1 Current Accounting Initiatives and Topics May 3, 2007 Jim Kroeker

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

3 Accounting Group Activities Oversight of standard setting FASB, EITF Coordination with other US and non-US regulators Accounting consultations Pre-filing requests from registrants Internal consultations from Divisions of Corporation Finance and Enforcement Rulemaking, interpretive guidance and reports Staff Accounting Bulletins Reports to Congress

4 Overview Complexity in Accounting XBRL Activity Materiality Recent Accounting Issues

5 Unnecessary Complexity One View of Unnecessary Complexity Unnecessary complexity is viewed as the overly detailed rules, bright lines, and safe harbors in financial reporting standards that may cause or enable a company’s transactions and events to be accounted for in a manner that does not reflect their economic substanceUnnecessary complexity is viewed as the overly detailed rules, bright lines, and safe harbors in financial reporting standards that may cause or enable a company’s transactions and events to be accounted for in a manner that does not reflect their economic substance Not necessarily things that are difficult to do; for example: Application of fair value measurement may be difficult but not necessarily complex to present or understand Accounting for complex business arrangements may sometimes be complex because of the underlying economics

6 Unnecessary Complexity Potential Causes/Drivers Volume of interpretive literature – –Example: DIG process related to Statement 133 Fear of being second guessed – –Example: Recent EITF request to deal with software revenue Potential Dangers/Problems Complexity creates the potential for investors to receive financial reports that are difficult to understand and that may not transparently portray a company’s financial condition and results of operations. Complexity also imposes increased costs on preparers and auditors of financial statements.Complexity also imposes increased costs on preparers and auditors of financial statements.

7 Improving Financial Reporting – Standard-Setters Reconsider Complex Standards Leasing Make Sure Standards are Principles-based Recent standards have moved in this direction Reconsider Standards to Produce Information That is More Transparent Pensions

8 Improving Financial Reporting – Regulators Accept reasonable differences in judgment Reasonable people can have different views Disclosure can explain treatment used Discourage accounting motivated transactions These often are not consistent with the principles of a standard

9 Objectives-Oriented Standards What We’re Striving For Standards grounded in conceptual framework with few alternatives or exceptions Guidance still to be provided, but principles/ objectives govern More professional judgment Expedite standard setting process Facilitate international convergence Emphasis on substance over form Fewer structuring possibilities

10 Improving Financial Reporting – Preparers Use professional judgment Unbiased, neutral judgments Consider all available information Focus on the objective(s) Seek the most transparent treatment Enhance disclosure

11 Structured Transactions Problems arise when transactions are designed around accounting literature – –Transactions undertaken or redesigned to obtain particular accounting treatment – –Transactions that don’t appear to make economic sense on their own – –Look for a true (non-accounting) purpose At issue in many enforcement cases Evident in many “off-balance sheet” areas

12 Improving Financial Reporting – Auditors Don’t be afraid to use professional judgment Don’t ask for every issue to be covered in a standard or by the SEC We’ve gone from “Where does it say this is wrong?” to “Where does it say this is OK?” Don’t get involved with accounting- motivated transactions

13 Interactive Data & XBRL Potential Benefits v Investors, analysts & other users u Direct, real-time access to instantly consumable data u Interactive, personalized analysis u Lower cost of more complete data set v Registrants and preparers of reports u Efficient preparation, internal data collection, analysis and release of information u Direct communication channel with investors and stakeholders

14 Interactive Data & XBRL Current Issues and Activities v Voluntary filer program with expedited review v New products being launched to ease use of data u XBRL-enabled Interactive Financial Report Viewer available on SEC website v Proposed rule to expand XBRL voluntary program to cover mutual fund risk/return data v SEC to provide XBRL data covering executive compensation summary information for several hundred companies this summer

15 Interactive Data & XBRL v Taxonomy Development Project u $5.5M contract with XBRL US, Inc. towards the development of a full suite of US GAAP taxonomies. u When complete will provide the basis for any company in any industry to prepare their financials & notes to the financial statements in XBRL u Project include public comment period (summer 2007) where all parties in the financial reporting supply chain should review the taxonomies u This is an important opportunity to get involved in the development of the taxonomies and ensure they meet financial reporting and analysis needs

16 SAB Quantifying Misstatements The Concepts Quantification of the effect of prior period misstatements Weaknesses perceived in both the iron curtain and rollover approaches on a stand alone basis Registrants should quantify errors using both a balance sheet (iron curtain) and income statement (rollover) approach – –Importance of qualitative considerations – –Does not amend SAB 99 Not a general amnesty for prior period misstatements

17 Other Materiality Topics Considering thoughts on: Interim Period Materiality: Securities law considers interim periods as discrete financial statements; APB 28 may be interpreted as considering interim periods as only a part of the annuals, however… …Investors do react to quarterly results; Should originating errors and carry-over errors be considered and assessed separately under SAB 99?

18 Other Materiality Topics Also considering thoughts on: Other aspects of SAB 99: What other quantitative and qualitative metrics impact the SAB 99 analysis (for example, EPS)? How are similar errors aggregated? Can quantitatively material errors be deemed qualitatively immaterial? In what circumstances is that likely to occur?

19 Recent Accounting Topics Subprime Loans v Allowance for loan losses Consider impact on credit trends May require adjustments to historical loss rates v FAS 140 impact of restructuring loans v Disclosures FSP SOP discusses relevant disclosures for uncertainties, credit concentrations, and significant estimates Item 303 of Regulation S-K Item 303, Management’s Discussion & Analysis

20 Recent Accounting Topics APB Opinion No. 25 u u Views of the Office of the Chief Accountant are expressed in its September 19, 2006 letter, which can be accessed at: ffletters.shtml ffletters.shtml

21 Recent Accounting Topics Market Instruments A market instrument is an instrument that is designed to be sold into the market at a value intended to be reasonably equivalent to the fair value of employee share options statement providing the Office of the Chief Accountant’s current views on market instruments is available at The Office of the Chief Accountant’s response to the Zions Bancorporation proposal is available at Office of the Chief Accountant’s response to the Zions Bancorporation proposal is available at

22 Recent Accounting Topics Statement 133 – “Critical Terms Match” Foreign currency or commodity transactions hedged with in a narrowly defined period (but not perfectly matched) Registrant’s applied the “critical terms matched” If critical terms did not match due to payment date or settlement date differences the SEC staff will not object to continued application of hedge accounting provided: – –All other provisions in paragraph 65 were met – –Registrant evaluates and supports the reasonableness of its conclusion that the critical terms of the derivative and hedged item matched (e.g., settlement of derivative and hedged item occurred within same month on different days) – –A quantitative analysis confirms hedge was highly effective and that unrecorded ineffectiveness was deminimus

23 Consultations with OCA Guidance for Consulting with OCA Take advantage of it! Most companies just “want to get the accounting right.” We want to help. Perhaps easier than the comment letter process Guidance for resolving ‘pre-filing’ questions is posted on the SEC’s website – – Companies should provide OCA with a written submission (commonly referred to as a “pre-clearance” submission) – –Auditor participation – –Audit committee participation Registrants can request their SEC reviewer to consult on specific matters during a Corp. Fin review process

24 Consultations with OCA Consulting with OCA Recommended form and content of correspondence to expedite the process What to expect from OCA – –Team leader will contact the company within 3 days of receipt of submission; entire process usually takes 2 – 4 weeks but depends on nature of the issue – –Team, Senior Associate and Deputy Chief Accountants may be involved – –Company may request Chief Accountant review of conclusion reached by OCA staff

Current Accounting Initiatives and Topics