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					    SEC Hot Topics Seminar
Recent Accounting Developments
            IFRS
      September 24, 2008

                     Bill Hitselberger
                     CFO and EVP
IFRS
                                                                 ®




                                             SM




   International set of principles based accounting
    standards issued by the International
    Accounting Standards Board (IASB)
       IASB- independent standard-setter based in London
   Recent growth fueled by globalization of
    business and finance
   Over 100 countries currently require or allow
    use of IFRS by public companies (European
    Union adopted in 2005)
   Convergence project between IASB and FASB
    (2002)
       Goals: High quality, global standards and alignment of
        reporting of U.S. GAAP & IFRS                                1
IFRS differences
from GAAP
                                            ®




                              SM




 IFRS standards contain much less detail
 Less guidance on revenue recognition
 Little industry specific guidance
 Contingencies- different probability
  threshold and measurement objective
 Impairment testing- single step method
  vs. two step test, makes write-downs
  more likely
 LIFO inventory costing not permitted

                                                2
Recent SEC
Developments
                                                    ®




                                     SM




 November 2007- Foreign private
  issuers using IFRS allowed to file
  without reconciliation to GAAP
 December 2007- Concept release
  issued regarding allowing U.S. public
  companies to use IFRS
 August 27, 2008- Proposal released for
  public comment:
     Roadmap for potential mandatory adoption
      of IFRS by U.S. issuers
     Proposed rule to allow optional use of IFRS
      by certain U.S. issuers
                                                        3
Roadmap for
Mandatory Adoption
                                               ®




                                       SM




   Proposed adoption dates:
     Large accelerated files – 2014
     Accelerated files – 2015
     Smaller companies – 2016

   Proposed dates to be reconsidered in
    2011 based on:
     Continued improvement in the standards
     Accounting education
     XBRL data tagging
     Funding for IASA
                                                   4
IFRS Issues
                                                     ®




                                    SM




   Principles-based, similar to U.S. GAAP prior
    to U.S. v. Simon (1969)
   Will result in different standards for private
    companies- increases cost of going public?
   Training of educators, practitioners,
    auditors, analysts, regulators and investors
   XBRL – Convert current financials and notes
    by 2010- this cost will undoubtedly increase
    with new IFRS standards to implement a
    few years later

                                                         5
IFRS Issues, cont.
                                              ®




                               SM




 Impact on existing contracts and debt
  covenants, rating agencies and equity
  analysts
 Industry specific guidance?
 Comparability issues between countries-
  many countries modify the standards
 Benefits of adoption for public companies
  with no foreign operations?
 Impact on U.S. markets- is U.S. GAAP
  the gold standard?
                                                  6
IFRS Issues, cont.
                                                  ®




                                   SM




   Costs to convert
     Training of company personnel
     Fundamental changes to existing processes
     SOX 404 processes and documentation
     Preparation of current + prior period
      financials and disclosures
     Audit fees
     Additional XBRL costs
     Modify existing contracts and covenants



                                                      7
              ®




         SM




Questions?


                  8
 Conducting Effective
Internal Investigations
       Justin P. Klein
       Tami S. Stark
      Robert Cepielik
      Robert L. Hickok


           2008
                          9
 The Basics of Internal
Corporate Investigations




                           10
Why Conduct an Internal Investigation?
   Respond to allegations of wrongdoing within an
    organization
       Corporate officers and directors owe fiduciary duties of
        care; can‟t ignore a potential problem
       If no concurrent government investigation, investigate
        to take remedial action and make voluntary disclosure
        decision
       If concurrent government investigation, investigate to
        respond to a government investigation




                                                                   11
What are the First Steps?
   Initial assessment of allegations
       Credibility
       Materiality
       Scope and impact on organization
       Likelihood of Government investigation
   Appropriate response measured against
    initial assessment



                                                 12
Roles in Conducting the Investigation
   Company management and in-house counsel
   Outside professionals
       Outside counsel (regular outside counsel or no prior
        relationship?), forensic accountants, electronic discovery
        professionals, private investigators, external auditors
   Role of the Audit Committee and/or Board of
    Directors




                                                                 13
Common Mistakes – Initial
Assessment
   Underestimate (or overestimate) the allegation
       Can‟t be material in size
       Effective triage
   First steps are inappropriate & insufficient
       Too slow to take appropriate action
       “We can handle it”
       This is an internal matter – we will keep in “our house”
   Lack of consideration to important factors (e.g.
    independence, privilege, preservation of documents etc.)




                                                                   14
Common Mistakes – Initial
Assessment (cont’d)
   Underestimate internal human resource
    issues
       Amount of time
       Effect on morale
 Do not involve outside assistance early
  enough
 Do not involve external auditors early
  enough



                                            15
Defining the Audit Committee’s Role
Key Issues:
 Independence Issues
 Role of Management versus Board
 Governance of Investigation
 Information Flow
 Counsel for Audit Committee




                                      16
When Audit (Special) Committee Should
be Involved
Events Triggering Need for Involvement
 Allegations are accounting or financial reporting
  related
 Allegations involve members of senior
  management
 Allegations could have a material impact on the
  way the company is viewed




                                                      17
Policies and Procedures
for an Internal Investigation
   Upjohn Letter
       Authorization of internal investigation in
        writing
   Document Retention
   Document Collection
   Effective Interviews
   Attorney-Client Privilege Issues



                                                     18
Document Retention
 Assessment of what needs to be retained
  and collected
 Methods for notifying Employees of their
  obligations
 Monitoring Collection
 Reminders and Audits




                                             19
Document Collection
 How are documents gathered
 How are documents processed and
  reviewed
 Technology options
       Must you share your technology with
        adversaries?




                                              20
Effective Interviews
 Two Attorneys
 Where, when, how
 Corporate “Miranda” warnings
       What do you do when the employee asks for
        counsel?
 Goals
 Memorializing interviews?




                                                    21
Whistleblower Issues
   Sarbanes-Oxley provides broad protection for
    whistleblowers in publicly held corporations
       The act sets guidelines for audit committee to establish
        procedures for confidential anonymous submission by
        employees regarding accounting or auditing concerns
          The Act creates a legal remedy for whistleblowers
          The Act mandates that audit committees have mechanisms to
           receive and process whistleblower complaints
          The Act requires attorneys to become in-house whistleblowers
          The Act criminalizes employer retaliation




                                                                          22
Whistleblower Issues (cont’d)
   The Act‟s anti-retaliation provisions apply to
       publicly traded corporations, their officers and employees
       corporation‟s contractors, subcontractors, and agents
   The Whistleblower protections of Sarbanes-Oxley went into
    effect on July 30, 2002
   Whistleblower complaints regarding potential violations of
    the federal securities laws are forwarded to the SEC




                                                                     23
Whistleblower Issues (cont’d)
   Section 806 of the Act provides that
    no public company may discriminate
    in any manner against any employee
    who assists in an investigation of
    activity that she/he “reasonably
    believes” constitutes a violation of
    federal securities laws or who
    participates in a proceeding relating
    to an alleged violation of federal
    securities laws
                                            24
Whistleblower Issues (cont’d)
   Employer action prohibited:
       discharge
       demotion
       suspension
       threats and harassment
       any other manner of discrimination that affects
        the employee‟s terms and conditions of
        employment



