SEC Year in Review 2010

Table of Contents
Significant 2009 Developments
New Commission Rules
- Oil and Gas Reserve Information
- XBRL
- Updates for the New Business Combinations and Noncontrolling Interests Accounting Standards
- Auditor Reporting on Internal Control Over Financial Reporting
- Proxy Disclosure Enhancements
Proposed Rules – Proxy Statements
- Shareholder Director Nominations
- Shareholder Voting on Executive Compensation of TARP Recipients
- E-Proxy Process Enhancements
On the Horizon – Roadmap for Domestic Issuers to File IFRS Financial Statements
Commission and Staff Guidance
- New Accounting Standards and SEC Staff Guidance
- Areas of Frequent SEC Staff Comment
- Accounting Standards Codification
- Internal Control Reporting after a Reverse Acquisition
- Non-GAAP Financial Measures
- Smaller Reporting Companies
- Financial Reporting Manual
- C&DIs
Staff Project – Core Disclosure Requirements
PCAOB Developments
- Adopted Standard – Engagement Quality Review
- Proposed Standards – Assessing Risk in an Audit
- Guidance
Glossary of Standards

Significant 2009 Developments

In 2009, the Securities and Exchange Commission devoted much of its attention to the financial crisis and the regulatory shortcomings it exposed. The Commission focused on:

• Participating in efforts by the Obama administration and Congress to reform the U.S. government’s approach to financial markets regulation;
• Initiatives to protect client assets at investment advisers, address market structure inequities, enhance corporate governance, strengthen the resiliency of money market funds, and upgrade the regulation of credit rating agencies; and
• Recruiting new executive staff leadership and revitalizing the Enforcement Division.

The Commission had been expected to make progress on its roadmap for domestic issuers to file financial statements prepared in accordance with International Financial Reporting Standards (IFRS) this year. However, commenters raised a number of complex issues related to the workability of various aspects of the Commission’s approach, and the activities listed above took priority.

During 2009, the Commission proposed a number of amendments to its proxy rules and adopted rules amending proxy disclosures on governance and compensation. In June, the Commission resumed its controversial effort to change its proxy rules to allow shareholders to nominate directors by making another rulemaking proposal. The SEC reopened the proposal for comment in December. In July, the SEC proposed amendments to the proxy rules that would require companies that were recipients of Troubled Asset Relief Program funds to conduct a non-binding shareholder vote on executive compensation if the funds were still outstanding. In October, the Commission proposed rules to amend the electronic (or “e”) proxy rules in an effort to increase the percentage of retail shareholders who vote when proxy statements are made available only via the Internet. In December, the SEC finalized rules that modify compensation and corporate governance disclosures in proxy statements.

The Commission updated a number of rules that had become out of date as a result of new technologies and new accounting standards. In December 2008, the SEC published revisions to modernize its oil and gas reporting and disclosure rules, and in January 2010 the FASB amended its standards to align them with the SEC’s revised rules. In April, the Commission also updated its rules, forms, schedules, and financial reporting releases for the new business combinations and noncontrolling interests accounting standards.

The only internal control over financial reporting (ICFR) requirement remaining unimplemented is audit reporting on ICFR by nonaccelerated filers. Currently, every issuer must provide a management’s report on ICFR, and all accelerated filers must also provide an auditor’s attestation report on ICFR. In September, the SEC’s Office of Economic Analysis released its Study of the Sarbanes-Oxley Act of 2002 Section 404 Internal Control over Financial Reporting Requirements. The Report indicated that although compliance costs are still high, the guidance published by the SEC and PCAOB in 2007 had been effective in reducing the costs of internal reporting and investors value audits of ICFR. In October, the SEC deferred the compliance date for non-accelerated filers to have their auditors report on their ICFR to fiscal years ending on or after June 15, 2010.

The SEC staff updated its guidance for new accounting standards and SEC rules. In April, it issued Staff Accounting Bulletin (SAB) 111 to conform its codified SABs to the FASB’s newly issued other-than-temporary impairment (OTTI) guidance. The result of this action is that the OTTI guidance in the SABs is limited to equity instruments. The staff issued SAB 112 in June to conform the SABs to the FASB’s new business combinations and noncontrolling interests standards, and in October it issued SAB 113 to conform the SABs to the SEC’s amended rules on oil and gas reporting.

During the year the staff provided guidance on implementing new accounting standards, including standards on convertible debt in which the conversion option can be settled wholly or partially in cash, subsequent events, and the FASB’s Accounting Standards Codification (ASC).

The staff also provided guidance on complying with the Commission’s rules and regulations. XBRL interactive data submissions began for the largest registrants. The staff reviewed their submissions and published their observations. It also made two presentations on XBRL that are publicly available. The staff added small business compliance guides on initial public offerings, interactive data, filing Form Ds, and how to raise capital and comply with the securities laws. The Division of Corporation Finance updated its Financial Reporting Manual three times during the year and added to its Compliance and Disclosure Interpretations(1) throughout the year. In January 2010, the staff issued additional C&DIs aimed at removing impediments to disclosing non-GAAP measures that registrants believe provide meaningful information to their investors.

Both the SEC and the PCAOB experienced leadership changes. At the SEC, Christopher Cox stepped down as Chairman and was replaced by Mary Schapiro in January. New senior staff appointments include Jim Kroeker, Chief Accountant, and Meredith Cross, Director of the Division of Corporation Finance. At the PCAOB, Mark Olson resigned as Chairman and Daniel Goelzer was named acting Chairman. The PCAOB also named a new Chief Auditor, Martin Baumann.

Looking forward to 2010, the Commission expects to resume work on the IFRS roadmap early in the year and to continue work on many of the regulatory initiatives described above. In addition, the staff has begun a project to recommend improvements in the Commission’s core disclosure requirements that would drive better (as opposed to more) disclosure.

This letter summarizes many of the 2009 Commission and staff activities described above. We discuss rulemaking initiatives finalized in 2009 first, followed by those still in the proposal stage as of December 31, 2009. The letter makes several references to accounting standards. We have provided definitions in the glossary that appears at the end of this letter. Although not the focus of this letter, we also briefly discuss the 2009 activities of the Public Company Accounting Oversight Board.

New Commission Rules

Oil and Gas Reserve Information
(Release 33-8995, FR 78)

As discussed further in our 2008 SEC Year in Review letter, in December 2008, the Commission adopted revisions to modernize its oil and gas reporting requirements, which had been unchanged since the early 1980s. The new requirements were published in Financial Reporting Release (FR) 78 and are effective for registration statements filed on or after January 1, 2010, and for annual reports on Forms 10-K and 20-F for fiscal years ending on or after December 31, 2009. Early adoption is not permitted. A company may not apply the new rules to disclosures in quarterly reports prior to the first annual report in which the revised disclosures are required.

In January 2010, the FASB issued Accounting Standards Update (ASU) 2010-03, which amended ASC 932, (formerly FAS 19). The ASU amended the accounting standards to align them with the SEC’s new rules in FR 78. The ASU is effective for annual reporting periods ending on or after December 31, 2009. See our Accounting Year in Review: 2009 for further information regarding the ASU.

