1 update by the office of the chief accountant wesley r. bricker professional accounting fellow u.s....
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Update by the Office of the Update by the Office of the Chief AccountantChief Accountant
Wesley R. BrickerWesley R. BrickerProfessional Accounting FellowProfessional Accounting Fellow
U.S. Securities and Exchange U.S. Securities and Exchange CommissionCommission
Update by the Office of the Update by the Office of the Chief AccountantChief Accountant
Wesley R. BrickerWesley R. BrickerProfessional Accounting FellowProfessional Accounting Fellow
U.S. Securities and Exchange U.S. Securities and Exchange CommissionCommission
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Discussion TopicsDiscussion Topics
Who We Are: Interacting with OCAWho We Are: Interacting with OCA
What We’ve Been Doing: Rule-Making and Policy What We’ve Been Doing: Rule-Making and Policy DevelopmentsDevelopments
How We Think: Recent Hot TopicsHow We Think: Recent Hot Topics
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The Securities and Exchange Commission, The Securities and Exchange Commission, as a matter of policy, disclaims as a matter of policy, disclaims responsibility for any private publication or responsibility for any private publication or statement by any of its employees. statement by any of its employees. Therefore, the views expressed today are my Therefore, the views expressed today are my own, and do not necessarily reflect the own, and do not necessarily reflect the views of the Commission or the other views of the Commission or the other members of the staff of the Commission.members of the staff of the Commission.
DisclaimerDisclaimer
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Who We Are: Who We Are:
Interacting with OCAInteracting with OCA
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Office of the Chief AccountantOffice of the Chief Accountant
Chief Accountant: James L. KroekerChief Accountant: James L. Kroeker
Appointed August 25, 2009Appointed August 25, 2009
Principal advisor to the Commission on accounting and auditing Principal advisor to the Commission on accounting and auditing mattersmatters
Deputy Chief Accountants: Paul Beswick, Brian Croteau & Julie ErhardtDeputy Chief Accountants: Paul Beswick, Brian Croteau & Julie Erhardt
Main groups in OCAMain groups in OCA
AccountingAccounting
Professional Practice (Audit and Independence)Professional Practice (Audit and Independence)
International AffairsInternational Affairs
ResponsibilitiesResponsibilities
Rulemaking, interpretive guidance and reportsRulemaking, interpretive guidance and reports
Oversight of standard settingOversight of standard setting
ConsultationsConsultations
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Avenues for ConsultationsAvenues for Consultations
Pre-filing basis – requests from registrantsPre-filing basis – requests from registrants Guidance posted on the SEC’s website: Guidance posted on the SEC’s website:
http://www.sec.gov/info/accountants/ocasubguidance.htmhttp://www.sec.gov/info/accountants/ocasubguidance.htm Submit GAAP questions by email to [email protected] GAAP questions by email to [email protected] Submit 404 questions by email to Submit 404 questions by email to
[email protected]@sec.gov
Post-filing basis – Post-filing basis –
Internal consultations from Divisions of Corporation Internal consultations from Divisions of Corporation Finance and EnforcementFinance and Enforcement
Requests from registrantsRequests from registrants
Informal discussion with OCA staff membersInformal discussion with OCA staff members
(202) 551-5300(202) 551-5300
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What We’ve Been Doing: What We’ve Been Doing:
Rule-Making and Policy Rule-Making and Policy DevelopmentsDevelopments
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What We’ve Been DoingWhat We’ve Been Doing
IFRS in the U.S.IFRS in the U.S.
Monitoring Major Convergence ProjectsMonitoring Major Convergence Projects
Dodd-Frank and Related RulemakingDodd-Frank and Related Rulemaking
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Rule-Making and Policy Rule-Making and Policy DevelopmentsDevelopments
IFRS in the U.S.
