BDO SEIDMAN, LLP

1
BDO SEIDMAN, LLPSJuly 2006FINANCIAL
REPORTING UPDATE
2
Speakers and Replay Information

• Speakers
• Ben Neuhausen
• Jan Herringer
• Jeff Lenz
• Replay Access
• www.bdo.com/about/publications/assurance

3
Agenda

• GAAP Update
• Internal Control Reporting Update
• SEC Update
• Questions and Answers

4
GAAP Update July 2006
5
Agenda

• New Texas Margin Tax
• FASB Interpretation No. 48
• FASB Invitations to Comment
• FASB Staff Positions
• Proposed FASB Staff Positions
• EITF Consensuses
• EITF Open Issues

6
New Texas State Margin Tax

• New state tax enacted May 18, 2006
• Applied to entities that do business in Texas, or
  that are chartered or organized in Texas
• Existing franchise tax is a hybrid while new tax
  law is a margin tax
• New tax computed as 1 (0.5 for retailers and
  wholesalers) of taxable margin, which is the
  lesser of
• 70 of revenue
• Revenue minus cost of goods sold or
• Revenue minus compensation
• New tax treated as income tax under Statement 109
• Requires adjustment of existing deferred tax
  assets/liabilities as of May 18, 2006 (enactment)
• Effective for existing deferred taxes NOW (e.g.,
  for calendar year companies quarter ended June
  30)

7
FASB Interpretation No. 48

• Deals with accounting for uncertain tax
  positionsrecognition, measurement, and
  disclosure
• An uncertain tax position is a deduction or
  credit with an uncertainty about whether it would
  be sustained upon examination

8
FASB Interpretation No. 48

• Recognition thresholdmore likely than not to be
  sustained upon examination
• Presume that position would be examined
• Same thresholdmore likely than notfor
  derecognition

9
FASB Interpretation No. 48

• Measurement of positions that meet recognition
  threshold
• Largest amount of benefit that is greater than 50
  percent likely of being realized

10
FASB Interpretation No. 48

• Effect is to compute income tax provision and
  current and deferred tax assets/liabilities as
  though tax returns had been filed with positions
  meeting the recognition and measurement tests of
  Interpretation 48

11
FASB Interpretation No. 48

• Effective date and transition
• Fiscal years beginning after December 15, 2006
• Inventory all uncertain tax positions for all
  open years for all tax jurisdictions
• Apply recognition and measurement criteria of
  Interpretation 48, adjust current and deferred
  assets and liabilities and opening retained
  earnings

12
FASB Interpretation No. 48

• Disclosure
• Rollforward of total unrecognized tax benefits at
  beginning and end of year
• Other items

13
FASB Interpretation No. 48

• Other issues addressed
• Quarterly financial statements
• Balance sheet classification (current/noncurrent)
• Interest and penalties

14
Invitations to Comment

• Accounting for insurance policiesshould
  insurance and financing elements be bifurcated?
• Accounting standards process for private
  companies
• Conceptual framework

15
FASB Staff Positions--Final

• FAS 13-2 Timing of tax payments in leveraged
  lease transactions

16
FASB Staff Positions--Proposed

• FAS 126-a Revision to the Definition of a Public
  Entity to Include an Obligor for Conduit Debt
  Securities
• AUG AIR-a Accounting for Planned Major
  Maintenance
• Accrue in advance method no longer acceptable.
  Defer and amortize, expense as incurred, or
  built-in overhaul method continue to be
  acceptable
• FAS 123R-e Amendment of FASB Staff Position FAS
  123(R)-1
• Addresses whether a modification of an instrument
  in connection with an equity restructuring or a
  business combination should be considered a
  modification for purposes of applying FSP FAS
  123(R)-1
• Registration Rights Agreements

17
EITF Update
SELECTED EITF ISSUES
18
Final Consensus

• 05-1, Convertible debt that becomes convertible
  upon issuers call
• Latest of several convertible debt issues
  discussed by EITF in last year
• Need to assess substance of conversion rightat
  issuance is it considered reasonably possible
  that the conversion right will become exercisable
  absent the issuers call
• If so, then conversion upon call is accounted for
  as a conversion with no gain or loss
• If not, then conversion upon call is accounted
  for as an extinguishment with gain or loss