The release is available on the SEC’s website: click here

XBRL
(Release 33-9002)

Christopher Cox, the previous SEC Chairman, promoted the power and ease of using financial statements filed in interactive data format throughout his tenure at the Commission. In January, the Commission published rules requiring issuers to provide to the SEC financial statements using XBRL. The largest companies commenced XBRL reporting this year, and the phase-in for other issuers is scheduled over the next two years. The phase-in schedule is as follows:

• Year 1 – XBRL reporting commenced for domestic and foreign large accelerated filers that use U.S. GAAP and have a worldwide public float above $5 billion. The SEC estimated that this group includes approximately 500 companies, and 346 issuers in this group have already provided XBRL submissions. These large companies began XBRL reporting in fiscal periods ending on or after June 15, 2009;
• Year 2 – All other domestic and foreign large accelerated filers (generally filers with over $700 million in public float) using U.S. GAAP will be subject to interactive data reporting for fiscal periods ending on or after June 15, 2010;(2) and
• Year 3 – All remaining filers using U.S. GAAP, including smaller reporting companies, and all foreign private issuers that prepare their financial statements in accordance with IFRS as issued by the IASB will follow in the third year, beginning with fiscal periods ending on or after June 15, 2011.

Domestic filers will begin XBRL reporting in their Form 10-Q for the first quarter ending on or after June 15 of the year that the rules become applicable. Foreign private issuers will begin XBRL reporting in their Form 20-F or 40-F for the applicable year ending on or after June 15. SEC staff guidance on XBRL implementation is discussed below in the Commission and Staff Guidance section of this letter.

Registrants will be required to provide an exhibit containing interactive data with each quarterly and annual report. They will also be required to provide such an exhibit with (1) each current report (i.e., Form 8-K or 6-K) containing updated or revised versions of its financial statements and (2) certain registration statements as discussed below.

To allow filers time to become familiar with tagging footnotes and schedules, the rules phase in the level of detail in which this information must be tagged. In a filer’s initial year, each footnote to the financial statements and each financial statement schedule will need only to be tagged individually as a single block of text. Beginning in the second year, a filer will be required to tag the footnotes and schedules in greater detail.

To accommodate transition, the rules also provide filers with two grace periods. Generally, interactive data exhibits will be required at the same time as the rest of the related report or Securities Act registration statement. However, a filer’s initial interactive data exhibit will be required within 30 days after the earlier of the due date or filing date of the related report or registration statement. In year two a filer will also have an additional 30 days to provide the first interactive data exhibit that includes the detailed tagging of its footnotes and schedules.

In addition to providing XBRL data as an exhibit to SEC filings, a filer must also post the data to its website if it maintains one. Interactive data will not be required as an exhibit to a Securities Act registration statement that does not contain financial statements (e.g., most filings on Form S-3 that incorporate the financial statements by reference) or an initial public offering. A company that first becomes an SEC registrant after the three-year phase-in period will be required to submit interactive data beginning with its first quarterly report on Form 10-Q or annual report on Form 20-F or Form 40-F, as applicable.

The XBRL data will not be subject to auditor reporting. The data provided in XBRL format will be furnished rather than filed for the first two years. After that, the data will be filed and subject to correspondingly increased liability. XBRL data is not required for other companies’ financial statements a registrant may file, such as those provided pursuant to Rules 3-05, 3-09, 3-14 and 3-16 of Regulation S-X. Filers may provide interactive data earlier than required but must follow the new rules – not the previous voluntary program.

The release is available on the SEC’s website: click here

Updates for the New Business Combinations and Noncontrolling Interests Accounting Standards
(Release 33-9026, FR 79)

In April, the SEC adopted technical amendments that conform its rules, forms, schedules and Codification of Financial Reporting Policies with ASC 805 (formerly FAS 141R) and ASC 810 (formerly FAS 160). In FR 79, the Commission updated the Regulation S-X financial statement rules, the Regulation S-K nonfinancial statement rules, the Securities Act forms, and the Exchange Act rules, forms, and schedules to make the terminology and presentation and disclosure requirements consistent with the new accounting standards. The amendments also removed references to “pooling of interests” accounting and replaced them with references to “combinations of entities under common control” accounting, since such combinations involving businesses are the only ones that are accounted for retrospectively at carryover cost basis.

Also, the SEC staff amended the SABs that provide guidance on business combinations topics and ASC 480-10-S99-3A (formerly EITF Topic D-98) to provide guidance on redeemable noncontrolling interests. The amendments to the SABs are discussed later in this letter.

The release is available on the SEC’s website: click here

Auditor Reporting on Internal Control Over Financial Reporting
(Release 33-9072)

In October, the Commission deferred the compliance date for auditors of non-accelerated filers to report on internal control over financial reporting (ICFR) from fiscal years ending on or after December 15, 2009 to fiscal years ending on or after June 15, 2010. As a result, nonaccelerated filers with fiscal years ending December 15, 2009 through June 14, 2010 will have an additional year before they are required to have their auditors report on ICFR. Non-accelerated filers have been required to provide management reports on ICFR since fiscal years ended on or after December 15, 2007; this is simply a deferral of the auditor attestation requirement.

The SEC had deferred auditor reporting on ICFR in June 2008 so that the SEC’s Office of Economic Analysis could complete a study of whether additional guidance provided to company managers and auditors in 2007 was effective in reducing the costs of complying with ICFR reporting. The study was published shortly before the October deferral,and it indicated that although compliance costs are still high, the 2007 guidance reduced the costs of internal reporting and investors value audits of ICFR.

When the SEC deferred the compliance date, Chairman Schapiro emphasized that the Commission will provide no further extensions. However, in December the U.S. House of Representatives approved a bill on financial regulatory reform that would exempt smaller companies from complying with the ICFR audit requirement. The Senate still needs to vote on the bill and the ultimate outcome is uncertain.

The release is available on the SEC’s website: click here

Proxy Disclosure Enhancements
(Release No. 33-9089)

In December, the SEC finalized amendments to its proxy disclosure rules. The amended rules require disclosures about the relationship of a company’s overall (not just executive) compensation policies to risk; director and nominee qualifications; company leadership structure; and the potential conflicts of interests of compensation consultants.

The amendments modify the compensation and corporate governance proxy disclosures by requiring:

• New disclosure and analysis of how a company’s overall compensation policies for employees create incentives that can affect the company’s risk and management of that risk if it may have a material effect on the company;
• Changes in the Summary Compensation Table and Director Compensation Table to disclose the aggregate grant date fair value of stock and option awards, computed in accordance with ASC 718 (formerly FAS 123R), rather than the dollar amount recognized for financial statement purposes for the fiscal year (this change returns the disclosure to that initially approved in 2006);
• New disclosure of the qualifications of directors and nominees for director and the reason why a company believes each director or nominee is qualified to serve as a director and as a member of a named committee in light of the company’s business and structure;
• Additional disclosure of any directorships of public companies held by each director and nominee at any time during the past five years;
• New disclosure regarding the consideration of diversity in the process by which candidates for director are considered for nomination;
• Companies to disclose legal proceedings involving a company’s directors, nominees for director and executive officers for 10 (rather than five) years;
• New disclosure about a company’s board leadership structure and the board’s role in the risk management process;
• New disclosure about the services provided by and fees paid to compensation consultants and their affiliates when they play any role in determining or recommending the amount or form of executive and director compensation, if they also provide other services to the company; and
• Companies to disclose the results of shareholder votes on Form 8-K, rather than Forms 10-Q or 10-K, generally within four business days of the meeting.

