The Value of Experience

“Taming the Tidal Wave of Change”

August 25, 2010

HASKELL & WHITE LLP SEC Roundtable Series

This Morning’s Agenda

I. Welcome and Brief Introductions

II. A “Tidal Wave” – Really?• Revenue recognition• Leases• Financial statement presentation• Loss contingencies and going concern• Financial instruments, fair value and other projects

III. Closing and Questions

Haskell & White LLP: Who We Are

We are a middle-market focused firm powered by 60 client-centered professionals and 9 entrepreneurial partners

We practice with the technical competencies and experience of larger accounting firms and the attentiveness and responsiveness of smaller accounting firms

Our primary focus areas are SEC, Real Estate and M&A

Our SEC clients include both accelerated and non-accelerated filers; we serve pre-revenue pharma companies, as well as service businesses with revenues in the hundreds of millions

We have earned a “clean” PCAOB inspection report

Revenue Recognition (Topic 605)

• Proposed standard issued June 24, 2010• Comment deadline October 22, 2010• Exposure draft runs some 170 pages!• Entitled “Revenue from Contracts with Customers”• Modifies or eliminates some familiar revenue recognition “principles”• Final ASU expected second quarter of 2011

Revenue Recognition (Topic 605)

• CORE PRINCIPLE - Recognize revenue when transfer of goods/services to customer in the amount of consideration expected to be received

• Changes L/T contracts – Revenue from Percentage-of-completion would only be allowed if customer owns work-in-process as built or developed

• Required to account for all distinct goods or services – may require separation of a contract into different units of accounting

Revenue Recognition (Topic 605)

Additional changes –Collectability would affect how much revenue is recorded vs. whether revenue is recorded

Greater use of estimates (Of course!!)

Separation of performance obligations based on relative selling price. Revenue recognized when performance obligation is satisfied

Increased disclosures (Surprised? Not!!) More on qualitative and quantitative info in contracts

Revenue Recognition (Topic 605)

FASB created a chart reflecting 5 steps to applying the new revenue recognition proposals

Such is presented as Exhibit 1 in the August 2010 Journal of Accountancy article Convergence Milestone: Revenue recognition among proposals released as FASB, IASB commit to new timeline. (See next slide…)

Leases (Topic 840)

• Proposal stand issued August 17, 2010

• Comment deadline December 15, 2010

• Eliminates the operating lease classification and its off-balance sheet treatment

• Will focus on the entity’s right to use an asset

• Leases of intangible assets, biological assets, leases to explore for or use minerals, oils, natural gas and similar non-regenerative resource

Leases (Topic 840)

Accounting by Lessees• Lessees would record a right-to-use an asset, along with a corresponding obligation

to pay rentals

Accounting by Lessors• Lessors would take one of two approaches:

– If the lessor has significant exposure to risks associated with the underlying asset, it would apply a performance obligation approach.• The underlying asset would remain on the lessor’s books and the lessor

would recognize both a receivable and a performance obligation liability– If the lessor does not have significant exposure, it would apply a partial

derecognition approach• The lessor would recognize a receivable and derecognize a portion of the

underlying asset• The lessor would recognize sales for the present value of the lease

payments and cost of sales for the portion of the asset derecognized

Leases (Topic 840)

• The lease term—for both lessors and lessees—would be defined as the longest possible lease term that is more likely than not to occur

• The measurement of lease payments would include expected payments for contingent rentals and residual value guarantees

• Proposed standard would allow for a simplified form of lease accounting for leases with maximum possible terms of less than 12 months

• Proposed standard would also affect sale leaseback transactions

• No clause to grandfather outstanding leases

Leases (Topic 840)

Some of the impacts from this proposal:

• Financial ratios• Debt covenants• EBITDA• Buy versus lease decisions

Financial Statement Presentation

I. What is the Big Picture?

II. Why the Change from Today’s Statements?

III. How Will Things Change?

IV. When Will These Changes be Required?

The Big Picture: Core Principles

Create a new global standard that requires entities to effectively organize disaggregated information in a manner that clearly communicates a cohesive financial picture of the entity

Separate items with different economic characteristics through the disaggregation of components to better predict future cash flows

Introduce cohesiveness to statements by improving the flow of information through the various statements so that they complement each other

Facilitate assessments of an entity’s liquidity and financial flexibility

Why Change?

Today, US GAAP and IFRS provide very limited presentation guidance; guidelines provide too many alternatives and are dispersed across various standards (although the SEC’s Regulation S-X requires particular presentation and disclosures by public companies)

The result is variation in practice and inconsistencies in presentation that creates difficulties for financial statement users (for example, SCF and Comprehensive Income)

There is no guidance on the aggregation and disaggregation of financial data (for example COS and SG&A expenses); this will create standardization and facilitate comparisons across global jurisdictions

What Exactly Will Change?

