Current Issues in the Office
of the Chief Accountant
November 19, 2002
Scott A. Taub
Deputy Chief Accountant
Disclaimer
The Securities and Exchange
Commission, as a matter of policy,
disclaims responsibility for any
private publication or statement by
any of its employees. Therefore, the
views expressed today are my own,
and do not necessarily reflect the
views of the Commission or the other
members of the staff of the
Commission.
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Hot Topics in OCA
Public Company Accounting Oversight Board
SEC Rules and Regulations
Auditor Independence
CEO/CFO Certifications
Non-
Non-GAAP Financial Information
Off-
Off-Balance Sheet Arrangements
Critical Accounting Policies
Accounting Standards
Standard-
Standard-Setting Process
Principles-
Principles-Based Standards
Hot Accounting Issues
Disclosures
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Public Company Accounting
Oversight Board
Sarbanes-
Created by Sarbanes-Oxley Act
Board responsibilities
Auditing, quality control and independence
standards and rules
Inspection of registered public accounting firms
Investigations and disciplinary proceedings
Authority to implement further reforms, if
necessary
Board is subject to SEC oversight
New Board Chairman still to be named
Funding mechanism includes charge to accounting
firms and public companies
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Rule-Making
Auditor Independence
Sarbanes-
New rules required by Sarbanes-Oxley Act
Prohibition against the provision of certain
services by auditors to audit clients
Pre-
Pre-approval requirements
Audit partner rotation requirements
Auditor reports to audit committee
“Cooling-
“Cooling-off” period
GAO to study “mandatory rotation” of firms
Rules required to be adopted by January, 2003 –
not yet formally proposed
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Rule-Making
(Sarbanes-Oxley)
CEO/CFO Certifications (Sarbanes-Oxley)
Final rules in August requiring certification that..
Signing officer has reviewed report
Report is fairly presented
“Disclosure controls and procedures” have
been put into place and been evaluated within 90
days of report
Proposed rule requiring management report on
effectiveness of internal controls
Proposed rule would also require auditor report on
management’s assessment of controls
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Rule-Making
Pro Forma Financial Information
Cautionary advice issued in December 2001
non-
indicating that non-GAAP measures can be
misleading if not accompanied by appropriate
discussion
Proposed rule approved October 30 in response to
Sarbanes-
Sarbanes-Oxley requirements
Must be reconciled to GAAP figures
non-
Must include explanation of usefulness of non-
GAAP measure
Applies to earnings releases as well as filings
8-
Earnings releases must be filed on 8-K
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Rule-Making
Off-Balance Sheet Arrangements
(FR-
SEC issued guidance in January 2002 (FR-61)
indicating the need for disclosure in MD&A of…
off-
Information about off-balance sheet
arrangements
Contractual obligations due
Contingent liabilities and commitments
Related-
Related-party transactions
Sarbanes-
Sarbanes-Oxley Act requires a rule covering
many of these same topics
Rule was proposed October 30
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Rule-Making
Disclosure of Critical Accounting Policies
(FR-
December 2001 cautionary advice (FR-60)
Asked management to discuss in MD&A
critical accounting policies and estimates
Focus on those policies and estimates that
involve significant judgment and could
materially affect financial statements
Rule proposal in May 2002 that would codify
requirement to discuss these items
Comment period has ended and we are
considering the comments
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Rule-Making
Other Rule Proposals in Response to
Sarbanes-Oxley Act
Prohibition on company officials influencing,
manipulating, or misleading auditor for
purpose of making financial statements
misleading
Disclosure of code of ethics for senior officers
Disclosures regarding financial experts on
audit committee
insider-
Restrictions on insider-trading during pension
fund blackout periods
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Accounting Standards
Standard Setting
High quality of our accounting standards and
our capital markets is largely due to private
sector standard setting process
FASB’s processes can and must be improved
Develop a mechanism to ensure timely
completion of projects
SEC oversight to be more active
Sarbanes-
Funding secured by Sarbanes-Oxley Act
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Accounting Standards
Principles-based standards
Expedite standard setting process
Facilitate international convergence
Emphasis on substance over form
Standards grounded in conceptual framework
with few alternatives or exceptions
Sarbanes-
Sarbanes-Oxley Act requires study of
principles-
principles-based standards by July 30, 2003
In order to work, all participants must be willing
to participate
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Hot Accounting Issues
Cash Flow Presentation
SEC is looking critically at cash flow
statements in reviews
Registrants should review transactions that
have financing elements but are presented
within operating cash flows
Income Statement Presentation
01-
Payments to customers (EITF 01-9)
Gross vs. net presentation
Resellers
Physically-
Physically-settled derivative contracts
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Hot Accounting Issues
Fair Value Measurements
Use of fair value is required in many situations
Allocation of purchase price
Accounting for derivatives
Impairment analysis
non-
Equity issued to non-employees
Measurements should use best information
available
Measurements should be consistent and
neutral
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Hot Accounting Issues
Business Combinations
Recognizing intangible assets
FAS 142 criteria
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EITF 02 1 regarding customer relationships
Indefinite Intangible Assets
Staff will expect significant documentation of
factors considered
Unit of measure for impairment analysis
Goodwill impairment testing
Impact of decrease in market price of stock
Issues regarding reporting units
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Hot Accounting Issues
Disclose – Disclose – Disclose
Even when accounting follows GAAP,
disclosures may be necessary to give investors
sufficient information
Revenues that may not be repeatable
one-
Effects of one-time transactions
Nature of risks faced by the company
Consider including reasons for certain
transactions in disclosure
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