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Update by the Office of the Update by the Office of the Chief AccountantChief Accountant

Wesley R. BrickerWesley R. BrickerProfessional Accounting FellowProfessional Accounting Fellow

U.S. Securities and Exchange U.S. Securities and Exchange CommissionCommission

Update by the Office of the Update by the Office of the Chief AccountantChief Accountant

Wesley R. BrickerWesley R. BrickerProfessional Accounting FellowProfessional Accounting Fellow

U.S. Securities and Exchange U.S. Securities and Exchange CommissionCommission

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Discussion TopicsDiscussion Topics

Who We Are: Interacting with OCAWho We Are: Interacting with OCA

What We’ve Been Doing: Rule-Making and Policy What We’ve Been Doing: Rule-Making and Policy DevelopmentsDevelopments

How We Think: Recent Hot TopicsHow We Think: Recent Hot Topics

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The Securities and Exchange Commission, The Securities and Exchange Commission, as a matter of policy, disclaims as a matter of policy, disclaims responsibility for any private publication or responsibility for any private publication or statement by any of its employees. statement by any of its employees. Therefore, the views expressed today are my Therefore, the views expressed today are my own, and do not necessarily reflect the own, and do not necessarily reflect the views of the Commission or the other views of the Commission or the other members of the staff of the Commission.members of the staff of the Commission.

DisclaimerDisclaimer

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Who We Are: Who We Are:

Interacting with OCAInteracting with OCA

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Office of the Chief AccountantOffice of the Chief Accountant

Chief Accountant: James L. KroekerChief Accountant: James L. Kroeker

Appointed August 25, 2009Appointed August 25, 2009

Principal advisor to the Commission on accounting and auditing Principal advisor to the Commission on accounting and auditing mattersmatters

Deputy Chief Accountants: Paul Beswick, Brian Croteau & Julie ErhardtDeputy Chief Accountants: Paul Beswick, Brian Croteau & Julie Erhardt

Main groups in OCAMain groups in OCA

AccountingAccounting

Professional Practice (Audit and Independence)Professional Practice (Audit and Independence)

International AffairsInternational Affairs

ResponsibilitiesResponsibilities

Rulemaking, interpretive guidance and reportsRulemaking, interpretive guidance and reports

Oversight of standard settingOversight of standard setting

ConsultationsConsultations

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Avenues for ConsultationsAvenues for Consultations

Pre-filing basis – requests from registrantsPre-filing basis – requests from registrants Guidance posted on the SEC’s website: Guidance posted on the SEC’s website:

http://www.sec.gov/info/accountants/ocasubguidance.htmhttp://www.sec.gov/info/accountants/ocasubguidance.htm Submit GAAP questions by email to OCA@sec.govSubmit GAAP questions by email to OCA@sec.gov Submit 404 questions by email to Submit 404 questions by email to

404smallbusiness@sec.gov404smallbusiness@sec.gov

Post-filing basis – Post-filing basis –

Internal consultations from Divisions of Corporation Internal consultations from Divisions of Corporation Finance and EnforcementFinance and Enforcement

Requests from registrantsRequests from registrants

Informal discussion with OCA staff membersInformal discussion with OCA staff members

(202) 551-5300(202) 551-5300

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What We’ve Been Doing: What We’ve Been Doing:

Rule-Making and Policy Rule-Making and Policy DevelopmentsDevelopments

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What We’ve Been DoingWhat We’ve Been Doing

IFRS in the U.S.IFRS in the U.S.

Monitoring Major Convergence ProjectsMonitoring Major Convergence Projects

Dodd-Frank and Related RulemakingDodd-Frank and Related Rulemaking

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Rule-Making and Policy Rule-Making and Policy DevelopmentsDevelopments

IFRS in the U.S.