                                                      25
Whistleblower Issues (cont’d)
   Processing of employee complaints
       Must be filed within 90 days of alleged discriminatory
        behavior
       Claim filed with the Department of Labor (DOL)
       The Department of Labor will initiate an investigation,
        using the procedures already established under the
        airline whistleblower protection provision at 49 U.S.C.S.
        § 42121(b)
       Department of Labor to conclude investigation within
        180 days of the filing of a complaint




                                                                26
Whistleblower Issues (cont’d)
   If the Department of Labor finds in its
    investigation that the employee has been
    the victim of discrimination or
    retaliation, the DOL will order interim
    reinstatement
   Either party may appeal the results of
    the DOL investigation.
       Appeals heard by an Administrative Law Judge in
        accordance with the procedures at 29 C.F.R. Part
        18



                                                           27
Whistleblower Issues (cont’d)
   If the DOL does not issue a final
    decision within 180 days of the filing
    of the complaint, the claimant may
    bring an action at law or equity in the
    appropriate district court of the
    United States




                                          28
Whistleblower Issues (cont’d)
 Interim reinstatement available after
  initial Department of Labor
  investigation
 Section 806 does not diminish the
  rights, privileges, or remedies of any
  employee under any federal or state
  law, or under any collective
  bargaining agreement


                                           29
Whistleblower Issues (cont’d)
   Requirements for a prima facie case: the
    employee must show that their whistleblowing
    activities were a contributing factor in the
    unfavorable personnel action alleged in the
    complaint
   In order to rebut this prima facie case, the
    employer must demonstrate by clear and
    convincing evidence that it would have taken
    the same employment action without the
    whistleblowing. 49 U.S.C.S. § 42121(b)(2)
    (2002)




                                                   30
Whistleblower Issues (cont’d)
   Section 1107 of the Act imposes criminal
    penalties for taking any harmful action
    with respect to any person who provides
    a law enforcement officer any truthful
    information relating to the commission
    of a crime under federal law
       Carrying large fines or maximum of 10 years
        of imprisonment




                                                      31
Memorializing the Results
of an Investigation
   How should you present the results of an
    investigation?
       Written report
       Board or Audit Committee presentation
       What do you do with witness interviews?
   Trade-off between facilitating information
    flow and creating evidentiary trail to be
    used against you



                                                  32
Decision to Make a
“Voluntary Disclosure”
   Benefits of Voluntary Disclosure
       Sentencing Guidelines/DOJ Revised Guidelines
       Seaboard Doctrine
       Leniency programs
   Costs of Voluntary Disclosure
       Assures Government action
       Triggers private litigation
       Privilege waiver issues




                                                   33
    Dealing with the
  Government During a
Government Investigation




                           34
Government Investigations
 Who investigates?
 How does the Government investigate?
 How to prepare
 Impact on Internal Investigations
 Compliance program‟s effect
 Charging and Sentencing Decisions




                                         35
Who Investigates Organizations and
Individuals?
              EPA     HHS     FBI

         OSHA         EEOC     DOL

        USPIS         FDA       DOD

  SEC   CMS         DOJ      DEA STATE AGs

 FAA    IRS     FTC       USSS… and others

                                             36
Parallel Investigations of SEC &
Criminal Authorities
 Access Requests vs. Criminal Referrals
 Due Process
       Form 1662 (9th Circuit Stringer Decision)
       Always Parallel- does this benefit SEC
        investigation?
   Decision When Criminal Authorities Will
    Surface



                                                    37
What Triggers A Government
Investigation?
 Complaints
 Whistleblower
 Public Problem
 Disgruntled/Former Employee
 “Routine” Examinations
 Restatement
 Company disclosure




                                38
Government Investigations
   How does the Government view corporate
    conduct?

   What does the Government expect of
    good corporate citizens?




                                             39
Good Corporate Citizens
   Regulate own behavior
   Prevent and detect violations of law
   Implement effective compliance programs
   Antifraud programs and controls
   Implement Remedial Acts Quickly




                                           40
How Does the
Government Investigate?
   Depends on scope of the investigation

   Covert and overt phases of an
    investigation




                                            41
How Does the
Government Investigate?
   Covert Phase
       Undercover agents
       Informants/Whistleblowers
       Tapes/Wire taps
       Reviews Telephone, Trading and Other Records
        from Third Parties




                                                   42
How Does the
Government Investigate? (cont’d)
   Overt Phase
       Search Warrant
       Voluntary Request or Subpoena
       Surprise Interview
       Scheduled Interview
       Grand Jury




                                        43
How Does the
Government Investigate? (cont’d)
   Search Warrants
       Probable Cause
       Entities and Individuals
       Place to be Searched and Items to be Seized




                                                      44
How Does the
Government Investigate? (cont’d)
   Subpoena
       Grand Jury Subpoena
       HIPAA Subpoena
       IG Subpoena
       Civil Investigative Demand




                                     45
How Does the
Government Investigate? (cont’d)
   Interviews
       “Surprise”
       No “Miranda” required (Instead Privacy Act)
       Scheduled Interviews
       Grand Jury Testimony?
   Employees can choose to participate in
    “voluntary” interview or not
       Discouragement poses risk of “obstruction” charge




                                                            46
How to Prepare for a
Government Investigation
   Discussion of Relevant Information
   Develop a Plan
   Communicate the Plan
   Train Key Personnel




                                         47
What to do if Presented with a
Subpoena
   Consult with counsel
   Determine who issued subpoena and for which
    side
       Prosecution/plaintiff
       Defense
   Testifying or producing evidence?
   File motion to „quash subpoena‟ if you believe
    you have no bearing or information that pertains
    to the case




                                                       48
How to Prepare for
Government Investigation
   Search Warrants
       Safety

       Response Team

       Communications

       Organization‟s Interests

       Individual‟s Interests




                                   49
How to Prepare for
Government Investigation (cont’d)
   Interviews
       Surprise Interviews

       During the Search

       Scheduled Interviews




                                    50
How to Prepare for
Government Investigation (cont’d)
   Subpoena
       Counsel must handle response

       Proper preservation

       Proper search

       Proper and timely response




                                       51
How to Prepare for
Government Investigation (cont’d)
   The Grand Jury
       Secrecy

       Counsel and Indemnification

       Obstruction and Perjury Issues




                                         52
 Preserving the Privilege
Within the Company
  •   The Internal Investigation

  •   Legal Advice or Business Advice, or Both?

