BDO SEIDMAN, LLPS October 26, 2005 FINANCIAL REPORTING UPDATE

1
BDO SEIDMAN, LLPSOctober 26, 2005FINANCIAL
REPORTING UPDATE
2
Speakers and Replay Information

• Speakers
• Ben Neuhausen National Director Accounting
  Standards
• Jeff Lenz National SEC Department
• Replay Access
• www.bdo.com/about/publications/assurance

3
GAAP Update October 2005
4
FASB Statements

• No new Statements since the last quarterly update
  call

5
FASB Exposure Drafts

• Revised Exposure Draft on earnings per share
• Three Exposure Drafts amending FASB Statements
  133 and 140
• Amendments to sale accounting guidance in
  Statement 140
• Servicing rightsrecord all at fair value at
  closing option to mark to fair value
• Hybrid financial instrumentsoption to mark
  entire instrument to fair value rather than
  bifurcating

6
FASB Staff Positions--Final

• FAS 13-1 Rent incurred during construction
  charged to expense as incurred not eligible for
  capitalization
• FAS 123R-1 Classification of employee awards as
  liability or equity follows Statement 123R
  guidance until expiration or exercise
• FAS 123R-2 Practical guidance on definition of
  grant date

7
FASB Staff Positions--Proposed

• FAS 123R-c Shortcut approach to compute APIC
  pool
• FAS 133-a Instant gains (losses) on derivatives
• SOP 94-6-a Disclosure of nontraditional loans
• FIN 46R-c What variability should be considered
  in defining variable interests

8
FASB Staff Positions--Proposed

• AAG INV-a Fully benefit responsive investment
  contracts (GICs, etc.)
• FAS 140-c Narrow clarification
• FTB 85-4-a Investments in life insurance
  contracts
• FIN 45-b Minimum revenue guarantees
• FIN 13-a Tax contingencies and leverage leases

9
EITF Update
SELECTED JUNE 2005 EITF ISSUES DISCUSSED or
EFFECTIVE
10
EITF Issues Discussed in Sept. 2005

• 04-13, Inventory Exchanges (Consensus reached)
• Exchanges of inventory in contemplation of one
  another are nonmonetary exchanges under APB
  Opinion No. 29 and FASB Statement No. 153.
• Generally should be measured at carryover basis
  (historical cost)
• Exceptionmeasure at fair value if
• Finished goods exchanged for raw materials or WIP
  (transferor of finished goods only)
• Fair value is objectively measurable
• Transaction has commercial substance

11
EITF Issues Discussed in Sept. 2005

• 05-1, Accounting for the Conversion of an
  Instrument That Becomes Convertible upon the
  Issuer's Exercise of a Call Option
• (No conclusion reached)
• EITF rejected previous tentative conclusions,
  asked FASB Staff to do further research

12
EITF Issues Discussed in Sept. 2005

• 05-07, Accounting for Modifications to Conversion
  Options Embedded in Debt Instruments (Consensus
  reached)
• Change in fair value of a conversion option
  should be treated the same as a change in cash
  flows
• If transaction is a modification, change in fair
  value creates discount or premium, affects future
  interest expense

13
EITF Issues Discussed in Sept. 2005

• 05-08, Income Tax Consequences of Issuing
  Convertible Debt with a Beneficial Conversion
  Feature (Consensus reached)
• Basis difference on the debt is a temporary
  difference record a deferred tax liability
• Debit side of journal entry is shareholders
  equity
• As debt discount is amortized to interest
  expense, basis difference shrinks and deferred
  tax liability is reversed to deferred tax benefit
  (P/L)
• Retrospective application

14
EITF Issue 05-08

• On January 1, 2005, an entity issues an
  in-the-money convertible debt instrument

15
EITF Issue 05-08

• Journal entries at issuance

16
EITF Issue 05-08

• 2005 Results

17
EITF Issue 05-08

• 2005 Income tax provision
• Current tax provision 24 (60 x 40)
• Deferred tax benefit 1.20 (3 x 40)
• Total income tax provision 22,80
• Effective tax rate 40 (22.80/57)

