ken miller 2012 americas school of mines may€¦ · (source: audit analytics) • the primary...

2012 Americas School of Mines

U.S. Accounting, Auditing andRegulatory Update

May 16, 2012

FASB and Standard Setting Update

PwCMay 2012

2

FASB Leadership

FASB board members

Seidman(2013)Chairman

Linsmeier(2016)

Golden(2017)

Smith (2017) Siegel (2013) Buck (2015) Schroeder(2015)

PwCMay 2012

Advisory Groups to the FASB

• Financial Accounting Standards Advisory Council(FASAC)

• Financial Crisis Advisory Group (FCAG)

• Private Company Financial Reporting Committee(PCFRC)

• Investor Task Force (ITF)

• Investors Technical Advisory Committee (ITAC)

• Valuation Resource Group (VRG)

32012

The current state of convergence projects - FASB timeline

Revenue recognition

Financial instruments - liquidity disclosures

Financial instruments - hedging

Financial instruments - impairment

Financial instruments -measurement&classification

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4

Consolidation - principal vs. agent

Consolidation - investment companies

Insurance contracts

Leases

Revenue recognition

Deliberations Exposure Draft (or Re-Exposure) Re-deliberations Final Standard

Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 2013

Inactive convergence projects: Emission trading schemes, Financial instruments with characteristics ofequity, Financial statement presentation, Reporting Discontinued Operations, Earnings per share, Incometaxes, Postretirement Benefit Obligations, Conceptual Framework

SEC hot topics

PwCMay 2012

5

SEC leadership

Commissioners

OPEN*

PwC

Mary Schapiro (I)Chairman

Daniel Gallagher (R) Elisse Walter (D) Luis Aguilar (D) Troy Paredes (R)

6

Office of the Chief Accountant Division of Corporation Finance Division of Enforcement

Jim Kroeker, Chief Accountant Meredith Cross, Director Robert Khuzami, Director

Paul Beswick, Deputy Chief Accountant – Accounting

Julie Erhardt, Deputy Chief Accountant – International

Brian Croteau, Deputy Chief Accountant –Professional Practice

Mike Starr, Deputy Chief Accountant – Policy Support &Market Monitoring

Position Open, Chief Accountant* Howard Scheck, Chief Accountant

May 2012

* Wayne Carnall returned to PwC in July 2011 after 3 ½ years as the Chief Accountant for the Division of Corporation Finance

SEC Structure

Office of the ChiefAccountant(“OCA”)

Division of Corporation Finance(“Corp Fin”)

Division of Enforcement

•Interacts with thestandard setters ofGAAP and GAAS

- FASB

- IASB

•Ensures compliance in form and content

- Quarterly & annual reports

- Registration statements

- Transactional filings

•Investigates possible federalsecurities law violations

- Non-GAAP financialstatements

- Omission of material

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- IASB

- PCAOB

•Considers Companypositions onaccounting, financialreporting and auditingmatters, particularlyunusual, complex orinnovative transactions

•Considers registrant requests for waivers andinterpretations of form and content.

•Each registrant reviewed at least once everythree years

- Comment letter may be issued based onreview

- May refer to enforcement

- Omission of materialinformation

- Misleading disclosures

- First Regulation G case inNovember 2009

- Clawback on executivebonuses

- Contemporaneousdocumentation onpension valuationassumptions

7

Restatement trends10 year comparison (Source: Audit Analytics)

1200

1400

1600

1800

Total restatements per unique filer

PwCMay 2012

0

200

400

600

800

1000

1200

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

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Restatements trends (continued)(Source: Audit Analytics)

• The primary causes of restatements have not changed over the past severalyears.

• Top restatement issues:

1. Debt, quasi-debt, warrants & equity (BCF)

2. Expenses (payroll, SGA, other)

PwCMay 2012

2. Expenses (payroll, SGA, other)

3. Liabilities, payables, reserves, and accrual estimates

4. Deferred, stock based, and/or executive compensation

5. Revenue recognition

6. Accounts/loans receivables, investments & cash issues

7. Cash flow statement classification errors

9

Comment Letter Trends

Primary focus areas are:

- Timing of loss recognition.

