Audit Committee Issues

Transcription

1 2 Audit Committee Issues January 13, 2010 Attorney Advertising Prior results do not guarantee a similar outcome Models used are not clients but may be representative of clients 321 N. Clark Street, Suite 2800, Chicago, IL

2 3 Housekeeping Call for technology assistance Dial *0 (star/zero) for audio assistance Questions can be entered via the Q&A tab located on your menu bar at the top of your screen. We will address questions at the end of the program. We encourage you to maximize the PowerPoint to full screen usage: Hit F5 on your keyboard; or Select View from the toolbar menu and click Full Screen To print a copy of this presentation: Click on the printer icon in the lower right-hand corner Convert the presentation to PDF and print as usual Foley will apply for CLE credit after the Web conference. If you did not supply your CLE information upon registration, please it to jbartz@foley.com 4 Today s Presenters Mark Plichta Partner Foley & Lardner LLP Richard Herlin Partner Deloitte & Touche LLP John K. Wozniak Corporate Vice President & Chief Accounting Officer Motorola Inc. Isaac Kaufman Director Hanger Orthopedic Group Kindred Healthcare, Inc. Trans World Entertainment

3 5 FASB Rulemaking Projects 6 Consolidation (including Securitizations and SPEs) Generally, more vehicles on balance sheet Reasons for the changes Companies were stretching the use of offbalance sheet entities to the detriment of investors Provide better transparency to investors by enhancing disclosure requirements Some large banks moved SIVs back on balance sheet when they failed, suggesting they should have been on balance sheet all along

4 7 Consolidation Key Changes Elimination of qualified special purpose entities and additional disclosure requirements (FAS 166) Determination of whether a variable interest entity should be consolidated is now made on a more principles-based judgment, considering, among other things The entity s purpose and design A company s ability to direct the activities of the entity that most significantly impact the entity s economic performance 8 Lessee Accounting Current operating v. capital approach is flawed Difficulty in drawing the line between operating and capital leases in a principled way, given the mixture of subjective judgments and bright-line tests Opportunity to structure transactions to achieve a particular lease classification Lack of comparability between companies Lack of sufficient disclosure relating to operating leases necessary to allow investors to determine pro forma leased assets and liabilities Joint discussion paper essentially would require lessees to treat all leases as capital leases, using the right to use method

5 9 More Liabilities on Balance Sheet -- Impact Not just financial firms are affected Relatively high risk of misstatement in the consolidation area Complex area of accounting More principles-based means more judgment involved Potential to gross up balance sheet and materially impact financial ratios Could impact financial covenants and ability to borrow Potential to affect executive compensation metrics 10 Fair Value Accounting The fair value debate - fair value is here to stay SEC recommended to Congress that FV accounting be improved, not suspended Critics (most notably financial institutions) are vocal but are in the minority Regulators and investors generally favor the use of fair value Don t shoot the messenger

6 11 Fair Value Accounting Improvements to fair value Valuing assets and liabilities in inactive markets Determining whether sales of comparable assets are distressed or orderly Increasing and improving disclosure of how fair value is measured 12 Fair Value Accounting What is next for fair value? Likely that additional assets and liabilities will be measured at fair value Increased used of judgment in determining fair values Increased use of judgment requires a more vigilant audit committee Joint IASB/FASB project likely to result in new accounting pronouncements being issued by the end of 2010 Potential for splitting regulatory accounting from financial accounting

7 13 Contingencies SFAS 5 record contingencies if probable and estimable 2008 Exposure Draft and SFAS 141(R) would have increased required disclosure and recognition Issuers and attorneys objected U.S. legal system unique Difficult to predict outcomes Factual information can be misleading Privilege and attorney work product issues ABA AICPA treaty 14 Contingencies FASB now only considering changes to disclosures Temporary fix for 141(R): FSP 141R-1 Criteria if liability cannot be determined during measurement period Information before the end of the measurement period indicates that it is probable that a liability had been incurred at the acquisition date The amount of the liability can be reasonably estimated

8 15 Contingencies FASB decided on the following broad principles for disclosures about loss contingencies: Should focus on the contentions of the parties, rather than predictions about the future outcome Should be more robust as the likelihood and magnitude of loss increase and as the contingency progresses toward resolution Should provide a summary of information that is publicly available about a case and indicate where users can obtain more information Final rules are scheduled to be released the first quarter of Recent SEC Developments

9 17 Internal Controls (SOX 404) Management assessment of internal control over financial reporting required for all companies Auditors attestation report on internal controls required for most companies Exception for non-accelerated filers (companies with less than $75 million market cap) Will expire for companies with FYE after June 15, 2010 The SEC has said no more extensions 18 Conversion to IFRS SEC set forth a proposed roadmap for conversion from US GAAP to International Financial Reporting Standards Would have required three years of IFRS financial statements as early as 2014 for some issuers Perceived benefits include: Comparability with foreign peer companies Increased opportunity for global investment Potential reduced costs and efficiencies More principles based IFRS could better reflect economic reality

10 19 Conversion to IFRS Comment period for the roadmap ended April 20, 2009 SEC was quiet for many months other priorities Recently the SEC has started to talk about IFRS again 20 Conversion to IFRS Impact Conversion, when it comes, will be a very large undertaking for many companies Will require coordination among accounting, legal, tax, IT and others Strain on companies resources will be exacerbated by material FASB projects Convergence Revenue recognition Companies should try to get ahead of these processes to the extent possible Communicate with FASB Consider when making material changes like new credit facilities and new IT systems or software

11 21 The Audit Committee is Responsible for That Too? 22 Other Audit Committee Considerations Risk Biggest governance buzzword of 2009 Audit committees are sometimes viewed as a board s risk experts Potential for overlap Compensation committee Risk committees Risk profile is very company/industry specific

12 23 Other Audit Committee Considerations Securities offerings Important in the current financial environment May need restated financial statements for any number of innocent reasons (discontinued ops, guarantor footnote, etc.) Auditor consents Comfort letters May need consents and comfort letters from prior auditors or auditors of acquired companies 24 Other Audit Committee Considerations According to the IRS: Transfer pricing? IRS Commissioner Shulman said that boards should specifically address [the] relative profit allocated to low tax jurisdictions, and make sure they reflect the real economic contributions made in those jurisdictions.

13 25 Questions & Answers 26 Save the date for upcoming NDI Web Conference Series programs: January 27, 2010 Corporate Governance Developments February 10, 2010 Risk Management in the Boardroom February 24, 2010 Investor Relations Issues March 10, 2010 General Counsel Evolving Trends March 24, 2010 Nonprofit Corporate Governance April 7, 2010 Sustainability in the Boardroom April 21, 2010 Trends in the Recruitment and Selection of Directors May 5, 2010 SEC Enforcement Update May 19, 2010 M&A in the Boardroom Visit Foley.com/ndi to register and for more details.

14 27 Thank You A copy of the PowerPoint presentation and a multimedia recording will be available on our Web site within 2-3 days: We welcome your feedback. Please take a few moments before you leave the Web conference today to provide us with your feedback: