Tras seg 2014 accounting guide 02.19.14 final (digital)

2014Accounting & Financial
Reporting Guide

Contents
1 Dear Clients and Friends
3 Executive Summary
4 2014 Accounting & Financial Reporting Highlights
5 Creating Investor Confidence and Regaining Public Trust
6 U.S. GAAP/IFRS Convergence
12 SEC Office of the Chief Accountant (OCA) Update
14 SEC Enforcement
15 PCAOB Update
17 PCAOB Standard Setting Update
21 Hot Accounting and Reporting Topics for 2014 and Beyond
21 Management’s Discussion and Analysis Disclosures
22 Disclosures in Consideration of the Current Economic Environment
26 Disclosure Overload and Redundancy
27 SEC Considerations of Foreign Private Issuers (FPI)
27 Cross Border Transactions
28 COSO Update
30 SEC AQM and XBRL
30 Other SEC Updates for the 2013 Annual Reporting Season and Beyond
32 Appendix A — Highlighted Speeches — Linked to Full Text
32 2013 AICPA National Conference on Current SEC and PCAOB Developments
33 Appendix B — Abbreviations
34 Notes
35 Notes
36 About SolomonEdwards

SolomonEdwards | 2014 Accounting & Financial Reporting Guide 1
Dear Clients and Friends:
T
his year marks our fourth annual publication of this guide to the most critical
issues shaping the accounting and financial reporting landscape. Over these
past four years, your positive reaction to our efforts in producing this guide
book continues to motivate us to fulfill our role as a trusted advisor in your business.
SolomonEdwards’ role as a trusted advisor has become critical to many firms in
light of the continued uncertainty that characterizes both our global economy and
the regulatory environment in accounting and financial reporting. We take this
responsibility seriously, and we will continue to carry on the goal of providing clear
interpretive guidance to our clients for even the most complex accounting and
reporting topics. With that objective in mind, we are very proud to share with you
our 2014 Accounting Financial Reporting Guide.
Joint efforts by the Financial Accounting Standards Board in the U.S. and the
International Accounting Standards Board to converge accounting standards in key
areas like revenue recognition, leases and financial instruments continue to unfold
with the hope that these long deliberated topics will be finalized in 2014. Meanwhile,
continued regulatory scrutiny inspired by the spirit of investor protection forms the
agenda for our profession. As a result, practitioners are required more than ever
before to prioritize training in technical accounting to ensure their ability to contribute
value to their constituencies.
This guide highlights the most important trends discussed at the AICPA National
Conference on Current SEC and PCAOB Developments held in December of 2013.
Nearly 2,000 professionals gathered in Washington, D.C. to hear the annual update
by the leaders and regulators in our profession, while many more watched via live
simulcast across the country. SolomonEdwards proudly sponsors this conference
as a national underwriter because we believe this conference sets the tone for our
profession each and every year.
We hope our guide will prove to be a valuable resource as you seek to navigate
accounting and financial reporting challenges in 2014. Our technical experts see
these topics in real time each and every day with our clients, and they have added
their insights where appropriate to the guide’s utility as a practical desktop reference
source. We look forward to serving and partnering with you in the future and we thank
you for your continued trust and confidence in our firm.
Best regards,
Edward S. Baumstein, CPA
President CEO, SolomonEdwardsGroup, LLC