- Disclosures regarding reasonably possible losses.

- Accounting policy for legal costs.

- Disclosure of indemnification and loss sharingarrangements.

Disclose each item in the effective tax rate reconciliation that

LossContingencies

PwCMay 2012

exceeds 5 % of income tax expense at the statutory rate.

Inappropriately combining items relating to foreignjurisdictions in the tax rate reconciliation.

Disclose allocation of pretax income between foreign anddomestic and the related taxes.

Provide quantified information about tax benefits when amaterial tax benefit is derived from a particular jurisdiction.

Challenge company’s assertion that subsidiary earnings areindefinitely reinvested when registrant’s have liquidity issues.

IncomeTaxes

10


Staff compares other public information to segmentdisclosures for consistency.

Operating segments must have “similar economiccharacteristics” to be aggregated.

Changes in operating segments may impact goodwillimpairment test.

SegmentReporting

PwCMay 2012

Given the increase in goodwill impairments, Staff commentshave focused on "foreshadowing" disclosures.

Additional disclosure for reporting units that are at risk forfailing step one of impairment test. A reporting unit may be"at risk" if the reporting unit's fair value is not "substantially inexcess of its carrying value."

GoodwillImpairment

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Revenue

One or multiple units of accounting

Gross vs. net presentation considerations

Disclosure of reseller/distributor arrangements

Separate presentation required for revenue and cost ofrevenue line items for bundled arrangements (products versusservices)

Determination of selling price between VSOE, TPE and ESP

PwCMay 2012

Ensure companies present the most directly comparable GAAPmeasure with equal prominence with reconciliation.

Describe why the Non-GAAP measure is useful information toinvestors and how management uses the measure

Disclose the limitation of Non-GAAP measures as far ascomprehensiveness and comparability.

Prohibition of non-GAAP measures that exclude expenses thatare integral to operating the business

Non-GAAP Measures

Determination of selling price between VSOE, TPE and ESP

12


Provide an executive overview

MD&A should not be simply a repeat of information providedelsewhere; rather, explain the "whys" and "implications"

Discuss trends, which may have a material impact on futureoperating results and liquidity

Critical accounting estimates should discuss how changes in

PwCMay 2012

MD&ACritical accounting estimates should discuss how changes inassumptions impacts operating results; provide sensitivityanalysis for assets that may be impaired in the future.

Focus on liquidity – stranded cash offshore

Cash flows including discussing the drivers of changes in cashflows from operations and trends in cash flow, particularlywhen cash flow does not correlate to income from operations(e.g., positive cash flow, but operating losses, or vice versa)

13

New Accounting Topics

PwCMay 2012

14

Goodwill impairment – revised standard

• In September 2011, FASB issued final guidance intended to ‘simplify’ thegoodwill impairment test

- Impacts both public and private entities

- Effective for fiscal years beginning after December 15, 2011, with earlyadoption permitted

• What are the changes?

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• What are the changes?

- Companies now have the option to first assess qualitative factors todetermine whether step one of the two-step impairment test is necessary

- Proceed to Step 1 if it is more likely than not (i.e. greater than 50%likelihood) that the fair value of a reporting unit is less than its carryingamount. Otherwise, no further testing necessary

Goodwill impairment – revised standard

• The standard includes examples of events and circumstances to considerwhen determining whether it is more likely than not that a reporting unit’sfair value is less than its carrying amount

• New qualitative factors also replace those used for interim tests and tests ofreporting units with a negative carrying amount

• Entities also should consider the amount of ‘cushion’ (if any) between a

PwCMay 2012

16

• Entities also should consider the amount of ‘cushion’ (if any) between areporting unit’s most recently determined fair value and its carrying amount

• The new qualitative assessment is optional; an entity can skip to step one inany period for any reporting unit. The selection of reporting units is not anaccounting policy that needs to be followed consistently

• See Dataline 2011-28 for further discussion and our insights

Presentation of items of other comprehensive income

• In June 2011 the FASB and IASB issued final standards on the presentationof comprehensive income

• Requires entities to present profit or loss and OCI either in a singlecontinuous statement or in two separate, but consecutive, statements

- Eliminates the option under U.S. GAAP to present OCI in the statement ofchanges in equity. As the IASB had eliminated this option in 2007, thechanges to IFRS are more limited.