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Commission Statement in Support of Commission Statement in Support of Convergence and Global Accounting StandardsConvergence and Global Accounting Standards

Issued February 2010Issued February 2010

Explains history of Commission’s steps to foster a Explains history of Commission’s steps to foster a single set of high-quality globally accepted accounting single set of high-quality globally accepted accounting standardsstandards

Summarizes feedback on proposed “Roadmap”Summarizes feedback on proposed “Roadmap”

Provides an approach forward for U.S. capital marketsProvides an approach forward for U.S. capital markets Directs staff of the Office of the Chief Accountant, in Directs staff of the Office of the Chief Accountant, in

consultation with other Divisions and Offices of the consultation with other Divisions and Offices of the commission, to develop and carry out a work plancommission, to develop and carry out a work plan

Progress reports beginning in October 2010Progress reports beginning in October 2010

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Key Areas of the Work PlanKey Areas of the Work Plan

Whether to incorporate IFRS for U.S. issuers

Sufficient development and application of IFRS for the U.S. financial reporting system

The independence of standard setting for the benefit of investors

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Key Areas of the Work PlanKey Areas of the Work Plan

How to incorporate IFRS for U.S. issuers (transition)

Investor understanding and education regarding IFRS

Examination of the U.S. regulatory environment that would be affected by a change in accounting standards

The impact on issuers, both large and small, including changes to accounting systems, changes to contractual arrangements, corporate governance considerations, and litigation contingencies

Human capital readiness

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Work Plan ExecutionWork Plan Execution

Sources of Information

Investors

Issuers (both U.S. and foreign)

Auditors

Attorneys

Other regulators

Standard setters

Academics

Methodology

Staff research

Survey of academic research

Outreach through:

Comment letter requests

Roundtables

Targeted interviews

Status Report – October 2010

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Requests for Comment – Work PlanRequests for Comment – Work Plan

Aspects of the impact on U.S. investors (Release 33-9133) U.S. investors' current knowledge of IFRS and preparedness for

IFRS How investors educate themselves on changes in accounting

standards The extent of and time needed to undertake changes to improve

investors' understanding of IFRS and the related education process.

Aspects of the impact to issuers (Release 33-9134) Compliance with contractual arrangements based on U.S. GAAP

(e.g., financial covenants) Compliance with corporate governance requirements (e.g., audit

committee financial expert and other stock exchange listing requirements)

Application of certain legal standards tied to amounts determined for financial reporting purposes.

Comments on both releases are requested by October 18

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Lease Classification Under IFRSLease Classification Under IFRS

IAS 17, LeasesIAS 17, Leases

Operating vs. FinancingOperating vs. Financing

Principle: A lease is a finance lease if it transfers Principle: A lease is a finance lease if it transfers substantially all the risks and rewardssubstantially all the risks and rewards incidental to incidental to ownership of an asset.ownership of an asset.

Indicators of a finance lease (par. 10):Indicators of a finance lease (par. 10): Lease transfers ownership by the endLease transfers ownership by the end

Bargain purchase that is reasonably certainBargain purchase that is reasonably certain

Lease term covers major part of economic lifeLease term covers major part of economic life

PV of minimum lease payments equal substantially all of PV of minimum lease payments equal substantially all of the FV of the leased assetthe FV of the leased asset

Leased assets are of a specialized natureLeased assets are of a specialized nature

Lease classification is made at inceptionLease classification is made at inception

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Monitoring Major Monitoring Major Convergence ProjectsConvergence Projects

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Commission Statement in Support of Commission Statement in Support of Convergence and Global Accounting StandardsConvergence and Global Accounting Standards

Recognizes ongoing convergence process between FASB and IASB

Financial crisis has underscored importance of convergence Responses to crisis have been global Companies and their investments are globally

interconnected

Focus on quality of standards

Challenges

FASB / IASB Memorandum of Understanding

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Selected Convergence ProjectsSelected Convergence Projects

Leases and Revenue Recognition

IASB / FASB published joint Exposure Drafts

Financial Instruments

FASB published its Exposure Draft

FASB / IASB conducting outreach

Insurance Contracts

IASB published Exposure Draft

FASB is preparing a Discussion Paper

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Dodd-Frank and Related Dodd-Frank and Related RulemakingRulemaking

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Dodd-Frank and Related Dodd-Frank and Related RulemakingRulemaking

Financial Stability Oversight Council

Accounting standard setting

SEC’s approach to regulatory reform rulemaking

Invitation to provide preliminary comments on (see links on SEC website): OTC derivatives

Hedge funds

Corporate disclosure

Credit rating agencies

Other areas

Comments posted on website

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How We Think: How We Think:

Recent Hot TopicsRecent Hot Topics

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Accounting Estimates Accounting Estimates

Accounting assumptions in the current environment

Preparation of financial statements requires preparers to make assumptions about the future E.g. fair value measurements, impairment assessments

