-11

Policies and Procedures for Accounting and Finance Departments

Should you hire outside consultants to help formulate/update accounting policies? Slide 12



INDEX OF DISCUSSIONS (CONTINUED)

Discussion Subject Key Issue Slide

Tax Workpapers Sign OffWho does your auditor require to sign off on tax workpapers that show evidence of review? Slide 13-14

Adoption of SFAS No. 160

Companies deciding not to present financial statements in accordance with SFAS 160 in favor of a non – GAAP presentation Slide 15-16

Segment Reporting of Unrealized Gains and Losses

Reflecting realized hedge gains within segment earnings and unrealized hedge gains outside of segment earnings Slide 17

Purchase Price AllocationsParent companies pushing down purchase price allocations to their acquired companies?

Slide 18

Issuing restricted stock Valuation methods used by companies to determine the fair value of restricted stock options

Slide 19

Cost Method vs. Equity MethodMethod used when the acquiring entity has a share under 50% and exercises no significant control over the acquired entity

Slide 20



INDEX OF DISCUSSIONS (CONTINUED)

Discussion Subject Key Challenge Slide

Effective Financial ControlReporting structures for line finance functions in matrix organizations

Slide 21-22

Earnings ReleaseHow complete are auditors with respect to their due diligence when earnings are released? Slide23

Maintaining DocumentationStoring all internal documentation (memos etc.) for auditor due diligence Slide 24



DISCUSSION GROUPS IN THE CONTROLLERS TERRAIN

• Asset retirement Obligations Forum

• Business Combinations Discussion Group

• Canadian Reporting Discussion Group

• Derivative accounting Discussion Group

• External Auditor Management Discussion group

• Fair Value Discussion Group

• IFRS Discussion Group

• IFRS Financial Instruments Forum

• IFRS Implementation Forum

• Internal Controls Management Forum

• Pension Accounting Discussion Group

• Revenue Recognition Discussion Group

• Stock Option Expensing Discussion Group

• US GAAP and IFRS Convergence Forum

• XBRL Discussion Group

To subscribe to any of these groups, write to Niloy at [email protected]



FIXED ASSET IMPAIRMENT

Combining with

Depreciation &

Amortization32%

Separate Line 68%

“We would generally show them as a separate line item, unless they are clearly immaterial. These are disclosed in the notes to the financials, so we believe it makes it easier for the reader to follow if they are broken out separately as an adjustment to net income on the cash flow statement.”

Controller | Food

“If your income statement reports fixed asset impairments and write-offs in a separate line item from depreciation and amortization expense, it would seem appropriate to also show fixed asset impairments and write-offs in a separate line item in the cash flow statement. If they are combined in the income statement, it seems reasonable that the cash flow statement would report them combined as well.”

Manager | Utilities

“We would only reflect fixed asset impairments as a non-cash add back if the amounts were material enough to merit separate disclosure.Generally, this is not the case, so the write-offs are included in depreciation/amortization.”

Director of Accounting Services | Computer Software & Services

Issue— Whether to include non-cash items as a separate line added back to net income in arriving at “net cash provided by operating activities”

Key Takeaways

Thirteen out of nineteen respondents have a separate line item on their cash flow statements for the amount of fixed asset impairments as a non-cash add-back to net income.

Six out of nineteen respondents combine the impairments with depreciation/amortization expense.

n = 19

Answers from Our Members

Click here to access the discussion thread

June 3, 2009

Question

Background

Our Company has fixed asset impairments and write offs of other assets in our income statement. These non-cash items are presented in the cash flow statement as a separate non-cash add-back to net income to arrive at “net cash provided by operating activities".

Question

We want to know if other companies are including these non-cash items as a separate line added back to net income in arriving at “net cash provided by operating activities”, or if companies combine asset impairments and/or write-offs with the depreciation and amortization expense add-back in arriving at “net cash provided by operating activities"?

Interim Director Accounting and Financial Reporting, Specialty Retail How do you treat non-cash items to arrive at “net

cash provided by operating activities”?



CONTROL WAIVER POLICY


“The only such cases we have are a waiver of an annual physical inventory requirement based on documented consistently good results in a cycle counting program, or for a waiver of a particular segregation of duty conflict based on a documented and effective mitigating control. In both cases the Corporate Controller must approve in writing beforehand.”

Director, Internal Controls | Manufacturing

“We have no formal policy prohibiting control waivers but we only approve them on a case-by-case and short-term basis. Employees have not abused this privilege to date.”