• The IASB standard requires items that will be recycled be presented

PwCMay 2012

• The IASB standard requires items that will be recycled be presentedseparately from items that will not be recycled. This is not required underU.S. GAAP because all items are recycled.

• The FASB standard requires reclassification adjustments to be measured andpresented by net income and OCI line items on the face of the incomestatement(s) and no longer allows them to be summarized and shown in thefootnotes.

• However, the FASB has indefinitely deferred this requirement due toconcerns over operationality. IFRS has retained the option to showsummarized reclassification adjustments in the footnotes.

17

Balance sheet netting

• On December 16, 2011, the FASB issued Accounting Standards Update No.2011-11, Disclosures about Offsetting Assets and Liabilities

• Requires new disclosures to help reconcile differences in the offsettingrequirements under U.S. GAAP and IFRS, which continue to be significant forcertain entities

• Includes an exception that will continue to permit netting of derivatives,

PwCMay 2012

• Includes an exception that will continue to permit netting of derivatives,repurchase agreements, and related collateral subject to master nettingagreements under U.S. GAAP, provided certain conditions are met

• No similar exception is included under IFRS

• Effective for annual reporting periods beginning on or after January 1, 2013,and interim periods within those annual periods

18

Balance sheet netting

New disclosure requirements

• The following information for assets and liabilities within the scope of the new standardwill be required:

a. The gross amounts of those recognized assets and those recognized liabilities

b. The amounts offset to determine the net amounts presented in the statement offinancial position

c. The net amounts presented in the statement of financial position

PwCMay 2012

c. The net amounts presented in the statement of financial position

d. The amounts subject to an enforceable master netting arrangement or similaragreement not otherwise included in (b)

e. The net amount after deducting the amounts in (d) from the amounts in (c)

• New requirements exclude loans and customer deposits at the same institution (unlessthey are offset in the statement of financial position), as well as financial instrumentsthat are only subject to a collateral agreement

• Flexibility with respect to how certain items are disclosed is permitted. For example,companies can choose to disclose items (c) through (e) above either by class of financialinstrument or by counterparty.

19

Tax Accounting - General Update

• Current economic conditions continue to have ramifications on theassessment of the realizability of deferred tax assets and the assertionsregarding indefinite reinvestment of foreign earnings.

• Realizability of deferred tax assets:

- Valuation allowance model differs from other impairment models

- Evidentiary model places greater weight on recent performance

PwCMay 2012

- Evidentiary model places greater weight on recent performance

- Model considers four sources of taxable income

- Cumulative losses are a significant piece of negative evidence

• Indefinite reinvestment of foreign earnings

- Stress on liquidity needs

- U.S. international tax reform in regard to Subpart F

20

Parent’s accounting for CTA upon the sale or transfer of agroup of assets within a foreign subsidiary that meets thedefinition of a business - Issue 11-A

Background

• A parent may agree to sell a group of assets that resides within a foreignsubsidiary to a third party while retaining its ownership of the foreign entity

Proceeds may or may not be distributed to the parent in the transaction

• Issue - There are differing views in practice about whether the guidance inASC 830-10 (FAS 52) or ASC 810-10 (FAS 160) applies to a sale or transfer or

PwCMay 2012

21

ASC 830-10 (FAS 52) or ASC 810-10 (FAS 160) applies to a sale or transfer ora group of net assets within a foreign subsidiary that meets the definition of abusiness under ASC 805 (FAS 141R)

If the foreign currency guidance applies, the parent would only releaseCTA into earnings if the transaction results in a complete or substantiallycomplete liquidation of the foreign entity (typically 90% or more)

