Taft Kortus Mark Fitzpatrick March 6, 2008 Accounting and Auditing Update.

Taft Kortus Mark Fitzpatrick

March 6, 2008

Accounting and Auditing Update

Agenda

• Accounting updates• Auditing updates• Review & compilation updates• Exposure drafts• Questions & comments

FASB Issuances

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EITF Issuances

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SFAS No. 157 – Fair Value Measurements

• Effective for years beginning after 11/15/08 and related interim periods (after 2/08 delay)

• Applies to accounting pronouncements that require or permit FV measurements

• Does not apply to:– Accounting for share-based payments arrangements (FAS 123(R))– Pronouncements that require or permit measurements that are similar to

FV, but not intended to measure FV

SFAS No. 157 – Fair Value Measurements--Objectives

• Establish a consistent definition of FV– The price received to sell an asset or paid to transfer a liability in an orderly

transaction between market participants at the measurement date (Exit price)– Results in unbiased measurement that is consistent period to period, entity to

entity• Establish a consistent framework for permitted or required FV

measurements– Hypothetical transaction at the measurement date– Orderly transaction between market participants– Market-based assumptions specific to assets or liabilities– Costs not attributable to assets or liabilities must be expensed

SFAS No. 157 – Fair Value Measurements--Objectives

• Establish a consistent framework for permitted or required FV measurements– Assumes highest and best use of the asset– Assumes principal or most advantageous market

• Focus on market type• Based on perspective of the Company

– Transaction price can equal exit price, unless:• Related party transaction• Non-orderly transaction (fire sale, bankruptcy, etc)• Unit of account differences with different rights• Market transaction occurs is different from defined

principal market


• Establish a consistent framework for permitted or required FV measurements– Fair Value Hierarchy (Prioritization)

• Level 1 – quoted prices in active markets for identical assets or liabilities

• Level 2 – directly or indirectly observable assumptions for the assets or liabilities

• Level 3 – unobservable assumptions– Company assumptions about what market participants

would use (not entity specific)– Requires significant judgment


• Expanded disclosures regarding FV measured assets and liabilities, including

– Information that enables users to assess inputs for both recurring and non-recurring FV measurements

– Effect of the measurements on earnings for the period for recurring FV measurements using significant unobservable (Level 3) inputs

• Disclosures required for assets and liabilities measured at FV on a recurring and non-recurring basis in periods subsequent to initial recognition

• Disclosures should be in tabular format• Consider combining with other FV disclosures (SFAS 107)

FAS 158 – EvolutionFAS 87/88FAS 87/88

Basic Basic Pension Pension

Accounting Accounting RulesRules

19891989

FAS 106FAS 106

Accounting for Accounting for Other Other

Postretirement Postretirement BenefitsBenefits

19951995

FAS 132FAS 132

Uniform Uniform DisclosureDisclosure

19981998

FAS 132(R)FAS 132(R)

IncreasedIncreased

DisclosureDisclosure

20032003

FAS 158FAS 158

TransparencyTransparency

20072007

FAS 158 – Pension Expense

+ Service Cost+ Service Cost

+ Interest Cost+ Interest Cost

- Expected Return on AssetsExpected Return on Assets

+Amortization of Loss (Gain)+Amortization of Loss (Gain)

=Net Periodic Pension Cost=Net Periodic Pension Cost

No Change!No Change!

FAS 158- Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans

• Balance sheet recognition, fiscal years ending after– December 15, 2006 for public companies– June 15, 2007 for non-public companies

• Record Net Pension Asset (Liability)

• Shown on balance sheet of sponsor as “other asset” if over-funded or “other liability” if under-funded

• May need current portion

FAS 158 – Funded Status

Plan AssetsPlan Assetslessless

Projected Benefit Projected Benefit Obligation (PBO)Obligation (PBO)

FAS 158 – Transition

• No change in Net Periodic Pension Cost (NPPC)• Prepaid pension expense will become net

pension liability or asset• Unrecognized gains/losses and changes in

funded status run through OCI• Measure assets and obligations as of year-end

(effective after 12/15/08)

FSP 158-1

• Updates the illustrations contained in the appendices of FAS 87, 88 and 106

• Does not provide additional implementation guidance

• Does not change any of the provisions of Statement 158.

SFAS No. 159 – The Fair Value Option for Financial Assets and Financial Liabilities

• Issued February 2007• Effective for fiscal years beginning after 11/15/07 • Applies to all entities, including NFP• Phase 1 of FASB Fair Value Option Project• Phase 2—non financial assets & liabilities (discussions

start Q3 2007)• FASB likes Fair Value!

