Quarterly Accounting Update

Transcription

1 Quarterly Accounting Update March 15, 2005

2 Agenda Guidance You Need to Know Now: Share-Based Payment Current Leasing Issues Income Taxes Conditional Asset Retirement Obligations Accounting Changes Other FASB Activity: Staff Positions (FSPs) Other FASB Projects Q & A and Conclusion

3 Keep In Mind: This webcast is based on the observations of Deloitte & Touche LLP representatives. Although we believe these slides to be accurate, we cannot represent that they are complete or without error This webcast does not provide official Deloitte & Touche interpretive accounting guidance

4 FASB Statement 123(R) Share-Based Payment

5 Statement 123(R) Why did FASB address this Issue? Simplify the existing accounting rules reduce complexity Improve financial reporting by - Eliminating alternatives - Increasing relevance of reported compensation - Focus on objects not rules Promote international convergence Constituents urged the Board to address

6 Statement 123(R) Scope of this Standard Very Broad! All Share-Based Payments to employees Excludes: - ESOPS - Only Limited Guidance on Nonemployees Impact of this Standard Limited exception for nonpublic companies All transactions in scope measured at fair value Will require extensive use of judgment - Does accounting comply with the objectives - Selection of valuation technique and assumptions

7 Statement 123(R) Implementation Pitfalls Measurement Fair Value at Grant Date - Model used should result in best estimate of fair value - Must use a model that incorporates all the aspects of a given award into the determination of its fair value - May differ from methodology used for 123 footnote purposes Recognition - Must make estimates of forfeitures - Carefully consider your service period - Can be highly impacted by the type of award - Don t forget about inventory capitalization

8 Statement 123(R) Implementation Pitfalls (Cont.) EPS computation - Requires the use of treasury stock method to reflect in diluted EPS Income Tax Accounting Treatment - Two-event approach to income tax accounting - Reverted to the Statement 123 approach (APIC pool) - You must determine your beginning APIC pool (dating back to 1995) Liability vs. Equity issues - Carefully analyze you plans in light of the 123(R) guidance

9 Statement 123(R) Effective Date and Transition Type of Company Period when you must first apply Required Effective Date (Periods Beginning After) Required Method of Transition for unvested awards Optional Transition Method for Prior Periods Most Public Companies Interim or Annual 6/15/05 Modified Prospective Restate Prior Periods Small Business Issuers Interim or Annual 12/15/05 Modified Prospective Restate Prior Periods Nonpublic- Fair Value Reporters Annual 12/15/05 Modified Prospective Restate Prior Periods Nonpublic - Other Annual 12/15/05 Prospective None

10 Polling Question #1 Given the rapidly approaching effective date, what is company s level of readiness for adoption of Statement 123(R)? Statement 123(R)? We didn t know this was an issue We know it s an issue but haven t done anything yet We re moving along and are working towards adoption We have already done the heavy lifting Don t know or Not Applicable.

11 Statement 123(R) What s next Phase II project Implementation issues group? Potential for additional guidance by SEC

12 Current Leasing Issues

13 Current Leasing Issues History and evolution - Restatements - SEC Staff Letter Primary issues - Amortization of leasehold improvements - Rent holidays - Lease incentives Lessor considerations

14 Current Leasing Issues Issue Identification - Inconsistent periods used to determine lease classification, depreciation periods for leasehold improvements, and amortization periods for determining rent expense in operating leases Lease term - Careful consideration of paragraph 5(f) (and 5(o)) Rent holidays - Right to use defines lease commencement and should be part of lease term Depreciation of leasehold improvements

15 Current Leasing Issues Accounting for leasehold improvement related incentives - Substance of lessor payment - Lessor or lessee property - Pro-rata consolidation not appropriate Statement of cash flows

16 Current Leasing Issues Lessor considerations - Leasehold improvements and incentives - Rent holidays

17 Proposed FASB Interpretation, Recognition of Tax Positions An Interpretation of FASB Statement No. 109

18 Uncertain Tax Positions Key Concept - Clarifies the criteria for recognition and measurement of benefits from uncertain tax positions - Differs from realizability evaluation for DTA Exposure draft of Interpretation expected in early Q Effective for periods ending after December 15, 2005 Transition method Cumulative effect of a change in accounting principle

19 Uncertain Tax Positions Accounting Model (Asset Approach): - Step 1 - Recognition Probable of being sustained Consistent with FAS 5 definition Should level tax opinion Cannot consider detection risk - Step 2 - Measurement Best estimate No contingency reserve or valuation allowance Changes in judgment: - Recognition - Derecognize when it is more likely than not that the position will not be sustained - Measurement - Adjust best estimate through income statement

20 Uncertain Tax Positions Classification Interest expense for settlement of underpayment disputes - Calculate based on unrecognized amounts Disclosures - Unrecognized penalties and interest FAS 5 contingent loss rules - Unrecognized tax benefits FAS 5 gain contingency rules May provide IRS with a roadmap to aggressive positions

21 Uncertain Tax Positions Example of Application of Interpretation Facts: - Technology company calculates R&D credit of $225,000 - Comprised of three employees: Two programmers - $150,000 One manager 75% of $100,000 - Probability assessment: Credit for programmers Probable Credit for manager Not probable