19
Final Consensus

• 06-2, Accounting for Sabbaticals
• Sabbatical for which an employee becomes eligible
  after a period of years are considered to
  accumulate as that term is used in FAS 43 and 112
• As a result, accrue estimated cost over service
  period

20
Final Consensus

• 06-3, Accounting for Sales, Use, Value Added, or
  Excise Taxes
• Whether taxes should be presented gross as
  revenues and costs, or net
• Presentation gross or net is a policy decision
• If gross presentation, disclose amount included
  in revenues and costs
• Change would be a change in accounting principle

21
Tentative Consensus

• 06-1, Consideration paid by service provider to
  an intermediary rather than to a customer
• Is debit revenue reduction or an expense?
• Generally consistent with EITF 01-9 guidance for
  consideration paid to customer

22
Tentative Consensus

• 06-4, Endorsement Split-dollar life insurance
• Employer has a postretirement obligation to
  employee
• Purchase of insurance does not settle the
  employers obligation

23
Tentative Consensus

• 06-5, Company-owned life insurance
• Asset should be measured by considering all
  consideration that company would receive upon
  surrender
• Each policy should be measured individually

24
Open EITF Issues

• 05-4, Liquidated damages in equity derivative
  contracts
• 06-6, Application of EITF 05-7 to reduction or
  elimination of a conversion right
• 06-E, Application of AICPA Broker-Dealer Guide to
  energy traders

25
Future EITF Issues

• Accounting for previously bifurcated conversion
  option in convertible debt that no longer meets
  the bifurcation criteria
• Joint development, manufacturing, and marketing
  arrangements in biotechnology and pharmaceutical
  industries

26
Internal Control Reporting Update July 2006
27
404 Matters - Agenda

• PCAOB and SEC Roundtable
• Next Steps
• Expected AS 2 Amendments
• SEC Concept Release
• Expected Rulemaking
• Recently Released COSO Guidance

28
PCAOB and SEC Roundtable Results

• PCAOB and SEC Roundtable on Second-Year
  Experiences with ICFR Requirements (held May 10,
  2006)
• Participants
• Consensus
• ICFR reporting and auditing results in benefits
• But costs still too high

29
PCAOB and SEC Roundtable Results

• Improvements made in Year 2
• Improved quality in financial reporting
• Standardization of processes / elimination of
  redundancy
• Cost reductions
• Investor confidence restored
• Improvements still to come
• Determining appropriate mix of controls
• Further distinction between management and
  auditor roles
• Implementation guidance for smaller companies
• Roundtable transcript and replay are available
  at
• http//www.sec.gov/spotlight/soxcomp/soxcomp-trans
  cript.txt
• http//www.connectlive.com/events/secicr2006/

30
PCAOBs Four-Point Plan

• Amend Auditing Standard No. 2
• Reinforce auditor efficiency through PCAOB
  inspections
• Provide guidance and education for auditors of
  small companies
• Continue PCAOB Forums on auditing within the
  small business environment
• PCAOB announcement is accessible at
• http//www.pcaobus.org/News_and_Events/News
• /2006/05-17.aspx

31
Expected Revisions to AS No. 2

• Clarify definitions of SD and MW
• Reconsider strong indicators of a material
  weakness to allow for more judgment in
  determining whether a deficiency exists
• Guide auditors to increase their use of work of
  others where appropriate
• Clarify materiality and scoping decisions
• Emphasize integration of the audit of internal
• control with the audit of the F/S

32
SECs Next Steps

• SEC will not exempt smaller companies from SOX
  404
• Expects to issue a short postponement of
  effective date for implementation
• Intends to issue assessment guidance for
  management
• Oversight of PCAOB inspection program
• SEC announcement is accessible at
  http//www.sec.gov/news/press/2006/2006-75.htm

33
SECs Concept Release

• SOX 404 guidance for companies
• SEC seeks public input
• 35 questions posed
• Guidance expected to cover
• Risk and control identification
• Managements evaluation
• Documentation requirements

34
SECs Concept Release

• Smaller companies unique characteristics
  include
• Limited number of personnel
• Top managements wider span of control
• Dynamic and evolving nature of smaller companies
• Results in unique differences in achieving
  effective internal control over financial
  reporting