The amendments become effective February 28, 2010, and the SEC staff issued the following transition guidance in its C&DIs in December:

• Form 10-K and Proxy Statements – If an issuer’s fiscal year ends on or after December 20, 2009, its Form 10-K and proxy statement must comply with the new proxy disclosure requirements if they are filed on or after February 28, 2010. If such an issuer files its 2009 Form 10-K before February 28, 2010 and its proxy statement on or after February 28, 2010, the proxy statement must comply with the new proxy disclosure requirements. If the issuer’s fiscal year ends before December 20, 2009, its 2009 Form 10-K and related proxy statement are not required to comply with the new proxy disclosure requirements, even if they are filed on or after February 28, 2010.
• Registration statements under the Securities Exchange Act of 1934 and the Securities Act of 1933 – A reporting issuer with a fiscal year that ends on or after December 20, 2009 will be required to comply with the new disclosure requirements in registration statements once it has filed its Form 10-K for that year. A reporting issuer with a fiscal year that ends before December 20, 2009 will not be required to comply with the new disclosure requirements until it files its fiscal 2010 Form 10-K. As a result, any registration statements for such issuers filed before the 2010 Form 10-K is required to be filed will not be subject to the amended disclosure requirements.
• Form 8-K – Any shareholder meeting that takes place on or after February 28, 2010 is subject to the new Form 8-K reporting requirement.
  If the meeting takes place before February 28, 2010, Form 8-K reporting is not required.

The C&DI is available on the SEC’s website: click here

The release is available on the SEC’s website: click here

Proposed Rules - Proxy Statements

Shareholder Director Nominations
(Release No. 33-9046)

In June, the Commission proposed changes to the proxy rules to remove impediments to the exercise of shareholders’ rights to nominate and elect directors to company boards of directors. The Commission had made proposals in 2003 and 2007 to provide greater access to shareholders in the director nomination process that were not finalized, and the 2009 proposal builds on the earlier proposals. The proposal would require a company to include in its proxy materials a shareholder’s, or group of shareholders’, nominees for director if certain requirements related to stock ownership and nominating process are met. In addition, the new rules would require companies to include in their proxy materials shareholder proposals that would amend, or that request an amendment to, a company’s governance regarding nomination procedures or disclosures related to shareholder nominations, as long as the proposal complies with SEC rules. Companies would be required to use the new nomination procedures only if doing so would not violate state law. Comments on the proposal were due on August 17. On December 14, the Commission re-opened the public comment period through January 19, 2010 to seek views on additional data and related analyses that were added to the public comment file after August 17.

The release is available on the SEC’s website: click here

Shareholder Voting on Executive Compensation of TARP Recipients
(Release No. 34-60218)

One of the SEC’s actions in response to the credit crisis and the government assistance provided to financial institutions was to propose amendments to the proxy rules that would apply to issuers subject to Section 111(e) of the Emergency Economic Stabilization Act of 2008. This section requires that Troubled Asset Relief Program (TARP) recipients conduct a non-binding shareholder vote on the compensation of executives. The vote would be required in any period in which financial assistance under the TARP remains outstanding. The company would be required to solicit this shareholder vote when it solicits proxies for the election of directors at an annual meeting. The vote would not be binding on the board of directors, and also would not limit the ability of shareholders to make proposals for inclusion in proxy materials related to executive compensation. Comments on the proposal were due on September 8.

The release is available on the SEC’s website: click here

E-Proxy Process Enhancements
(Release No. 33-9073)

In October, the SEC proposed changes to the e-proxy rules that the Commission issued in 2007. The SEC’s e-proxy rules have a notice and access model that requires all issuers and other soliciting persons to post proxy materials on a website and furnish notice of the availability of the materials to shareholders. Issuers can also deliver full sets of the printed proxy statements to shareholders. The SEC proposed amendments in 2009 because surveys showed that issuers using only the notice and access delivery method had a lower percentage of retail shares voted by shareholders than issuers using the full-set delivery option.

The proposed changes would:

• Allow flexibility regarding the format of the Notice of Internet Availability of Proxy Materials (the Notice), allowing companies to make it a more plain English announcement that clarifies that the materials are available online and that hard copies can be requested and explains how shareholders can request hard copies or review the materials online and how to vote, either using a proxy card or online;
• Provide guidance about identifying the matters intended to be acted on at the shareholders’ meeting in the Notice; and
• Revise the deadlines so that soliciting persons other than the issuer have more time for delivering a Notice when they rely on the notice and access model only.

Comments were due November 20, 2009.

The release is available on the SEC’s website: click here

On the Horizon – Roadmap for Domestic Issuers to File IFRS Financial Statements
(Release No. 33-8982)

In 2008, the SEC proposed a roadmap for domestic issuers to file financial statements prepared in accordance with IFRS, and the comment period closed on April 19, 2009. Commissioner Elisse Walter reported on the current status of the roadmap at the 2009 AICPA National Conference on Current SEC and PCAOB Developments, where she observed that the comment letters raised a number of complex issues including issues related to the workability of various aspects of the proposed approach. She also noted that Chairman Schapiro has said that the Commission would soon address the proposed roadmap and stated that she expects further action in early 2010. She also expressed caution, saying, “I remain committed to striving towards one global set of high-quality accounting standards. I also continue to believe that there are critical issues that still need to be addressed as the Commission moves forward. My views remain the same – I believe that we should move forward with further incorporating IFRS into the U.S. capital markets if, and only if, it is the right thing to do for U.S. investors.”

The release is available on the SEC’s website: click here

Commission and Staff Guidance

New Accounting Standards and SEC Staff Guidance

Other-than-Temporary Impairment – SAB 111

In April, the SEC staff issued SAB 111, which amended ASC 320-10-S99 (SAB Topic 5M). SAB 111 removed the guidance on other-thantemporary impairments of debt securities.(4) This guidance was no longer considered necessary, since the FASB issued ASC 320-10 (formerly FSP FAS 115-2 and 124-2), to provide guidance for assessing when an impairment of a debt security is other-than-temporary. The FSP is limited to debt securities, and if management does not intend to sell the security and it is more-likely-than-not that it will not have to sell the security before it recovers in value, it requires companies to split OTTI charges between credit losses, which are charged to earnings, and the remainder of the impairment charge (non-credit portion), which is recorded in other comprehensive income (OCI). As a result, ASC 320-10-S99 now addresses only available-for-sale equity securities and maintains the staff’s previous views related to equity securities.

At the Center for Audit Quality (CAQ) SEC Regulations Committee meeting held in June, the staff stated that it has issued a number of comments that primarily relate to the required income statement presentation of total OTTI, the portion recognized in OCI, and the portion recognized in earnings. The staff observed that there have been several different presentations which are acceptable:

• Present all the amounts within the income statement;
• Present the gross OTTI and the OCI portion parenthetically within the OTTI caption on the face of the income statement; and
• Present the disclosure separately at the bottom of the income statement.

The staff indicated that the presentation of the disclosure outside of the income statement in the notes to the financial statements is only acceptable if the OTTI amounts are clearly immaterial.

SAB 111 is available here

The CAQ SEC Regulations Committee minutes are available on the CAQ’s website: click here

Business Combinations and Noncontrolling Interests
Push-Down Accounting – SAB 112

The SEC staff issued SAB 112 to update various SABs to make them consistent with the new business combinations accounting standard(5) and the new noncontrolling interests accounting standard.(6) SAB 112 included revisions to ASC 805-50-S99-2 (SAB Topic 5J) on push-down accounting. The principle in push-down accounting remains the same – to reflect the parent’s basis in the subsidiary’s financial statements – but the manner in which this is accomplished has changed because the parent’s basis is now fair value at the time the parent obtained control (not the parent’s cost). The push-down accounting thresholds remain unchanged. Push down accounting is:

• Required in the separate financial statements of an entity if 95% or more of the entity has been acquired;
• Permitted if 80-95% has been acquired; and
• Prohibited if less than 80% has been acquired.