SFAS No. 159 – The FV Option for Financial Assets and Financial Liabilities

• Key Objectives– Permits entities to choose to measure many financial instruments and

certain other items at FV

– Helps mitigate application of complex hedge accounting provisions (FAS 133)

– Expands use of FV measurement – consistent with FASB’s long-term measurement objectives for accounting for financial instruments


• Applicable to all financial assets and liabilities except:– Investment in consolidated subsidiaries or VIE– Obligations for pension benefits, post-retirement and post-employment

benefits, stock options, and other forms of deferred compensation arrangements

– Financial assets and liabilities recognized under leases– Deposit liabilities, withdrawable on demand, of financial institutions– Financial instruments that are, in whole or in part, classified as a

component of shareholder’s equity (i.e., convertible debt security with a non-contingent beneficial conversion feature)


• Impact on current accounting practices– Entities can use to measure eligible items at FV at specified

election dates– Unrealized gains and losses are reported in earnings at each

subsequent reporting date

• Many disclosure requirements• Can simplify derivative accounting

FAS 141(R)—Business Combinations

• Effective periods beginning after 12/15/08• Obtaining “control” is new basis event

– Account for 100% of fair value of target & apply ownership % acquired (if < 100%)– Generally, recognize 100% of fair values of assets acquired and liabilities assumed;

residual as goodwill– Gain or loss recognized on any pre-existing noncontrolling equity investment of the

acquirer

• Transaction costs are expensed• Contingent consideration—must estimate & assign probability• Restructuring accruals recognized only if FAS 146 concepts met at

acquisition date (EITF 95-3 superseded)• Acquired IPR&D is capitalized• Earlier application is prohibited

FAS 160—Noncontrolling Interest in Consolidated Financial Statements

• Amends ARB 51• Effective periods beginning after 12/15/08• Represents portion of net assets of a subsidiary not

attributable to Parent• Replaces term “minority interest”• Is reported as a component of equity (not mezzanine)• Net income/loss (and comprehensive income/loss) are

allocated even if the continued attribution results in a negative amount for the noncontrolling interest

• Provides guidance on deconsolidation• Earlier application is prohibited

EITF Issues 06-04 & 06-10

• Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements (06-04)

• Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements (06-10)

• Effective for fiscal years beginning after 12/15/07

EITF 07-02

Accounting for Convertible Debt Instruments That Require or Permit Partial Cash Settlement upon Conversion

• Issue is how to account for a convertible debt instrument that requires or permits partial cash settlement upon conversion if, at issuance, the embedded conversion option is not required to be separately accounted for as a derivative under FAS 133

• No conclusion

FIN 48: Accounting for Uncertainty in Income Taxes

• Applies to all tax positions accounted for under FAS 109• A tax position includes:

– Decision not to file tax return– Allocation or shift of income between jurisdictions– Within a tax return:

• Decision to exclude reporting taxable income

• Decision to classify a transaction, entity or other position as tax exempt

– A permanent reduction of income taxes payable

• FAS 5 will continue to apply to non-income tax contingencies

Two-Step Process

1. Recognition– Based on technical merits– More-likely-than-not threshold

2. Measurement– The largest amount of tax benefit

greater than (>)

50% likely of being realized upon ultimate settlement

Measurement Scenario

$60 is the largest amount of benefit that is greater than 50% likely of being realized

Possible Estimated Outcome

Individual Probability of Occurring (%)

Cumulative Probability of Occurring (%)

$100 5 5

80 25 30

60 25 55

50 20 75

40 10 85

20 10 95

0 5 100

Subsequent Recognition

• Initial recognition– If the more-likely-than-not threshold is not met in the initial period, recognition

occurs in the first interim period that meets one of the following conditions:

• More-likely-than-not recognition threshold is met• Settlement through negotiation or litigation• Statute of limitations has expired

• Subsequent derecognition – Occurs in the first period that the more-likely-than-not threshold is no longer met

• Establishing a valuation allowance is not derecognition

Subsequent Recognition

• Subsequent changes in judgment should result from the evaluation of new information

• Subsequent changes should not occur from the new evaluation or new interpretation of information previously available

Interest and Penalties

• Interest – accrued according to the provisions of the relevant tax law

• Interest rate applied to the difference between:– Tax position recognized according to FIN 48 and– Amount previously taken or expected to be taken in the tax return

• Penalties – accrued in the period the enterprise claims or expects to claim the position in the tax return

Classification

• Interest – Either income taxes or interest expense• Penalties – Either income taxes or another expense

classification• Accounting policy elections and must be consistently

applied• Disclose policy for interest and penalty classifications

Disclosures• MAJOR CHANGES – See illustrative example FIN 48,

paragraph A33 • Reconciliation of unrecognized tax benefits at the

beginning and end of the period, including:– Increases and decreases in unrecognized tax benefits from tax

positions taken in:

• The prior period

• The current period– Decreases relating to settlements with taxing authorities– Reductions from lapse of statute of limitations

• Basically, a roll-forward

Disclosures Cont.

