July 2012

RISKSINTERNALCONTROLS

I.T.MANAGEMENT

FINANCIALREPORTING

TECHNICALACCOUNTING

REGULATORYREPORTING

M&A

TAX

RESOURCEMANAGEMENT

CASHFLOW

FINANCIAL REPORTING____________________________________________________________

Implementation of New Fair Value Measurement Standard

INTERNAL CONTROLS____________________________________________________________

COSO Framework Update

Essential BriefingsIMPLEMENTATION OF SECTION 952 OF

THE DODD-FRANK ACT

Contents

______________________________________________________________________________________________________________________________________________________

ESSENTIAL BRIEFINGS2 IMPLEMENTAT ION OF SECT ION 952 OF

THE DODD-FR ANK ACTIn Final Rulemaking Release No. 33-9330 , Listing Standards for Compensation Committees, the SEC has issued final rules implementing Section 952 of the Dodd-Frank Act (which added Section 10C to the Exchange Act). Section 952 relates to the following:

______________________________________________________________________________________________________________________________________________________

FINANCIAL REPORTING4 IMPLEMENTAT ION OF NE W FA IR VALUE

ME ASUREMENT STANDARD Effective for interim and annual periods beginning after December 15, 2011 for public companies and for annual periods beginning after December 15, 2011 for nonpublic companies, ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Certain Fair Value Measurement and Disclosure Requirements in US GAAP and IFRS” was introduced with the intention of converging US GAAP and IFRS.

______________________________________________________________________________________________________________________________________________________

INTERNAL CONTROLS7 COSO FR AME WORK UPDATE

The Internal Control – Integrated Framework published in 1992 by The Committee of Sponsoring Organizations of the Treadway Commission (COSO) has become a cornerstone used by CFOs and auditors alike in designing, implementing and evaluating internal controls over financial reporting.

July 2012

1 | SingerLewak July 2012

E S S E N T I A L B R I E F I N G S

IMPLEMENTATION OF SECTION 952 OFTHE DODD-FRANK ACTBY JIM PITRAT, CPA | MANAGING PARTNERjpitrat@singerlewak.com | 310.477.3924

In Final Rulemaking Release No. 33-9330 , Listing Standards for Compensation Committees, the SEC has issued final rules implementing Section 952 of the Dodd-Frank Act (which added Section 10C to the Exchange Act). Section 952 relates to the following:

a. exchange listing standards for compensation committees of issuers with listed equity securities, and

b. disclosures in proxies and in-formation statements regard-ing conflicts of interest raised by the work of compensation consultants.

Listing Standards Relating to Compensation Committees:

According to the final rules:

•Each national securities ex-change and national securities association must prohibit the

initial or continued listing of any equity security of an issuer that is not in compliance with the independence require-ments (as defined in 10C-1 as it relates to compensation com-mittees)/

•This rule is subject to the fol-lowing exemptions (exemptions generally relating to specific securities), among others:a. Standardized options, and

Security futuresb. Limited partnerships.c. Companies in bankruptcyd. Open-end management

investment companiese. Foreign private issuers (If

reasons for not having an independent compensation committee is disclosed in

Form 20-F).f. Listed companies when

more than 50% of the vot-ing power for the election of directors is held by an indi-vidual, a group, or another company.

g. Smaller reporting compa-nies.

•Exchanges are required to es-tablish their own independence requirements.

•Exchanges must consider the following when establishing their independence require-ments:1. the source of compensation

of a compensation commit-tee member, and

2. whether a compensation committee member is affili-ated with the issuer.

•Each member of the compen-sation committee must be a member of board of directors and independent.

•A compensation committee is permitted to obtain the advice of a compensation consultant (which could include indepen-dent legal counsel and other

July 2012 SingerLewak | 2

Exchanges are required to establish their own

independence requirements

compensation advisers).•Listed issuers must provide

funds for the compensation of such advisers.

•A compensation adviser is not required to be independent.

•However, the following inde-pendence factors must generally be taken into account before engaging one: - Other services provided to the company.

- The amount of fees from the issuer received by the indi-vidual engaging the adviser as a percentage of that individu-al’s total income.

- Conflict of interest policies and procedures of the indi-vidual engaging the compen-sation adviser.

- Business relationships be-tween the adviser and com-mittee members.

- Stock of the company owned by the adviser.