At the June CAQ SEC Regulations Committee meeting, the staff discussed the application of ASC 805-50-S99-2, as revised by SAB 112, in the following fact patterns:

• Scenario 1
  Company A purchases between 80% and 95% of Company B and elects push down accounting. In that case, 100% of Company B’s fair value (and thus 100% of any goodwill resulting from the new basis of accounting recorded by Company A, including goodwill attributable to the noncontrolling interest) should be reflected in Company B’s separate financial statements.
• Scenario 2
  Company A acquires substantially all of Company B in a series of transactions. Consistent with the requirements of ASC 805 (formerly Statement 141R), Company A reflects the acquisition of Company B at 100% of its fair value as of the date on which control is obtained. For example, assume Company A purchases 25% of Company B in March 2009, an additional 35% interest in September 2010 and the remaining 40% interest in June 2012. Company A will report its acquisition of Company B at fair value in September 2010 at the time the additional 35% interest (i.e., control) is obtained. The June 2012 purchase of the 40% noncontrolling interest represents an equity transaction. Any difference between the fair value of the 40% acquired in June 2012 and the amount at which it is already reflected in Company A’s financial statements is charged or credited to equity and does not affect Company A’s basis in Company B.

In that case, in June 2012, at which point Company B became 100% owned and push down accounting would be required, the amount pushed down in Company B’s separate financial statements is the amount that Company A recorded in the transaction which resulted in control, i.e., the basis at September 2010, adjusted for subsequent activity (e.g., depreciation and amortization of basis differences).

While Scenarios 1 and 2 are straightforward applications of Topic 5J, there are other scenarios in which the application is not as clear and preclearance with the staff may be appropriate:

• Scenario 3
  A company acquires 51% control of a target at a time when Statement 141 was in effect and accounts for the transaction in accordance with that standard. Accordingly, the noncontrolling interest resulting from this acquisition is not written up to fair value. Subsequently, the company acquires an additional 44% to obtain 95% of the target. This second transaction occurs at a time when ASC 805 (formerly Statement 141(R)) is effective. When this second step occurs, it is accounted for as an equity transaction since there was no change in control. We understand that SAB 112 would require the registrant to push down the mixed basis that existed on the date control was obtained under Statement 141 (i.e., 51% at prior acquisition cost and 49% at carryover basis), adjusted for subsequent activity. However, there may be significant practical challenges to this approach. If so, a registrant may wish to consider potential alternatives and discuss them with the SEC staff.
• Scenario 4
  Collaborative groups under ASC 805-50-S99-2 may present particularly challenging fact patterns under SAB Topic 5J, as revised by SAB 112. For instance, individual members within the group can acquire their interests in a target at different times, they may or may not own more than 50% of the target on an individual basis, and the composition of the group may change as members sell their interests to third parties. SEC staff views continue to evolve on these topics.

SAB 112 is available here

The CAQ SEC Regulations Committee minutes are available on the CAQ’s website: click here

Equity Reconciliation

Under ASC 810-10-50-1A(c) (formerly FAS 160 and ARB 51 paragraph 38(c)), companies are required to reconcile total equity at the beginning of the period to total equity at the end of the period. The SEC’s recent technical amendments to Regulation S-X, Rule 3-04 (Release 33-9026), similarly require issuers to reconcile total equity at the beginning of the period to total equity at the end of the period. However, the SEC rules (Section 211 of the Codification of Financial Reporting Policies) continue to prohibit issuers from including redeemable equity in any caption titled “total equity.”

Redeemable equity is not permanent equity, but it is equity. Therefore, the SEC staff has observed that registrants should present it in the reconciliation provided to comply with ASC 810. However, registrants with redeemable noncontrolling interests, redeemable preferred stock or other redeemable equity classified outside permanent equity should not include these items in any total, regardless of whether it is titled “total equity” or something else.

At the June CAQ SEC Regulations Committee meeting, the staff identified two acceptable means of presenting the equity reconciliation to satisfy the requirements of both the SEC’s rules and GAAP. The following discussion is in the context of redeemable noncontrolling interests:

• Provide a column for redeemable noncontrolling interests in the equity reconciliation, but exclude the related amounts from any “total” column. In that case, the reconciliation could include a row for net income or a supplemental table identifying the allocation of net income among controlling interests, nonredeemable noncontrolling interests and redeemable noncontrolling interests.
• Exclude redeemable noncontrolling interests from the equity reconciliation, but provide a supplemental table (e.g., in the notes to the financial statements or the “statement of changes in equity and noncontrolling interests”) reconciling the beginning and ending balances of redeemable noncontrolling interests. In that case, the caption “net income” in the equity reconciliation could note parenthetically the amounts related to redeemable noncontrolling interests.

The CAQ SEC Regulations Committee minutes are available on the CAQ’s website: click here

Oil and Gas – SAB 113 and C&DIs
SAB 113

The SEC staff issued SAB 113 to update SAB Topic 12, Oil and Gas Producing Activities, for its recent rulemaking and SAB Topic 3, Senior Securities, for an associated technical reference. The staff updated the SABs to make them consistent with the new rules in two releases discussed above: FR 78, Modernization of Oil and Gas Reporting, and FR 79, Technical Amendments to Rules Forms, Schedules and Codification of Financial Reporting Policies. SAB 113 also removed Topic 12.A.3.d, which previously required a balance sheet of the general partner of an oil and gas limited partnership to be included in a registration statement for an offering of limited partnership interests.

The staff expects registrants to apply the updated guidance in Topic 12 on a prospective basis in conjunction with the application of FR 78, which is effective for registration statements filed on or after January 1, 2010, and for annual reports on Forms 10-K and 20-F for fiscal years ending on or after December 31, 2009.

SAB 113 is available here

C&DIs

In October the staff issued new C&DIs that comprise the staff’s interpretations of the oil and gas rules in Regulations S-X and S-K that focus on the determination of oil and gas reserves.

The oil and gas C&DIs are available here

Subsequent Events
Reporting Retrospective Accounting Changes in Amendments to Periodic Reports

At the June CAQ SEC Regulations Committee meeting, the SEC staff confirmed that issuers should correct material errors in prior period financial statements by amending the affected periodic reports (e.g., Forms 10-K and 10-Q). The staff noted that issuers should not use Form 8-K to file financial statements that have been restated to correct a material error. Further, the staff observed that financial statements that are restated to correct material errors should be filed as timely as possible.

However, the staff changed its view regarding whether such amendments should also reflect the retrospective effects of subsequent accounting changes.(7) The staff now believes that once a company files interim information that reflects accounting that is applied retrospectively, any subsequent amendment to a periodic report to correct an error should reflect the retrospective accounting in addition to the correction of the error. To illustrate, assume a company’s first quarter Form 10-Q reflects the adoption of a new accounting standard that requires retrospective application. If the company subsequently discovers an error in prior year financial statements, the amended financial statements included in a Form 10-K/A should reflect both the retrospective application of the new accounting standard and the correction of error. The disclosures should clearly segregate the effects of each of these items.