VP- SEC Compliance | Retail

“Your situation makes me think the waiver process may be flawed, too lenient, and lacks consequences if a wavered control weakness is exposed/exploited. Consider making the waivers risk based, require different levels of management approval, require strategic plans to resolve the problem while the waiver is in effect, include expirations, and even consider having the business/requestor reserve money as a contingency. For instance, waiver requests with higher risk, should expire sooner (quarterly/semi annual), require higher and multiple levels of approval, require a strategic solution or even require the business to put up real dollars as a reserve in case the risk is exposed.”

IT Audit Project Leader | Banking

“We don't have formal policy per se; however we utilize a formal change request form for all control changes including waivers. While the waiver request may be raised by anyone, we require a Business Process Champion to scrutinize the waiver to ensure proper business justification and formally evidence approval on the form prior to submitting to our SOX Home Office for Processing (i.e., updating our scoping files). Our SOX Home Office will also perform a cursory review to confirm agreement.”

Associate Director, SoX PMO | Other

Issue— Prohibitive policy on control waiver

Key Takeaways

Majority respondents agree that while the waiver request may be raised by anyone, they require a Senior Executive to scrutinize the waiver to ensure proper business justification.

Question

My organization has a tendency to request control waivers for ease of job performance instead of a legitimate business need. I would like to write a fairly prohibitive policy on control waivers to minimize these requests. Does anyone have an example or input?

Senior Manager Financial Controls and Business Processes, Drugs

May 14, 2009


n = 7



RESPONSIBILITY FOR CORPORATE WIDE SOX COMPLIANCE


“Director level, but including also other responsibilities.The highest level of exclusively dedicated to SOX compliance corporate-wide is a Senior Manager - the responsibilities are the same as you describe, but reporting to the Director (global finance) who is ultimately accountable to SOX compliance.”

Director | Beverages

“At our company, the responsibility to direct and lead the day-to-day internal controls over financial reporting assertion process is assigned to a director-level position. This person reports to a first-level VP who has other finance and accounting responsibilities. The VP's primary role is to provide leadership and report results to executive management and the Audit Committee. This VP reports to the CAO and Controller.”

Director | Utilities

Issue- Designation held by the Head of Corporate-wide SOX compliance

Key Takeaways

48% of the respondents say the Head of Corporate-wide SOX compliance in their organization holds a Senior Director/Director designation.

23% of the respondents say the Head of Corporate-wide SOX compliance in their organization holds a Vice President designation.

“Other - Manager, Internal Controls & Compliance reporting to Global VP-Controller”

Internal controls and Compliance Manager | Chemicals

Question

The Head of Corporate-wide SOX compliance, whose responsibilities include planning, testing, reporting and coordinating with External Auditors, holds which of the following levels at your organization:

•Vice President •Senior Director or Director •Other (please specify)

Senior Director/ Director

48%

Other29%

Vice President23%

May 13, 2009

Other designations include Financial Consultant, Senior Manager, Staff VP of Internal Audit, Manager reporting to Global VP-Controller


n = 35

What designation is held by the Head of Corporate-wide SOX compliance in your

organization?



GROUPING OF LOW VALUE ASSETS TOGETHER FOR CAPITALIZATION

Question

I would like to know if others out there have grouped low value assets together for capitalization - for example, the purchase of $100K in laptops where each individual unit does not meet the capitalization threshold, but does as a group.

1. Have you grouped assets together for capitalization?

2. Do you have a threshold set to decide what will meet this special grouping of assets and what doesn't?

Anonymous Peer

0%

100%

Do you group low value assets together for capitalization?

No

Issue—Do companies group low value assets together for capitalization?

Key Takeaways

• All respondents group low value assets in their organization for capitalization though each one has separate threshold limits set.

Yes


“1. We do group small dollar value assets together for capitalization if they meet two criteria/requirements.

2. First, they must be part of an initiative - for example, if we were buying a security camera for each store, we would consider that an initiative. Another example might be a company-wide upgrade of computers to support a new software tool. We would not consider something where we just happen to be buying a large volume of items. For example, if we had to purchase chairs to replace chairs that were worn out, we would not capitalize. The second requirement is that the initiative has to have a total of $1M or greater.”

- Manager, Accounting Policy | Telecommunications

“1. Yes.

2. Our 'group' threshold is the same as the individual threshold. Thus, if a single asset purchase or group asset purchase is greater than $100k, it would be subject to capitalization. Keep in mind that this is purely a convention to ensure sufficient capitalization of fixed assets and will vary from entity to entity.