• The total amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate

• Interest and penalties recognized– In the income statement– On the balance sheet

• A description of tax years that remain subject to examination by major tax jurisdictions

• Various disclosures where it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months

Effective Date & Transition

• Fiscal years beginning after December 15:– 2006 for public companies– 2007 for private companies

• Shall be applied to ALL tax positions upon initial adoption

• Cumulative effect* – adjustment to the opening balance of retained earnings

• Private companies—disclose in 2007 if believe material effect on retained earnings upon adoption

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Auditing Standard Issuances

The New Risk Assessment Audit Standards

• Pre-engagement activities—gathering information• Eight new standards from the Auditing Standards Board

(ASB) – effective for 2007 calendar year-ends– SAS 103—111

• Fundamental changes to auditing principles• Goal of the ASB is to improve quality of audits

Objectives of The Risk Assessment Standards

• More in-depth understanding of the entity, its environment, and internal control

• More rigorous assessment of the risks of how and where the financial statements could be materially misstated

• Improved linkage between the auditor’s assessed risk and the nature, timing, and extent of audit procedures performed

Risk Based Audit Phases• Pre-engagement activities—gathering information

– Meetings throughout the year– Other information (minutes, internal FS, etc)

• Assess risk and develop audit plan– New risk assessment procedures required in this phase

• Perform audit plan– Consists of typical interim and final fieldwork

• Conclude and report– Issue report and other required communications

Risk Assessment Procedures - An Expanded Planning Phase

• Evaluate the design and implementation of your internal controls, including entity level controls

• Review other documentation that provides information on your operations and the environment

• Develop a customized audit plan based on our risk assessment

How Will Your Audit Change?

• Timing of the audit– More work occurring prior to year-end.– More interaction during the planning phase.

• Deeper understanding and focus on internal controls– Evaluate whether controls have been designed & implemented

effectively– If designed effectively, we may test operating effectiveness.– Likely increase in communication of internal control deficiencies.

• Procedures customized based on assessment of risk– Nature, extent and timing of tests may differ from PY.– More focus may be put on some areas, less in others.

How Can You Get Ready?

• Review COSO’s internal control framework• Improve internal documentation

– Significant processes

– Control activities

– Assessment of risk

• Coordinate schedules with your audit team• Don’t wait!!

SAS 114 – The Auditor’s Communication With Those Charged With Governance

• Supersedes SAS 61• Effective for audits of periods beginning on or

after 12/15/2006.


• Governance:– Means the person(s) with responsibility for overseeing the strategic

direction of the entity and obligations related to the accountability of the entity.

• Management:– Means the person(s) responsible for achieving the objectives of the

entity and who have the authority to establish policies and make decisions by which those objectives are to be pursued.


• When?– Sufficiently timely to enable appropriate action to take place

• How?– Prefer in writing, but must document oral discussions

• Communicate what?– Auditor’s responsibilities– Overview of the planned scope and timing of the audit– Significant audit findings (see next page)


• Significant audit findings– Auditor’s views regarding qualitative matters including accounting

policies, significant estimates, and disclosures – Significant difficulties encountered in the conduct of the audit (for

example, delays, difficulty in obtaining information, etc.) – Uncorrected misstatements – Management representations – Consultations with other accountants – Adjusting entries identified in the audit – Issues discussed with management – Other significant findings

IFRS Convergence

• FASB/IASB working together on different projects

• SEC has eliminated IFRS to US GAAP reconciliation for foreign filers

• Most countries are adopting IFRS– US is the only country who has not – IFRS may be different between some countries

• Coming soon!

Other Current Projects

• Codification• Conceptual framework• Revenue recognition• Financial statement presentation• Leasing• Liabilities & equity

Questions

&

Comments

Taft Kortus Mark Fitzpatrick March 6, 2008 Accounting and Auditing Update.

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