The CAQ SEC Regulations Committee minutes are available on the CAQ’s website: click here

Subsequent Events and Financial Statement Issuances

Under ASC 855 (formerly FAS 165), public companies are required to evaluate subsequent events through the date that the financial statements are issued and to disclose that date in their financial statements. The Standard states that financial statements are considered issued when they are widely distributed to shareholders and other financial statement users for general use and reliance in a form and format that complies with GAAP. ASC 855 became effective for interim and annual financial periods ending after June 15, 2009.

Prior to ASC 855, the SEC staff had provided guidance on when financial statements are considered issued in ASC 855-10-S99 (formerly EITF Topic D-86). Under ASC 855-10-S99, financial statements are considered issued the earlier of when they are widely distributed to all shareholders and other financial statement users or when they are filed with the Commission. This guidance indicates that to be considered issued, the financial statements should be in a form and format that complies with GAAP and, in the case of annual financial statements, contains an audit report that indicates that the auditors have complied with generally accepted auditing standards in completing their audit.

At the September 2009 EITF meeting, the SEC staff stated that ASC 855-10-S99 will be amended to indicate that posting financial statements to a registrant’s website is considered to be wide distribution to all shareholders and other financial statement users if the registrant uses its website to disclose information to the public in a manner consistent with the requirements in Regulation FD.(8) This may enable an issuer to better control the date on which it issues its financial statements. To illustrate, consider a registrant based in Los Angeles that completes its Form 10-K at 7:45 p.m. pacific time (45 minutes after the SEC’s EDGAR system stops accepting filings) on February 25, 2010. The company cannot file its Form 10-K with the SEC until the EDGAR system reopens at 3 a.m. pacific time on February 26. If the company uses its website in the manner described in ASC 855-10-S99 and can post its financial statements to its website by midnight pacific time, it can still issue its financial statements on February 25.

ASC 855-10-S99 is available on the FASB’s website: click here

Subsequent Events and Financial Statement Reissuances

ASC paragraphs 855-10-25-4 and 50-4 outline requirements when a company reissues its financial statements, such as when financial statements are presented in registration statements filed with the SEC. These paragraphs require a company to disclose the date through which subsequent events have been evaluated in both the originally issued financial statements and in the reissued financial statements.

At the September CAQ SEC Regulations Committee meeting, the SEC staff provided informal guidance on applying paragraphs 25-4 and 50-4 when a company is reissuing financial statements by incorporating them by reference into a registration statement. The staff addressed concerns that the standard might eliminate a company’s ability to incorporate by reference previously filed financial statements if the financial statements would need to be amended to disclose the date through which subsequent events were re-evaluated. The staff indicated that it will allow companies to incorporate by reference financial statements in registration statements without revising them to disclose the date through which subsequent events were re-evaluated. In addition, the staff observed that issuers may rely on disclosures about subsequent events contained in other reports (e.g., Form 8-K) that are also incorporated by reference into the registration statement in meeting the ASC 855 requirements.

The CAQ SEC Regulations Committee minutes are available on the CAQ’s website: click here

Amendment of ASC 855

The FASB has undertaken a project to amend ASC 855 to resolve unintended implementation problems it has caused for public companies. In December, the FASB issued an Exposure Draft of an Accounting Standards Update that would amend ASC 855. Although companies that file or furnish financial statements with the SEC would continue to be required to evaluate subsequent events through the date the financial statements are issued, the FASB has proposed that they would no longer be required to disclose the date through which subsequent events were evaluated.

Subsequent Events and Form S-8

The SEC staff issued a C&DI that formalized its position on subsequent events and Form S-8. This situation arises when an issuer’s previously filed financial statements need to be revised (e.g., due to a material discontinued operation, change in reportable segments, or accounting change that requires retrospective application), but revised financial statement have not been filed before the Form S-8 is filed. Practice has generally been to disclose the event giving rise to the change on a Form 8-K that is incorporated by reference in the Form S-8 and to incorporate the registrant’s financial statements presented in its most recent Form 10-K by reference in the Form S-8 without revision. The staff noted that it is up to the company and its counsel to determine whether a change requires updating the financial statements to be incorporated by reference in the Form S-8. Similarly, it is the responsibility of the auditor to determine if it will issue a consent to use its report if there has been a change but the financial statements have not been revised.

The C&DI on Form S-8 is available at Securities Act Forms, Question 126.40: click here

ASC 810, Consolidation of Variable Interest Entities

ASC 810 (formerly FAS 167), may require an SEC registrant to consolidate or deconsolidate an entity.(9) It may require this either (a) as a result of the change in accounting that occurs when an entity adopts ASC 810 or (b) due to events or changes in circumstances that occur after an entity has adopted ASC 810. A summary of these issues follows:

Internal Control Reporting – The SEC staff would typically expect management’s report on ICFR to include controls at all consolidated entities, irrespective of the basis for consolidation. When FIN 46 first became effective, the staff provided relief in situations “where the registrant does not have the right or authority to assess the internal controls of the consolidated entity and also lacks the ability, in practice, to make that assessment.” Since under ASC 810 VIEs will be consolidated by entities with the power to direct the activities of the VIE that most significantly affect its economic performance, it appears there will be few situations where relief from internal control reporting will be available.(10) After adoption, the staff also provides temporary relief from internal control reporting for VIEs that are newly consolidated due to events or changes in circumstances, as the staff does for other newly acquired entities.(11)

Rule 3-05 and Article 11 of Regulation S-X and Form 8-K – In the past, the adoption of a new accounting standard that resulted in a registrant consolidating an entity that is a business for the first time has not been considered the type of extraordinary corporate event that triggers the need for acquired business financial statements under Rule 3-05 of Regulation S-X and Item 9.01(a) of Form 8-K. The adoption of the ASC 810 also should not trigger the need for historical financial statements of newly-consolidated VIEs that are businesses. The SEC staff has not provided guidance on whether the consolidation or deconsolidation of a VIE resulting from adopting a new accounting standard is a reportable event under Item 2.01 of Form 8-K. The staff has, however, informally indicated that pro forma information may be appropriate. After adoption, when events or changes in circumstances require a registrant to consolidate or deconsolidate a VIE, this is an event that may require reporting pursuant to Rule 3-05 and Article 11 of Regulation S-X and/or Items 2.01 and 9.01 of Form 8-K, even if a registrant did not issue or receive any consideration. Under these rules, the need to report and nature of the reporting required depend on whether the VIE is a business (under Rule 11-01(d) of Regulation S-X) or a collection of assets, whether it is consolidated or deconsolidated, and its significance.

Newly Applied Accounting Standards
Effects on Registration Statements

The FASB requires companies to adopt many new accounting standards through retrospective application. If a company adopts a new accounting standard that requires retrospective application in an interim period and then decides to file a new registration statement, the SEC staff generally does not allow the company to incorporate the annual financial statements into the registration statement by reference since they no longer comply with GAAP.(12) The company’s selected financial data and Management’s Discussion and Analysis of financial condition and the results of operations (MD&A) generally also require updating. Accordingly, the company can present the revised prior period financial statements, selected financial data and MD&A in the registration statement. Alternatively, the company could file the revised information on a Form 8-K under Item 8.01 and incorporate it by reference in the registration statement. The revised disclosure should not be provided by amending the most recent Form 10-K. Since the disclosure in the Form 10-K was appropriate when it was filed, it is not appropriate to amend that filing.

