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SEC Update
Charlie MuhaDeloitte & Touche LLP
AGA/EEI Accounting Leadership Conference—June 26, 2005
SEC Update
•Review Process
•Off-Balance Sheet Arrangements, Special Purpose Entities, and Transparency of Filings by Issuers
•Frequent Staff Comments
Review Process
•Office of the Chief Accountant–Top priorities:
•Reducing complexity of financial reporting
•Internal control requirements (SOX 404)•Stock compensation (SAB No. 107)•International convergence
Review Process
•Division of Corporation Finance–Staffing increases and changes–Proactive and early identification of
potential problem areas–Staff Focus
•Exchange Act reports, largest issuers and “riskiest” offerings
•More limited reviews
Review Process
•Public availability of SEC comment letters and issuer responses –Selected letters and responses currently
available at www.livedgar.com –SEC to publicly release comment letters
and responses•Applicable to filings after August 1, 2004•Posted on SEC website not less than 45 days
after completion of review•Notification of completion of review•Confidential treatment requests
Off-Balance Sheet Arrangements, Special Purpose Entities, and Transparency of Filings by Issuers
•Initiatives to Improve Transparency–Discourage transactions and transaction
structures primarily motivated by accounting and reporting concerns, rather than economics.
–Expand the use of objectives-oriented standards, which would have the desirable effect of reducing complexity in accounting standards.
Off-Balance Sheet Arrangements, Special Purpose Entities, and Transparency of Filings by Issuers
– Improve the consistency and relevance of disclosures that supplement the basic financial statements.
– Improve communication focus in financial reporting.
Off-Balance Sheet Arrangements, Special Purpose Entities, and Transparency of Filings by Issuers
•Standard Setting Recommendations–Continue work on consolidation
accounting–Reconsider accounting guidance for
defined benefit pension plans and OPEB’s–Reconsider accounting for leases–Continued exploration of feasibility of
reporting all financial investments at fair value
–Disclosures need to be better organized and integrated
Staff Alert – Annual Report
•Disclosure of previously unreported Form 8-K Events
•Certification Requirements•Placement of ICFR reports•Auditor Consents
Frequent Staff Comments
•MD&A•Financial statement classification•Intangible assets and goodwill•Reserves •Revenue recognition•Segment reporting•Pension disclosures•Fair value determination
MD&A
•Executive Overview
•Results of Operations–Trend analysis–Uncertainties, risks,
commitments, events–Forward-looking–Aggregation of reasons
for changes
MD&A
•Liquidity & Capital Resources–Direct method of statement of cash flows–Sources and uses of cash–Forward-looking–Dividend payments
•Contractual Obligation Table– Interest payments–Other liabilities–Footnote disclosure
MD&A
•Critical Accounting Policies– Identification & qualification of
assumptions/estimates–Sensitivity analysis–Historical analysis
Financial Statement Classification
•Income statement– Components of revenues, O&M, and operating
and non-operating income (i.e. equity method income)
– Discontinued operations versus continuing operations (EITF 03-13 & other reporting issues)
•Balance sheet– Current versus long term classification– Cash equivalents – “Auction rate securities”
Financial Statement Classification
•Statement of cash flows– Classification between operating, investing
and financing activities
– Presentation on a gross versus net basis
•Sample letter sent to registrants related to Statement of Cash Flows– “…presentation of items in the cash flow
statement cannot be overstated.”
– Cash collection from long-term receivables and sale of receivables
Intangible Assets and Goodwill
•Purchase price allocation•Indefinite life•Valuation issues•Impairment methodologies•Disclosures
“We note that you have allocated $35 million and $7 million to non-amortized trademarks for the X and Y acquisitions. Provide us with sufficient information to understand how you concluded that these assets have indefinite useful lives.”
Reserves
•Loss contingencies–Nature of loss contingency –Amount accrued and material changes in
accrual–Estimated range of reasonably possible loss–Significant assumptions
Reserves – SEC Comment
“You indicate that the company has accrued an environmental liability of $40.8 million. You further indicate that the costs could be significantly higher, but do not provide a range, as required by FIN 14, "Reasonable Estimation of the Amount of a Loss - An Interpretation of FASB Statement No. 5." Prospectively, please provide a range of loss in your filings, including an assessment of the most likely outcome of a probability assessment of the relative likelihood of a given point estimate.”
Reserves
•Impairment and restructuring charges–Early-warning disclosures–Analyze in MD&A what happened, why,
and the current and future effects of the charge
•Income taxes–Complete and full disclosure of income
tax matters –Deferred tax asset valuation allowance
Revenue, Segments and Pensions
•Revenue recognition accounting policy disclosure
•Segment reporting– Identification of segments and aggregation–Product/service revenues, geographic
information and other required disclosures –Changes in segments
•Pension –Basis for, reasonableness of, and changes
to significant assumptions
Fair Value Determination
•Examples of valuation issues include– Barter and non-monetary transactions– Cheap stock and equity transactions– Investments and long-lived assets
•Transparent accounting policy and MD&A •Reference to independent appraisals
OTT Impairments – SEC Comment
We did not see any mention of EITF 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” in your Form 10-K. Please be aware of the disclosure requirements, which were effective December 31, 2003, relative to your decommissioning trust fund and your available for sale securities.
Copyright © 2005 Deloitte Development LLC. All rights reserved.