BoardMatters Quarterly, January 2012

Ready for year-end

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Questions for the audit committee to consider

  • Has the audit committee reviewed sensitive year-end accounting and reporting matters with management and the auditors?

  • Are the company’s publicly available communications about the business consistent with its segment disclosures in the financial statements?

  • Does the company have all the resources that it needs to analyze and begin to implement the new guidance expected to result from the Boards’ joint projects?
The SEC expanded its review of whether information disclosed in a company’s SEC filings is consistent with other public information, such as a company’s earnings calls or its website.

Amid the steady flow of accounting change, companies need to keep their eye on current reporting matters.

Understanding the SEC’s current hot topics

Understanding the current focus of the SEC can help companies as they head into the year-end financial reporting season. Although each company’s facts and circumstances are different, the economic conditions in which they operate and their financial reporting challenges are often similar.

While the SEC staff continues to comment on familiar topics, such as significant estimates, revenue recognition, segment disclosures, impairment and financial instruments, the SEC increased its focus on several other areas in 2011.

  • Loss contingency disclosures

    Significant resources were devoted to evaluating and enforcing compliance with current loss contingency disclosure requirements. The SEC staff challenged both the sufficiency of disclosures and a company’s ability to estimate that range.

  • Foreign operations

    The SEC increased its attention on disclosures about liquidity, risk factors and results of operations for companies with foreign operations. Particular attention has been paid to a company’s disclosures when specific foreign operations have a disproportionate effect on the financial statements relative to the company’s size.

    Questions have been raised about the tax effects of operating in foreign jurisdictions, including the effect on liquidity of permanently reinvesting foreign earnings. The SEC also has asked companies to provide more detailed disclosures about any exposure they may have to European sovereign debt.

  • Publicly available company information

    The SEC expanded its review of whether information disclosed in a company’s SEC filings is consistent with other public information, such as a company’s earnings calls or its website.

    For example, if the SEC perceives any discrepancy between how a company’s business is described in its segment footnote and in public information beyond its filings, the SEC often asks for an explanation and may request additional information in order to evaluate the company’s identification of operating segments.

  • Non-GAAP financial measures

    Greater focus has been put on non-GAAP financial measures. The SEC staff has been asking companies to enhance disclosures in their press releases and filings to describe how a non-GAAP measure is useful to investors and to challenge the appropriateness of presenting such a measure when a company is unable to demonstrate that it is useful.

  • Accounting change

    Meanwhile, standard setters continue to work on proposals to change accounting and auditing rules. In November, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) (collectively, the Boards) issued their revised exposure draft on revenue recognition. Companies should carefully review the revised proposal. The Boards made several changes to their original proposal that could have significant effects on some transactions.

    Stay tuned for further developments from the Boards as they continue to jointly and separately work on consolidations, financial instruments and insurance contracts. In addition, they plan to issue their revised proposal on leases in the first half of 2012.

 Questions for the audit committee to consider

Regulatory activity

In December, James Kroeker, SEC Chief Accountant, announced that the SEC staff will need additional time to complete work on its recommendation to the commissioners regarding the possible incorporation of IFRS into the US financial reporting system.

While the SEC staff's recommendation had been expected in 2011, Mr. Kroeker provided no new timetable for a decision by the commissioners.

Rather, he indicated that the SEC staff will proceed “carefully and thoughtfully, being guided by an ideal that produces the maximum benefit for the investing public and the capital markets.”

He further noted that he was “encouraged about the potential prospects of IFRS incorporation,” especially as he considered the input received on the May 2011 staff paper exploring a potential incorporation approach, i.e., “condorsement.”

In October, the Public Company Accounting Oversight Board issued a proposal to improve transparency by requiring the disclosure of the engagement partner’s name along with certain key participants in public company audits. Comments were due by 9 January 2012.

Following its October 2010 green paper, Audit Policy: Lessons from the Crisis, the European Commission (EC) proposed regulations that would have a significant effect on the European and global audit environment.

The proposals, which must be approved by the member states of the European Union and the European Parliament, include mandatory auditor rotation after six years and separation of audit and non-audit activities of the largest firms into separate entities. Consideration of these matters will take an extended period of time.

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