  •   Best Practices




                                              53
Internal Investigations
   When does organization conduct
    investigation?
       Before
       During
       After




                                     54
Internal Investigations (cont’d)
   First to the Facts
   Master of the Facts
       Be able to tell the story, with documents
       Impact of issue on the financial statements
   Thorough document collection
       Proper chain of custody for all evidence
   Effective interviews
   Scope of the investigation
       No restrictions placed on scope
       Effective and efficient scoping




                                                      55
Internal Investigations (cont’d)
   Maintaining Attorney-Client Privilege and
    Work Product Protection
   Demand for Waiver of Privilege
   Effective Communication with the
    Government




                                                56
The Attorney-Client Privilege
  And How To Preserve It




                                57
Preserving the Privilege
Outside the Company
 Company‟s Privilege threatened by
 external contacts

     Government investigations

     Civil litigation

     Third Party relationships


                                     58
Preserving the Privilege

   Government Investigations

       DOJ/SEC Requests for Waiver

       Crime-Fraud Exception

       Litigation Dilemma



                                      59
Preserving The Privilege (cont’d)


   Cooperation and the Waiver of Privilege
   Organizational Sentencing Guidelines
   August 2008 Revised DOJ Guidelines
   DOJ Policy
   SEC Policy



                                              60
U.S. Sentencing Guidelines

For reduction in culpability score, a
corporation‘s cooperation must be:
   •   Timely – ―must begin essentially at the same time as
       the organization is officially notified of a criminal
       investigation‖
   •   Thorough – ―disclosure of all pertinent information‖

Is there enough information for law enforcement
to ―identify the nature and extent of the offense
and the individual(s) responsible for the criminal
conduct‖?
                                                               61
DOJ Revised Guidelines for Prosecuting
Business Organizations
    Issued August 28, 2008 as part of U.S. Attorneys
     Manual
        Effective Immediately
    Credit for Cooperation will not depend on Corporation‟s
     waiver of privilege or work product
        Credit for cooperation will depend on disclosure of
         “relevant facts” about the putative misconduct
        Government may not request non-factual privileged
         communications or work product
           Two exceptions: (1) where corporation has asserted an
            advice-of-counsel defense, or (2) where communication is in
            furtherance of a crime or fraud
        Analogy to individual defendant: “analysis parallels that for
         a non-corporate defendant, where cooperation typically
         requires disclosure of relevant factual knowledge and not
         of discussions between an individual and his attorney”

                                                                          62
DOJ Revised Guidelines for Prosecuting
Business Organizations (cont’d)
   Relevant factor is whether corporation has “engaged in
    conduct intended to impede the investigation”
       In evaluating cooperation, prosecutors may not take into account whether
        corporation is advancing or reimbursing attorney fees for employees
           Prosecutors may not request that corporation refrain from such action
       Mere participation in joint defense agreement does not preclude
        cooperation credit
           Prosecutors may not request that corporation refrain from entering
             such agreement
           But joint defense agreement may prevent corporation from providing
             “relevant facts”
       Prosecutors may consider whether corporation has leaked sensitive
        information provided by prosecutors
           Prosecutors may properly request that corporation treat sensitive
             information as confidential if it wants cooperation credit




                                                                                63
Revised DOJ Guidelines:
Witness Interviews
   DOJ recognizes corporate personnel are
    typically interviewed during an investigation
       If interviewed by counsel, certain notes and
        memoranda may be privileged
       To receive cooperation credit, corporation need not
        produce, and prosecutors may not request, privileged
        notes or memoranda
   To earn cooperation credit, corporation does
    need to produce, and prosecutors may
    request, relevant factual information
       Relevant factual information may come from
        interviews by counsel
       May include non-privileged evidence such as
        accounting and business records and emails between
        non-attorney employees

                                                               64
Revised DOJ Guidelines:
Corporate Compliance Programs
   DOJ encourages corporate compliance
    programs and voluntary disclosures of
    problems a corporation discovers
       Existence of a compliance program is not sufficient, in
        and of itself, to justify not charging a corporation for
        criminal misconduct by directors and officers
   Critical factors in evaluating a compliance
    program
       Is it adequately designed for maximum effectiveness
        in preventing and detecting wrongdoing?
       Is management enforcing the program, or tacitly
        encouraging misconduct to achieve business
        objectives?
       Prosecutors should assess whether a program “is
        merely a “paper program” or whether it was
        designed, implemented, reviewed, and revised, as
        appropriate, in an effective manner”
                                                                   65
 Some Companies Heard the
 Message
U.S. Attorney Alice Martin describing Bob Bennett‘s
approach in representing HealthSouth where the company
was not charged criminally:

―At our first meeting, Mr. Bennett came in and said
HealthSouth wanted to waive its privileges . . . He said,
‗We want to cooperate, and we want to do whatever we
can to help you determine who, what, when and why
this fraud occurred. Here are my telephone numbers,
including my home number, and you call me directly,
because I want to make sure whatever you need gets
done.‖
                                                            66
Can a Company Cooperate Without
Waiving Privilege?
 Privilege waiver is not required
 Risk of waiver vs. risk of non-waiver
 Limited or partial waiver available?
 Implications of privilege waiver on
  subsequent civil suits




                                          67
Crime-Fraud Exception
   Client committing or planning a crime or fraud

   Client engaged in communications

   Seeking Advice of Counsel

   In furtherance of the crime or fraud




                                                     68
Crime-Fraud Exception (cont’d)

   Applies in Civil or Criminal Cases

   Low Threshold of Proof

   Attorney Knowledge not Required




                                         69
Crime-Fraud Exception (cont’d)

―It is the purpose of the crime-fraud exception to
the attorney-client privilege to assure that the
‗seal of secrecy‘ between lawyer and client does
not extend to communications ‗made for the
purpose of getting advice for the commission of
a fraud‘ or crime.‖

United States v. Zolin, 491 U.S. 554, 563 (1989)
(citations omitted)

                                                     70
Preserving the Privilege
   The Litigation Dilemma

       Waiving the privilege in the Face of Parallel
        Proceedings




                                                        71
Preserving the Privilege (cont’d)
Third Party Issues

     Public Relations Consultants

     Accountants, Auditors and Investigators

     Non-Testifying Experts

     Litigation Consultants




                                                72
Seabord & Cooperation
Considerations of SEC
   Egregiousness of Conduct
   Compliance Procedures in Place at Time
   Supervisory Misconduct or Lower
   Length of Misconduct
   Harm
   Detected by Entity & Remedial Response
       How quick
       Self-reported
       Internal investigation
       Was internal investigation made available to the staff?
   Assurances Conduct will not Recur
   Is the company the same as when conduct occurred?




                                                                  73
Particularly Relevant to Question of Civil
Penalties Against a Corporation

   Statement of the Securities and Exchange
    Commission Concerning Financial Penalties,
    January 4, 2006
   Concerns Public Issuers
   2 Main Factors: Benefit to Corporation & Harm to
    Shareholders
   Additional Considerations: Remedial Steps &
    Cooperation




                                                   74
SEC Waiver Policy
   Seabord says: “the Commission does not view a
    company‟s waiver of a privilege as an end in itself, but only
    as a means (where necessary) to provide relevant and
    sometimes critical information to the Commission staff”
   Waiver of a privilege is not a prerequisite to obtaining credit
    for cooperation
   Objective is to obtain information (consider alternative
    means before making request)
   Must be a request, not a demand




                                                                 75
Compliance Programs and
   Remedial Action




                          76
Federal Sentencing Guidelines
 Apply to organizational defendants
 Mitigating factor that reduces
  culpability score if organization has in
  place an “effective program to
  prevent and detect violations of law”
  (compliance program)
 Reduced guideline score results in
  lower criminal fine


                                         77
Federal Sentencing Guidelines (cont’d)
 Guidelines amended April 2004,
  effective November 2004
 Seven minimum steps for a
  compliance program
 “Violation of law” defined more
  broadly than current guidelines




                                         78
Scope of Program
   Amendment expands objective of
    compliance programs to include
    prevention and detection of
    “violations of any law, whether
    criminal or noncriminal (including a
    regulation), for which the
    organization is, or would be, liable”




                                            79
Two Basic Requirements of an
Effective Program
1.   “Exercise due diligence to prevent
     and detect violations of law;” and
2.   “Otherwise promote an
     organizational culture that
     encourages a commitment to
     compliance with the law.”