- Technical Accounting and Policy | Insurance”

May 05, 2009


n = 7



NUMBER OF KEY CONTROLS

Question

1) How are other companies going about reducing their number of key controls?

2) What are the best practice around this?

Computer Software Development Company

Issue—How are companies planning to reduce the number of key controls within the S-OX function

“We are focusing on making sure our process owners are aware of and consider the primary root cause we've found behind many of our control deficiencies - recognition and adjusted behavior related to some kind of change, typically personnel related. Inadequate on-boarding and training of staff or managers, including new hires, often leads to a breakdown in performing a thorough enough of a review or knowing what to look for when an error is made. We continue to communicate this with upper and mid-management, in addition to front-line management and their staff as we plan 2009 so they will try to better anticipate these situations in the future.Overall, we're trying to not make too big of a deal over the absolute number of control deficiencies as we feel we're at a reasonable number overall (based on a single benchmark of number of deficiencies - ~8 - per 1000 employees) and we don't want to create an additional reason for our people to not report processes or controls that didn't operate as intended. We stress self-reporting over the formal 404 testing as the "right" way to identify deficiencies.”

Director | Utilities

Key Takeaways

Most respondents stress on starting with a good risk assessment and review testing results of past years as a benchmark.


“During the first year of SOX in 2004, we had 668 key controls. During this first quarter 2009 testing period, we tested 337 key controls. During the first few years, we sided on the side of caution, thus equating to a lot of unnecessary and redundant key controls. Over the years, and especially with the new AS5 standard and SEC Guidelines for management, we have been able to reduce the number of key controls and really focus on the high risk areas. Both internal audit and external audit were consulted on this process and agree with it.We were able to accomplish this by reviewing all of our Risk Control Matrices with their respective process owners and our Control Review Committee to make sure that we had the controls in place we truly needed to manage our risk. No more, no less. We also classified our key controls as either Important or Critical based on specific criteria. In this way, we only have approx 100 of the 337 identified as Critical. We place more emphasis on these from a financial perspective.The criteria that we used to determine which of the key controls were critical is shown below:

* A reasonable possibility that a significant or material misstatement of the company's financial reporting would not be prevented or detected.* Involves a certain amount of judgment in its performance (accruals, variance analysis etc) * Potential for manipulation of entries * Does not have strong secondary controls in place * Complexity of underlying accounting requirements * Part of the "vital few" controls heavily relied on for the process * Important part of the monitoring system for the process”

- Controls Compliance Manager | Utilities

May 04, 2009


n = 7



“We have tried many different approaches. But essentially the bottom up approaches only yielded 15%-10% reduction annually with substantial effort in reducing the number of controls from controls to "Key" controls to "Super Key" controls.

We have found that following AS-5 in 2007/2008 we were able to achieve 30%-50% reduction (some instance up to 70%) reduction by looking at the top down approach and focusing on risk with potential material impact to our company. The increased reliance on Company Level Controls and Regional Controls contributed 70% to 80% of this reduction. The increased importance of Tone at the Top and recognition of the maturity of our control environment helped further.Rather than having just a control approach we had a top down approach based on risk and introduced rotational review/testing of locations, more self testing, use of walkthroughs and more sophisticated audit testing using data mining.

The overall result is not only a reduction of controls tested but a reduction of time performing the testing and cost reduction to travel to locations. A win-win situation.

A key success factor was to discuss our approach and new scope in all transparency with the External Auditor to ensure they would still be able to rely on the work being done and that the savings on our side would not result in increased audit fees.”

- Audit Manager | Health Products & Services

NUMBER OF KEY CONTROLS (CONTINUED)

“Last year we engaged PwC to assist us in maximizing AS5 as part of our annual Risk & Completeness Assessment. We focused on key financial statement line items and those entity-level, direct company level, indirect company level and transactional controls which if not operating effectively could result in a material misstatement to the financial statements (including fraud controls). This effort reduced the number of key controls by 38%. Transactional controls were minimized where reliance could be placed on company level or entity-level controls.

Most reductions occurred in ITGC where we eliminated those processes which were not necessary for SOX 404 compliance (i.e., backup & recovery); reductions in key controls which were not truly controls (operating activities); combinations of key controls which are tested simultaneously; roll-up of balance sheet reconciliation key controls into one.

Our External Auditor was included in discussions. We balanced the above with the desire to have the External Auditor be able to maximize their reliance on the work performed.”