2 2014 Accounting Financial Reporting Guide | SolomonEdwards

SolomonEdwards | 2014 Accounting Financial Reporting Guide 3
Executive Summary
In 2014, as we begin to adjust to the notion that economic uncertainty
and volatility represent the “new normal,” focus within the accounting
and financial reporting profession must remain fixed on quality and
transparency by practitioners, rule makers, and users. Further, we
anticipate that the general uncertainty that characterizes the global
economic landscape will continue to describe the regulatory environment
through 2014. As a result, it is imperative for practitioners in accounting
and financial reporting to challenge themselves to provide the utmost
quality and transparency to their stakeholders and constituents. Per
William Balhoff, Chairman of the America Institute of Certified Public
Accountants (AICPA), “quality is a universal language,” requiring
practitioners to remain focused on their responsibilities to support value
growth, bolster investor confidence, maintain regulatory compliance and
manage talent. All of these challenges faced by the global accounting
profession were addressed by presentations given by some of our
profession’s most influential regulators and policy setters during the
AICPA’s 40th Annual National Conference on Current SEC and PCAOB
Developments, held December 9-11, 2013.
This conference generally serves to set the course for the United States accounting and
financial reporting community during the following year. The Conference communicated
the need for the profession to exercise due diligence and effort and take appropriate
measures to ensure continued investor confidence and gain greater public trust in
accounting, financial reporting and capital market regulation. In order to enhance the
deliverable, practitioners must ensure they are practicing a healthy skepticism, as well
as a respect for judgment in an effort to provide the most relevant information in
consideration of the current economic environment.
Included within this publication is a summary of the key themes and emerging issues
that will form the agenda for the accounting and financial reporting community in 2014
and beyond.

2014 Accounting Financial
Reporting Highlights
ƒƒ Creating Investor Confidence and Regaining Public Trust — A survey conducted
by The Center for Audit Quality (CAQ) indicated that “main street investors” feel
more confident with independent auditors (72% in 2013 vs. 70% in 2012). To
continue to build upon the strength of the profession, it is important for auditors
to be clearly independent and objective while exercising due professional
skepticism to challenge management’s critical accounting policies and significant
estimates. Audit Committees and Issuers are encouraged to review their reporting
model to ensure it is applicable to the current market environment and provides
transparent, clear, relevant, useful, and comparable information to investors to
restore public trust in America’s capital markets.
ƒƒ U.S. GAAP and IFRS Convergence — Substantial progress has been made on
these priority projects with revenue recognition, leases, and financial instruments
scheduled for final standard release in 2014. The exposure draft on the insurance
contracts project was issued in 2013 and scheduled deliberations will be held
through 2014, with the final standard scheduled for issuance in mid-2015. All of
these aforementioned new convergence standards will bring with them sweeping
changes in accounting and financial reporting. Accordingly, the standard setting
process concerning these key issues has been a slow one characterized by
rigorous debate amongst standard setters and significant feedback from the
profession. As a result, the regulators have been forced to rethink positions on
these key topics time and again to ensure that both the fundamental objectives to
improve financial reporting are achieved in harmony with practitioner concerns
regarding cost and burden of implementation and potentially harmful impacts on
enterprise value. Convergence activities spearheaded by the FASB and IASB
have been underway now for nearly a decade, yet fundamental challenges in
reconciling the approaches of these global standards makers remain. The
resultant impact on the accounting and financial reporting community is what
has become a predominantly “wait and see” attitude amongst practitioners.
Should the final standards in these key areas actually be issued in 2014, there
will finally be an opportunity for practitioners to take up implementation
preparations in earnest.
ƒƒ SEC Office of the Chief Accountant Update — The OCA Staff updated the
conference on its developments and focus over the past year. They discussed
views on the FASB outreach, simplification of accounting standard, GASB
standards and municipal issuers, valuation standards, audit committees, auditor
independence and internal controls over financial reporting.