                                          80
Seven Minimum Components of an
Effective Program
1.   Establish compliance standards and procedures
     to prevent and detect violations of law.
2.   Organization’s leadership, including the
     governing authority and high-level personnel,
     shall be knowledgeable about the content and
     operation of the program.
          Designate a specific individual or individuals, who will
           be responsible for ensuring the implementation and
           effectiveness of the program.
          Give these individuals the necessary resources to
           carry out their responsibilities.
          Individuals shall report on the implementation and
           effectiveness of the program to the governing
           authority or appropriate subgroup.



                                                                      81
Seven Minimum Components of an
Effective Program (cont’d)
3.   Use reasonable efforts not to include within the
     substantial authority individuals who have a
     history of engaging in violations of law or other
     conduct inconsistent with an effective prevention
     and detection program.
4.   Communicate the existence and substance of the
     program to members of the company’s governing
     authority, leadership, employees, and, as
     appropriate, the company’s agents.
          Conduct training programs.
          Disseminate materials.




                                                         82
Seven Minimum Components of an
Effective Program (cont’d)
5.   Take reasonable steps to ensure that the program
     is being followed, including:
         Monitoring and auditing the program;
         Periodically evaluating the program‟s effectiveness;
           and
         Instituting a system whereby employees and
           agents may report or obtain guidance regarding
           potential or actual violations of law without fear of
           retaliation, including providing a mechanism to
           allow for anonymous reporting.




                                                               83
Seven Minimum Components of an
Effective Program (cont’d)
6.   Promote and enforce the program through
     appropriate incentives to perform and disciplinary
     measures for violations of the law and failing to
     take reasonable steps to prevent or detect
     violations of law
7.   If a violation is detected, take reasonable steps to
     respond appropriately and prevent further similar
     violations




                                                            84
Potential Remedial Actions
   Antifraud programs and controls
   Instituting a hotline
   Developing a code of conduct
   Setting the tone at the top
   Promoting ethical behavior
   Continuous training
   Hiring effective internal auditors
   Employee terminations and other disciplinary actions
   Proactive testing of controls and transactions




                                                           85
 Antifraud Programs & Controls – Steps
 and Considerations
    • Tone at the top
    • Code of Conduct/Ethics                                              • Identify fraud risk
    • Whistleblower Hotline                                                 factors, fraud risks
                                                                            and fraud schemes
                                             Creating
                                             a Control
                                            Environment

                                                           Performing
                               Monitoring                  Fraud Risk
                               Activities                 Assessments

• Monitoring
  effectiveness of
  antifraud programs                 Sharing        Designing and
  and controls                   Information and    Implementing
                                 Communication        Antifraud
                                                       Control
                                                      Activities
• Effective communication                                               • Link or map
  of antifraud programs                                                   identified fraud
  and controls throughout                                                 risks to control   86
                                                                          activities
Reasons Why a Company Needs Anti-
Fraud Programs & Controls
   Organizational Benefits
       Survival
       Greater Profitability
       Intact or enhanced image
       Improved efficiency & increased ability to meet commitments
       Enhanced morale – attract/retain talent

   Individual Benefits
       Morale
       Reduced stress
       Job satisfaction
       Greater employment security




                                                                      87
Creating the Right Tone
Avoid:
 Unusual business practices
 Aggressive Accounting Methods
 Earnings management issues
 A culture of pressure on the numbers
 Violations of company rules, regulations
  and code of conduct



                                             88
The Benefits of an Effective Program to
Prevent and Detect Violations of Law

    Business benefits of deterrence and
     early detection
    Proactively manage business risks.
    Avoid prosecution
    Lower fines and penalties



                                           89
What does the Government
Expect from the Internal
Investigation?


                           90
Office of Inspector General (OIG)
Guidance - Element #7

The development of policies and procedures
for the investigation of identified instances of
noncompliance or misconduct. These should
include directions regarding the prompt and
proper response to detected offenses, such
as the initiation of appropriate corrective
action and preventive measures and
processes to report the offense to relevant
authorities in appropriate circumstances.
                                                   91
Office of Inspector General (OIG)
Guidance - Element #7
   Policies and procedures for investigation of
    misconduct and non-compliance
       Prompt and proper response
       Leads to appropriate corrective action
       Report to authorities as appropriate




                                                 92
Office of Inspector General (OIG)
Guidance - Element #7 (cont’d)
   Investigations must be tailored to
    circumstances, but…
       Must identify the Root Cause of the problem
       How and Why it happened




                                                      93
Corrective Action Plan
   Report to Government

   Repayment

   Referral to Civil/Criminal authorities




                                             94
The Charging Decision
   Nature and Seriousness of the Offense

   Pervasiveness of Wrongdoing

   Corporation‟s History




                                            95
The Charging Decision (cont’d)
   Timely and voluntary disclosure and
    willingness to cooperate in investigation of
    its agents … including …




                                               96
The Charging Decision (cont’d)
   … waiver of corporate attorney-client and
    work-product protection




                                                97
The Charging Decision (cont’d)
   Existence and Adequacy of Compliance
    Program

   Remedial Action

   Collateral Consequences




                                           98
The Charging Decision (cont’d)
   Adequacy of Individual Prosecution

   Other Available Remedies




                                         99
Sentencing Decision
   Deputy Attorney General Memo of January
    28, 2005
   “Most serious readily provable offense”
     but
   “Advisory” Guidelines are the norm




                                              100
Contact Information

          Robert L. Hickok, Esquire
           Hickokr@pepperlaw.com
           215.981.4583
          Justin P. Klein, Esquire
           Kleinj@ballardspahr.com
           215.864.8606
          Tami S. Stark, Esquire
           Starkt@sec.gov
           215.597.1043
          Robert Cepielik, CPA
           rcepielik@deloitte.com
           215.299.5212


                                              101
                                       #10024167v.2
FAS 141(R) and FAS 160
Accounting for business combinations
and noncontrolling interests
FAS 141(R) highlights


►   Joint convergence project between the FASB and IASB
    ►   Obtaining control is a new basis recognition event
        ►   Revaluation of pre-owned equity interests upon obtaining control
            ►   Gains and losses recognized in income
        ►   Post-control acquisitions are equity transactions
            ►   No step acquisition accounting
    ►   Generally, recognize 100% of the fair values of assets acquired,
        liabilities assumed and any noncontrolling interests; residual is
        goodwill
        ►   Limited exceptions remain to fair value recognition
    ►   FAS 141(R) will be effective for annual periods beginning after
        15 December 2008



