Mind the GAAP
Current Accounting and SEC
Developments
December 17, 2006
Aryeh Fund
Partner
Points to Remember
Simplicity
Transparency
Principles
Judgment
Fair Value
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New Accounting
Pronouncements
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Agenda
New Accounting Pronouncements
FAS 155: Accounting for Certain Hybrid Financial
Instruments, an amendment of FAS Statements No. 133
and 140
FAS 156: Accounting for Servicing of Financial Assets,
an amendment of FAS Statement No. 140
FAS 157: Fair Value Measurements
FAS 158: Employers' Accounting for Defined Benefit
Pension and Other Postretirement Plans
Proposed pronouncements
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Statement 157, Fair Value
Measurements
(September 2006)
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Statement 157: Fair Value Measurement Overview
Provides a framework on how to measure fair value.
When to measure fair value is established by the FASB
on a project by project basis
Provides for expanded and detailed disclosures to
enable users of financial statements to assess the
inputs used to develop measurements
Transition and effective date
Effective for fiscal years beginning after November 15,
2007, Early adoption is encouraged
Proposed FSP FAS 141-b, 142-e, 144-b: Fair Value
Measurements in Business Combinations and
Impairment Tests
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Statement 157: Fair Value Measurement
Revises the definition of fair value
The price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between
market participants at the measurement date
Outlines a “Fair Value Hierarchy” which should be
used to rank sources of inputs to estimate fair value,
based on their reliability
Level 1, Level 2, Level 3
Discusses methods of determining fair value in the
absence of quoted market prices for identical or
similar instruments
Market approach, Income approach, Cost approach
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FASB Interpretations
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FIN 48: Accounting for
Uncertainty in Income Taxes
(July 2006)
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Overview of FIN 48
Mandates a two step process in accounting for
uncertainty in income taxes:
Initial recognition of tax benefits must be more-likely
than-not of being sustained upon examination
If recognition threshold is met, recognize largest benefit
that has a probability of greater than 50% likely of being
ultimately realized
Tax planning strategies must meet the MLTN threshold
to be considered in determining valuation allowance
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FIN 48 - Measurement: Example 1
A company takes a tax position that will reduce
income taxes payable by $100 in the current year
The tax position is considered more-likely-than-not to
be sustained based on its technical merits
Further, management believes there is a 60% chance
that the entire benefit of $100 would be realized in a tax
examination, considering negotiations
In this case, the full $100 benefit should be recognized
because it is more than 50% likely that $100 will be
realized assuming a tax audit and considering
potential settlement negotiations
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FIN 48 - Measurement: Example 2
A position is “more-likely-than-not” to be sustained.
Management believes there are three possible outcomes
in a tax authority examination:
Probability
of Outcome
30%
30%
40%
Benefit
$100
$80
$0
In this case, $80 should be recognized as there is a
60% chance that at least that amount will be realized
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FIN 48 - Interest and Penalties
Accrue interest expense on the difference between the
tax position recognized in the financial statements and
the amount claimed on the tax return over the period
interest would accrue pursuant to the tax law
Accrue statutory penalties when tax position does not
exceed minimum statutory threshold to avoid penalties
Classification of interest and penalties on the income
statement is a policy election
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FIN 48 – Disclosures, Effective Date and
Transition
Rollforward of tax exposure liabilities (on a worldwide
aggregate basis)
Classification of interest and penalties as well as the
amount of interest and penalties in the income
statement and accrued on the balance sheet
If changes to an estimate are reasonably possible in
the next 12 months a discussion of the nature of the
uncertainty, event that could cause a change and
range of possible change
Description of open tax years by major jurisdiction
Effective Date - 1/1/07 for calendar year companies
Transition - cumulative effect
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FASB Staff Positions
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FSP : Accounting for Planned Major