22 Uncertain Tax Positions Example of Application of Interpretation Assessment: - Step 1 Recognition Programmers Recognize Manager No recognition - Step 2 - Measurement Two programmers 90% of $150,000 Financial statement impact: - Reduce tax expense by $135,000 - Record a tax liability for $90,000 Classified based on expected timing of cash flows - Record interest expense on $90,000

23 Polling Question #2 Do you agree with the FASB that guidance is needed in accounting for uncertain tax positions? Yes. There is too much diversity in practice. No. There are not significant practice issues in this area. Maybe, but this guidance is heading in the wrong direction. Don t know or undecided

24 Proposed FASB Interpretation, Accounting for Conditional Asset Retirement Obligations

25 Accounting for Conditional Asset Retirement Obligations Recognition Pursuant to Statement 143 companies have not been recording liabilities for conditional asset retirement obligations citing the following: - The conditional nature of the obligation does not create a liability until the retirement activity occurs, or - The timing and (or) method of settling the obligation is unknown

26 Accounting for Conditional Asset Retirement Obligations Recognition (cont d) FASB has expressed a different view: - No tangible asset will last forever, therefore the asset retirement obligation is certain to occur - Uncertainties over the timing and (or) method of settling the obligation affect the fair value of the obligation - The ability to indefinitely defer settlement of the obligation, does not relieve the company of its present duty to settle the obligation - Conclusion = Conditional asset retirement activities are within the scope of Statement 143

27 Accounting for Conditional Asset Retirement Obligations Reasonable Estimate May be cases in which companies do not have sufficient information to estimate the fair value of the obligation (e.g., sufficient information to estimate a potential range of settlements) In these cases, companies should record the obligation in the first period in which sufficient information is available If unable to reasonably estimate fair value, companies should disclose that fact along with the reasons why

28 Accounting for Conditional Asset Retirement Obligations Effective Date Effective no later than the end of the fiscal year ending after December 15, 2005 Interpretation will permit but not require restatement of interim financial information during any period of adoption. Status Exposure Draft issued June 2004 Comment period ended August 2004 Expect final standard in 1 st quarter 2005

29 Accounting for Conditional Asset Retirement Obligations Transition Initial application of this Interpretation shall be measured using current information, current assumptions, and current interest rates Companies shall recognize a cumulative effect of a change in accounting principle upon adoption of this Interpretation

30 Polling Question #3 Do you anticipate that you will be recording more asset retirement obligations as a result of applying this Interpretation, when it becomes effective? Yes No Don t know/ no answer

31 FASB Proposed Statement Accounting Changes and Error Corrections

32 Accounting Changes and Error Corrections Project Scope and Objective Eliminate differences between U.S. GAAP and IFRS related to changes in accounting principle - APB Opinion 20 cumulative effect in period of change - IAS 8 retrospective application Improves comparability between periods Does not impact accounting for the following: - Corrections of errors - Changes in estimates Exception: Change in depreciation method = change in estimate effected by a change in accounting principle - Changes in reporting entity

33 Accounting Changes and Error Corrections Changes in Accounting Principle General rule - retrospective application - Adjust all prior periods presented - Exceptions: Specific transition guidance in new principle Impracticable Impracticability - Effects are not determinable Period-specific apply in earliest period practicable Cumulative apply prospectively as of earliest date practicable (e.g., FIFO to LIFO) - Assumptions about management s intent in prior periods - Availability of information for significant estimates - Must make every reasonable effort

34 Accounting Changes and Error Corrections Disclosures Change in accounting principle - Nature and justification for change (preferability) - Effects of change on each line item for all periods presented (and prior, if applicable) - Applied retrospectively; if not, the reasons therefor Correction of an error - Effect on each line item for all periods presented (and prior, if applicable) - Comparative information has been restated Change in estimate & change in reporting entity - Disclosure requirements carried forward

35 Accounting Changes and Error Corrections Effective Date Changes and corrections made in periods beginning after December 15, 2005 Does not change existing pronouncements in transition as of effective date Status Exposure draft issued December 2003 Comment period ended April 2004 Expect final standard in 1 st quarter 2005

36 Other FASB Activity

37 FASB Statements Expected in 2005 Earnings per Share (2Q 2005, effective?) - Will change EPS for instruments that may be settled in cash or shares, mandatorily convertibles, annual/ytd computations Purchase Method Procedures (ED 2Q, Final 4Q?) - Will change aspects of purchase price determination and allocation Non Controlling interests - Change to the accounting for minority interest

38 FASB Statements Expected in 2005 Fair Value Measurements (2Q 2005, FY beg after 6/15/05?) - May change some practice e.g., include own credit - Clarify CON 7 FASB Staff Positions - Useful Life and Amortization of Intangibles - FIN 46R Implicit Variable Interests - Sale of 12(b)(1) Fees - Segments Similar Economic Characteristics - Suspended Well Costs - Amend SOP 78-9 for Real Estate Partnerships - OCI of Equity Method Investees - Electronic Equipment Waste Obligations

39 Polling Question #4 What is your view regarding the idea of having separate GAAP for nonpublic companies? It s a good idea. GAAP is too hard so cut the small guy a break. Existing standards may be difficult to apply, but that doesn t mean that nonpublic companies need separate standards. The process is working fine right now. The change is unnecessary. Don t know / not applicable.

40 Other FASB Activity GAAP Hierarchy GAAP Codification Project - A project to codify GAAP to simplify retrieval Standard Setting for Private Companies - Working Group to look into whether there should be differential GAAP for nonpublic companies

41 Questions