                Page 103
In general, what is not changing


►   Determining the accounting acquirer
►   Determining the acquisition date (designation of a
    different ―effective date‖ no longer permitted)
►   Certain exceptions to fair value measurement
►   Measurement period (the purchase accounting ―window‖)
    ►   Except that the measurement period now applies to all aspects of
        a business combination
    ►   Changes in measurement recognized retroactively
►   Accounting for asset acquisitions




              Page 104
The Acquisition Method


1. Identify the acquirer
2. Determine the acquisition date
3. Measure consideration transferred
4. Recognize and measure the identifiable assets acquired
   and liabilities assumed, and any noncontrolling interests
   in the acquiree
5. Recognize and measure goodwill or a gain from a
   bargain purchase (i.e., negative goodwill)




           Page 105
Identifying a business combination


►   A business combination is a transaction or other event in
    which an acquirer obtains control of one or more
    businesses
►   Examples of business combination transactions that are
    not considered business combinations in FAS 141:
    ►   Control of a business obtained pursuant to a contractual
        arrangement
    ►   Lapse of minority participating rights that previously prevented
        control and consolidation
    ►   Investee share buy-back or redemption that results in obtaining
        control
    ►   Initial consolidation of variable interest entities


              Page 106
Broadened definition of a business

Current rules                           New rules
                                        ► Business – An integrated set of
► Under EITF 98-3, a business is a
                                          activities that is capable of being
   self-sustaining integrated set of      conducted and managed for the
   activities and assets                  purpose of providing (a) a return to
   conducted/managed to provide a         investors, or (b) lower costs or other
   return to investors                    economic benefits directly and
                                          proportionately to owners,
► Consists of (a) inputs, (b) processes   members, or participants
   applied to inputs and (c) outputs to ► Consists of (a) inputs and (b)
   generate revenue                       processes applied to those inputs
                                          ► Perspective of a market participant
► Must contain all of the above to
                                        ► Development stage company can
   conduct normal operations after        be a business
   separation from transferor
                                        Considerations
                                        ► Broad implications beyond business
                                          combinations


              Page 107
Measuring the consideration transferred

►   Consideration transferred is presumed to be the best evidence of fair
    value of Acquirer‘s interest and is the sum of the fair values of:
    ►   Net assets transferred
        ►   Gain or loss on acquisition date remeasurement
    ►   Equity interests issued by the acquirer
    ►   Contingent consideration arrangements
►   Add the acquisition date fair value of any pre-existing noncontrolling
    equity investment to consideration transferred
    ►   Gain or loss on remeasurement
►   Consideration transferred excludes:
    ►   Costs/effects of settling preexisting relationships (EITF 04-1)
    ►   Compensation for future services
    ►   Transaction costs or transaction cost reimbursements



                Page 108
Equity interests issued by the acquirer

Current rules                               New rules
► Date used to determine the                ► The value-per-share will be
  value-per-share in purchase                 determined at the date the
  accounting depends on the                   Acquirer gains control
  terms of the exchange offer                 (e.g., on closing)
  ►   If fixed exchange ratio, per-
      share value is computed at
      announcement of the deal              Considerations
  ►   If variable exchange ratio (e.g.,     ►   Purchase price will be unknown
      adjusts for movements in the              until acquisition date
      Acquirer‘s stock price), per-
      share value is computed when          ►   May have significant effect on
      the ratio ceases to float (i.e., at       the amount of goodwill recorded
      closing or perhaps earlier if
      cap/floor/collar in place)


              Page 109
Contingent consideration arrangements

Current rules                                  New rules
                                               ► Recorded at acquisition date fair
► Recorded when ―beyond a
                                                 value with subsequent accounting
   reasonable doubt‖                             based on classification
    ►   Additional purchase price if based         ►   If classified as equity, no ―day 2‖
        on earnings or similar factors                 remeasurement
    ►   No effect on purchase price if based       ►   If classified as a liability, ―day 2‖
                                                       remeasurements to fair value
        on security price                              ►   Remeasurement through earnings
    ►   Complicated rules if contingency is                with possible FAS 133 exception
        embedded in a security or is a         ►   Compensation if payout is linked to
        separate security                          employment, otherwise analysis is
                                                   similar to EITF 95-8
►   EITF 95-8 analysis if payout is
    linked to continuing employment
                                               Considerations
                                               ► Will result in a different amount of
                                                 goodwill recognized compared to
                                                 current guidance
                                               ► May result in significant earnings
                                                 volatility

                Page 110
Share-based payment awards

Current rules                           New rules
► FV of equity granted in excess of     ► Same as current except:
   equity relinquished is compensation    ► Acquirer must be ―obligated‖ to

► FV of equity issued subject to future       replace the awards
   service is recorded as                 ► Future service period is based on

   compensation expense over the              the ratio of the past service period to
                                              the greater of the total service period
   future service period
                                                       or the original service period
    ►   Future service period is based on
        the ratio of the future service period
        to the total service period              Considerations
►   FV of equity issued related to past          ► More compensation cost in post-
    service included as purchase price             combination financial statements
                                                   when replacement awards have
                                                   shorter service period than target
                                                   awards



                 Page 111
Share-based payment awards example


►   At closing, an Acquirer issues fully vested options with a
    FV of $1,000 to replace Target‘s employee awards. The
    Target awards were granted 2 years ago with a original
    service period of 4 years and a closing date FV of $900.

►   Under FAS 141R, compensation expense recorded by the
    Acquirer would equal $550, which is the sum of (1) the
    excess fair value ($100) and (2) the amount attributable to
    the unvested original service period ($900 x 2/4, or $450).




            Page 112
Transaction costs

Current rules                       New rules
► Fees/costs of raising acquisition ► No change for debt and equity
  debt capitalized separately and     raising fees/costs
  amortized                         ► Transaction-related costs
► Fees/costs of raising new equity    charged to expense as incurred,
  netted against proceeds             even if paid by seller
  received                          ► New rules do not apply to
  ► But no fees are allocated to      acquisitions of net assets that do
     equity when shares are used as   not constitute a business
       acquisition consideration
►   External transaction related
    costs (advisory, legal, due       Considerations
    diligence, accounting) added to   ► Reduces earnings and goodwill
    purchase price (and thus          ► Material costs may signal M&A
    generally to goodwill)              activity to the market


              Page 113
Purchase price allocation

►   Significant changes in recognition and measurement of
    acquired assets, liabilities and any noncontrolling interest
    ►   ―Full goodwill‖ method
►   Fair value measurements are from a market participant
    (not a buyer specific) perspective pursuant to FAS 157
    ►   Only limited exceptions remain to fair value measurement
        ►   Goodwill and negative goodwill (residual)
        ►   Employee benefit obligations (FAS 87, FAS 106, etc.)
        ►   Share-based payments
        ►   Deferred income taxes
        ►   Reacquired rights
        ►   Indemnification assets
        ►   Assets held for sale



               Page 114
Preacquisition contingencies

Current rules                      New rules
► Use FV of contingency if         ► Requires the use of FV on the
  determinable at closing or         acquisition date for (1) all
  becomes determinable during        contractual pre-acquisition
  the allocation ―window‖            contingencies and (2) non-
► If not determinable, apply FAS 5   contractual pre-acquisition
  probable and reasonably            contingencies that are
  estimable criteria                 determined to be ―more-likely-
                                     than-not‖ of materializing

                                   Considerations
                                   ► Increased recognition of pre-
                                     acquisition contingencies
                                   ► Measurement challenges




            Page 115
Preacquisition contingencies (cont‘d.)