18
EITF Issue 05-08

• If issuer is in a NOL carryforward position,
  consensus does not affect balance sheet or income
  statement, but does affect
• Valuation allowance against deferred tax asset
• Footnote disclosure of valuation allowance
• Footnote disclosure of effective tax rate

19
PCAOB Update October 2005
20
PCAOB Update

• Chairman McDonough resignation
• Interpretive Guidance Applying COSO to smaller
  companies (ED coming soon)
• PCAOB standards pending SEC exposure and
  approval
• Auditing elimination of a material weakness
• Tax services and independence

21
SEC UPDATEOctober 2005
22
SEC Update

• Small Business Advisory Committee activities
• Rulemaking Deferral of 404 reporting for
  non-accelerated filers
• Proposed rulemaking Changes in accelerated
  filing dates
• Miscellaneous developments
• Expected future activities

23
Small Business Advisory Committee Deliberations

• More info. at http//www.sec.gov/info/smallbus/ac
  spc.shtml
• Definitions (where and how to draw lines to scale
  regulations based on size
• Small companies Smallest 6 of market
  capitalization (under 700 million)
• Microcap companies Smallest 1 of market
  capitalization (under 100 million)

24
Small Business Advisory Committee Recommendations

• August recommendations to SEC
• Give non-accelerated filers one more year to
  comply with 404 reporting
• Freeze filing date requirements for small
  companies that are accelerated filers (at 75/40
  days)
• Commission should look to Committees definition
  of small company in implementing this
  suggestion

25
Rulemaking Deferral of 404 Reporting for
Non-Accelerated Filers

• Release 33-8618 (http//www.sec.gov/rules/final/33
  -8618.pdf)
• 404 reporting now required in years ending on or
  after 7/15/07
• No relief for new accelerated filers
• No 2006 relief for FPIs that meet definition
• Comments requested (due 10/31) on issues re 404
  reporting by smaller companies
• Different reporting requirements (management,
  auditors)?
• At what size threshold?
• Cost estimates

26
Proposed Rulemaking Changes in Accelerated
Filing Dates

• Release 33-8617 (http//www.sec.gov/rules/proposed
  /33-8617.pdf)
• Would create three categories of issuers and
  revise filing dates (this year)

27
Proposed Rulemaking Changes in Accelerated
Filing Dates (contd)

• Form 10-Q due date would remain at 40 days
  permanently
• Would make it easier to change to a less
  accelerated status
• Change to the lower status in the same year as Q2
  float drops below 25M / 75M
• Comments due 10/31

28
Miscellaneous Developments

• Chairman Christopher Cox has replaced Chairman
  Donaldson
• Commissioner Annette Nazareth has replaced
  Commissioner Goldschmid
• Chief Accountant Don Nicolaisen has resigned
  (effective 10/31)

29
Miscellaneous Developments (contd)

• Securities offering reform
• FAQ on transition issues (http//www.sec.gov/divis
  ions/corpfin/transitionfaq.htm)
• Disclosure of risk factors, unresolved comments,
  WKSI status, and voluntary filer status applies
  to fiscal years ending on or after 12/1/05 (not
  reports filed on or after 12/1/05)
• Risk factor disclosures required in 10-Qs only
  after an issuer is first required to include in
  Form 10-K
• Additional FAQ expected

30
Miscellaneous Developments (contd)

• IRS Rev. Proc. 2005-51
• Available at http//www.irs.gov/irb/2005-33_IRB/a
  r14.html
• Requires disclosures regarding certain tax
  penalties in Form 10-K (Item 3)
• Requirement is not reflected in the 10-K
  instructions
• Disclose in 10-K covering period of IRS demand
  for payment (or year paid, if paid first)
• Subject to additional penalties if fail to
  disclose
• Applies to penalties related to returns due after
  10/22/04

31
Miscellaneous Developments (contd)

• Relief for hurricane Katrina victims
• http//www.sec.gov/news/press/2005-142.htm
• http//www.sec.gov/news/press/2005-132.htm

32
Expected Future Activities

• Materiality/PAJEs project
• New SAB still expected very soon
• Revisit executive comp. proxy disclosures
• Not in time for this proxy season
• Revisit auditor independence rules
• Audit committee is the audience