- Manager - Internal Audit Services | Utilities




Issue- Should you hire external consultants to help formulate/update accounting policies and procedures

POLICIES AND PROCEDURES FOR ACCOUNTING AND FINANCE DEPARTMENTS

Question

I am a new CFO at a Joint Venture and I have noted that either inadequate or non-existence procedures or polices for the following areas:1) Budgeting;2) Finance and accounting;3) approval authority.I have been asked to write the procedures and policies. I have two options either to write the policies and procedures relying on my inexperienced accounting and finance staff or hire a consultant. Please advise what option is best for me to take and "why". I would appreciate your thoughts on the pros and cons of the option you have advised me to take.

Energy Company

“The only way for an inexperienced staff to gain experience is by "doing". I would suggest that since you need to get the procedures and policies written in a timely fashion, I would suggest hiring a consultant. I would, however, have one of your staff members work very closely with the consultant so they can gain valuable insight and take over these duties the next time.Since you seem to be on the ground floor on this, now would be a good time to establish standards for your procedures and policies, and establish an on-line website where all of this information can be housed and easily accessed. Someone would then need to maintain this on an on-going basis in order to keep it current.”

- Senior Executive | Energy & Utilities Company

“I had a similar issue in a prior life. I was the GA for the Company and had my people reach out to contacts within and outside of industry. We were able to obtain a "copy" of that other company's accounting policies and procedures. The accounting unit used this as a starting point and then customized the document. We were able to obtain a copy from a like organization. The approach saved us a huge amount of time, provided the inexperienced accounting group a good perspective on what pols and procs are, and laid out a framework that everyone could understand. We did not need to start from scratch and did not need to hire a third party. We were able to develop draft policies within four to six weeks, and working procedures within the next three months.”

- Vice President, Internal Audit | Transportation

Key Takeaways

34% respondents recommend hiring external consultants for formulating/updating the policies and procedures


Should you hire outside consultants to help formulate/update accounting policies?

April 16, 2009


n = 6



TAX WORKPAPERS SIGN OFF

Question

On a quarterly basis, our external auditors (Big 4 firm) looks for evidence that our Corporate Controller has reviewed our internal tax workpapers in support of our tax provision, tax liability rollfowards, and valuation allowances. The auditors have the expectation that the Corporate Controller signs off on each of the summary tax workpapers supporting these balances/calculations.

1) How involved does your Corporate Controller get in reviewing detailed workpapers prepared by your tax department in support of the tax provisions/tax balances?

2) Do your auditors specifically "require" a sign off by the Corporate Controller on the summary workpaper schedules?

3) Do your SOX key controls require the Corporate Controller to sign off on the workpapers showing evidence of review?

4) We are proposing that the Corporate Controller simply prepare a memo to the files that he has reviewed the tax issues, etc., with the Tax VP and based on that review, is comfortable that the tax balances are appropriate (or something like that). Do you do something like that at your company?

Diversified Services Company

Issues—Whom does your auditor require to sign off on tax workpapers that show evidence of review?

Key Takeaways

89% respondents don’t require their controller’s sign off on such reviews

11% respondents require their controller’s sign off on such issues

Do your auditors require the Controller to sign off on tax workpapers showing

evidence of reviews?

April 13, 2009

n = 9




TAX WORKPAPERS SIGN OFF(CONTINUED)


“We don't have detail reviews at the Controller level. Even our Tax VP will not review all Tax accruals and related workpapers. However, we do have quarterly tax issues meetings led by our Tax VP where taxes are reviewed and explained at a high level with our Controller. Our auditor attends these meetings as well.

The meeting calendar and issues deck is our primary evidence of review.Neither our SOX controls nor our auditors require Controller sign-off on any individual workpapers.”

- SOX Manager | Leisure

“We have the following one particular key control in place that is tested quarterly for federal and state taxes: Key Control - The VP Income Taxes and the CAO review and approve the income tax contingent liability reserve, including liabilities for uncertain income tax positions, and any significant estimates or judgments quarterly.Test Plan - Verify the sign off sheet for federal taxes was completed by both the CAO and VP Income Taxes.All other tax key controls are reviewed and signed off by the VP Income Taxes. Discussions are on-going with the Controller and CAO should any issues arise.”

- Controls Compliance Manager | Utilities

“I believe that the tax workpapers and quarterly provision work should be reviewed and approved by the person who is most qualified.

1. Our Chief Accounting Officer used to review and signoff on the tax provision workpapers. The workpapers were reviewed and checked in detail by our VP Tax and he would walk the CAO through the significant issues and the calculations/workpapers. Afterward our CAO would signoff that he has reviewed. We now have a heavy SVP of Tax who is qualified to review and approved the provision. We no longer require the CAO review and signoff of the provision workpapers.