Subsequent accounting
► Adjustments made only when new information about the possible
  outcome is obtained
    ►   Contingent liabilities measured at higher of (1) acquisition-date fair value
        or (2) Statement 5 amount
    ►   Contingent assets measured at lower of (1) acquisition-date fair value or
        (2) best estimate of future settlement amount
►   All adjustments (outside the ―window‖ or resulting from changes in
    circumstances) to pre-acquisition contingencies should be recorded
    by charges or credits to the results of operations
►   Non-contractual pre-acquisition contingencies that are not determined
    to be more likely than not of materializing are not recognized on the
    acquisition date and are recorded by charges or credits to the results
    of operations when they become probable (FAS 5)

               Page 116
Restructuring costs

Current rules                                  New rules
                                               ► No purchase accounting adjustment
► Recordable pursuant to EITF 95-3
                                                  unless FAS 146 definition of a liability is
   in purchase accounting if three                met at acquisition date.
   conditions are met:                             ►   Transaction or event occurs that leaves
   ►   Relates to the Target‘s (not the                an entity little or no discretion to avoid the
                                                       future transfer or use of assets to settle
       Acquirer‘s) people or facilities                the liability
   ►   Meet definition of ―exit costs‖             ►   We believe that the liability must exist at
       (severance, facility closings, moving           the target and not depend on the business
                                                       combination
       of personnel, cancellation of
       redundant contracts)                    ►   Reductions to prior EITF 95-3 accruals
                                                   still reduce goodwill after adoption
   ►   Acquirer formulates a plan and
       carries it out within a reasonable
                                               Considerations
       time period
                                               ► Generally will result in less goodwill and
                                                  increased post acquisition expense as
                                                  inclusion in purchase accounting will be
                                                  rare



               Page 117
Acquired in-process R&D

Current rules                          New rules
► EITF 86-14, FAS 2 and FIN 4          ► IPR&D assets acquired recorded as
► Purchase price should be allocated     intangible assets
   to R&D projects in process that         ►   Generally indefinite life intangibles
   have fair value                             until completion or abandonment
► If project has ―no alternative       ► Subsequent expenditures expensed
   future use,‖ amount allocated       ► Upon completion – assign a useful
   should be expensed                    life and amortize
                                       ► New rules do not apply to
                                         acquisitions of net assets that do
                                         not constitute a business
                                       Consideration
                                       ► Amortization or impairment
                                         recognized in future earnings



             Page 118
Intangibles the Acquirer does not
intend to use
Current rules                        New rules
► In practice, the Acquirer          ► All intangible assets and all
  allocates little or no value to      other assets (for which there is
  intangible assets (e.g. a brand      not a specific exception) are to
  name) that it does not intend to     be measured at fair value, as
  support or utilize after the         defined in FAS 157. That is,
  acquisition                          value based on the highest and
                                       best use by a market participant

                                     Considerations
                                     ► Assets that will not be utilized
                                       are recognized in purchase
                                       accounting
                                     ► Estimated useful life and future
                                       impairment


             Page 119
Income taxes

Current rules                                 New rules
► Reduction in Target‘s valuation             ► EITF 93-7 is nullified
   allowance after the acquisition date       ► Reduction in Target‘s valuation
   shall be applied to reduce to zero           allowance after the acquisition date
    ►   Any goodwill related to the             is recorded as a reduction of
        acquisition, then                       income tax expense
    ►   Other non-current intangible assets   ► All adjustments to income tax
        related to the acquisition, then
                                                uncertainties that pre-date or result
    ►   Income tax expense                      from the acquisition are recorded as
►   Income tax uncertainties that pre-          an element of the income tax
    date or result from the acquisition         provision
    ►   Reductions applied similarly to       ► Transition – effective for pre-FAS
        reduction in valuation allowance        141(R) transactions
    ►   Increases recorded to goodwill
                                              Considerations
                                              ► May have a significant impact on
                                                the effective tax rate



                Page 120
Acquirer‘s deferred tax valuation allowance

Current rules                         New rules
► A reduction in the Acquirer‘s       ► A change in the Acquirer‘s
  valuation allowance for a DTA         valuation allowance for a DTA
  that results from a change in the     that results from a change in the
  Acquirer‘s circumstances due to       Acquirer‘s circumstances upon a
  a business combination                business combination should be
  generally is accounted for as a       accounted for as an event
  reduction to goodwill                 separate from the business
  ► For example, an Acquirer buys a     combination (i.e., through the
     profitable Target and determines   income tax provision)
      it is able to utilize the benefit of
      its own NOL‘s it formerly
      believed would expire




              Page 121
Excess of tax deductible goodwill over
financial goodwill
Current rules                         New rules
► No DTA recorded at the              ► Amends FAS 109 to require the
  acquisition date. Any tax             recognition of a DTA in
  benefits are recognized when          purchase accounting, similar to
  realized and shall be applied to      other temporary differences
  reduce to zero                         ►   Requires solving an equation
   ►   Any goodwill related to the           due to the iterative nature of the
       acquisition, then                     calculation
   ►   Other non-current intangible       Considerations
       assets related to the acquisition, ► Less goodwill recognized
       then
                                          ► Potential income tax expense
   ►   Income tax expense
                                         volatility as benefits recognized
                                         through DTA prior to realization



             Page 122
Noncontrolling interests

Current rules
► Remaining minority interest is recorded at historical cost
New rules
►   Fair value at acquisition date in U.S. GAAP
    ►   Derive the value directly; or
    ►   Derive the value of acquired business as a whole and subtract
        consideration transferred by the acquirer
►   IFRS Alternative
    ►   Proportionate share of net identifiable assets (i.e., no share of goodwill)
►   Exchange price might not be the best indication of noncontrolling
    interest fair value in a less than 100% acquisition
    ►   Effect on future goodwill impairments




               Page 123
Negative goodwill

Current rules                         New rules
► First, adjust all Target‘s          ► First step remains the same—
  assets/liabilities to fair values     adjust all assets/liabilities to FV
  (with any related deferred tax        including contingent purchase
  effects)                              price
► If negative goodwill results, first ► If negative goodwill results,
  proportionately reduce the            challenge purchase price
  carrying value of long-term, non-     allocation
  financial assets unless future      ► Any resulting negative goodwill
  contingent purchase price may         is immediately recorded as a
  be paid                               gain (but not extraordinary)
► If any negative goodwill            Considerations
  remains, record an immediate        ► Greater potential for gain
  extraordinary gain
                                      ► Long-term nonfinancial assets
                                        remain at fair value

