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Dr. Wayne H. Shaw May 8, 2013

FASB PCAOB Update

Presentation Summary

Current Joint FASB/IAS ProjectsFuture FASB/IAS CollaborationOther issues facing the FASBPCAOB Direction

Current Joint FASB/IAS Projects

1. Revenue Recognition2. Financial Instruments

– Classification and Measurement– Impairment– Hedging

3. Leasing4. Insurance Contracts5. Consolidation6. Investment Companies

Current Guidance Comparison Persuasive Evidence of an Agreement

ProposedA contract is an agreement that creates legally enforceable rights and obligations.A contract with a customer must exist to be within scope of the model.May be oral, written, or implied by customary business practices.To recognize revenue for a contract with a customer, the following criteria must be met:Contract has commercial substanceParties have approved contract and are committed to performRights are identifiablePayment terms are identifiable.

Current Guidance Comparison Delivery

ProposedDelivery of goods or the performance of services is an indicator that control over contractually promised goods or services has transferred to the customer and that revenue may be recognized. Delivery or performance may occur at a point in time or over time.Indicators of the transfer of control include, but are not limited to, the following:

– Right to payment– Passage of legal title– Physical possession– Significant risks and rewards– Customer acceptance.

Current Guidance Comparison Fixed or Determinable

ProposedA contract’s transaction price represents the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. This price may include variable consideration components.An entity would estimate variable consideration using either:– (1) An expected value (probability weighted amount) – (2) The most likely amount depending on which method

better predicts the amount of consideration to which the entity is entitled. If there is variable consideration, cumulative recognizable revenue may be constrained

Current Guidance Comparison Collectibility

ProposedThere is no recognition threshold for expectations about collectibility.Revenue is recognized based on the amount to which the entity expects to be entitled, without regard to collection risk.If collectibility is significantly in doubt, a contract may not exist.Any impairment losses (and reversals) would be presented as a separate line item adjacent to revenue.

Revenue Recognition New Guidelines

1. Identify the contract with a customer2. Identify the separate performance

obligations3. Determine the transaction price4. Allocate the transaction price to the

separate performance obligations5. Recognize revenue when or as the

vendor satisfies a performance obligation

Financial Instruments Classification and Measurement

Still have three “baskets” for financial assets– Hold to collect (Amortized cost)– Hold to collect and sell (FV thru OCI)– Residual (FV thru NI)

Two assessments that determine classification within these basketsCash FlowBusiness Model

Financial Instruments Cash Flow Assessment

Do the financial asset’s contractual terms give rise ton specified dates to cash flows that are solely payments of principal and interest?– Apply to each instrument including hybrid

instrumentsIf yes, go to business model assessment.If no, measure at FV thru NI

Financial Instruments Business Model Assessment

Is the business model hold to collect cash flows?– If yes, measure at amortized cost.

Is the business model hold to collect cash flows and sell financial assets?– If yes, measure at FV thru OCI.

If no to both, measure at FV thru NI.

Financial Instruments General Rule

Generally at amortized costFV thru NI if– It plans to transact at FV when it incurs the

liability – The liability results from a short sale.

FASB/IAS Update

SEC Comments on Convergence in February 23, 2010

Directed staff to develop a Work Plan ofWhetherWhen, and HowThe United States should transition to IFRSWork Plan will be evaluated in 2011New expected resolution date – 2015

Perceived problems with IFRS

Commenters who expressed this view noted that:IFRS is not sufficiently developed or applied in practice to be adopted as a single set of global standards (e.g., either IRDS lacks guidance in certain significant areas, or the guidance it does contain appears to or may allow too much latitude to achieve more comparable financial reporting than U.S. GAAP,Jurisdictional variants in the application of IRFS pose a significant challenge to the adoption of IRFS as a truly global reporting model; andThe achievement of a genuine common global financial reporting model would require consistent application, auditing, and enforcement across countries.

Issues in Work Plan Sufficient development and application of IFRS for the U.S. domestic reporting system; The independence of standard setting for the benefit of investors; 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; and Human capital readiness.