If deconsolidation guidance applies, CTA is released into earnings when aparent loses control of a business


November 2011 meeting

• The Task Force reached a consensus-for-exposure that the deconsolidationguidance should govern

• The Task Force also decided that the portion of the foreign entity’s CTA to be

PwCMay 2012

22

• The Task Force also decided that the portion of the foreign entity’s CTA to beallocated to the disposed business should be determined using a systematicand rational approach

The Task Force decided not to prescribe a particular approach

• Effective prospectively to transactions occurring after the effective date


March 2012 meeting

• Task Force discussed feedback received through the comment letter process

• Several Task Force members expressed concern about issues raised throughthe comment letter process, such as scope, interaction with hedging

PwCMay 2012

23

the comment letter process, such as scope, interaction with hedgingguidance, and operational complexity

• The Task Force asked the FASB Staff to perform further research andtargeted outreach

• Further discussion is expected at the June 2012 meeting

Definition of a Business

An integrated set of activities and assets that is capable of being conducted andmanaged to provide a return to investors (e.g., dividends, lower costs or othereconomic benefits). A business consists of inputs and processes applied tothose inputs that have the ability to create outputs.

• Removes self-sustaining requirement (the “output requirement”).

• Assessment made from the perspective of hypothetical acquirer.

PwCMay 2012

• Rebuttable presumption a business exists if goodwill is present.

• Development stage enterprises may be businesses even without revenue.

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Is it an asset or a business? Why do we care?

Business Combination Asset Acquisition

Recognize as astandalone asset

Goodwill Allocate to otheridentifiable assets

Capitalize and assess In-Process Research Expense upon

Under US GAAP, several key accounting differences can arise depending onwhether a transaction is accounted for as a business combination or an assetacquisition.

PwCMay 2012

25

Capitalize and assessfor impairment andultimate useful life

In-Process Researchand Development

(IPR&D)

Expense upontransaction close

Record at estimated fairvalue at close, mark tomarket after closethrough P&L if a liability

ContingentConsideration

Most likely record whenprobable and estimable,do not mark to market

Expense as incurred Transaction/Deal Costs Record as part of cost ofasset acquired

Is it an asset or a business?

• New standard significantly expanded the definition of a “business”

• A Business must be capable of being conducted and managed to provide areturn to investors (e.g., dividends, lower costs or other economic benefits)

• Aspects of new definition that can be challenging:

- Integrated set of activities must only be capable of producing outputs andproviding a return to investors.

PwCMay 2012

◦ An integrated set without revenue is still likely a business.

- Acquirer does not need to acquire all inputs and processes from seller.

◦ Consider nature of missing elements and ability of market participant to replicate them.

26

Step 2:Assessescapability

Step 1:IdentifyelementsIn theacquiredgroup

PROCESS

PROCESS

OUTPUTINPUT

What did the acquirer buy? What did the acquirer get and want toget out of this acquisition?

Are there any existing process(es) transferred to the acquirer toproduce the output?

Are there sufficient inputs and Are there any inherent processes

Framework

YESNO

YES

Step 3:Marketparticipantsability toproduceoutput

capabilityof the groupto produceoutputs

Are there sufficient inputs andprocesses to produce outputs?

Are there any inherent processesattached to the inputs?

What is(are) the missing inputs and/or processes toproduce/achieve the outputs?

Are market participants capable of continuing to produceoutputs?