ƒƒ SEC Enforcement — SEC Enforcement Division presented recent actions and
litigation related to the financial crisis. The Division plans to refocus its efforts
on financial fraud, and has created a Fraud Task Force (FRAud).
ƒƒ PCAOB Update — James Doty, PCAOB Chairman, set forth the following certain
near-term priorities:
–– The Auditor’s Report
–– Audits of Brokers and Dealers
–– Related Party Transactions
–– Audit Quality Indicator Project
ƒƒ Hot Accounting and Reporting Topics for the 2013 Annual Reporting Season
— Based on the SEC’s review of public filings and PCAOB’s review of audit
engagements in 2013, the SEC and PCAOB highlighted the most common issues
preparers and auditors should focus on this upcoming annual reporting season.
Creating Investor Confidence and Regaining Public Trust
Cynthia Fornelli of the Center for Audit Quality (CAQ) addressed the conference again
this year to emphasize the role of the audit on investor confidence.
Ms. Fornelli reminded participants that the audit profession is strong — and this is
critical to investor protection. As an example, she mentioned that total number of
financial restatements has leveled off over the last few years and the number of issues
per restatement has fallen to a 12 year low. Ms. Fornelli attributes this to the work of the
auditors, issuers, PCAOB, SEC, FASB and others, who have worked together to ensure
the strength and reliability of information provided to investors. As a result, investor
confidence is high, which is depicted in the annual survey conducted by the CAQ.
Ms. Fornelli voiced her support of the objectives of the many audit and accounting
quality projects that are ongoing within various bodies. She believes focus on
continuous quality enhancement will continue to keep the audit profession strong.
Ms. Fornelli concluded her speech noting the ways in which the CAQ and industry are
building on its strength:
ƒƒ Investing in talent
ƒƒ Developing new resources to continually improve
ƒƒ Working together to fight financial fraud
ƒƒ Improving transparency
ƒƒ Advocating for rules that work for businesses and investors in a global economy.

U.S. GAAP/IFRS Convergence
FASB Perspective
Russell Golden, Chairman of the FASB, addressed the AICPA conference in his first
year as Chairman on topics consistent with the themes of the conference. Interestingly,
Mr. Golden did not directly address the topic of convergence with IFRS standards,
which had been the focus of FASB speeches in prior years.
The FASB’s first priority is related to FASB agenda-setting. Here, Mr. Golden noted that
especially as work nears completion on the top three convergence projects — revenue
recognition, leases and financial instruments — it is very important to thoughtfully
consider the types of projects that are added to the agenda. In order to strike the right
balance between satisfying the larger, more overarching issues within the industry and
the more immediate concerns of investors on newer or “hotter” topics.
Mr. Golden’s view is that the projects should fall under three categories:
1. Foundational
2. Recognition, Measurement and Presentation
3. Reduction of complexity
Mr. Golden also emphasized a desire to address implementation and education issues
related to all new standards.
The foundational projects are those that would have a larger, more long-term impact on
the profession and on those who rely on U.S. GAAP. Mr. Golden gave two examples of
this type of project: the FASB’s conceptual framework and the disclosure framework
project. In Mr. Golden’s words, “the conceptual framework is a set of interconnected
objectives that identify the goals and purposes of financial reporting and the underlying
concepts that help achieve those objectives.” One of the purposes in the FASB’s
creation was creation of a conceptual framework and it is important to stay true to
that mission.
The disclosure framework project focuses on the effectiveness of disclosures.
The goal would not be to add more information or simply cut out disclosures,
but attempt to streamline the disclosures as much as possible to ensure clear
communication and transparency for the investors. However, the quality must be
retained in this process — the focus will be on investors and the relevance of the
disclosures to their needs.
The second project category relates to standards that focus on recognition,
measurement and presentation. These standards are the basis for U.S. GAAP —
or as Mr. Golden stated, “The blocking and tackling of accounting.” An area that
would fall under this type of standard is pension accounting, with the goal being
to increase transparency.

