EEI / AGA Spring Accounting Conference

Transcription

1 EEI / AGA Spring Accounting Conference May 19, 2014 Regulatory Update

2 With you today: Name Contact Sean P. Riley Partner U.S. Power and Utilities (617)

3 SEC, FASB and COSO - Update Selected Topics

4 SEC Update

5 On the docket An active environment With a new Chair named in 2013, focus has been on enforcement and completion of rule making. The current agenda Very active regulatory agenda Considerable political and budgetary pressure Division of Enforcement continues to be high profile

6 Restatement and revision trends Top five causes of restatements and revisions 1. Debt, quasi-debt, warrants & equity (BCF) 2. Tax expense, benefit, deferral and other issues 3. Cash flow statement 4. Acquisitions, mergers, disposals and reorganization accounting issues 5. Revenue recognition Source: Audit Analytics

7 SEC filing review process Each registrant to be reviewed at least once every three years Depth and scope varies in the type of review and nature of comments (full review, accounting/legal review, or limited review) Comparison of SEC filings to other publicly available data (e.g., press releases) Comment letters and responses are publicly available via EDGAR 20 business days after review is completed or registration statement is effective 7

8 What is the source for comments? Filed documents 10-K, 10-Q, 8-K Company s website Analysts calls Financial press Whistleblower PCAOB - inspection 8

9 SEC comment letter trends: MD&A Provide an executive overview Discuss trends which may have a material impact on future operating results and liquidity Should not simply repeat information provided elsewhere; rather, explain the whys and implications Discussion of critical accounting estimates should include changes in assumptions, judgments, estimates, and other variables impact operating results Enable users to see the company through the eyes of management Drivers for changes in cash flows from operations 9

10 SEC comment letter trends: Non-GAAP measures Non-GAAP disclosure requirements include: The relevance of the measure How management uses the measure and how investors should use the measure Limitations on the measure Appropriate reconciliation to a GAAP measure Reference to the lack of comparability to measures used by other companies Common pitfalls include: Inappropriate items excluded Non-GAAP measures given greater prominence than GAAP measures 10

11 SEC comment letter trends: Fair value disclosures Lack of quantitative information for unobservable inputs Disclose weighted average of significant inputs when the range is wide Expanded disclosures about valuation techniques for Level 2 fair value measurements How changes in one unobservable input affect another unobservable input used in the fair value measurement for a given instrument We note that you disclose the significant unobservable inputs used in your Level 3 fair value measurements in addition to the range of such inputs. Given the wide range of inputs in certain cases, please revise your disclosure in future filings to also disclose the weighted average of the significant unobservable inputs reported. 11

12 SEC Comment letter trends: Impairments Foreshadowing disclosures in periods prior to impairment losses Disclose significant inputs used in determining fair value (similar to disclosures required for recurring fair value measurements) Disclose determination of reporting units Disclose information on identification of asset groups Please explain how you concluded the [group1] level is the lowest level for which identifiable cash flows are largely independent of other groups of assets or liabilities. 12

13 SEC comment letter trends: Financial statement presentation Continued focus to ensure financial statement presentation and classification complies with GAAP and SEC requirements Common areas for comment include: Classification of certain amounts in the statement of cash flows Application of guidance in Rule 5-02 which requires separate presentation of account balances if they exceed a certain threshold Disclosure of both net income (loss) and net income (loss) attributable to the registrant in the quarterly financial data table Held for sale and discontinued operations presentation 13

14 SEC Comment letter trends: Acquisition accounting Treatment of various items in purchase accounting and the interaction with regulatory accounting Ensuring all other required business combination disclosures have been made, including valuation techniques and inputs used Consideration of requirement to disclose the following: - Amounts of revenues and expenses of the acquiree since the acquisition date - Supplemental pro forma information as if the business combination occurred as of the beginning of the annual reporting period Acquisition related accounting and disclosure considerations can be complex depending on the nature of the transaction and related regulatory considerations 14

15 SEC comment letter trends: Loss contingencies Disclose reasonably possible range of loss exceeding what has already been recorded or disclosure that it is immaterial to all financial statements Disclose why a Company cannot determine a reasonably possible range including a description of procedures in place to develop such conclusion Disclose what the potential impact of a settlement may be on cash flows We note in your disclosure on environmental contingencies that you believe it is reasonably possible that costs associated with such liabilities may exceed current reserves in amounts that could be material but cannot be estimated. Please clarify if your inability to estimate includes not only the additional possible loss but also the range of loss that could exceed current reserves

16 Comment letter trends: Derivative accounting Accounting conclusions reached by companies with respect to their derivative commodity contracts Disclosure of information related to the volume of derivative activity Presentation of realized and unrealized gains and losses for derivative instruments for which hedge accounting is not applied both on the income statement and within the MD&A We note your disclosure that Company A enters into basic service power supply contracts for residential, small and medium general service customers that are 12 months in duration and provide for 50% of supply requirements. Please tell us what factors you considered in evaluating these contracts for derivative accounting implications. 16

17 Comment letter trends: Regulatory accounting Disclose how certain items are treated in the rate making process Ensuring items recorded in regulatory asset accounts are recoverable Disclose material regulatory assets and liabilities and the following key factors, preferably in a tabular format: - Nature of the cost deferred - The amount deferred - Where regulatory assets are classified on the balance sheet - The recovery period and whether a return is being provided Please tell us your consideration of disclosing the remaining recovery period of regulatory assets not earning return 17