Maintenance Activities
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FSP: Accounting for Planned Major Maintenance
Activities
Current guidance on accounting for planned major
maintenance (PMM) describes four acceptable
methods:
Accrue-in-advance
Direct Expense
Built-in-overhaul
Deferral method
Current guidance on interim reporting permits annual
costs that clearly benefit more than one interim
reporting period to be charged to each interim period
by the use of accruals and deferrals
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FSP: Accounting for Planned Major Maintenance
Activities
FSP prohibits the accrue-in-advance method in interim
and annual financial statements
Other methods continue to be acceptable
Disclose method of accounting for PMM
Amends AICPA Accounting and Audit Guide for
Airlines
Amends APB 28, Interim Financial Reporting
Effective for the first fiscal year beginning after
December 15, 2006
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Proposed FSP’s
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Proposed FSP’s
Proposed FSP EITF 00-19: Accounting for Registration Payment
Arrangements
Best efforts to register shares; contains penalty provision
FAS 5 analysis of contingent liability
No effect on classification
Exemption from FAS 133
Proposed FSP Clarification to FSP FAS 123R-1Equity
Restructuring for Grandfathered Awards
Application of “other GAAP” for former employees if modified
Restructuring is not a modification if conditions are met
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Emerging Issues
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Emerging Issues
Service providers’ payments to third parties (EITF 06-1)
Based on benefit provided to customer
Other than cash or no control over form – no revenue reduction
Cash – reduction of revenue
Accounting for Sabbatical leave (EITF 06-2)
No performance requirement
FAS 43 conditions met
Accrue as liability
Accounting policy for sales taxes (EITF 06-3)
Election to present on either gross or net basis
Does not apply to tax systems based on total revenues
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SEC Releases, Rules and
Interpretations
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Executive Compensation
Disclosures
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Overview
Primary provisions:
New Compensation Disclosure and Analysis (CD&A)
New and Amended Tables (e.g. Summary Compensation)
Additional disclosures for equity ownership of officers and directors
Modified disclosures for related “person” transactions
New S-K Item 407 – director independence and corporate
governance
Named Executive Officers:
Principal executive officer
Principal financial officer
Three other highest paid executive officers
Re-Exposed: Proposal to require compensation disclosure for up
to three additional highly compensated employees.
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Applicability
Regulation S-B filers may provide less extensive
disclosure
Foreign private issuers may continue to follow the
compensation-disclosure requirements in Form 20-F
Must disclose more detailed information if it is made
publicly available for some other reason (such as a
home-country requirement)
Effective - Forms 10-K and 10-KSB: Fiscal years
ending on or after December 15, 2006.
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SAB 108: Considering the Effects of
Prior Year Misstatements when
Quantifying Misstatements in the
Current Year Financial Statements
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SAB 108 – Overview and Effective Date
SAB 108 is an interpretation of the staff’s views on the
process of quantifying financial statement
misstatements
Issued to address diversity in practice in quantifying
financial statement misstatements and the potential for
the build up of improper amounts on the balance sheet
from prior year uncorrected misstatements
Effective date – periods ending after November 15,
2006
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SAB 108 – Methods of Evaluating
Misstatements
The SAB requires registrants to quantify
misstatements in current-year financial statements
using both the balance sheet (“iron curtain”) and
income statement (“rollover”) methods.
The rollover method focuses on the impact of
uncorrected misstatements primarily from an income
statement perspective.
The iron curtain method focuses on the impact from a
balance sheet perspective considering any
adjustments which would be required to properly
reflect the balance sheet at period end.
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SAB 108 - Methods for Quantifying
Misstatements - Example
A registrant has an improper expense accrual (i.e., an
overstated liability) of $100 at the end of Year 5. The
error has built up over 5 years at $20 per year. What
is the amount of the error in Year 5?