FASB/IAS Update FASB Chair Remarks on December 4, 2013

Beginning quote from George Bernard Shaw:– Reasonable people adapt themselves to the

world. – Unreasonable people attempt to adapt the

world to themselves.– All progress, therefore depends on

unreasonable people.

FASB/IAS Update FASB Chair Remarks on December 4, 2013

First, stressed the independence of the FASBSecond, set the level of quality expected in standards.– Must be clear and unambiguous– Must be capable of rigorous interpretation and

application– U.S. stakeholders frequently need support in

interpreting standards.

FASB/IAS Update FASB Chair Remarks on December 4, 2013

Notes diversity in the implementation of IFRS across jurisdictionsDoesn’t suggest IFRS is flawed. Just means that 100% comparability is not achievable in the near future.Ultimately, the SEC will make the decision.

FASB Private Company Council

Set up to determine change to US GAAP for private companies– Basis is different needs of private companies– Try to reduce costs and complexity– Not meant to be a fundamentally different

GAAPFASB consider changes for endorsementIf fails, will provide written explanation

FASB Private Company Council

Projects first on agenda– Fair value of intangibles in acquisitions– Variable interest entities– Plain vanilla interest rate swaps

Research initiatives– Stock-based compensation– Development-stage enterprises– Interest rate swaps with multiple

counterpartiesNot considered – uncertain tax positions

PCAOB Update

Report on 2007-2010 Inspections of Domestic Firms that Audit 100 or Fewer Public Companies

According to the report, 44 percent of the audit firms inspected during the 2007-2010 period had at least one "significant audit performance deficiency" compared to 61 percent in the 2004 — 2006 period .Of the individual audits inspected between 2007 and 2010, 28 percent had at least one significant audit performance deficiency compared to 36 percent of the audits inspected between 2004 and 2006.

Report on 2007-2010 Inspections of Domestic Firms that Audit 100 or Fewer Public Companies (2/25/13)

Audit areas with frequent inspection findings in the 2007-2010 period related to:auditing revenue recognition; auditing share-based payments and equity financing instruments; auditing convertible debt instruments; auditing fair value measurements; auditing business combinations and impairment of intangible and long-lived assets; auditing accounting estimates; auditing related party transactions; use of analytical procedures as substantive tests; and audit procedures to respond to the risk of material misstatement due to fraud.

PCAOB Issues a Proposal for the Reorganization of Auditing Standards (3/26/13)

The proposal provides a potential framework for reorganizing the Board's existing interim and PCAOB-issued auditing standards into a topical structure with a single integrated numbering system. The proposed reorganization is intended to present the standards in a logical order that generally follows the flow of the audit process.Among the proposed changes, all PCAOB auditing standards would be grouped into the following categories: general auditing standards, audit procedures, auditor reporting, matters relating to filings under federal securities laws, and other matters associated with audits.

CONCEPT RELEASE ON AUDITOR INDEPENDENCE AND AUDIT FIRM ROTATION (8/16/11)

Suggested problem is application of professional skepticism and objectivity

Quotes from Speech by James Doty, Chairman of the PCAOB on 12/3/12

In a thoughtful opinion by Judge Henry Friendly, one of the most respected jurists in U.S. history, the Second Circuit Court of Appeals affirmed the trial court's decision that proof of compliance with GAAP was "not necessarily conclusive that [the auditors] acted in good faith, and that the facts as certified were not materially false or misleading.“Many accounting firms devote inestimable time and attention to the study of the fine points of the applicable accounting regimes.

Quotes from Speech by James Doty, Chairman of the PCAOB on 12/3/12

Thus audit practices have shrunk in comparison to audit firms' other client service lines — not all of which are schooled in, or depend upon, the fundamental exercise of skepticism. This threatens to weaken the strength of the audit practice in the firm overall.After nearly ten years of inspecting the audits of issuers, the PCAOB has identified hundreds of engagements that did not meet PCAOB standards in significant respects.These are serious audit deficiencies in procedures and actions that mean, essentially, that the audit opinions involved were not adequately supported. Moreover, inspection findings have increased at many firms over the last several years.

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