The third category for future projects will relate to reduction of complexity.
Oftentimes, the standards that preparers must follow require hours of reading,
reviewing or otherwise interpreting in order to understand the actual meaning of the
standard. The writing may be so complex that the meaning is hidden under all of the
language. While other new standards are complex in the amount of resources it takes
to implement. Additional people, systems or even time spent in implementing a
standard could represent significant costs to an organization, with the risk being that
the cost of compliance outweighs the benefit the organization or investor might gain
as a result of the standard. In order to reinforce this focus, Mr. Golden indicated that
the Board itself is developing an internal Board policy on complexity. These guidelines
would ensure that the Board considers complexity in the development of any standard.
Finally, Mr. Golden emphasized his support of education and outreach to ensure
effective implementation. The Board will create a transition resource group to identify
and solve implementation issues. The first group that will be created will be for revenue
recognition. The group will consist of preparers, auditors and investors, both domestic
and international. The group will be formed after the standard is issued with activities
ceasing once implementation is completed — sometime in 2016. This will ensure a
smooth transition to the standard and promote effective implementation.
Mr. Golden ended his speech reiterating, “Our mission, as always, is to promote
transparency, reduce complexity, and ensure continued progress toward the
convergence of international accounting standards.”
IASB Perspective
The Chairman of the IASB, Hans Hoogervorst, spoke to the conference again this year
regarding the worldwide adoption of IFRS. He is very pleased with the expansion and
positive moves that have been made throughout the year of 2013 towards the mission
of bringing transparency to the world.
According to Mr. Hoogervorst, the SEC was interested in IFRS as global standards
supported the SEC’s desire to help raise the quality of financial reporting globally.
Using the SEC’s 2012 report as a tool to highlight the progress of the IASB, he
framed his contents around the concerns identified in the 2012 report.
The initial concern addressed by Mr. Hoogervorst was that deeper cooperation with
standard setters such as the FASB is necessary. As a result, the IASB created the
Accounting Standards Forum (ASF), which contains members from multiple standard
setting boards including the FASB. A second item highlighted in the SEC report was
the concern regarding cost of transition. To respond to this concern, the IASB and the
Canadian accounting standards oversight council co-founded an independent survey
by FEI Canada to review the transition costs experienced by Canadian companies in
their transition to IFRS. The data was categorized into small, medium and large
companies. The average cost for small companies was $.2 million, $.5 million for

medium companies and $4.0 million for large companies. Mr. Hoogervorst concluded
that the costs experienced by Canada were not significant and should not be viewed as
an obstacle to adoption.
A further concern of the SEC was the level of adoption of IFRS. Mr. Hoogervorst
discussed the ever increasing footprint of IFRS, even in the U.S. During 2013, research
was completed to highlight the expanding footprint. Of the 122 countries researched,
101 countries have fully adopted and require the usage of IFRS for financial reporting,
10 countries permit the usage of IFRS for financial reporting, 2 countries are in process
of adoption, 2 additional countries require the use of IFRS for filing banks, and 7
countries have not yet adopted the standards.
Another concern of the SEC that was addressed by Mr. Hoogervorst is the importance
of ensuring that international standards are applied and enforced on a globally
consistent basis. In response to this concern, in September 2013, the IASB entered a
joint statement of cooperation with IOSCO, the International Organization of Securities
Commissions, with the goal of working together to ensure global adoption and
enforcement of standards.
Mr. Hoogervorst remains positive about the strength and importance of global adoption
of IFRS, again emphasizing the need for the United States to get on board with IFRS.
He counts on the enlightened interest of the U.S. to continue to review and thoughtfully
consider adoption of IFRS.
U.S. GAAP / IFRS Convergence Work Plan Updates
The Directors of the FASB and IASB, Sue Cosper and Alan Teixeira, respectively,
provided a summary of the combined efforts and progress of each Board as they
strive towards convergence. Specifically, they provided updates on revenue recognition,
leases, financial instruments, and insurance contracts. Revenue recognition was
covered in detail at the conference, while the others were highlighted in the
presentation by Ms. Cosper and Mr. Teixeira.
Substantial progress has been made on these priority projects with revenue recognition,
leases, and financial instruments scheduled for final standard release in 2014. The
exposure draft on the insurance contracts project was issued in 2013 and scheduled
deliberations will be held through 2014, with the final standard scheduled for issuance
in mid-2015.
The remaining four priority projects that have achieved the greatest convergence are
described below. The topic of revenue recognition had an individual session where the
panel was comprised of a combination of preparers, auditors and users.