While the SEC staff generally requires registrants to revise affected information in the manner discussed above, in limited circumstances, the staff permits issuers to use what is sometimes referred to as the “accommodation approach.” Under this approach, if a registrant and its auditor conclude that revising the prior financial statements is not necessary, then in lieu of filing revised financial statements, the registrant provides the relevant revised amounts in a selected financial data table in the registration statement,(13) with prominent disclosure that the amounts have been revised and the reasons for the revision. An area in which the staff has allowed the accommodation approach is new accounting standards related to earnings per share.

Sometimes new accounting standards (e.g., ASC 810 (formerly FAS 167), ASC 605-25 (formerly EITF 08-1) and ASC 985-605 (formerly EITF 09-3)) provide the option of adopting retrospectively or prospectively. Companies will need to consider the consequences of the method they choose as they evaluate the financial statement requirements of registration statements to be filed, declared effective or post-effectively amended after their first Form 10-Q is filed that reflects the adoption of such standards. This could be important because if the effect of adoption is material and a registrant has (a) adopted retrospectively and (b) filed interim financial statements for a period that includes the date of adoption, the SEC staff will expect the registrant to revise its prior period annual financial statements, selected financial data and MD&A before incorporating them by reference or presenting them in a new registration statement (other than one filed on Form S-8). Conversely, if a registrant elects to adopt only on a prospective basis, or if the retrospective application is not material, its registration statement may incorporate by reference its most recent Form 10-K (assuming the prior financial statements don’t require revision for other purposes).

Adoption of FSP APB 14-1

ASC 470-20 (formerly FSP APB 14-1) states that it should be applied retrospectively but only to instruments that were outstanding during the periods presented in the annual financial statements presented for the period of adoption. This has led to questions about how the amounts for the prior years presented in a data table should be prepared. The SEC staff accepts the following approaches for preparing selected financial data tables:(14)

Financial Statement Approach – Present amounts for periods covered by the financial statements that agree with the financial statements, i.e., that reflect the application of ASC 470-20. Do not revise prior period amounts. The amounts in the table reflect the cumulative effect of applying ASC 470-20 as an adjustment to the opening retained earnings(15) of the first period presented in the audited financial statements.

Selected Financial Data Table Approach – Revise prior period amounts so that all periods reflect the application of ASC 470-20. The amounts in the table reflect a cumulative effect of applying ASC 470-20 as an adjustment to the opening retained earnings(16) of the first period presented in the table. It should be noted that if this approach is used and ASC 470-20 is applied to convertible debt instruments that were extinguished or converted prior to the period covered by the audited financial statements, the cumulative effect adjustment reflected in the audited financial statements will be different from that under the Financial Statement Approach.

Disclosures accompanying the table should describe the approach used, and companies using the financial statement approach should disclose that the data for the prior periods are not comparable to the data for the periods for which the audited financial statements are provided.

The staff also updated its guidance in ASC 480-10-S99-3A (formerly EITF Topic D-98) to reflect its view that a portion of the equity component of a convertible debt instrument that is recognized pursuant to ASC 470-20 may be within the scope of ASC 480-10-S99-3A and need to be classified as temporary equity.

Business Combinations – Measurement Period Adjustments

Registrants must provide revised financial statements in registration statements when material retrospective adjustments to provisional acquisition accounting entries have been identified but not reflected in the financial statements. The SEC staff has stated that, similarly, if a company makes an acquisition, the company’s revised financial statements should be utilized in the Regulation S-X, Rule 1-02(w) significance calculations, even if the registrant has not yet provided revised financial statements reflecting the retrospective adjustments.(17)

Areas of Frequent SEC Staff Comment

Goodwill Impairment – MD&A

At the September CAQ SEC Regulations Committee meeting, the SEC staff observed that registrants should address in MD&A the business and economic conditions that gave rise to a goodwill impairment charge. The staff commented that it is the business conditions leading to the impairment that are of interest to users (not the noncash nature of the charge) and should be highlighted in the discussion.

At that meeting and also at the 2009 AICPA National Conference on Current SEC and PCAOB Developments, the staff discussed a second impairment disclosure issue – the disclosures a company should make in MD&A if it has a reporting unit with a material amount of goodwill that is at risk of failing step 1 of the impairment test in ASC 350-20-35 (formerly FAS 142). And if an issuer does not have any reporting units that are at risk of future material goodwill impairment, the staff recommends that it disclose that fact in MD&A.

The CAQ SEC Regulations Committee minutes are available on the CAQ’s website: click here

The SEC staff’s presentation, including the materials on impairment disclosure (slides 21-23), is available on the SEC’s website: click here

Loan Loss Reserves – MD&A

In August, the Division of Corporation Finance sent “Dear CFO” letters to several public companies, primarily financial institutions, identifying suggested MD&A disclosures related to loan loss reserves. The letter serves as a reminder to registrants of the disclosure requirements in MD&A, specifically, those related to provisions and allowances for loan losses. The letter suggests that registrants with material amounts of higher risk loans disclose information such as the following:

• Carrying value of such loans
• Current loan-to-value ratios
• Amount and percentage of refinanced or modified loans
• Delinquency statistics or other quality information
• Policy for non-accrual status classification for loans for which the monthly payment is less than the interest
• Expected timing of adjustments of option ARM loans
• Amount and percentage of customers that are making the minimum payment on their option ARM loans.

The letter also suggests, among other items, the following disclosures:

• Any changes in practice for determining the allowance for loan losses, why the change was made, and its effect
• Information about declines in collateral value, including timing and frequency of appraisals, consideration of housing price depreciation, and the estimated amount of residential mortgage loans with loan-to-value ratios above 100%.

The letter is available on the SEC’s website: click here

Segment Reporting

The SEC staff frequently comments on the following aspects of registrants’ segment reporting.

• When it reviews a filing and considers a registrant’s segments, the staff will look at the materials presented to analysts and the business and MD&A sections of the filing and consider whether they are consistent with the segments reported.
• The staff also questions whether the aggregation of operating segments into reportable segments is appropriate. ASC 280-10 (formerly FAS 131) allows operating segments to be aggregated if the segments have similar economic characteristics as well as similar products/services, production processes, customers, method of distribution, and regulatory environment. ASC 280-10 states that segments with similar economic characteristics would be expected to have similar long-term average gross margins. The staff encourages registrants to determine whether operating segments have similar economic characteristics by considering all the facts, analyzing any indicators of economic dissimilarity, focusing on the factors that correlate most closely with the future prospects of the segments, and considering the volatility of underlying trends.

Executive Compensation Disclosure

In 2007, the Division of Corporation Finance performed a targeted review of the executive compensation disclosures of approximately 350 issuers, and in 2008 and 2009 the Division analyzed executive compensation disclosures in connection with its traditional review program. The staff’s most common concern in 2009 was the same as in 2008 and 2007 – that registrants should provide more analysis of how and why compensation decisions were made.

The staff has also observed that a company must disclose performance targets if they are a material element of its compensation policies and decisions unless the registrant can support that the disclosures cause competitive harm. When performance target information was not disclosed, the staff has asked companies to either disclose the information or explain to the staff why the disclosure would cause competitive harm. If the registrants were able to support that the disclosure would cause competitive harm, the staff has asked the companies to disclose how likely they would be to achieve the target.