Assets

Business

Business Assets

YES

YES

NO

NO

NO

YES

On the Horizon – FinancialInstruments

PwCMay 2012

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Financial Instruments – hedge accounting

Timeline

June 2008:

FASB issues ED with goalof simplification; deferschanges to joint financialinstruments project

December 2010:

IASB issues exposuredraft on general modelonly; comment periodended March 9, 2011

H2 2012

IASB’ final standard(Q3 for proposal onmacro hedging); FASBto be determined

PwCMay 2012

May 2010:

FASB issues hedgeaccounting proposalsas part of financialinstruments project

February 2011:

FASB issuesdiscussion paperseeking views onIASB’s proposal;comment period endedApril 25, 2011

IASB currently inactive redeliberations;FASB pending

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Financial Instruments – hedge accounting

Overview — Comparing the boards’ proposals

• Objective is simplification;targeted changes proposed

• Easier to qualify for hedgeaccounting (reasonably effective)

• Less onerous hedgeeffectiveness assessment

• Objective is simplification andlinkage to risk managementactivities

• Proposals are broader and insome cases more flexible thanthe FASB’s

• Seeks views regardingunderstandability, operability, andauditability of the IASB’s proposal

• Asks whether FASB should aimfor convergence, or targetedimprovements to U.S. GAAP for

FASB 2010 proposal IASB revised draft FASB discussion paper

PwCMay 2012

effectiveness assessmentrequirements

• Removal of shortcut and criticalterms match methods

• Cannot elect to “stop” hedgeaccounting

the FASB’s

• Concept of effectiveness as wellas what can be hedged, isdifferent from FASB’s proposal

• Cannot elect to “stop” hedgeaccounting

• Requires new disclosures

improvements to U.S. GAAP forhedge accounting

• Feedback to be considered inredeliberations

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IFRS developments

PwCMay 2012

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IFRS usage globally

More than 100 countries require, permit or are converging orconverting to IFRS for public company reporting

Major global capital markets

Australia IFRS

Brazil IFRS

Canada IFRS

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Canada IFRS

China Converging to IFRS

France IFRS

Germany IFRS

Hong Kong IFRS

Japan IFRS permitted

Switzerland IFRS or US GAAP

UK IFRS

US Analysis ongoingCountries seeking convergence with the IASB or pursuing adoption of IFRSs

Countries that require or permit IFRSs

United States

May 2012

Current status of SEC staff IFRS work plan

• At the December 2011 AICPA/SEC conference, the SEC staff indicated thatadditional time was needed to complete a final report on its IFRS work plan

• The staff is in the process of drafting a final report summarizing all of itsefforts to complete the IFRS work plan and expects to publish that reportduring 2012

• Jim Kroeker, SEC Chief Accountant, noted that the SEC remains committed

PwC

• Jim Kroeker, SEC Chief Accountant, noted that the SEC remains committedto completing a final comprehensive report on its IFRS work plan, and thatadequate time will be taken to develop a strong and lasting framework forincorporating IFRS, if that is the decision of the SEC

33May 2012

The US path to IFRS is increasingly uncertain

• The vision of using IFRS as the global, high quality, consistently appliedstandards remains compelling; however,

- Key convergence projects will not be completed until 2012 or later

- The SEC staff IFRS work plan will not be completed until the first half of2012

PwCMay 2012

34

2012

- Lack of a business or political mandate for rapid change

- Consistency of application and governance concerns remain

• These factors point to a longer period before IFRS, or some form thereof, islikely to apply to domestic companies

Corporate governance

PwCMay 2012

35

The Dodd-Frank Act – at a glance

• The Dodd-Frank Wall Street Reform & Consumer Protection Actwas signed into law on July 21, 2010 by President Obama.

• 18 months of congressional deliberation and over 2300 pages

• Comprehensive reform with many details left to regulators’discretion

• Over 500 rules to be written; 60 studies to be performed; 90

PwCMay 2012

• Over 500 rules to be written; 60 studies to be performed; 90reports to be issued

• The Act significantly reshapes financial regulation by creating newregulators, forms of regulation, regulating new markets, bringingnew firms into the regulatory arena, and providing new rulemakingand enforcement power to regulators.