             Page 124
A business combination achieved in stages

Current rules                         New rules
► Cost accumulation model             ► Revaluation of previously owned
  ►   Each asset/liability adjusted     equity interests upon obtaining
      proportionately                   control
  ►   Minority interest recorded at       ►   Gains and losses recognized in
      historical cost                         income
                                      ► Generally, all
                                        assets/liabilities/noncontrolling
                                        interest are fully adjusted to fair
                                        value
                                      Considerations
                                      ► Gains and losses recognized on
                                        prior investment


             Page 125
FAS 160 highlights


►   Joint convergence project between the FASB and IASB
    ►   Noncontrolling interests considered equity
        ►   Noncontrolling interests‘ share of consolidated earnings no longer an
            expense
        ►   Loss allocation in excess of noncontrolling interest basis is required
    ►   Loss of control is a new basis event
    ►   No changes to ARB 51 intercompany accounting
►   Effective for annual periods beginning after
    15 December 2008




                Page 126
Reporting noncontrolling interest

Current rules                            New rules
► Typically ―minority interest‖ reported ► Mezzanine accounting is not
   as a mezzanine item between             permitted and ―noncontrolling‖
   liabilities and equity                  interest is reported as a separate
► Consolidated net earnings exclude        component of shareholders equity
   minority interest component           ► Consolidated net earnings include
► Rule 5-04 of Reg S-X requires            noncontrolling interest component
   presentation of minority interest       ► Income attributable to noncontrolling

   after income tax as a component of          interests shown separate as an
   income from continuing operations           allocation of consolidated net
                                                 earnings
                                          Considerations
                                          ► No net EPS impact to parent
                                            (except for loss allocation)




              Page 127
Reporting noncontrolling interest –
presentation (cont‘d)
                                                      Current   Statement
                                                       GAAP           160
Revenues                                                $300        $300
Expenses                                                 200         200
Income before taxes                                      100         100
Income taxes                                              35          35
Income before minority interest                           65          n/a
Minority interests                                         5          n/a
Consolidated net income                                 $ 60          65


Less: Attributable to noncontrolling interests in
subsidiary(ies)                                                        5
Consolidated net income attributable to controlling
interests                                                           $ 60




               Page 128
Reporting noncontrolling interest—
attribution of earnings

►   Earnings/OCI must be attributed to controlling and
    noncontrolling interests
    ►   Acceptable alternative methods depending on the circumstances
►   Earnings/OCI generally attributed based on the relative
    ownership interests, except when:
    ►   A substantive contractual arrangement specifies attribution among
        subsidiary owners,
    ►   Acquisition of partially-owned subsidiary occurred before effective
        date of FAS 141(R), or
    ►   Acquirer pays a control premium in a partial acquisition and is
        accounted for in accordance with FAS 141(R) and a subsequent
        goodwill impairment occurs


              Page 129
Reporting noncontrolling interest—
allocation of losses
Current rules                             New rules
► Losses attributed to both the           ► Allocated losses can exceed the
   controlling and minority on the basis    noncontrolling interest investment
   of their ownership interests and         (i.e., it can go negative)
   contractual rights and obligations,      ► Could have beneficial impact to
   but generally only to minority                income attributable to controlling (i.e.
   interest to the extent of the minority        Parent) interest and EPS
   interest investment (minority interest   ► Pro forma disclosure required in
   can‘t go negative)                            year of adoption

                                             Considerations
                                             ► Prospective adoption precludes
                                               recouping losses previously
                                               absorbed by parent
                                             ► Losses of subsidiary will be
                                               allocated to noncontrolling interest
                                               deficit


                Page 130
Increase in parent‘s ownership interest
(step acquisition)
Current rules                        New rules
► Account for each acquisition       ► After control obtained,
  based upon the fair value of the     subsequent changes in
  proportionate amount of              ownership of a subsidiary
  assets/liabilities/goodwill          accounted for as capital
  acquired in each acquisition         transactions (i.e., investments
  (cost accumulation)                  by owners)

                                     Considerations
                                     ► No purchase accounting on buy-
                                       out of NCI, even if NCI existed
                                       prior to the adoption of FAS
                                       141R and FAS 160


            Page 131
Step acquisition—example

►   Assume Parent owns 80% of Subsidiary which has net assets of
    $4,000 and that the carrying amount of the NCI shareholders‘ 20%
    interest is $800
►   Parent acquires additional 10% from the NCI for $500
►   Pursuant to FAS 160, Parent would account for its increased
    ownership interest as a capital transaction as follows:


       Stockholders‘ equity – noncontrolling interest                   $400
       APIC                                                               100
            Cash                                                                $500


     Under current rules, the $100 reduction of paid-in capital would have been allocated
     to the proportionate share of net assets acquired


               Page 132
Decrease in parent‘s ownership interests
without a loss of control
Current rules                           New rules
► Per SEC SAB 51, issuance by           ► After control obtained,
  subsidiary of new shares results        subsequent changes in
  in gain/loss recognized in              ownership of a subsidiary
  income or directly to the parent‘s      (provided control is maintained)
  shareholders‘ equity                    accounted for as capital
  ► Sale by Parent of existing            transactions (i.e., distributions to
      subsidiary shares also results in   owners)
      gain/loss, but must be recorded
      in income
                                        Considerations
                                        ► No income statement effect on
                                          sale if control is not lost




              Page 133
Loss of control of subsidiary

Current rules                      New rules
► Loss of control results in       ► Similar to current, except that
  deconsolidation and gain or loss   any retained shares are
  recognition                        revalued to FV and a gain/loss
► Gain or loss is the difference     recorded (new basis recognition
  between the FV of any              event)
  consideration received and the
  carrying value of the interest   Considerations
  sold                             ► ―Full‖ gain or loss recognition,
► Any remaining noncontrolling       including revaluation of retained
  interest is recorded based on      interest
  historical carrying value




            Page 134
Effective date and transition


►   The standards are effective for fiscal years beginning after
    15 December 2008
►   Early adoption prohibited for U.S. GAAP
►   Purchase accounting matters
    ►   No effect on prior transactions, except:
        ►   Changes to deferred tax asset valuation allowances and income tax
            uncertainties after effective date of FAS 141(R) will effect Acquirer‘s
            earnings, even if related to previous acquisitions
►   Noncontrolling interest matters
    ►   Prospective, except for presentation and display
    ►   Remeasurement of amounts recorded before adoption prohibited



                Page 135
US GAAP and IFRS differences

►   IFRS                                               ►   US GAAP
    ►   Contingencies                                      ►   Contingencies
        ►   Initial recognition:                               ►   Initial recognition:
            ►   Liabilities: recognize if there is a               ►   Contractual: recognize at FV at
                present obligation and FV can                          acquisition date
                be measured reliably                               ►   Noncontractual: recognize at FV
            ►   Assets: not recognized                                 at acquisition date if determined
        ►   Subsequent measurement:                                    that the contingency is more
                                                                       likely than not to occur
            ►   Liabilities: higher of IAS 37
                liability amount or the amount                 ►   Subsequent measurement:
                initially recognized                               ►   Liabilities: higher of FAS 5
                                                                       amount or acquisition date FV
                                                                   ►   Assets: lower of best estimate of
                                                                       future settlement or acquisition
                                                                       date FV
    ►   Noncontrolling interest                            ►   Noncontrolling interest
        ►   Measured at FV or at share of
                                                               ►   Measured at FV
            FV of acquiree's net identifiable
            assets