Staff guidance on this topic can be found in a speech by Shelley Parratt, which is on the SEC’s website: click here

Financial Institutions

The SEC staff has published a presentation on areas of frequent staff comment on filings by financial institutions. The presentation is available on the SEC’s website: click here

Accounting Standards Codification
(Release 33-9062A, FR 80A)

In August, the Commission issued Financial Reporting Release 80A to provide guidance on the FASB’s Accounting Standards Codification. In June, the FASB issued ASC 105-10 (formerly FAS 168), to establish the Codification as the source of authoritative U.S. accounting principles. The Codification reorganized existing U.S. accounting and reporting standards by topic, and all guidance contained in the Codification carries an equal level of authority. ASC 105-10 was effective for financial statements issued for interim and annual periods ending after September 15, 2009.

Certain of the Commission’s rules contain references to pre-Codification accounting standards. FR 80A states that concurrent with the effective date of the Codification, references in the Commission’s rules and staff guidance to pre-Codification accounting standards should be understood to mean the corresponding reference in the Codification. The Commission noted that it and its staff intend to undertake a project to revise the U.S. GAAP references in the Commission’s rules and staff guidance.

The Commission also noted that although the FASB has stated that the Codification supersedes existing references in U.S. GAAP, the Codification does not supersede Commission rules or staff guidance.

The release is available on the SEC’s website: click here

U.S. GAAP References in Filings

In conjunction the transition to the Codification, the SEC staff has encouraged companies to make financial statements more useful to users by drafting financial statement disclosures that avoid specific GAAP references and instead clearly explain accounting concepts.

In financial statements for periods ending after September 15, 2009, the SEC staff believes that references to accounting standards should be to the Codification. Moreover, references to specific accounting standards throughout the financial statements should be on a consistent basis for all periods (i.e., disclosures for comparative periods should not refer to only pre-Codification standards). We understand that the SEC staff will not object if financial statements refer to both the Codification and pre-Codification accounting standards to facilitate investor understanding. Further, the staff will not request an amendment or revision if financial statements refer to only pre-Codification accounting standards, although the staff may issue a comment to remind a company to refer to the Codification in future filings.

At the CAQ SEC Regulations Committee meeting held in June, the staff observed that it does not expect companies to revise or amend financial statements for periods prior to September 15, 2009 simply because they do not refer to the Codification. In other words, a company’s June 30, 2009 Form 10-K, with references to only pre-Codification accounting standards, may be incorporated by reference into a Form S-3 registration statement that becomes effective after September 15, 2009, even if the Form S-3 also incorporates by reference the September 30, 2009 Form 10-Q that refers to the Codification.

The CAQ SEC Regulations Committee minutes are available on the CAQ’s website: click here

XBRL

During the year the SEC staff updated its C&DIs on XBRL implementation issues faced by registrants and provided its observations from reviews of the first group of Form 10-Qs containing XBRL data. The staff also has a resource page on the SEC’s website that provides XBRL resources, including a presentation on XBRL that the staff made this summer and FAQ guidance. Further, the staff presented observations on XBRL implementation at the 2009 AICPA National Conference on Current SEC and PCAOB Developments. We have provided links to these resources below.

The C&DIs on XBRL are available on the SEC’s website: click here

The staff observations from review of interactive data financial statements are available on the SEC’s website: click here

The staff interpretations and FAQs related to interactive data disclosure are available on the SEC’s website: click here

The XBRL resource page is available on the SEC’s website: click here

The staff presentation at the 2009 AICPA National Conference on Current SEC and PCAOB Developments is available on the SEC’s website: click here

Internal Control Reporting after a Reverse Acquisition

In April, the SEC staff added guidance to the C&DIs on internal control reporting after a reverse acquisition. This guidance addresses the requirements after a reverse acquisition in which a shell company acquires a private operating company and the private operating company is the acquirer for accounting purposes. It does not address reverse acquisition transactions involving two operating companies. The guidance indicates that if it is not possible to conduct an assessment of the issuer’s ICFR, a registrant may exclude management’s assessment of ICFR in the Form 10-K covering the fiscal year in which the transaction was consummated.(18) The guidance also states that issuers may take a similar approach after transactions involving special-purpose acquisition companies.

The C&DI on ICFR and reverse acquisitions is available at Question 215.02: click here

Non-GAAP Financial Measures

In April, the staff added guidance to the C&DIs on what constitutes a non-GAAP financial measure subject to the additional disclosure requirements in Regulation G or Item 10(e) of Regulation S-K. These rules exclude from the definition of a non-GAAP financial measure “financial measures required to be disclosed by GAAP, Commission rules, or a system of regulation of a government or governmental authority or self-regulatory organization that is applicable to the registrant.” The guidance indicates that unless a non-GAAP financial measure is required to be disclosed in the filing in which it is presented, it is considered a non-GAAP financial measure and the additional disclosures must be provided. We understand that the guidance was issued to address situations where registrants provided non-GAAP financial measures (e.g., tangible common equity) that were not required in the SEC filing in which they were provided.

This C&DI is available on the SEC’s website at 102.05: click here

In addition, the staff revised its FAQ document covering non-GAAP financial measures.(19) The staff issued the revisions in January 2010 so issuers can consider them in the upcoming earnings reporting season. The revisions are intended to remove impediments to disclosing non-GAAP financial measures that companies believe provide meaningful information to investors. They were issued in the form of new C&DIs, which replace the FAQ document.

These C&DIs are available on the SEC’s website: click here

Smaller Reporting Companies

During 2009, the Commission released four guides that summarize and explain rules adopted by the SEC as they apply to smaller public companies:

• 1.     Staff Observations in the Review of Smaller Reporting Company IPOs
  The SEC staff compiled this summary of common comments cited in the staff’s comment letters sent to smaller reporting companies in connection with the reviews of initial registration statements under the Securities Act of 1933. The staff observations are available on the SEC’s website: click here
• 2.     Interactive Data for Financial Reporting – A Small Entity Compliance Guide
  The staff prepared this guide as an overview of the XBRL requirements for smaller companies. The guide is available on the SEC’s website: click here
• 3.     Filing and Amending a Form D Notice
  The staff prepared this guide for smaller companies to explain Form D, a form used to file a notice of an exempt offering of securities with the SEC under Rule 504, 505, or 506 of Regulation D or Section 4(6) of the Securities Act of 1933. The guide is available on the SEC’s website: click here
• 4.     Q&A – Small Business and the SEC
  The staff compiled this series of questions and answers to help smaller filers understand how to raise capital and comply with the securities laws. The guide is available on the SEC’s website: click here

The staff also provided access to its presentation on common financial reporting issues facing smaller issuers that it presented at the Forums on Auditing in the Small Business Environment hosted by the PCAOB during 2009. This presentation is available here

Financial Reporting Manual

The SEC staff updated the Financial Reporting Manual three times during 2009. The staff added guidance applicable to:

• Foreign private issuers related to the Foreign Issuer Reporting Enhancements rule changes contained in Release 33-8959, the use of IFRS, and clarification of several other interpretations, Topic 6.
• Independent accountant’s involvement, Topic 4.
• Effect of subsequent events on financial statement requirements in filings, Topic 13.

In the new Topic 4, the staff changed its position on the use of unregistered audit firms in registration statements covering IPOs. Now, any audit firm that is reporting on or playing a substantial role in the audit of an issuer’s financial statements included in an IPO filing must be registered with the PCAOB.

The staff announced that during 2010 it plans to update the Manual for topics covered at the CAQ SEC Regulations Committee and International Practices Task Force meetings since the inception of these groups.