Reminders Identify and follow objectives of the accounting standards

Base assumptions on reasoned analysis and available information

• Current market data; expert forecasts

Do not manipulate models or assumptions to achieve a desired outcome

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Accounting Judgments Accounting Judgments

Start with faithful application of accounting literature

Where accounting literature does not address the situation:

Provide information useful to investors and creditors in their decision-making processes

Professional judgment SEC staff will accept reasonable differences in judgment, coupled

with transparent disclosure Concurrent documentation enhances credibility of judgment

Economic substance Problems arise when transactions are designed around accounting

literature Often not consistent with principles of standard

Transparent disclosures

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Implementation – Consolidations Implementation – Consolidations Standard (FAS 167)Standard (FAS 167)

Reporting enterprise should consolidate variable interest entities in which it has a controlling financial interest

Power over the activities that most significantly impact an entity's economic performance

Interest that either obligates the reporting enterprise to absorb losses of the entity or provides a right to receive benefits from the entity that could potentially be significant

Economic substance is important in performing the evaluation

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Implementation – Creditor Implementation – Creditor Accounting for Debt RestructuringsAccounting for Debt Restructurings

Commercial real estate loans

Creditor might modify loan terms to reduce or defer debtor’s or loan guarantor’s near-term cash payments Restructuring into an A Note & B Note

Evaluate loans receivable for impairment (ASC 310-10-35 [FAS 114]) Loan guarantees that are non-substantive should not

be used to avoid recognizing loan impairments

Disclose restructuring activities

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Equity Method Investment – Equity Method Investment – Impairment Impairment

Impairment model for equity method investmentImpairment model for equity method investment

Other-than-temporary declines in valueOther-than-temporary declines in value Holistic assessment of all factors described in the Holistic assessment of all factors described in the

guidanceguidance

ASC 323-10-35-31, 32 [APB pars. 6(b), 19(h)]ASC 323-10-35-31, 32 [APB pars. 6(b), 19(h)]

Not a cost-recovery model, such as is Not a cost-recovery model, such as is applicable for long-lived assets applicable for long-lived assets

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Post-Acquisition Accounting for Loans Post-Acquisition Accounting for Loans Acquired in Business CombinationsAcquired in Business Combinations

AICPA Depository Institutions Expert Panel submission described AICPA Depository Institutions Expert Panel submission described two approaches:two approaches: Recognize interest income based on contractual cash flows as Recognize interest income based on contractual cash flows as

described in ASC 310-20described in ASC 310-2011

Recognize interest income based on expected cash flows as Recognize interest income based on expected cash flows as described in ASC 310-30described in ASC 310-3022

Accounting policy:Accounting policy: Policy should be disclosed and applied consistentlyPolicy should be disclosed and applied consistently

Any change in accounting policy should be justified on the basis of Any change in accounting policy should be justified on the basis of preferabilitypreferability

If interest income is recognized based on expected cash flows, If interest income is recognized based on expected cash flows, all accounting and disclosure guidance in ASC 310-30 should be all accounting and disclosure guidance in ASC 310-30 should be followedfollowed

1 Formerly FAS 911 Formerly FAS 91

2 Formerly SOP 03-32 Formerly SOP 03-3

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Subtopic 815-40-25Subtopic 815-40-25**––Sequencing ConsiderationsSequencing Considerations

Determination of whether an EITF 00-19 instrument can be Determination of whether an EITF 00-19 instrument can be recorded in equity when there is a separate outstanding variable recorded in equity when there is a separate outstanding variable share-settled contract (unlimited shares) can be complexshare-settled contract (unlimited shares) can be complex

Existence of a potentially variable share-settled contract will Existence of a potentially variable share-settled contract will not always result in liability treatment of the Instrumentnot always result in liability treatment of the Instrument

Key considerations include:Key considerations include: What is the Company’s sequencing policy? What is the Company’s sequencing policy? Is the Company’s sequencing policy reasonable?Is the Company’s sequencing policy reasonable? Are there sufficient unissued and authorized shares that can be Are there sufficient unissued and authorized shares that can be

allocated to the instrument following the Company’s sequencing allocated to the instrument following the Company’s sequencing policy?policy?

What are the specific facts and circumstances of the Company? What are the specific facts and circumstances of the Company?

** Formerly EITF 00-19Formerly EITF 00-19

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QuestionsQuestions