2. Auditors require that the SVP of Tax signoff on the quarterly provision workpapers. CAO no longer signs off on the workpapers; however, he does look at them.

3. We use a tax provision checklist which details the steps completed by the SVP of Tax during his review of the provision workpapers. He signs off on each step of the process. We use the signoff of each step as evidence of his review. The external auditors have access to the provision workpapers which allows them to evaluate whether his review was effective.

4. See 1,2 and 3 for our process. I think that your proposed process would work fine.”

- Director Internal Audit | Media




ADOPTION OF SFAS No. 160

Question

We have a small amount of Noncontrolling Interests in our consolidated financial statements which will be subject to SFAS No. 160 - "Noncontrolling Interests in Consolidated Financial Statements" (SFAS160) as of the 1st quarter of 2009. We are prepared to adopt SFAS160 and present as detailed in the pronouncement.

1) Has anyone made a decision to not present the financial statements in accordance with SFAS160 because they have deemed it to be immaterial?

2) If so, can you please provide some insight on your justification for a non-GAAP presentation?

3) For those that are going to present in accordance with SFAS No. 160, have you modified the presentation from that presented in the standard, and if so, please describe how?

Health Products & Services Company

Issues—Are companies deciding not to present financial statements in accordance with SFAS 160 in favor of a non – GAAP presentation?

Key Takeaways

All respondents have adopted and reporting according to SFAS 160

Are companies presenting financial statements in accordance with SFAS 160?

“1) No, we are adopting it and it is material to our financial statements.

2) N/A

3) No, we have followed the presentation prescribed in SFAS 160.”

- Director - Accounting and Reporting | Telecommunications


April 2, 2009

n = 6




ADOPTION OF SFAS(CONTINUED)(Continued.)What was clear to me in reading SFAS no. 160 is that total comprehensive income, comprehensive income items and total, amount of comprehensive income allocatable to the noncontrolling and the controlling have to be shown prominently in the financial statements themselves (either on a equity rollforward if you do these for interim filings or by creating a statement of comprehensive income).Lastly, we are discussing with our auditors how you deal with charges from the controlling entity to the noncontrolling entity (e.g. interest and royalties) and previous write-ups due to step acquisitions in assets (for which we have only written up PP&E, Customer relationships by the controlling ownership). They are getting back to us soon, however, we believe our past practice will stay in place. Basically, continue to allocate amortization and deprecation and other such items for step up acquisitions (prior to 12/31/08) to the controlling only. We are going to continue to allocate net income of the noncontrolling entity to the controlling and noncontrolling based on equity ownership % and will go below zero total equity of the noncontrolling (new and not previously allowed). SFAS no. 160 doesn't change the attribution methods of income. However, it caused us to rethink if the parent had a loan and charged interested to the noncontrolling entity would you allocate 100% of the interest expense booked at the noncontrolling entity to the controlling) or would you do it proportionately based on ownership interest. We believe we will continue our past practice of allocating proportionately. Basically, the net effect is that even though the interest income and expense eliminate in consolidation, we get a credit to the controlling entity for the portion of the interest expense that is allocated to the noncontrolling partner.”

- Vice President - External Reporting and Compliance | Transportation

“1. We have not passed on presenting this due to immateriality2. I shy away from non GAAP presentation as you never now when it may become more material (e.g. an impairment charge at a non-controlling entity or increased activity with joint ventures)3. Balance sheet - relabeled minority interest to be noncontrolling interest and classified within equity. Broke out controlling (in detail), one line item for noncontrolling and the sum total of these (which is now total equity. Basically, moved minority interest from the mezzanine between long-term liabilities and equity to equity.Income statement- net income is now consolidated net income then we show the portion allocatable to the noncontrolling and to the controlling (again, really a presentation issue), however, worth noting that the capital net income will include the noncontrolling portion.Cash Flow and footnotes - ensure referenced to minority interest was changed to noncontrolling interests/Statement of comprehensive income - we added a new statement to our 10-Q for comprehensive income (as we do not show an equity rollforward). This new statement basically shows total comprehensive income and then the amount of comprehensive income allocatable to the noncontrolling and the controlling. We are still working with our auditors to understand if we need to show the components of comprehensive income items broken down between controlling and noncontrolling. We have a footnotes that does this piece SFAS 160 is not clear whether the later is needed on an interim basis. (Continued.)