18 Comment letter trends: Consolidation / noncontrolling interests (NCI) Compliance with all of the disclosure requirements including the nature of restrictions on consolidated VIE assets that are reported in the balance sheet Determination as to whether or not the reporting entity is the primary beneficiary of the VIE and, if not, disclosure of the basis for that determination, including: - Identifying the scope and duration of the VIE's activities that are significant to the entity's performance, - Considering all sources of power that may exist, including below the Board of Directors level and at the VIE's formation, and Appropriateness of the application of the equity method of accounting related to 50% or more owned joint ventures 18

19 Other areas of focus Segment reporting Cybersecurity Dividends and restricted net assets Income taxes Disclosure controls and procedures Compensation and incentive plans 19

20 FASB Update

21 FASB overview Highlights Convergence in question board has diverged with the IASB on key aspects of the joint priority projects Renewed focus recently refreshed the agenda as to current areas of focus and eye towards simplification Private company reporting amended guidance to address concerns raised by private company preparers and users As our work on joint projects with the International Accounting Standards Board (IASB) comes to completion over the next year, the board will focus on improving U.S. GAAP for our stakeholders here and abroad. FASB Chairman, Russ Golden

22 FASB leadership Board members Russ Golden Chairman Reducing complexity Board enters redeliberations on key projects with fresh perspective Jim Kroeker Vice Chairman Tom Linsmeier Larry Smith Marc Siegel Daryl Buck Hal Schroeder

23 ASU : Reporting of Discontinued Operations Summary (Issued April 2014) Too many disposals currently qualify for discontinued operations Main change - A disposal is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity s operations and financial results o Examples include a disposal of a major geographical area, a major line of business, a major equity method investment, or other major parts of an entity In general, effective in Calendar 2015; early adoption is permitted for disposals not yet reported in previously issued financial statements

24 Where does it stand? Disclosure framework Users and preparers continually express concerns on the usefulness of disclosures and perceived disclosure overload. FASB two part project: - Board s decision process - Entity s decision process The SEC has initiated its own project to evaluate existing disclosure requirements our goal is to both improve disclosure content make it more useful to investors and at the same time, where we can, reduce the amount of disclosure content FASB Chairman, Russ Golden

25 Where does it stand? Private Company Council The PCC has moved at a rapid pace since the groups inception. Recently issued Goodwill VIE guidance Hedge accounting Still being discussed Intangible assets

26 Where does it stand? Simplification - a new focus FASB is focused on how to simplify GAAP to reduce complexity and drive consistency and comparability Currently evaluating whether to add ideas on simplification to FASB agenda Potential contenders cash-flow and income taxes Stay tuned this is at the early stages

27 COSO

28 Impact of the new COSO framework 2013 Framework increases ease of use COSO s Internal Control Integrated Framework (1992 Edition) Refresh Objectives Consider changes in business & operating environments Articulate principles to facilitate effective internal control Expand operations and reporting objectives Updates Update Context Clarify Requirements Broaden Application COSO s Internal Control Integrated Framework (2013 Edition) Slide 28

29 Impact of the new COSO framework 2013 framework articulates principles and points of focus 2013 COSO Cube 17 Principles Points of focus 5 Components Principles articulate fundamental concepts of components Points of focus describe important characteristics of principles Controls Legend Components and Principles are requirements for an effective system of internal control Points of Focus and Controls are subject to management judgment Slide 29

30 17 principles of effective internal control Control Environment Risk Assessment Control Activities Information & Communication Monitoring Activities 1. Demonstrates commitment to integrity and ethical values 2. Exercises oversight responsibility 3. Establishes structure, authority and responsibility 4. Demonstrates commitment to competence 5. Enforces accountability 6. Specifies suitable objectives 7. Identifies and analyzes risk 8. Assesses fraud risk 9. Identifies and analyzes significant change 10. Selects and develops control activities 11. Selects and develops general controls over technology 12. Deploys through policies and procedures 13. Uses relevant information 14. Communicates internally 15. Communicates externally 16. Conducts ongoing and/or separate evaluations 17. Evaluates and communicates deficiencies 30

31 Impact of the new COSO framework Transition guidance COSO decided to supersede the 1992 Framework at the end of the transition period (i.e., December 15, 2014) - Reporting objectives A SEC registrant should be prepared to issue its certification on ICFR based on the 2013 Framework for reporting periods ending after December 15, Other suitable objectives - Board of directors and management may choose to transition other systems of internal control SEC staff: SEC staff plans to monitor the transition for issuers using the 1992 framework to evaluate whether and if any staff or Commission actions become necessary or appropriate in the future. However, at this time, I ll simply refer users of the COSO framework to the statements COSO has made about their new framework and their thoughts about transition. (Source: Paul Beswick, S.E.C. Chief Accountant) Slide 31

32 Impact of the new COSO framework Potential impact on ICFR Reactions and responses will differ depending on circumstances If 1992 Framework has been thoroughly applied to current ICFR, the transition should not result in significant changes or incremental effort Preliminary assessment (i.e., mapping of principles using points of focus to controls) may reveal gaps in design or documentation of some controls - Focus on design of indirect entity level controls (ELCs) that affect 14 principles associated with softer components of internal control - No impact expected on design of direct ELCs and transaction level controls (e.g., three way match, cash reconciliation) relating to Control Activities - Mapping exercise expected to support management s assertion under SEC regulations Fresh look may reveal opportunities to re-design controls to enhance effectiveness or efficiency No changes are expected in SOX compliance requirements Slide 32

33 Questions?