Revenue Recognition
As Mr. Teixeira stated, “We’re nearly there.” Currently, the standard is in the finalization
process. The goal has always been to issue a simple, single principle. A great volume
of work has gone into this standard to make it the best standard it can possibly be.
Revenue is one component that affects every company, so it is so important to get
it right. The last draft was issued in May and deliberation in the last six months has
centered on constraining the amount of revenue recognized, clarification on how to
recognize collectability and the structure of the arrangement, and accounting guidance
related to licenses.
The standard is targeted for issuance early 2014, with a January 1, 2017 effective date.
Early adoption will be permitted only within the IFRS community.
In addition to the presentation by the Board directors, there was a revenue focused
panel where some members of the large preparers were present to discuss the standard
and its impact on their business.
As it stands, the current proposal is closer to U.S. GAAP than current IFRS standards.
The model requires more estimates and judgment than previous iterations. Some key
metrics, such as gross margin, of registrants over the course of a contract may change
from current practice, and more disclosures would be required under the new standard.
As a result and as stated previously, education will be essential to assure a smooth
implementation of the model. In addition, processes will need to be adapted to the
new requirements and some systems may need to be updated as well.
The goal of the extensive outreach and re-deliberations that were conducted was to
deliver a less complex and more valuable framework for revenue recognition that can
be applied across industries. Entities that currently apply industry specific revenue
recognition guidance will be the most significantly affected — such as companies
in the construction and technology industries that enter into long-term contracts,
multiple-element goods and services arrangements, and companies that regularly
provide warranties to customers.
The goal under the new recognition framework is to align revenue recognition with
the transfer of goods or services in an amount that reflects the amount of consideration
expected to be received for the transfer of the goods or services. Under the proposed
revenue recognition standard, revenue would be recognized when performance
obligations are satisfied and promised goods or services are transferred to a customer.
The following five steps outline the process for revenue recognition:
1. Identify contract(s) with customer.
2. Identify the separate performance obligations within the contract(s).
3. Determine the total transaction price.
4. Allocate the transaction price to each performance obligation.
5. Recognize allocated revenue when each performance obligation is satisfied.

The panel addressed some of the members concerns and suggestions for smooth
implementation. As the transition method has not been finalized between full
retrospective or a modified retrospective approach at this point, the panel noted that
it would be best to plan for full retrospective as it will be easier to adjust and apply if
the standard is finalized with something less than full retrospective application.
In addition, the panel suggested that preparers should consider commission structures
as commissions could be significantly affected by the new standard. There is some
concern over implementation as for many companies this standard has effectively
transformed a large group of differing rules into one principle based rule. As such,
the joint transition group as discussed by Mr. Golden will be a large part of the
implementation of the standard.
Finally, the panel members urged preparers to begin thinking about the implementation
of the revenue recognition standard now. They advised reporting teams to put together
a project team, develop a project plan, identify all major revenue streams and determine
any controls, policies and systems that may need to be changed or updated
upon implementation.
Leases
The project on leasing has undergone significant deliberation and changes as the
Boards aim to produce the most effective standard for leasing. Currently the proposed
rules differentiate leases into two types: A or B. For both lessees and lessors, type A
and B will be comprised of basically the same items. Type A represents those leases
with an interest rate and associated interest expense typically experienced in leases for
equipment and vehicles, while type B will represent the straight line recognition leases,
commonly found in real estate leases.
The Boards have received a lot of feedback from both users and preparers. Users tend
to agree that leases create assets and liabilities and favor representation of these assets
and liabilities on the balance sheet, as opposed to off-balance sheet reporting. In
addition, they believe that there are differences between the lease types and the
recognition and measurement of these types should be applied differently. In addition,
users feel that disclosures around leases should be enhanced in order to promote
better clarity and transparency. Preparers generally support the standard and do feel
that both assets and liabilities are created in a leasing transaction, however, some think
that the cost of implementation of a standard would outweigh any perceived benefit
from its implementation. Some preparers feel that if there is not that large of a change
on the balance sheet at the end of the day, it might not be worth all of the effort and cost.
The Boards issued a joint exposure draft in May 2013. The comment period ended
in September and outreach took place in the fall of 2013. The Boards are continuing
deliberations and are planning to issue a final standard in 2014.