35
COSO Guidance for Smaller Public Companies

• Issued on July 11, 2006
• 20 fundamental principles
• Provides
• Guidance
• Examples
• Tools

36
COSO Guidance for Smaller Public Companies

• Neither replaces nor modifies the Framework
• Provides guidance on how to apply this Framework
• Directed to smaller companies - although
  applicable to all companies
• Guidance provided to assist in design and
  implementation of cost-effective internal control

37
COSO - Three Volumes

• Executive Summary- High level summary for BOD and
  Senior Management
• Guidance
• Evaluation Tools
• Available for purchase through the AICPA at
• https//www.cpa2biz.com/stores/coso3

38
Challenges to Attaining Cost-Effective Internal
Control

• Obtaining sufficient resources to achieve
  adequate segregation of duties
• Recruiting individuals with requisite financial
  reporting and skill in accounting
• Increased management focus on accounting and
  financial reporting
• Maintaining appropriate control over computer
  information systems

39
SEC UPDATEJuly 2006
40
SEC Update Agenda

• Expected Rulemaking
• Other SEC Activities
• SEC Practice Issues

41
Expected RulemakingThis Summer

• Internet Availability of Proxy Materials (Release
  34-52926)
• http//www.sec.gov/rules/proposed/34-52926.pdf
• Amendments to the Tender Offer Best-Price Rule
  (Release 34-52968)
• http//www.sec.gov/rules/proposed/34-52968.pdf
• Allowing foreign private issuers to exit the
  Exchange Act reporting system (Release 34-53020)
• http//www.sec.gov/rules/proposed/34-53020.pdf
• Executive Compensation and Related Party
  Disclosure (Release 33-8665)
• http//www.sec.gov/rules/proposed/33-8655.pdf
• Internal Control Reporting
• Management reporting
• Deferral for non-accelerated filers

42
Other SEC Activities

• New Commissioner Kathleen Casey replaces
  Cynthia Glassman
• New Chief Accountant coming soon?
• Materiality SAB
• Rollover vs. iron curtain method of evaluating
  the materiality of errors
• Could come soon or not at all

43
SEC Practice IssuesRetrospective Application

• Issues arising from retrospective accounting
  changes (Statement 154) and retrospective
  adoption of Statement 123(R)
• Information required in registration statements
• Facts Company discloses impending retrospective
  change (e.g., via Form 8-K or SAB 74 disclosure
  in 10-K) and then files a registration statement
  before Q1 10-Q is filed
• Only requires disclosure in the registration
  statement
• Facts Registration statement filed after 10-Q
  reflecting a retrospective change
• Restated audited financial statements need to be
  included (incorporated by reference) in the
  registration statement

44
SEC Practice IssuesStatement 123(R) Adoption

• Facts Company adopts Statement 123(R) in 2006
  using the prospective method. Company files 2005
  pro forma P/L. Does the 2005 pro forma P/L need
  to reflect the Statement 123 stock comp expense?
• No
• Facts Company makes an acquisition in 2006 and
  grants options to targets employees as part of
  the transaction. New options will be accounted
  for as compensation in the post-acquisition
  period. Does the Statement 123(R) comp expense
  need to be reflected in the 2005 pro forma P/L?
• SEC staff undecided stay tuned

45
SEC Practice IssuesStatement 123(R)
AdoptionInterim Disclosures

• All Statement 123(R) disclosures are required in
  the 10-Q for the first quarter of application.
  Should they also be included in subsequent 10-Qs?
• Yes
• Should disclosures in subsequent 10-Qs be made on
  a YTD basis, or both YTD and current quarter?
• YTD is required current quarter is optional
• Is prior period comparable Statement 123(R)
  information required?
• No
• Should prior period Statement 123/148 disclosures
  be made?
• Yes both YTD and current quarter disclosures,
  except minimum value disclosures are not
  permitted

46
SEC Practice Issues

• New SEC staff hot button
• Compliance with Rule 5-03 P/L format
• PCAOB staff FAQ Adjustments to prior period
  financial statements audited by a predecessor
  auditor
• http//www.pcaobus.org/Standards/Staff_Questions_a
  nd_Answers/2006/QA_Adjustments.pdf