Transcript KPMG Talkbook template - American Accounting Association

Current Developments in
Financial Reporting
American Accounting Association
Annual Diversity Section Conference
October 2011
Presented by
Terry Iannaconi
Partner
Department of Professional Practice
KPMG LLP
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Agenda
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Recent SEC staff comments and areas of interest
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Contingent losses and liabilities
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Non-GAAP measures

Stranded cash from foreign operations
SEC current projects of interest
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Disclosures about “conflict minerals”
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Dodd-Frank mandated rulemaking re compensation clawbacks following restatements
IFRS convergence and SEC workplan
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SEC staff workpaper re “endorsement approach”
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FASB projects including accounting for leases
PCAOB initiatives
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Auditor reporting enhancements

Independence enhancements including possible mandatory rotation
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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SEC Comments
and Projects
Loss Contingencies

Staff observation – The requirements of Regulation S-K with respect to commitments
and contingencies are different from the requirements of ASC 450.

January/February 2011 staff interaction/ comments to financial institutions resulted in
expanded quantitative disclosures re loss contingencies in connection with credit
losses / mortgage foreclosure exposures in Forms 10-K for fiscal year ended
12/31/2010

The Staff expects disclosure of ranges of reasonably possible losses when known or
disclosure that a range cannot be estimated
 The standard is not the ability to estimate “with certainty”, “with precision” or
“with confidence”
 The Staff expects companies to go through the process of estimation; “have to try”

The Staff expect that disclosures regarding a specific contingency would be updated
with the passage of time and they are skeptical if the contingency cannot be estimated
years after the contingency arises
 Review of settlements and comparison with previous disclosures and accruals
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Loss Contingencies

Excerpt from JP Morgan’s 12/31/10 Form 10-K:
 The Firm believes the estimate of the aggregate range of reasonably possible losses, in
excess of reserves established, for its legal proceedings is from $0 to approximately
$4.5 billion at December 31, 2010. This estimated aggregate range of reasonably possible
losses is based upon currently available information for those proceedings in which the
Firm is involved, taking into account the Firm’s best estimate of such losses for those
cases for which such estimate can be made. For certain cases, the Firm does not believe
that an estimate can currently be made. The Firm’s estimate involves significant judgment,
given the varying stages of the proceedings (including the fact that many of them are
currently in preliminary stages), the existence of multiple defendants (including the Firm) in
many of such proceedings whose share of liability has yet to be determined, the numerous
yet-unresolved issues in many of the proceedings (including issues regarding class
certification and the scope of many of the claims), and the attendant uncertainty of the
various potential outcomes of such proceedings. Accordingly, the Firm’s estimate will
change from time to time, and actual losses may be more than the current estimate.
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Non-GAAP Measures
 Staff interpretive guidance in January 2010 intended to “rationalize” disparity
between metrics used in earnings calls and in filings
 Recent SEC staff experience is that some issuers may attempt to use “irrational”
metrics
 Securities laws prohibit any disclosure that may be misleading
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Stranded Cash from Foreign Earnings
 Companies may have foreign earnings for which income tax is not provided due to intention not to
repatriate
 Ability of company to avoid repatriation must be considered
– Consider liquidity needs in various jurisdictions
 Are cash requirements in foreign jurisdiction the likely use of stranded cash? If stranded cash is
likely to be used in a manner that will avoid tax, disclosure of stranded cash may not be material
 If earnings may become subject to income tax due to cash needs in other jurisdiction, disclosure
of potential liquidity and tax consequences may be material information
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Disclosures about “conflict minerals”
 Not a financial reporting issue; disclosure related to humanitarian considerations in certain
African countries (Democratic Republic of Congo)
 Dodd-Frank requires SEC to make rules requiring disclosure about country of origin of certain
minerals used in production
 Rule proposed in December 2010; Dodd-Frank required final rules by April 2011
– Requires tracing source of 4 minerals including gold
– Requires independent audit of issuer’s “Conflict Minerals Report”
– Audit may be done by any independent qualified entity: e.g. supply chain consultant, auditor
– If audit is done by independent auditor of financial statements, service is permitted as non-audit
service
 Public roundtable held October 18, 2011
 Final rule expected by year end 2011
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Compensation clawback following restatements
 Dodd-Frank requires rulemaking to provide for clawback of management
compensation if financial statements are restated and based on restatement
compensation target would not have been met
 Division of Corporation Finance regards this as most difficult rulemaking
required by Dodd-Frank
 Must consider how to effect clawback if
– money has already been spent by recipient
– Recipient is no longer employed by company
 SEC staff believes audit committees would need to be vigilant to force
appropriate restatements recognizing management disincentive to bringing
restatement information forward
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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SEC – IFRS Work Plan
SEC Staff Paper Explores Endorsement Approach to IFRS
May 26, 2011 – SEC staff paper discusses endorsement
approach to IFRS
– Convergence of local standards with IFRS vs. endorsement
of specific new standards issued by IASB
– Retain U.S. GAAP framework and incorporate aspects of
IFRS over a 5 to 7 year transition period
– Consider endorsement of specific new IASB standards as
issued
– End point is ability to state that U.S. issuers financial
statements are in compliance with both U.S. GAAP and
IFRS
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Convergence of US GAAP and IFRS

SEC is continuing to evaluate the IFRS Work Plan and plans to consider an
approach to convergence later in 2011
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DCF has been reviewing large sample of IFRS financial statements to
evaluate the consistency and application of IFRS standards in practice

Possible approaches to incorporation:
 US GAAP could remain authoritative and joint projects could be completed
 All new FASB projects could have a convergence objective
 FASB could consider new standards issued by IASB and adopt as appropriate
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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FASB/IASB Exposure
Draft – Leases
Proposed Accounting Models – Lessee
and Lessor
“Right to use”
leased property
Lessee
Right-ofUse Model
Lessor
Models
Performance Obligation Model
Recognize
leased property
+ right to
receive
estimated future
lease payments
Lease payments
Recognize
lease liability to
permit use of
leased property
Recognize
“right-of-use”
asset
Recognize
liability to make
estimated
future lease
payments
Derecognition Approach
Recognize right
to receive
estimated future
lease payments
+ residual asset
Derecognize
leased property
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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PCAOB Activities
PCAOB Activities
• Possible Changes to Auditor’s Reporting Model
• Auditor Independence and Audit Firm Rotation
• Communications with the Audit Committee
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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PCAOB Concept Release – Possible Changes to
Auditor’s Reporting Model
Explores alternatives to auditor’s report that “could increase its
transparency and relevance to financial statement users, while not
compromising audit quality”
Identifies four new auditor report alternatives:
 Auditor’s discussion & analysis (AD&A) to supplement existing auditor’s
report
 Required and expanded use of “emphasis paragraphs”
 Auditor assurance on other information outside the financial statements
(e.g., MD&A, non-GAAP information, earnings releases)
 Clarification of the auditor’s standard report
Timing
 Proposed standard expected in early 2012
 PCAOB Roundtable held September 15
 Comment period ended September 30 – 147 comment letters received
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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PCAOB Concept Release – Auditor Independence
and Audit Firm Rotation
Explores ways to enhance auditor independence, objectivity, and
professional skepticism
Key elements:
 Mandatory audit firm rotation
 Alternatives to mandatory rotation
• Enhanced audit committee oversight
• Mandatory tendering of audit after certain period
• Improved PCAOB inspections
• Joint audits
Timing:
 December 14, 2011 deadline for submitting comments to PCAOB – 28
comment letters received as of 10/11/11
 March 2012: PCAOB Public Roundtable
© 2011 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG
International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
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Presenter’s contact details
Terry Iannaconi
Partner in Charge, Department
of Professional Practice –
Knowledge Sharing
212-909-5426
[email protected]