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Commission Statement in Support of Commission Statement in Support of Convergence and Global Accounting StandardsConvergence and Global Accounting Standards
Issued February 2010Issued February 2010
Explains history of Commission’s steps to foster a Explains history of Commission’s steps to foster a single set of high-quality globally accepted accounting single set of high-quality globally accepted accounting standardsstandards
Summarizes feedback on proposed “Roadmap”Summarizes feedback on proposed “Roadmap”
Provides an approach forward for U.S. capital marketsProvides an approach forward for U.S. capital markets Directs staff of the Office of the Chief Accountant, in Directs staff of the Office of the Chief Accountant, in
consultation with other Divisions and Offices of the consultation with other Divisions and Offices of the commission, to develop and carry out a work plancommission, to develop and carry out a work plan
Progress reports beginning in October 2010Progress reports beginning in October 2010
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Key Areas of the Work PlanKey Areas of the Work Plan
Whether to incorporate IFRS for U.S. issuers
Sufficient development and application of IFRS for the U.S. financial reporting system
The independence of standard setting for the benefit of investors
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Key Areas of the Work PlanKey Areas of the Work Plan
How to incorporate IFRS for U.S. issuers (transition)
Investor understanding and education regarding IFRS
Examination of the U.S. regulatory environment that would be affected by a change in accounting standards
The impact on issuers, both large and small, including changes to accounting systems, changes to contractual arrangements, corporate governance considerations, and litigation contingencies
Human capital readiness
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Work Plan ExecutionWork Plan Execution
Sources of Information
Investors
Issuers (both U.S. and foreign)
Auditors
Attorneys
Other regulators
Standard setters
Academics
Methodology
Staff research
Survey of academic research
Outreach through:
Comment letter requests
Roundtables
Targeted interviews
Status Report – October 2010
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Requests for Comment – Work PlanRequests for Comment – Work Plan
Aspects of the impact on U.S. investors (Release 33-9133) U.S. investors' current knowledge of IFRS and preparedness for
IFRS How investors educate themselves on changes in accounting
standards The extent of and time needed to undertake changes to improve
investors' understanding of IFRS and the related education process.
Aspects of the impact to issuers (Release 33-9134) Compliance with contractual arrangements based on U.S. GAAP
(e.g., financial covenants) Compliance with corporate governance requirements (e.g., audit
committee financial expert and other stock exchange listing requirements)
Application of certain legal standards tied to amounts determined for financial reporting purposes.
Comments on both releases are requested by October 18
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Lease Classification Under IFRSLease Classification Under IFRS
IAS 17, LeasesIAS 17, Leases
Operating vs. FinancingOperating vs. Financing
Principle: A lease is a finance lease if it transfers Principle: A lease is a finance lease if it transfers substantially all the risks and rewardssubstantially all the risks and rewards incidental to incidental to ownership of an asset.ownership of an asset.
Indicators of a finance lease (par. 10):Indicators of a finance lease (par. 10): Lease transfers ownership by the endLease transfers ownership by the end
Bargain purchase that is reasonably certainBargain purchase that is reasonably certain
Lease term covers major part of economic lifeLease term covers major part of economic life
PV of minimum lease payments equal substantially all of PV of minimum lease payments equal substantially all of the FV of the leased assetthe FV of the leased asset
Leased assets are of a specialized natureLeased assets are of a specialized nature
Lease classification is made at inceptionLease classification is made at inception
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Monitoring Major Monitoring Major Convergence ProjectsConvergence Projects
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Commission Statement in Support of Commission Statement in Support of Convergence and Global Accounting StandardsConvergence and Global Accounting Standards
Recognizes ongoing convergence process between FASB and IASB
Financial crisis has underscored importance of convergence Responses to crisis have been global Companies and their investments are globally
interconnected
Focus on quality of standards
Challenges
FASB / IASB Memorandum of Understanding
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Selected Convergence ProjectsSelected Convergence Projects
Leases and Revenue Recognition
IASB / FASB published joint Exposure Drafts
Financial Instruments
FASB published its Exposure Draft
FASB / IASB conducting outreach
Insurance Contracts
IASB published Exposure Draft
FASB is preparing a Discussion Paper
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Dodd-Frank and Related Dodd-Frank and Related RulemakingRulemaking
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Dodd-Frank and Related Dodd-Frank and Related RulemakingRulemaking
Financial Stability Oversight Council
Accounting standard setting
SEC’s approach to regulatory reform rulemaking
Invitation to provide preliminary comments on (see links on SEC website): OTC derivatives
Hedge funds
Corporate disclosure
Credit rating agencies
Other areas
Comments posted on website
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How We Think: How We Think:
Recent Hot TopicsRecent Hot Topics
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Accounting Estimates Accounting Estimates
Accounting assumptions in the current environment
Preparation of financial statements requires preparers to make assumptions about the future E.g. fair value measurements, impairment assessments
Reminders Identify and follow objectives of the accounting standards
Base assumptions on reasoned analysis and available information
• Current market data; expert forecasts
Do not manipulate models or assumptions to achieve a desired outcome
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Accounting Judgments Accounting Judgments
Start with faithful application of accounting literature
Where accounting literature does not address the situation:
Provide information useful to investors and creditors in their decision-making processes
Professional judgment SEC staff will accept reasonable differences in judgment, coupled
with transparent disclosure Concurrent documentation enhances credibility of judgment
Economic substance Problems arise when transactions are designed around accounting
literature Often not consistent with principles of standard
Transparent disclosures
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Implementation – Consolidations Implementation – Consolidations Standard (FAS 167)Standard (FAS 167)
Reporting enterprise should consolidate variable interest entities in which it has a controlling financial interest
Power over the activities that most significantly impact an entity's economic performance
Interest that either obligates the reporting enterprise to absorb losses of the entity or provides a right to receive benefits from the entity that could potentially be significant
Economic substance is important in performing the evaluation
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Implementation – Creditor Implementation – Creditor Accounting for Debt RestructuringsAccounting for Debt Restructurings
Commercial real estate loans
Creditor might modify loan terms to reduce or defer debtor’s or loan guarantor’s near-term cash payments Restructuring into an A Note & B Note
Evaluate loans receivable for impairment (ASC 310-10-35 [FAS 114]) Loan guarantees that are non-substantive should not
be used to avoid recognizing loan impairments
Disclose restructuring activities
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Equity Method Investment – Equity Method Investment – Impairment Impairment
Impairment model for equity method investmentImpairment model for equity method investment
Other-than-temporary declines in valueOther-than-temporary declines in value Holistic assessment of all factors described in the Holistic assessment of all factors described in the
guidanceguidance
ASC 323-10-35-31, 32 [APB pars. 6(b), 19(h)]ASC 323-10-35-31, 32 [APB pars. 6(b), 19(h)]
Not a cost-recovery model, such as is Not a cost-recovery model, such as is applicable for long-lived assets applicable for long-lived assets
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Post-Acquisition Accounting for Loans Post-Acquisition Accounting for Loans Acquired in Business CombinationsAcquired in Business Combinations
AICPA Depository Institutions Expert Panel submission described AICPA Depository Institutions Expert Panel submission described two approaches:two approaches: Recognize interest income based on contractual cash flows as Recognize interest income based on contractual cash flows as
described in ASC 310-20described in ASC 310-2011
Recognize interest income based on expected cash flows as Recognize interest income based on expected cash flows as described in ASC 310-30described in ASC 310-3022
Accounting policy:Accounting policy: Policy should be disclosed and applied consistentlyPolicy should be disclosed and applied consistently
Any change in accounting policy should be justified on the basis of Any change in accounting policy should be justified on the basis of preferabilitypreferability
If interest income is recognized based on expected cash flows, If interest income is recognized based on expected cash flows, all accounting and disclosure guidance in ASC 310-30 should be all accounting and disclosure guidance in ASC 310-30 should be followedfollowed
1 Formerly FAS 911 Formerly FAS 91
2 Formerly SOP 03-32 Formerly SOP 03-3
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Subtopic 815-40-25Subtopic 815-40-25**––Sequencing ConsiderationsSequencing Considerations
Determination of whether an EITF 00-19 instrument can be Determination of whether an EITF 00-19 instrument can be recorded in equity when there is a separate outstanding variable recorded in equity when there is a separate outstanding variable share-settled contract (unlimited shares) can be complexshare-settled contract (unlimited shares) can be complex
Existence of a potentially variable share-settled contract will Existence of a potentially variable share-settled contract will not always result in liability treatment of the Instrumentnot always result in liability treatment of the Instrument
Key considerations include:Key considerations include: What is the Company’s sequencing policy? What is the Company’s sequencing policy? Is the Company’s sequencing policy reasonable?Is the Company’s sequencing policy reasonable? Are there sufficient unissued and authorized shares that can be Are there sufficient unissued and authorized shares that can be
allocated to the instrument following the Company’s sequencing allocated to the instrument following the Company’s sequencing policy?policy?
What are the specific facts and circumstances of the Company? What are the specific facts and circumstances of the Company?
** Formerly EITF 00-19Formerly EITF 00-19
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QuestionsQuestions