- Any business or personal relationship of the compensa-tion advisor with an executive of the issuer.

Item 407(e) of Regulation S-K, Compensation committee, has been amended to require disclo-sure of the nature of a conflict of interest raised by the work of a compensation consultant, and how it is being addressed.

The exchanges must propose new or amende3d listing standards to comply with the requirements

within 90 days following pub-lication of the final rules in the Federal Register. Furthermore, within one year exchanges are required to issue listing standards fully complying with new Rule.

The new disclosures must be included in proxy or information statements covering any annual meeting of shareholders, or spe-cial meeting at which directors will be elected (which occurs on or after January 1, 2013).

3 | SingerLewak July 2012

Within one year exchanges are required to issue listing standards fully complying

with new Rule

JIM PITRAT CAN BE REACHED AT JPITRAT@SINGERLEWAK.COM

OR 310.477.3924

July 2012 SingerLewak | 4

IMPLEMENTATION OF NEW FAIR VALUEMEASUREMENT STANDARDBY SUZIE DORAN, CPA | PARTNER, ASSURANCE & ADVISORYsdoran@singerlewak.com

EXECUTIVE SUMMARY

Effective for interim and annual periods beginning after Decem-ber 15, 2011 for public companies and for annual periods beginning after December 15, 2011 for non-public companies, ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve

Certain Fair Value Measurement and Disclosure Requirements in US GAAP and IFRS” was

introduced with the intention of converging US GAAP and IFRS.

As March 31, 2012 was the first quarter for most public com-panies to adopt this ASU, this summary is to provide insight as to current practices and points on how to assist reporting entities in developing their future fair value disclosures.

NEW DISCLOSURE REQUIREMENTS:

Most of the disclosure require-ments relate to Level 3 FV mea-surements.

For all level 3 FV measurements:

•Quantitative information regarding significant unobserv-

able inputs,•Qualitative description of the

valuation process for recur-ring and nonrecurring Level 3 measurements. Such disclosures would include what group is responsible for the valuation, to which the group reports and the methods used to test the model.

•Qualitative discussion regard-ing the sensitivity of inputs used in recurring Level 3 FV measurements. If there are any interrelationships between unobservable inputs, such relationships and any potential impact on sensitivity should be disclosed.

Other requirements include:

•Level 2 recurring and non-recurring FV measurements needs to provide a qualitative description of the valuation techniques and input used

•Any gross transfers between Level 1 and 2 FV measure-ments by class, including the reasons for such transfers. Note

F I N A N C I A L R E P O R T I N G

Qualitative discussion regarding the sensitivity of inputs used in recurring

Level 3 FV measurements. If there are any

interrelationships between unobservable inputs, such

relationships and any potential impact

on sensitivity should be disclosed

5 | SingerLewak July 2012

that this is a change from pre-vious guidance, which required only significant transfers.

•All FV measurements must be presented by hierarchy levels. As a result, companies must are required to determine the level in the hierarchy of financial assets and liabilities that are not recorded at FV, but for which FV is disclosed such as long term debt recorded at amor-tized cost.

•Disclosures need to be made if companies exercise the excep-tion for measuring certain financial instruments with off-setting market and credit risks as a portfolio.

•The FV of a nonfinancial asset needs to disclose the reason if the highest and best use is dif-

ferent than how it is currently being used by the entity. KEY F INDINGS:

•Although the quantitative disclosures were included, it

appears that they were focused on compliance rather than on clarity. As time passes, prepar-ers will probably have more time to analyze the information to present it in a cogent and effective manner.

•The disclosures also were not consistently clear about what was missing from the quan-titative tables of significant unobservable inputs for Level 3 assets and liabilities when com-pared to the hierarchy tables.

•There was divergence in evalu-ating whether or not Level 3 liabilities/equity included nonperformance risk related to entity’s specific credit rating.

•Although most companies disclose the inputs in a tabular format that is consistent with

Although most companies disclose the inputs in a tabular format that is

consistent with the example in the ASU, many did not

reconcile or explain how the amounts in the significant unobservable input table

reconciled to the FV hierarchy table

July 2012 SingerLewak | 6

the example in the ASU, many did not reconcile or explain how the amounts in the signifi-cant unobservable input table reconciled to the FV hierarchy table.

