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CFO Newsletter - July 2012
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Transcript of CFO Newsletter - July 2012
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 [email protected] | 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 [email protected]
OR 310.477.3924
July 2012 SingerLewak | 4
IMPLEMENTATION OF NEW FAIR VALUEMEASUREMENT STANDARDBY SUZIE DORAN, CPA | PARTNER, ASSURANCE & [email protected]
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 [email protected]
OR 310.477.3924
7 | SingerLewak July 2012
COSO FRAMEWORK UPDATEBY AARON P. SULLIVAN, ACCA | MANAGER, ASSURANCE & [email protected]
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
[email protected] 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
SEPTEMBER 20SILICON VALLEY
SEPTEMBER 27LOS ANGELES
As part of our CFO Essentials Roundtable series, please join us for a spirited panel discussion focused on what it takes to get solid information systems in
place - why it’s important and how to build systems that deliver ROI and provide a competitive advantage.
PRESENTERS:Seth Fineberg, Technology Editor, Accounting Today
Bill Sutman, CFO, formerly with Relativity MediaMark Linden, CFO, Intacct Software
Jim Hart, Manager - Software Selection Expert, SingerLewakBob Green, CPA.CITP, Partner and Practice Leader, SingerLewak ERMS - Moderator
For more information, please visit www.SingerLewak.com/news.
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