Rollover method - $20, the amount by which the Year
5 income statement is misstated
Iron-curtain method - $100, the amount that would be
recorded to correct the Year 5 balance sheet
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SAB 108 – Correcting Misstatements
SAB addresses the mechanics of correcting
misstatements that include effects from the prior
year:
Current year corrections of material errors that include
prior year effects may result in the need to correct prior
year financial statements, even where the
misstatement was considered immaterial in the prior
year
Correcting prior year financial statements for
immaterial errors would not require previously filed
reports to be amended, corrections can be made in
subsequent filings
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SAB 108 – Initial Adoption
Initial adoption
A registrant applying the guidance for the first time that identifies a
material error existing at the beginning of the first fiscal year ending
after November 15, 2006 (i.e. existing at January 1, 2006 for a
December 31 year end) may correct the error with a one time
cumulative effect adjustment to opening retained earnings.
This cumulative effect adjustment is available only where the
misstatements were previously determined immaterial under a
registrant’s previous method of quantification
Cumulative effect adjustment must be recorded as of the beginning of
the fiscal year of adoption
Early adoption in an interim period 10-Q is encouraged
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SAB 108 – Foreign Private Issuers and nonSEC Registrants
Foreign Private Issuers
The SAB’s guidance applies to all SEC registrants
FPI preparing financial statements on a basis other than US GAAP needs to
determine how the cumulative-effect adjustment may impact its financial
statements
Use of the cumulative-effect adjustment may not be acceptable for an FPI’s
primary financial statements
The impact on an entity’s primary financial statements and its reconciliation
may require discussion with SEC staff
Non-SEC Registrants
The SAB’s guidance does not apply to non-SEC registrants
Currently unclear whether the FASB will consider the cumulative effect
adjustment for US GAAP
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Other SEC Matters
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SEC Comment Letters
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Key Themes in SEC Comment Letters
Revenue recognition - multielement arrangements; service
contracts; related costs
Convertible debt - embedded
conversion features, warrants
Financial statement
classification - gross vs. net;
COS v. SG&A; long term vs.
short term
Stock compensation –
valuation; recognition
Application of purchase
accounting - allocation of
purchase price to intangible
assets / asset lives
Statement of Cash Flows -
classifications
MD&A - analysis; depth of
discussion of critical accounting
policies
Critical accounting estimates impacts of judgments and
estimates
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International Convergence
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Approach to Convergence
Memorandum of Understanding between
FASB and IASB
Commitment to achieve convergence
Sets guidelines on how to approach the task
Presents standard setting goals to be
accomplished by the end of 2008
FASB and IASB working together on
Short term convergence
Major joint projects
Coordinated projects
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SEC Roadmap
SEC Roadmap
Roadmap agreed April 2005
Reaffirmed by SEC Chairman Cox and
EC Commissioner McCreevy in February
2006
Achieving goals depends on several
factors
Need for new degree of exchange and
cooperation among regulators on IFRS
adoption
SEC Comment letters
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XBRL
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XBRL
What is XBRL?
XBRL (eXtensible Business Reporting Language) is an XMLbased standard that allows businesses to prepare,
exchange, and analyze financial statements and the
information they contain.
Tagging of financial information based on taxonomies
Reports financial information in accordance with GAAP
and can be used for other types of business reporting
(such as tax filings and regulatory reporting)
Voluntary filing program
No additional information is provided
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Exposure Drafts
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Exposure Drafts
Exposure Draft: The Fair Value Option for Financial
Assets and Liabilities
(January 25, 2006)
Exposure Draft: Business Combinations - Purchase
Method Procedures and Accounting and Reporting of
Noncontrolling (Minority) Interests
(June 30, 2005)
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Trends and Challenges in US GAAP
Reduced complexity – increased transparency
Principles based accounting
Use of judgment
Strict application of rules where appropriate
International convergence
Fair value accounting
XBRL
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Presenter’s contact details
Aryeh Fund
KPMG Somekh Chaikin
(02) 531 2020
afund@kpmg.com
www.kpmg.com
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©2004 KPMG LLP, the U.S. member firm of KPMG International, a Swiss cooperative. All rights reserved.
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