•The ASU allows companies to use the third-party pricing exception. This gives compa-nies the option to not disclose quantitative information about unobservable inputs for unad-justed valuations provided by third-parties. As reporting his-tory grows, companies should be clear if they exercise this exception and the controls over third-party pricing informa-tion.

• It does not seem any compa-nies addressed the disclosure of differences between fair value using highest and best use and

the intended use by manage-ment. This appears reasonable

since nonfinancial assets would be valued at FMV, which would have to be higher if it is used in a manner different from the current form. Addi-tionally, the incremental differ-ence would need to be material to the FS line item for this to impact the FS.

It does not seem any companies addressed the disclosure of differences

between fair value using highest and best use and the intended use by management. This

appears reasonable since nonfinancial assets

would be valued at FMV, which would have to be higher if it is used in a

manner different from the current form

SUZIE DORAN CAN BE REACHED AT SDORAN@SINGERLEWAK.COM

OR 310.477.3924

7 | SingerLewak July 2012

COSO FRAMEWORK UPDATEBY AARON P. SULLIVAN, ACCA | MANAGER, ASSURANCE & ADVISORYasullivan@singerlewak.com

The Internal Control – Inte-grated Framework published in 1992 by The Committee of Sponsoring Organizations of the Treadway Commission (COSO) has become a cornerstone used by CFOs and auditors alike in designing, implementing and evaluating internal controls over financial reporting. The Frame-work gained acceptance follow-ing financial control failures in the early part of the millennium, and is currently the most widely used framework in the United States with widespread use inter-nationally.

COSO released an exposure draft in December 2011 that proposed an update and refresh of the 1992 framework. The comment period closed on March 31, 2012 and due to the significant volume of comments, COSO has resched-uled its planned issuance of the final revised framework from the fall of 2012 to the first quarter of 2013.

COSO will also release an ex-posure draft of Internal Control Over External Financial Report-ing Approaches and Examples later this year. The final frame-

work will be released accompa-nied by the internal control over external financial reporting docu-ment along with a document on evaluation tools.

After nearly 20 years COSO con-cluded that the underlying prin-

ciples and concepts of the origi-nal frame work were effective and still relevant, but the context and environment has changed significantly. One example is the now widespread use of technol-ogy. When the original frame-work was written internet, email and cloud computing was not as prominent as they are today.

COSO believes, supported by extensive user surveys, that the framework did not require an entire rewrite but rather a refresh. The following elements remain unchanged from the original framework:

1. The definition of internal control

2. The five components of inter-nal control

3. The fundamental criteria used to assess effectiveness of sys-tems of internal control

4. Use of judgment in evaluating the effectiveness of internal control

The following are elements of the revised framework:

1. Codification of principles with universal application for use in developing and evaluating

I N T E R N A L C O N T R O L S

The Framework gained acceptance following

financial control failures in the early part of

the millennium, and is currently the most

widely used framework in the United States with widespread use

internationally

the effectiveness of systems of internal control. The updated framework explicitly lists 17 principles across the existing five components of internal control.

2. Expanded financial reporting objective to address internal and external, financial and non-financial reporting objec-tives

3. Increased focus on operations, compliance and non-financial reporting objectives based on user input.

The benefits of the update are expected to be a framework that enhances individual entity performance with greater agil-ity, confidence and clarity. The framework is designed to allow the entity the agility to adapt to increasing complexity and pace of change, to mitigate risks to achieve important business, operational and financial objec-

tives and provide clear, reliable information to support decision making.

Users of the current framework should consider the implica-tions of the update on both their systems and documentation of internal control over financial re-porting. The expected timing of the release, quarter one of 2013,

removes the pressure of trying to implement a new approach late in the 2012 reporting year.

As COSO is not a standard set-ter, current users of the original framework who make assertions (public or private) regarding the effectiveness of their internal control should monitor guidance by appropriate regulators and standard setters for any prefer-ence regarding the internal con-trol framework to use for report-ing purposes during a transition period following issuance of the updated framework.

Please contact us if you have any questions on how this impacts your internal control over finan-cial reporting design, implemen-tation or assessment.

AARON SULLIVAN CAN BE REACHED AT

ASULLIVAN@SINGERLEWAK.COM OR 310.477.3924

The benefits of the update are expected to be a

framework that enhances individual

entity performance with greater agility, confidence

and clarity

July 2012 SingerLewak | 8

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