BDO SEIDMAN, LLP

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BDO SEIDMAN, LLPSDecember 2004 FINANCIAL
REPORTING UPDATESEC Matters
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FASB Activities

• Statement 151, Inventory Costs
• Amends ARB 43 to clarify that abnormal amounts of
  idle facility expense, freight, handling costs,
  and spoilage are current period costs
• Effective for inventory costs incurred during
  fiscal years beginning after June 15, 2005

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FASB Activities

• Statement 123R, Share-Based Payment
• Requirements
• Use fair value-based method of accounting for
  transactions in which employee services received
  are exchanged for either
• Equity, or
• Liabilities based on FV of companys equity or
  that may be settled by issuance of such equity

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FASB Activities

• Statement 123R, Share-Based Payment
• Current Literature to be Impacted
• Supersedes APB 25 and related interpretations
• Amends SFAS 123, however, does not change
  accounting for transactions with nonemployees
  (EITF 96-18 still applies)
• Does not change accounting for ESOP plans under
  AICPA Statement of Position 93-6
• Amends SFAS 95 with respect to excesstax benefits

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FASB Activities

• Statement 123R, Share-Based Payment
• Changes from Exposure Draft
• Effective for quarters after 6/15/05 for public
  companies, quarters after 12/15/05 for S-B filer
• Reverts to original Statement 123 conclusions
• No preference for particular option-pricing
  models
• Limited offset of excess and deficient tax
  benefits
• Straight-line amortization OK for awards with
  graded vesting
• Conditions for noncompensatory plans

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FASB Activities

• Statement 123R, Share-Based Payment
• Transition

• Public Companies
• Modified prospective method
• Apply new accounting to all awards granted after
  effective date
• Apply Statement 123 to awards granted after 1994
  but not vested as of effective date
• Restatement of prior years permitted, but not
  required

• Private Companies
• Pure prospective method
• Apply new accounting to all awards granted after
  effective date (fiscal years beginning after
  12/15/05)

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FASB Activities

• Statement 123R, Share-Based Payment
• Planning Considerations

• Carefully weigh the consequences of accelerating
  vesting
• Consider alternative compensation
  strategies--shift to restricted stock versus
  options

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FASB Activities

• Statement 152, Accounting for Real Estate
  Time-Sharing Transactionsan amendment of FASB
  Statements No. 66 and 67
• Amends Statements 67 and 68, to refer to the
  guidance in SOP 04-2
• Effective for financial statements for fiscal
  years beginning after June 15, 2005

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FASB Activities

• Statement 153, Exchanges of Nonmonetary
  Assetsan amendment of APB Opinion No. 29
• Eliminates the APB 29 exception for nonmonetary
  exchanges of similar productive assets and
  replaces it with a general exception for
  exchanges of nonmonetary assets that do not have
  commercial substance
• Effective for nonmonetary asset exchanges in
  fiscal periods beginning after June 15, 2005

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EITF Consensus Position Reached in November

• 03-13 -- Applying the Conditions in Para.42
  Statement 144 in Determining Whether to Report
  Discontinued Operations
• Classification as a discontinued operation is
  appropriate only if the ongoing entity
• Has no continuing direct cash flows
• Does not retain an interest, contract, or other
  arrangement sufficient to enable it to exert
  significant influence over the disposed
  components operating and financial policies
  after the disposal transaction

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Section 404 Reporting Update

• 3rd round of PCAOB FAQs (11-22-04)
• Framework for evaluating deficiencies
• Further acceleration deferred for one year
• 45 day deferral of 404 reporting for accelerated
  filers
• If public equity float lt 700 million and
• Fiscal Y/E from 11/15/04 2/28/05
• Rest of 10-K due at regular date

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Acceleration Deferral

• Revised accelerated filing deadlines for Forms
  10-K and 10-Q by accelerated filers