The Manual indicates which sections were updated and is available on the SEC’s website: click here

C&DIs

The SEC staff made updates to its C&DIs throughout the year. The updates provided guidance on topics such as oil and gas reserve disclosures and Form S-8 as discussed above.

The C&DIs are available on the SEC’s website: click here

Staff Project – Core Disclosure Requirements

Chairman Schapiro observed in November that the Commission expects to begin a comprehensive review of its core disclosure requirements. The goal of the project is to drive better (as opposed to more) disclosure. The staff has begun a project to develop recommendations for Commission action.

PCAOB Developments

Adopted Standard – Engagement Quality Review

In July, the PCAOB adopted Auditing Standard (AS) 7, Engagement Quality Review, and conforming amendments to the interim quality control standards. AS 7 applies to all audit engagements and engagements to review interim financial information that are conducted pursuant to the standards of the PCAOB, and it supersedes the Board’s interim quality control standard relating to concurring reviews. Although the standard has been adopted by the PCAOB, it must be approved by the SEC before it becomes final and it has yet to be approved. If approved by the SEC as drafted, the standard will become effective for the engagement quality reviews of audits of financial statements for fiscal years beginning on or after December 15, 2009 and reviews of financial statements for interim periods within those years.

AS 7 requires the concurring reviewer to evaluate the significant judgments made and related conclusions reached by the engagement team in forming the overall conclusion on the engagement and in preparing the engagement report. It also contains certain required procedures that are designed to focus his or her review on those significant judgments and conclusions.

The SEC releases can be found on their website: click here for the SEC release

Proposed Standards – Assessing Risk in an Audit

In December, the PCAOB voted to re-propose for comment seven auditing standards and related amendments that would revise the requirements for assessing risk in an audit. The standards were originally proposed in October 2008, and the PCAOB revised the proposed standards to address concerns expressed by those who commented. The proposed standards would supersede the Board’s interim auditing standards related to audit risk and materiality, audit planning and supervision, consideration of internal control in an audit of financial statements, audit evidence, and performing substantive tests of accounts and disclosures prior to the balance sheet date. Comments are due by March 2, 2010.

Guidance

Staff Audit Practice Alert – Audit Considerations Regarding Fair Value Measurements, Disclosures and Other-Than-Temporary Impairments

In April, the PCAOB issued the above-referenced Staff Audit Practice Alert to remind auditors about their responsibilities in conducting reviews of interim financial information and annual audits in light of the new FASB Staff Positions (FSPs) related to fair value measurements and other-than-temporary impairments.(20) The Alert does not provide new auditing guidance but rather serves as a reminder of matters to consider relating to the FSPs under existing PCAOB standards with respect to (1) reviews of interim financial information, (2) audits of financial statements including integrated audits, (3) additional disclosures required regarding fair value measurements and OTTI, and (4) auditor reporting as it relates to consistency matters.

Staff Views – An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements: Guidance for Auditors of Smaller Public Companies

In January, the PCAOB issued a Staff Views document that presents the views of the PCAOB staff on how auditors can apply certain provisions of AS 5 to audits of internal control over financial reporting of smaller, less complex public companies. This guidance reflects the consideration of comments received on the preliminary views document that was issued in October 2007. The revisions to the preliminary views document represent clarifications of guidance included in the preliminary views document and do not change the fundamental principles.

PCAOB Report on the First Year Implementation of AS 5

In September, the PCAOB issued a report on the most common or noteworthy observations from their 2008 inspections on the first year of implementation of AS 5. The report covers six broad topics:

1. Risk assessment
2. Risk of fraud
3. Using the work of others
4. Entity-level controls
5. Nature, timing, and extent of controls testing
6. Evaluation of deficiencies

Staff Q&A on the Accounting Standards Codification

In September, the PCAOB issued a Staff Q&A on the FASB’s Accounting Standards Codification to advise users that references in the PCAOB’s standards and staff guidance should be understood to mean the corresponding reference in the Codification. Further, the staff advised auditors to disregard descriptions of and references to accounting requirements in PCAOB standards that are inconsistent with the Codification. The Q&A guided auditors to look to the relevant sections of the Codification and to SEC requirements to identify the applicable accounting and reporting requirements for the company under audit. The PCAOB noted that it plans to revise these descriptions and references in its future standards-setting projects.

Glossary of Standards (1)

Back to Top

( 1) The SEC staff provides guidance, primarily on matters that are legal in nature, in a section of the Commission’s website called Compliance and Disclosure Interpretations (C&DIs).
2) For a schedule showing, by fiscal year end, the public float measurement dates and implementation dates for companies in this group, see slide 18 of the SEC staff presentation at: http://www.sec.gov/news/speech/2009/slides120809jkl.pdf.
4) The staff has not changed its view that perpetual preferred securities possessing significant “debt-like” characteristics may be evaluated under the OTTI model for debt securities, except when there is evidence of deterioration in the credit quality of the issuer.
5) ASC 805 (formerly FAS 141R)
6) ASC 810 (formerly FAS 160)
7) At the September 2003 SEC Regulations Committee meeting, the staff had indicated that financial statements in an amendment of a periodic report should be restated to correct an error but not for anything but the correction of the error.
8) Guidance on evaluating whether a registrant uses its website in this manner may be found in Release 34-38288
9) ASC 810 is effective as of the beginning of the first fiscal year beginning after November 15, 2009 and for interim periods in those years.
10) The SEC staff discussed this issue at the 2009 AICPA National Conference on Current SEC and PCAOB Developments. Click here
11) See the SEC staff’s Frequently Asked Questions related to Management’s Report on Internal Control over Financial Reporting, questions 1 and 3 here
12) Similar issues arise when a registrant retrospectively revises its financial statements for matters such as material error corrections, accounting changes, discontinued operations, and changes in the composition of reportable segments. The approach a company should follow when it files a new registration statement on Form S-8 was discussed earlier in this letter. We understand that a registrant usually does not need to file revised annual financial statements in order to conduct or continue an offering using an already effective registration statement. We understand that a registrant may continue to offer securities pursuant to an effective registration statement unless the revision to the financial statements would constitute a fundamental change. Determining whether a change is so significant that it constitutes a fundamental change is a legal question. In practice, fundamental changes are rare. However, an underwriter might request an issuer to voluntarily file revised financial statements or present them in a prospectus supplement.
13) Alternatively, a registrant could convey the revised information by filing it in a Form 8-K or Form 10-Q that is incorporated by reference in the registration statement.
14) The names of the approaches are names we have designated for convenience. They are not generally recognized and should not be used when describing the approach in a filing.
15) Or other appropriate components of equity or net assets in the statement of financial position.
16) See preceding footnote.
17) The SEC staff discussed this issue at the 2009 AICPA National Conference on Current SEC and PCAOB Developments. See http://www.sec.gov/news/speech/2009/spch120809wc.pdf, slide 16.
18) If the acquisition was consummated shortly after the accounting acquirer’s year end, the Form 8-K reporting the acquisition might not require the accounting acquirer’s financial statements for its most recent year end. In that case, the accounting acquirer’s financial statements for its most recent year end would need to be filed on a subsequent Form 8-K. In this fact pattern, the subsequent Form 8-K would not require an ICFR assessment, but the Form 10-K covering the fiscal year in which the transaction was consummated would.
19) The Frequently Asked Questions Regarding the Use of Non-GAAP Financial Measures document is available on the SEC website
20) The FSPs are FSP FAS 157-4, FSP FAS 115-2 and FAS 124-2, and FSP FAS 107-1 and APB 28-1.