• As of February 2012, a total of 225 Dodd-Frank rulemakingrequirement deadlines have passed. Of these 225 passed deadlines,164 have been missed and 61 have been met with finalized rules

36

Impact of Dodd-Frank Act

• The SEC’s website outlines several areas that these new rules impact:

- OTC derivatives

- Clearing and Settlement

- Asset backed securities

- Hedge fund advisors

- Whistleblower program

- Municipal Securities

- Credit rating agencies

- Corporate disclosures

- Conflict minerals

- Mine Safety Disclosures

PwCMay 2012

- Whistleblower program

- Corporate Governance

• Impact on SEC staffing / funding

• SEC has created a website for all stakeholders to provide input andcomments to the rulemaking process, as it relates to the numerous aspects ofthe Dodd-Frank act:http://www.sec.gov/spotlight/regreformcomments.shtml

37

- Mine Safety Disclosures

- Payments by ResourceExtraction Issuers


Disclosure of Payments by Resource Extraction Issuers

• Proposed regulation released in December 2010

• Include as unaudited exhibits to the annual report information relating topayments made to a foreign government or the U.S. Federal Government

• Information must include the type and the amount of the payments andmust be reported by project and by country.

PwC

• Companies, individuals and trade organizations have submitted theircomments to the SEC supporting the overall intend but questioning the levelof detail and the operational aspect of disclosing such information.

• Final regulation to be issued in the near future?

38May 2012


Disclosure of Payments by Resource Extraction Issuers,Cont’d

• Hundreds of responses have been posted on the SEC website. Some arequite humorous.

• My favorite is from Spencer Bachus (R-AL) and Gary Miller (R-CA), whichsays:

….. As you may know, the extractive industries provisions

PwC

….. As you may know, the extractive industries provisionswere inserted into the Act very late during the Dodd-Frankconference, without due legislative consideration bythe committees of jurisdiction. While the underlyinggoals of the section are laudable, the statutory language ofSection 1504 is highly problematic and almost certainlywould not have survived in its enacted form throughregular-order consideration in either body …..

39May 2012


Disclosure of Payments by Resource Extraction Issuers,Cont’d

Noteworthy Comment Letters

• API’s response of 1/28/11 – 47 pages long

• API’s response of 1/19/12

• Publish What You Pay response of 2/25/10 – 67 pages long

PwC

• Publish What You Pay response of 2/25/10 – 67 pages long

• George Soros response of 2/23/11

• PwC response of 3/2/11

• Branden C. Berns response of 12/7/11

• Senator Markowski’s and Senator Coryn’s response of 2/28/12

40May 2012


Disclosure of Payments by Resource Extraction Issuers,Cont’dDear SEC Commissioners,

Please do not give in to industry pressures on Section 1504 of theDodd-Frank Act (the Cardin-Lugar Amendment) – and make sure that ALLcompanies are covered, every country and every project gets reported,and loopholes that would allow large sums of money to go unreported are

PwC

and loopholes that would allow large sums of money to go unreported areclosed.

My Comment:

Transparency is essential for the light of public scrutiny to cleansegovernments of financial corruption. If America permits our ownbusiness leaders to fund corrupt governments, it will further harm theinternational respect for our nation. Big oil corruption and theirsupport of corrupt governments fosters terrorist hatred againstAmerica. Don’t harm our nation by exempting big oil from this critical law!

41May 2012

Types of CASH Payments to be disclosed

• Host government’s production entitlement

• NOC production entitlement

• Taxes levied on the profits of a company’s upstream activities

• Royalties

PwC

• Royalties

• Dividends

• Bonuses

• License fees, rental fees and other considerations

• Other, including tax levied on income, consumption or sales

42May 2012

The Debate is centered on the following:

• Cost/Benefit

• Fairness to US filers

• Definition of “not de minimis”

• Definition of “project”

PwC

• Definition of “project”

• Definition of “control”

• Interaction with foreign laws

• Location and timing of the disclosures

43May 2012

Questions or Comments?

©2012 PricewaterhouseCoopers LLP. All rights reserved. “PricewaterhouseCoopers” refers toPricewaterhouseCoopers LLP, a Delaware limited liability partnership, or, as the contextrequires, the PricewaterhouseCoopers global network or other member firms of the network,each of which is a separate and independent legal entity.

ken miller 2012 americas school of mines may€¦ · (source: audit analytics) • the primary...

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