For Fiscal Years Ending On or After Form 10-K Deadline Subsequent Form 10-Q Deadline
December 15, 2002 90 days after fiscal year end 45 days after fiscal quarter end
December 15, 2003 75 days after fiscal year end 40 days after fiscal quarter end
December 15, 2004 75 days after fiscal year end 40 days after fiscal quarter end
December 15, 2005 60 days after fiscal year end 35 days after fiscal quarter end
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Other SEC/PCAOB Activities

• SEC staff FAQ New 8-K rules
• (http//www.sec.gov/divisions/corpfin/form8kfaq.ht
  m)
• SEC staff FAQ Independence rules
  (http//www.sec.gov/info/accountants/ocafaqaudind1
  21304.htm)
• Securities Act reform proposal
• Communications
• Registration process
• Final prospectus delivery
• PCAOB tax services proposal would prohibit
• Tax shelter work
• Tax services to officers

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AICPA SEC Conference Themes

• Weve improved but need to do better
• Financial reporting should be a communication
  exercise not a compliance exercise
• Rules are the floor not the ceiling
• Preparers can enhance quality without more rules
• Staff recognizes many requirements are new
• Do not expect perfection
• Do expect total commitment to the change process

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Communication Exercise

• Contingencies
• No disclosure before the charge
• Zero accrued until settlement
• Financial instruments disclosures
• Disjointed, cover pieces, spread out, dont tie
  to F/S
• Hard to relate disclosures to F/S
• Message Say whats needed to communicate, even
  if not specifically required

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Communication Improvement Ideas

• Direct method cash flows reporting
• Pensions dont use smoothing mechanisms
• Disclose expense by nature (salaries, etc.)
• Depreciable lives (stratify cost by life)
• MDA Tables, real insight
• Reasons for structured transactions
• Would you have what you need to invest?

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Internal Control Reporting (Section 404)

• Benefits (fewer restatements) outweigh the costs
• Open dialog in the spring identify best
  practices and ways to streamline
• Concern re cost to small companies
• Expect material weaknesses
• Should not prompt severe reactions
• Keys are full disclosure and remediation
• Implementing new accounting standards

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Accounting Consultations

• Generally permitted, provided not construed to be
  bookkeeping
• A/S-2 raises concerns as to whether
• Providing advice pre-empts a company from
  demonstrating it has adequate controls over
  accounting and F/S preparation
• Failure to perform flawlessly indicates a
  significant deficiency or material weakness
• Firms have adopted a variety of approaches
• PCAOB did not intend to stop accounting
  discussions between companies and their auditors

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404 Reporting Material Weaknesses

• Disclose identified M/Ws in 10-K (dont wait
  until 10-K/A)
• M/W in ICFR ineffective DCPs? (usually)
• Revise Item 307 and 308(c) if necessary
• New M/W in 10-K/A
• Restatement
• Disclose (in plain English)
• What the problem is and what it impacts
• How and when you plan to remediate

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404 Reporting 45 Day Deferral 10-K/As

• Two 404 reports
• Revised (full) 302 certifications
• Revised Item 307/308(c) if necessary
• Consent if necessary
• S-2/S-3 ineligible until 10-K/A filed
• Can file S-8 and rely on Rule 144 before 10-K/A
  filed

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SEC Staff Hot Buttons

• Materiality project
• Wont affect 2004 reporting
• Material out of period adjustments require
  restatement
• Pension accounting
• Substantive plan
• Discount rate
• Mortality tables

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SEC Staff Hot Buttons (Cont.)