SEGMENT REPORTING OF UNREALIZED GAINS AND LOSSES

Question

Background – We are not applying hedge accounting to our FXderivatives. All MTM hits earnings in revenue (for salescontract derivatives) regardless of the timing of theunderlying transaction. For segment reporting, we do atopside adjustment to classify all hedge gains or lossesoutside of segment earnings (i.e., from segment earningsinto corporate and other).

We would like to reflect realizedhedge gains within segment earnings and unrealizedhedge gains outside of segment earnings. We are gettingmixed feedback from our auditors - they are sayingunrealized and realized must be in the same line item, noreclassifying.

Question –I know that is true for the main GAAP financials, but doesanyone do this for segment reporting. If so, does thishappen in a topside adjustment? Do your business unitsbook it? What are some pitfalls?

Energy Company

Issue— Reflecting realized hedge gains within segment earnings and unrealized hedge gains outside of segment earnings

Key Takeaways

Three out of six respondents say that realized hedge gains can be reflected within segment earnings and unrealized hedge gains outside of segment earnings.

Two out of six respondents say that realized hedge gains can be reflected within segment earnings and unrealized hedge gains outside of segment earnings.

“FAS 131 requires segment results to be presented inthe same manner as used by management, with areconciliation to the consolidated amount of the closestGAAP f/s measure. Accordingly, your auditors shouldnot have a problem with how you present segmentrevenues as long as: 1) The measure of segment revenue you are using isused in the measurement of segment profitability youare using, 2) It can be supported that this is truly your segmentmeasure of revenue as reviewed by the CODM, and 3) You appropriately reconcile the sum of segmentrevenue to the consolidated GAAP revenue amount.Note that these are certainly the same line item in theP&L, they are just in different columns in the segmentfootnote disclosure.”– Corporate Controller and Chief Accounting Officer | Telecommunications

“All FX gains/losses are excluded from segment reporting. Our segment reporting stops at operating profit of which FX gains and losses is not a component of.”

- Manager Financial Reporting | Manufacturing

“If your report to your CODM shows it that way, you can report it that way for segment reporting. Period. I would guess the only exception would be if you made your CODM reports intentionally misleading in some way. The auditors have no ability to force your segment reporting to follow any GAAP conventions, such as reporting realized and unrealized gains together. In one example, we have an item which must be recorded as an expense for GAAP but we record it as a contra-revenue for segment reporting.”

– Chief Accounting Officer | Financial Services


March 26, 2009


n = 6



PURCHASE PRICE ALLOCATIONS

Question

Does your organization push down purchase price allocations (including goodwill, intangibles, and fixed asset fair value changes) to acquired businesses or do you keep the adjustments at a division or corporate level? (please specify level of allocation)

Electronics Company

Do you push down purchase price allocations to acquired entities?

Issue—Do parent companies push down purchase price allocations to their acquired companies?

Key Takeaways

78% of the respondents push down purchase price allocations to acquired entities

22% of the respondents say it varies depending on whether the acquirer is domestic or foreign

“It depends. If it is a domestic, 100% owned, acquisition then we will push purchase accounting down to the acquired business. If there is a minority interest in the acquired business, we normally keep the adjustments at a corporate or elimination level. This is due to the fact that the division's books cannot be adjusted for purchase accounting of the majority owner and must stay at historic basis for the minority reporting (if any). For foreign acquisitions, it depends on the country as some (most) countries need to keep their books at historic basis for statutory reporting.”

- Senior Director, Financial Reporting | Media Company

Pushed down to

the acquired

entity, 78%

Varies depending

on foreign/do

mestic acquirer,


“All of our purchase price allocations (including goodwill, intangibles and fixed asset fair value changes) are pushed down to the reporting unit level. If you only have 1 reporting unit, then I would guess push down is not necessary. However, if you turn around and sell the discrete business that you are buying, later, you may have some carve out issues that you would need to deal with if you have pushed down.”

- Assistant Controller | Hospitality Company

March 12, 2009


n = 19



ISSUING RESTRICTED STOCK

Question

We have been issuing restricted stock and restricted stock units in lieu of stock options since the adoption of SFAS 123 (R). We are now considering issuing options and had the following questions regarding valuing options:

1) What valuation method do you apply to determine the grant date fair value for your options? 2) If it is not Black-Scholes, did you change upon adoption of SFAS 123 (R)?3) If not Black Scholes do you use a 3rd party to value your option grants?4) Do you have a model to assist in determining fair value?5) What considerations did use in determining the valuation method used?

Which model do you use to determine the grant date fair value of stock options?

Issue—What valuation methods do companies use to determine the fair value of restricted stock options?