                 Page 136
US GAAP and IFRS differences (continued)

►   Other significant differences
    ►   Definitional differences:
        ►   Fair value
        ►   Control
    ►   Classification differences:
        ►   Contingent consideration
        ►   Operating leases
    ►   Subsequent measurements
    ►   Effective date and transition:
        ►   US GAAP:
            ►   Fiscal years after 15 December 2008
            ►   Early adoption prohibited
        ►   IFRS:
            ►   Fiscal years after 1 July 2009
            ►   Early adoption permitted



                Page 137
Disclosure of Loss Contingencies -
 Proposed Amendments to FAS 5


Wednesday, September 24, 2008 - Philadelphia, PA



                                          Doug Raymond
Principal Disclosure Requirements
Related to Contingencies
 Regulation S-K, Item 303 – Management‘s
  Discussion & Analysis (―MD&A‖) – Known Trends
  and Uncertainties
 FAS 5 – Accounting for Contingencies
Management’s Discussion & Analysis
 MD&A should provide information necessary to understand
  the company‘s financial condition, changes in financial
  condition and results of operations.
 Must identify any known trends, demands, commitments,
  events or uncertainties that:
   •   are reasonably likely to materially increase or decrease company‘s
       liquidity;
   •   would cause reported financial information not to be necessarily
       indicative of future operating results or future financial condition; and/or
   •   any known material trends in its capital resources.
MD&A on Contingent Liabilities

 If an event is ―unlikely‖ to occur, no disclosure is
  required.
 If company cannot determine that an event is
  ―unlikely,‖ must assess the impact assuming the
  event will occur. If impact is likely to be material,
  disclosure is required.
   •   No clear SEC standards on what constitutes ―unlikely.‖ Some
       commentators suggest close to zero and others use a
       probability of less than 40 percent.
FAS 5 – Accounting for Contingencies
(Current Status)
 Must book a loss contingency liability if the loss is
  both ―Probable‖ and ―Reasonably Estimable.‖
   •   ―Probable‖ means the future event is likely to occur.
   •   ―Reasonably Estimable‖ means the company can estimate a
       reasonable range of the amount of the loss.
FAS 5 – Accounting for Contingencies
(Current Status)
 If the loss does not meet both of those conditions,
  but is ―Reasonably Possible,‖ disclose contingency
  in footnotes to the financial statements, including:
   •   the nature of the contingency, and
   •   an estimate of the possible loss or range of loss or statement
       that an estimate cannot be made
 No disclosure is necessary if probability of loss is
  remote.
Proposed Amendments to FAS 5
 Amendments designed to:
   •   Increase number of loss contingencies disclosed;
   •   Provide specific quantitative and qualitative information about loss
       contingencies; and
   •   Require tabular reconciliation of recognized loss contingencies.
 There is an exemption from disclosing certain required
  information if disclosure would be prejudicial to company‘s
  position in a dispute.
 As currently proposed, requirements would be effective for
  fiscal years ending after December 15, 2008
Proposed Amendments to FAS 5

 Would not have direct balance sheet impact.
 Would affect disclosure in the footnotes to the
  financial statements.
 Require disclosure of all loss contingencies, except
  contingencies for which the likelihood of loss has
  been determined to be ―Remote.‖
   •   Similar standard but different nuance from current FAS 5, which
       requires disclosure of loss contingencies that are at least ―Reasonably
       Possible.‖
   •   Reasonably possible means more than remote, but less than likely.
Proposed Amendments to FAS 5

 Disclosure of an unasserted claim or assessment
  would be required if:
  •   it is probable that the claim will be asserted, and
  •   the likelihood of loss, if the claim were to be asserted, is more
      than remote.
Proposed Amendments to FAS 5 –
Disclosure of Certain Loss Contingencies (cont’d)


 Disclosure of a loss contingency is required,
  regardless of likelihood of loss, if the contingency:
   •   is expected to be resolved in the ―Near Term;‖ and
   •   could have a ―Severe Impact‖ on the company‘s financial
       position, cash flows, or results of operations.
 Disclosure, in this case, would be required even if
  likelihood of loss is remote.
Proposed Amendments to FAS 5 –
Required Disclosure
 Quantitative information about loss exposure:
   •   Amount of the claim
   •   If no claim or assessment amount, best estimate of maximum
       exposure to loss
   •   A company may also disclose its best estimate of the possible
       loss or range of loss if it believes the amount of the claim or
       maximum exposure to loss is not representative of its actual
       exposure.
Proposed Amendment to FAS 5 –
Required Disclosure (cont’d)
 Qualitative information about exposure and likely
  outcome, including:
   •   Factors likely to affect ultimate outcome along with their
       potential effect,
   •   Qualitative assessment of most likely outcome, and
   •   Significant assumptions made in estimating amounts disclosed
       and assessing most likely outcome.
 Must include qualitative and quantitative discussion
  of insurance or indemnification arrangements that
  could lead to a recovery of some or all of the loss
Proposed Amendment to FAS 5 –
Required Disclosure (cont’d)
 Tabular Reconciliation of aggregate total amount
  recognized on its balance sheet for loss
  contingencies at the beginning and end of the
  period
 Qualitative description of the significant changes
  from the prior period
 Amount of related recoveries from insurance or
  indemnification arrangements
Proposed Amendments to FAS 5 –
Exemption from Disclosure

 If disclosure would be prejudicial, company may aggregate
  disclosure at a level higher than nature of contingency
 In the ―rare‖ instance that disclosing even aggregated
  information would be prejudicial, company may omit only that
  information that would be prejudicial.
   •   Must disclose that information has been omitted and the reason; and
   •   Must still provide quantitative and qualitative information, including
       amount of the claim or assessment or estimate of the maximum
       exposure to loss.
If Less than “Probable” and more than
“Remote”
Guidance        Probability of        Disclosure Requirement
                Loss

MD&A            Not Unlikely and      Disclose qualitative and quantitative
                Material              information necessary to understand impact
                                      on company‘s future liquidity, operating
                                      results or financial condition
Current FAS 5   Reasonably Possible   Disclose existence and, if possible, an
                                      estimate of the possible loss or range of loss



Proposed        Not Remote            Disclose qualitative and quantitative
Amendments to                         information, including claim or maximum
FAS 5                                 loss, and likely outcome
Concerns with Proposed Amendments to
FAS 5
 Disadvantage in disputes by providing insight into
  strategy and resources
 Increase in litigation, including potential liability for
  misstatements
 Threat to attorney-client privilege
 Difficulty in auditing disclosure
 Volume of disclosure may obscure material
  information
Contact Information

        Doug Raymond
       (215) 988-2548
   Doug.Raymond@dbr.com


        One Logan Square
    18th and Cherry Streets
  Philadelphia, PA 19103-6996
         215-988-2700
         215-988-2757

    www.drinkerbiddle.com

				
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