Financial Instruments
Both Boards made adjustments to their proposals from the prior year, due to outreach
and deliberation, which has resulted in a significantly more converged framework of
the two positions.
In regards to the Classification and Measurement (CM) element of Financial
Instruments, the FASB headed towards simplification and convergence in its 2013
Exposure Draft. It focused on measurement based on value realization of instruments.
The FASB was striving for reduction of complexity, more useful information and
convergence with the IASB’s position. The initial feedback received by the Board relate
to the cost and complexity of such a standard. Both Boards acknowledge that the
proposed changes would not affect the output as much as the process itself, calling
into question the need for such complexity in arriving at a similar result. The next steps
for the FASB is to step back and consider the cost and complexity issue that was raised
to determine whether the benefits of implementation outweigh the associated costs.
The IASB released its most recent exposure draft in 2012. The Board has received
general support for the clarifications made in the exposure draft as well as establishment
of an extra business model for debt instruments. The next steps for the IASB are to
determine transition upon adoption, disclosure and the interaction of the proposed
standard with insurance contracts.
The timeline for issuance of a final standard is the first half of 2014.
The impairment element of financial instruments has proved to be a very difficult
project for the Boards. The goal of both Boards’ models is to develop a single model,
with utilization of more forward-looking information. Both models implement the use of
expected credit loss, which reflects more forward-looking information. Neither model
utilizes an initial recognition threshold, however both models also have indicated that
assets that have deteriorated significantly since initial recognition would recognize
lifetime expected credit loss. In either case, the proposed standards would provide
enhanced disclosures to current requirements.
The differences between the approaches proposed by the Boards relate to the
measurement approach, initial recognition period of credit loss — FASB supports
recognition of lifetime losses, where IASB supports recognition of 12 months of losses;
and interest recognition for non-performing assets — FASB supports non-accrual,
where the IASB supports applying an effective rate on the balance of the instrument,
net of allowance.
Both models have strong support from its respective constituents; however generally,
preparers do not favor recognition of full lifetime loss on day 1. In addition, some
operational concerns exist related to discount rate and definition of estimated
foreseeable future. There are multiple issues that both Boards will address during
their deliberations. A final standard is expected in 2014.

Insurance Contracts
The insurance contract project has made some progress in the past year. Ms. Cosper
stressed that the proposal is important to all companies, as the standard does not
apply to insurance companies, but rather all insurance contracts. This could include
guarantees, contingencies, financial instruments, and some service contracts with third
parties. There are scope exceptions for standard product warranties and some other
insurance contracts; however it is important to consider all contracts under this
proposed rule.
The proposal utilizes 2 approaches to measurement:
ƒƒ Building block approach — long duration contracts
ƒƒ Premium allocation approach — short duration contracts
The key parts of the recognition model are as follows:
ƒƒ Revenue allocated to periods in proportion to value of coverage
ƒƒ Claims and expenses recognized when incurred
ƒƒ Changes in expectations are recognized immediately in net income
ƒƒ Changes to discount rates recognized in OCI
ƒƒ Interest accretion on liabilities recognized with interest expense
The Boards are currently in the midst of obtaining feedback and completing field tests.
The Boards are hopeful to issue a standard in June 2015.
Ongoing and Planned Projects
Projects on the FASB’s agenda include:
ƒƒ Going concern
ƒƒ Consolidations
ƒƒ Repurchase Agreements
ƒƒ Private Company Issues
ƒƒ Disclosure Framework
Projects on the agenda of the IASB include:
ƒƒ Disclosure initiative
ƒƒ Framework
ƒƒ Research program
SEC Office of the Chief Accountant (OCA) Update
Paul Beswick, Chief Accountant of the SEC Office of the Chief Accountant, updated the
attendees of the conference with some of the developments and focus of the Office over
the past year.