Key Takeaways

78% of the respondents use the Black Scholes Model

22% of the respondents use the Lattice Model

Black Scholes

model, 78%

Lattice Models,

22% ,


“1) Black Scholes

2) NA

3) NA

4) We calculate term and volatility ourselves and use the

Black Scholes model to calculated fair value5)

recommendation from outside consultant engaged during

the implementation of FAS123R -- Black Scholes is

relatively easy to understand and apply to grants. Also, it

is widely accepted and used for option valuation.”

- Senior Executive | Fortune 500

“1) We use a binomial lattice model.2) We changed in anticipation of 123(R); 1 year before adoption of the standard.3) Yes, we use a third-party (KPMG Valuation Group) and their proprietary lattice model.4) See 3 above.5) We felt the lattice model was more dynamic and produced more accurate results.”

- Senior Executive | Fortune 500

March 10, 2009


n = 10



COST METHOD Vs. EQUITY METHOD

Question

Company A has invested in Company B. Company Ahas purchased 30% of the equity of company B but donot exercise any significant influence at all. Equitymethod is appropriate when the investment is 20-50%and exercise significant influence. In this caseinvestment is 30% but no significant influence. Whatmethod company A should record this investmentunder cost method or equity method?

Manufacturing Company

Cost Method Vs. Equity Method when acquirer has no significant influence

Issue—What method should be used when the acquiring entity has a share under 50% and exercises no significant control over the acquired entity?

Key Takeaways

55% respondents recommend equity method

27% respondents recommend cost method Not sure,

18%

Equity Method,

55%Cost

Method, 27%


“Equity method accounting is required when significant influence exists and not necessarily due to the investor's lack of intent to exercise. It would be rare for a 30% equity interest to not have significant influence, though you can look to the transaction to identify measures that limit rights ordinarily associated with them. Provided the few details, equity method is your default.”

-Director, Policy & Reporting | Insurance Company

“It is likely the cost method. The ability to exert significant influence is the deciding factor. The percentage ownership only serves as a benchmark. An investor w/ greater than 20% ownership is assumed to have significant influence. Therefore, it will be treated as a presumption that must be overcome based on the specific facts and circumstances of your situation. Assuming as stated that significant influence does not exist, you should be able to rebut the presumption and account for it at cost. Another related item - remember that, if the equity has a readily determinable market value (e.g., publicly listed shares), you will have to classify the investment as either "available-for-sale" or "trading" and account for accordingly.”

-Assistant Controller | Media

March 19, 2009


n = 11



EFFECTIVE FINANCIAL CONTROL

Question

My Company is moving to a matrix organization. In this

organizational structure, line finance functions willdirectly report to Operational management. They willalso have a functional reporting line to the CFO. I am interested in understanding if other commercialorganizations, that have implemented the matrixstructure, use routine (i.e., monthly or quarterly) formalreporting mechanisms, both from decentralized

financeand operational management to ensure that thereported financial results and carrying values reflect atrue and fair view and have not been subject to undueinfluence in timing or recognition. The concern is as economic pressure builds that thereis a natural heightening of risk that there may beoperational management pressure on embeddedfinance to manage the stated results. 1) Does your Company have matrix reporting forfinance staff2) Do you require your embedded operational andfinance management to separately provide a formalrepresentation that the results are true and fair andfree of undue influence3) If answer to (2) is Yes - how often is therepresentation provided.

Transportation Company

How are your reporting structures for line finance functions organized?

Issue—What are the reporting structures for line finance functions in matrix organizations?

Key Takeaways

70% respondents have matrix structure for their line finance functions in their organization

30% respondents have other structures for their line finance functions in their organizations.

Matrix Structure,

70%

Other Structure,

30%

March 23, 2009


n = 10



EFFECTIVE FINANCIAL CONTROL (CONTINUED)

“We have a combination of a centralized anddecentralized reporting structure. We have operationalcontrollers that have a solid line to the senioroperations management and a dotted line to theCorporate Controller. We hold detailed monthlyfinancial reviews with each of the remote controllersand their respective V.P. This review includes theCFO, Corporate Controller and Director of FinancialPlanning & Analysis.We have actually incorporated this formal review intoour entity level controls for SOX purposes. We have aquarterly certification of all controllers in connectionwithout process of filing 10-Qs.”

- Vice President, Corporate Controller and Treasurer | Manufacturing Company


1.“We use matrix reporting for the Finance staff. The Controllers and CFOs report to the Business Unit CEO as well as the Corporate CFO.

2. We require Business Unit Controllers and CFOs to sign 302-type certifications as part of the financial closing process.

3.The certifications are performed quarterly in conjunction with our 10-Q filing.”