• Modifications of Conversion Options in
  Convertible Debt
• Under EITF 96-16, if the the present value of the
  cash flows of modified debt differs from the
  present value of the cash flows of the original
  debt by more than 10, the modification should be
  treated as an extinguishment
• The analysis should compare the fair value (not
  just the intrinsic value) of the conversion
  option immediately before and after the
  modification

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SEC Staff Hot Buttons (Cont.)Statement 115,
Accounting for Certain Investments in Debt and
Equity Securities
Transfers to and from the trading account should
be rare

• NOT ACCEPTABLE
• To enact a change in an investment strategy
• To achieve accounting results more closely
  matching economic hedging strategies
• To reposition portfolio due to expected economic
  outlook

• ACCEPTABLE
• Upon the adoption of a new standard
• Change in statutory requirements
• A significant business combination that alters
  investing strategy
• An unusual situation highly unlikely to recur in
  near term

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SEC Staff Hot Buttons (Cont.)Statement 115,
Accounting for Certain Investments in Debt and
Equity Securities
Accounting for Other Than Temporary Impairments
of Certain Investments The effective date of
recognition and measurement provisions of EITF
03-1 is deferred Continue to follow GAAP
including SAB Topic 5.M, until FASB completes
project Assessment and disclosure provisions of
EITF 03-1 remain effective
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SEC Staff Hot Buttons (Cont.)

• Conceptual Differences Between Statements 141 and
  142
• The determination of fair value under 141 differs
  from the useful life under 142.
• 141 bases valuation on traditional notion of fair
  value, e.g., marketplace participants (willing
  buyer and seller, etc.).
• 142 bases the intangibles assumed life on its
  utility to the company.
• SEC staff accepts this difference
• Valuation of the intangible should not be changed
  under 141 even if the useful life was limited to
  its company-specific utility under 142.

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SEC Staff Hot Buttons (Cont.)

• Accounting for Contingent Tax Benefits
• Companies should disclose amount of recorded and
  unrecorded tax liabilities pursuant to Statement
  5.
• The Staff does not consider potentially alerting
  the IRS to uncertain deductions via these
  disclosures to be an acceptable reason for
  non-compliance with GAAP and SEC rules.
• The FASB will soon expose, for public comment, an
  interpretation on this topic.

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SEC Staff Hot Buttons (Cont.)

• Changes in Circumstances and the Impact on
  Revenue Recognition
• Companies must continually assess whether their
  current accounting policies properly reflect the
  economics of their sales transactions.
• Software example Repeated software upgrades to
  existing products may change conclusion that the
  software is only incidental.
• Companies should have procedures and controls in
  place to ensure accounting policies evolve
  concurrently with the business.
• This will improve financial statement reliability
  and comparability for industries with complex
  revenue models such as the technology sector.

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SEC Staff Hot Buttons (Cont.)

• Nonmonetary Exchange Transactions That Culminate
  the Earnings Process
• Two main issues to be determined timing of
  recognition and income statement classification.
• Timing based on Concept Statement 5 and SAB
  Topic 13 criteria, e.g., earned and realizable,
  delivery or performance, etc.
• Classification based on Concept Statement 6,
  e.g., revenue treatment is only appropriate if
  the inflow is derived from activities that
  constitute ongoing major or central operations.
  Otherwise, classify as gain.

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SEC Staff Hot Buttons (Cont.)

• Accelerated Vesting of Option Grants Prior to the
  Adoption of Statement 123R
• Under APB 25, accelerated vesting of underwater
  options generally does not result in additional
  expense.
• However, any unrecognized compensation on the
  date of acceleration of in-the-money options
  would be recognized immediately.
• Under FAS 123, the company would be required to
  disclose the effect of accelerating the
  unamortized portion of unvested underwater
  options in their pro forma footnotes.
• Upon adoption of 123R using the MPA, compensation
  expense would be reduced or eliminated since
  acceleration mitigated the impact of existing
  underwater, unvested options.

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SEC Staff Hot Buttons (Cont.)

• Accelerated Vesting of Option Grants Prior to the
  Adoption of Statement 123R (Cont.)
• The SEC staff views this treatment consistent
  with previously expressed views regarding
  structured transactions which are specifically
  designed to achieve certain accounting goals.
• Accordingly, the staff expects disclosures of
  such transaction to be robust and transparent.
  Language to the effect of during fiscal 2004
  certain of the companys stock options were
  modified to accelerate vesting would be
  considered insufficient.