FASB Outreach
Mr. Beswick discussed the focus that the FASB has put on outreach in the standard
setting process. He mentioned that he believes the outreach, specifically to investors
has proved to be a very helpful process — at times hanging direction, but always
adding value — to the standard setting. He mentioned that he believes this process
would also be helpful in the agenda-setting process of the FASB in order to improve its
effectiveness. Mr. Beswick expressed that he was pleased that it is part of the FASB’s
future projects and believes that if the FASB is even better informed of problems that
need to be resolved, the entire standard setting process would benefit.
Simplification of Accounting Standards
Mr. Beswick also highlighted his agreement with another item on the agenda of the
FASB — simplification of accounting standards. As complexity can lead to difficulty
in implementation and may end in a decrease of useful information for investors, it
is important to ensure that the issue of complexity is addressed in not just future
standards, but currently existing standards as well.
GASB Standards and Municipal Issuers
In 2012, the GASB issued two standards on pension accounting. The SEC does not
have direct authority over the issuers of municipal securities, except for antifraud
provisions. However, the SEC does attempt to protect investors of municipal securities
through regulating the broker-dealers, enforcement of its antifraud provisions and its
oversight of the Municipal Securities Rulemaking Board. Municipal securities have
been a focus of the SEC in recent years resulting in cases brought against state and
local governments. The SEC will continue to focus on this area to ensure that investors
understand the risks in municipal securities and pension liabilities.
Valuation Standards
Significant importance has been placed on valuation of assets within financial
reporting, which has proved to be a valuable addition to the financial statements.
However, Mr. Beswick expressed concern over the lack of standardized expertise or
credentials within the valuation industry and suggests that much development is
needed in this area in order to continue the usefulness and reliability of third-party
valuations.
Audit Committees and Audit Fees
Audit committees are responsible for the oversight and selection of an audit firm. As
part of this process, an audit committee must be able to determine the quality of an
audit. Mr. Beswick referred to the PCAOB’s initiation of a project to develop audit quality
indicators. Mr. Beswick was encouraged by this development as he believes it will assist
audit committees and others in determining the overall quality of the product of audit
firms. In absence of a formal audit quality indicator, Mr. Beswick cautioned not to use

audit fees as the sole determinant for selection of a firm as auditor. He emphasized the
need to stress quality over cost in order to ensure the highest quality audit and thus
usefulness for the investor.
Auditor Independence
Again this year, Mr. Beswick emphasized the importance of auditor independence and
the role of the auditor as “gatekeeper” of financial information to investors. He cautions
firms on investing too quickly into the non-audit or consultancy practices. He notes
that these are the same practices and divisions firms disposed of a little over ten
years ago and urged firms to reflect on what these and any future acquisitions will
do to public trust.
Internal Control over Financial Reporting (ICFR)
Brian Croteau, Deputy Chief Accountant of OCA, addressed ICFR in his remarks
at the conference. Mr. Croteau is concerned over the evaluation of ICFR in that he
believes that some material weaknesses may go undetected by management. For
example, he noted that he does not often see material weaknesses unless they have
driven a material misstatement. This may be due to either the failure to detect the
weaknesses in the first place or the severity of the weakness being misjudged by
management. The Divisions of the SEC and the PCAOB will continue to work on this
area, but Mr. Croteau suggested that it might be helpful for preparers to take a look at
the SEC’s 2007 interpretative guidance on ICFR, assess internal controls and highlight
and remediate as appropriate.
SEC Enforcement
Andrew Ceresney, SEC Enforcement Division Co-Director, and David Woodcock, SEC
Enforcement Regional Director, addressed the conference to give an update on the SEC
Enforcement Division over the past year.
Much of recent focus of enforcement division has been on financial crisis cases due
to the current state of the world. As a result, fewer resources have been allocated to
financial reporting and audit violations. For example, Mr. Ceresney stated that there
were only 124 investigations opened and 79 cases filed in 2012 versus 228 opened
investigations and 219 cases filed in 2007.
The overall reduction in investigations and resulting cases has been certainly partially
attributed to reforms such as SOX. As a result of SOX, there have been significant
enhancements in auditing, the creation of the PCAOB, implementation of certification
of financial statements, and the requirement for testing and certifying ICFR. However,
Mr. Ceresney suggested that the reduction is not just a result of SOX and that the larger
reason may just be that the focus has been elsewhere. The SEC has created a team
within the Enforcement division in order to devote the resources to focus on financial
fraud in this “post-crisis world.”