- VP - Management Testing & Assurance | Insurance Company

“We do have a matrixed structure. We have identifiedwhich controls are distributed to the businesses vs.which are centralized to corporate. We identify whoperforms the control and who tests the control. This istrue for all key controls - and persons performing andtesters include finance and non-finance employees. The

SOX CoE manages the assignment and loading ofcontrols to our system to ensure none are missing. Forcontrols which are decentralized (for us some examplesinclude: the revenue recognition control, the financialstatement review control, the inventory verification,etc.,) we have the same control tested for all materialbusinesses. This is done quarterly. In addition theoperational head and finance head of each of thecentralized and decentralized organizations complete acertification quarterly.”

- Global SOX Compliance Manager | Chemicals Company

“First, finance should not report to OperationalManagement. This is inappropriate SOD and should bechanged. However, given that that is probably notpossible, the controller (I am assuming you have such

afunction), should provide any and all reporting on aquarterly basis to the CFO to show that the financialsare appropriately stated, as well as be included in theSOX 302 certification process attesting to thecompleteness and accuracy of the financialinformation.”

– Senior Executive | Energy Company




EARNING RELEASE

How complete is your external audit when earnings are released?


“We do not release our earnings results until our auditor is 100% done with their procedures.”

– Senior Executive | Utilities Company

“Our auditors are not complete with all procedures and are approximately 95+% complete. The remaining procedures are mainly documentation and procedures related to our Form 10-K. All significant areas are addressed prior to our earnings release.”

– Senior Vice President and Controller | Food & Beverages Company

“No, usually they are not done prior to the release. This year, specially, they were only about 70% done at our company. At a minimum, the auditors need to have audited the major/riskier accounts ( in most cases, revenue, inventory, accounts payable, litigation) and be comfortable that the procedures that will remain to be completed after the release more than likely will not generate significant audit adjustments. That being said it is approximately 80% of the work complete as of the date of the release.”

– Audit Manager | Consumer Products Company

Issue—How complete are auditors with respect to their due diligence when earnings are released?

Key Takeaways

33% respondents say their external audit is fully complete when their earnings are released.

29% respondents say their external audit is between 90%-100% complete when their earnings are released.

19% respondents say their external audit is between 80%-90%complete when their earnings are released.

14% respondents say their external audit is between 70%-80%complete when their earnings are released.

Question

In regards to the year end earnings release, are your external auditors done with their procedures before the earnings release is distributed to the public? If their procedures have not been completed, what is their completion percentage when the earnings are released (90%, 80%, etc.)

Health Products and Services Company

March 03, 2009


n = 21

Between 80%-90%

19%

Between 70%-80%

14%

Under 70%5%

Fully Complete

33%

Betw een 90%-100%

29%



MAINTAINING DOCUMENTATION

Question

I have a question regarding maintaining documentationof memos and other significant transactions. Right

now,each department within accounting currently stores

theirown documentation on various places on the hard

drive. I was thinking that we need to put a system in placerequiring memos and documentation to be stored in oneplace.

We have plans to include our policies and procedureson our intranet site but I don't think it makes sense tohave memos for various transactions on this site.How has your company addressed this?

Transportation CompanyHow do you manage all your documentation for

auditor due diligence?

Shared network or common hardrive,

50%

Other, 25%

Sharepoint tool, 25%


“We use a shared network drive where we post our accounting memos. After an accounting memo is reviewed and manually signed off (on the document itself) we scan the memo and post it to the shared drive (access is restricted to Corp Accounting). We also maintain a log of the accounting memos - which are dated and numbered. We scan the memos (vs posting a WORD version) to avoid changes to the final version of a memo.We email our auditors the scanned memos to ensure they get the final version and cannot make changes to our documentation. In addition, the email serves as evidence we provided the memo to the auditors.”

– Director of External Reporting | Chemicals Company

“Historically, we have always had each individual department keep their own memos in their own directories, which are generally not accessible by other groups. Each individual department does have a "shared" folder within their directory that they can place documents that they wish other groups to be able to access (generally read only), but putting items in that folder is at their discretion. To my knowledge, we have not considered consolidating memos into a central location, but it does sound like an interesting idea.”

– Director of Financial Reporting | Transportation Company

Issue—Has EITF 03-6-1 impacted the structure of your restricted stock programs?

Key Takeaways

50% of the respondents have a shared network or common hard drive of the documentation for auditor due diligence.

25% of the respondents use Sharepoint tool.

The remaining 25% use other tools.

February 25, 2009


n = 8

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