A common structure – required sections, categories and subcategories across all financial statements

Greater disaggregation – separate by activity and by economic characteristic

Greater cohesiveness – the relationship of items between the statements is clear and the financial statements complement each other

The New and Improved Financial Statements

Other comprehensive income, net of tax

Discontinued operation section

Discontinued operation section, net of tax

Discontinued operation section

Income tax sectionIncome tax sectionIncome tax section

Multi-category transaction section

Multi-category transaction section

Equity category

Debt categoryDebt category

Financing sectionFinancing sectionFinancing section

Investing categoryInvesting categoryInvesting category

Operating finance subcategory

Operating finance subcategory

Operating categoryOperating categoryOperating category

Business sectionBusiness sectionBusiness section

Statement of cash flowsStatement of comprehensive income

Statement of financial position

A Few More Noteworthy Changes

The Direct Method must be used to present the Statement of Cash Flows

The Notes to the financial statements must disclose the changes between opening and closing asset and liability balances that management regards as important (cash, noncash, impairments, remeasurements, etc.)

Comparative financial statements will be required to be presented

A reconciliation of Operating Income and Operating Cash Flows will be required

When Will All This Really Happen?

A “Staff Draft” is currently available to review; field tests are underway for financial institutions

The Exposure Draft of a new standard is expected to be released in Q1 2011

The Final Draft of a new standard is expected to be released in Q4 2011

Expected effective dates would likely be in 2013

Loss Contingencies (Topic 450)

Proposed standard issued July 20, 2010

Comment deadline September 20, 2010 (extended from August 20, 2010)

The FASB did not rule out being able to issue a final ASU during the fourth quarter with an effective date of December 2010

The proposed update would lower the current disclosure threshold and broaden the current disclosure requirements

Loss Contingencies (Topic 450)

Significant changes:

Require disclosure of certain remote loss contingencies

Require additional disclosures

Require disclosure of publicly available quantitative information, other relevant non-privileged information, and, in some cases, information about possible recoveries

Public entities would be required to provide tabular reconciliations, by class, of recognized loss contingencies

Loss Contingencies (Topic 450)

Disclosure threshold:

Reasonable possibility (more than remote) – required to be disclosed

Remote – disclosure may be necessary based on nature, potential magnitude, or potential timing

Threshold factors:

Potential impact on the entity’s operations

Cost to the entity for defending its contentions

Amount of effort and resources management may have to devote

Going Concern

Initial exposure draft issued on October 9, 2008

Comment period ended December 8, 2008

New exposure draft expected to be issued in Q4 2010, final document expected to be issued in Q1 2011

Going Concern

Decisions Reached by FASB Definition of Going Concern – the Board decided not to specifically define a going concern

Time Horizon - information about the foreseeable future, which is generally, but not limited to, 12 months from the end of the reporting period

Liquidation Basis of Accounting:

– Going concern unless liquidation is imminent

– Liquidation based statements should reflect information about the value of an entity’s resources and obligations in liquidation

Going Concern

Disclosures:Pertinent conditions and events giving rise to the assessment, including when such conditions and events are anticipated to occur, if reasonably estimable The possible effects of those conditions and events Possible discontinuance of operations Management’s evaluation of the significance of those conditions and events and any mitigating factors Information about the recoverability or classification of recorded asset amounts or the amounts or classification of liabilities

Financial Instruments

• Change prompted by global financial crisis

• Existing divergence in measurement under US GAAP

• Exposure Draft out in May 2010, comment period ends 9/30

• Present both amortized cost and fair value for FIs held for collection of payment of contractual cash flows. Effects net income and comprehensive income

• FIs held for sales or settlement (derivatives and trading instruments) would be recognized at FV and adjusted through net income

• Simplified criteria for hedging activities

Financial Instruments

Loans:Amortized cost $XXXAllowance for credit losses $(XX)Residual FV adjustment $(XX)Fair Value $XXX

Shareholders EquityCommon stock $XXXRetained earnings $XXXAOCI, excluding FV charges $XXXEquity, excluding FV charges $YYYFV changes on financial instruments $(XX)Total comprehensive equity $ZZZ

Financial Instruments

Scope• Public companies with <$1BB in assets get an additional 4 year

implementation. 2013 implementation projected

• Excludes items within equity, pension items, leases, equity investments (including bifurcated items), guarantees, physically settled forward contracts

Financial Instruments

Convergence Issues

• Not a joint release, IASB has split issue into 3 parts

• Differences on classification and measurement, IASB has only issued IFRS 9 on financial assets

• Each body is asking for comments on both and currently working through the differences

• Stay tuned!

Comprehensive Income

• Joint Project issued in May 2010 with comment period ending 9/30/10

• Would eliminate various methods of reporting OCI

• Presentation would be a continuous statement of financial performance that displays components of OCI

• Items that make up OCI do not change

Fair Value

• Joint Project to develop common fair value measurement and guidance

• Issued June 2010, comment period ending Sept. 7, 2010. Final expected Q1 2011

• Not intended to change US GAAP, but clarify intent of existing guidance under ASC Topic 820

• Highest and best use concepts are only relevant to nonfinancial assets

• Additional guidance on measuring FIs in equity

• Additional guidance on blockage factors and other premiums and discounts in a FV measurement

• Adds additional disclosure items

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