Financial Reporting and Audit Task Force — FRAud
The Fraud Task Force is chaired by David Woodcock with the mission to ensure a
maintained focus on financial fraud and violations. Generally, fewer fraud cases
are brought during periods of economic decline, and increased fraud cases are
experienced in periods of economic improvement. As this seems to be where the
U.S. stands today, the SEC believes it is important to refocus efforts here. In restating
a conclusion of a recent study, Mr. Woodcock said, “When times are tough, ethics
improve. And when business thrives and regulatory intervention remains at status
quo, ethics erode.”
Per Mr. Woodcock, the purpose of the task force is “to ensure we are doing all we can to
detect, deter, investigate and prosecute violations involving false or misleading financial
statements or disclosures.” The mission of FRAud is defined by 5 overarching goals:
1. Developing a deep understanding of the state of financial reporting fraud
2. Developing a state of the art methodology for identifying and investigating
financial statement fraud
3. Sharing information within and beyond the division on financial reporting fraud
detection methods and experience
4. Collaborate and coordinate across the agency and with regulatory and law
enforcement partners
5. Engage the public academia, whistleblowers and their counsel, and other third
parties in our effort to combat financial reporting fraud
Specifically, the financial fraud caseload will continue its focus on:
ƒƒ Auditors, as they are “watchdogs” — Operation Broken Gate identifies auditors
who fail to comply with professional standards
ƒƒ Identification of improper use of reserves
ƒƒ Revenue recognition
ƒƒ Audit independence violations
ƒƒ Cross-border transactions and FPIs
Mr. Ceresney emphasized the renewed focus to prosecute those who betray the trust of
public market.
PCAOB Update
In his keynote address, PCAOB Chairman James Doty stated that “economic success
depends on the confidence of the users of capital and the providers of capital alike.
Absence or inadequacy of information translates into more risk, higher return or cost
of capital.” As such, the PCAOB continues to examine the role the audit can and should
play in enhancing capital formation, investor protection and our economy. Generally,
information is needed to have markets function effectively. Investors rely on information
to make investment decisions. The PCAOB believes that “leveling the playing field” is

critical to building capital markets and maintaining market liquidity. The function of
the market depends on the flow of information, as such, trust and reliance on the
information is essential for growth of capital.
Mr. Doty feels that the role of the audit of financial statements has begun to be viewed
as irrelevant to the investment process. As such, the PCAOB has introduced proposals
and projects, with goals of raising awareness of the importance of the audit.
The first initiative discussed by Mr. Doty was the introduction of the Center for
Economic Analysis within the PCAOB. The purpose of the Center is to use economic
theory and models to enhance the PCAOB’s programs. A second goal of the center is
to use economic tools to research on how the audit can affect capital markets. As an
example of its potential usefulness, Mr. Doty referenced audit firms’ recent re-entry
into the consulting market through acquisitions. As this move is likely an effort to boost
revenue, Mr. Doty feels that the consequences to the audit must also be evaluated. For
example, will there be any implications to audit independence? Will firms lose their best
talent to consultancy? The Center for Economic Analysis will help to understand this
development’s impact.
Another initiative of the PCAOB is to examine the usefulness of its reporting. The focus
of the initiative is not to make the report more technical, but to make them as accessible
to users and anyone who can gain from them. The goal is to understand how they are
used by investors, analysts and preparers. Overall, the focus is to continually assess the
reports so that the usefulness and quality of the report is continually enhanced.
Another area of focus is audits of broker-dealers. The PCAOB has noted deficiencies in
all audit firms that were selected for testing and there were errors or deficiencies in 95%
of those audits. Mr. Doty feels that time should be spent on enhancing the usefulness of
broker-dealer audits.
Another area of focus for the PCAOB will be related party transactions. The PCAOB
has issued guidance in this area that directs auditors to: 1) Identify related parties, 2)
Identify and evaluate significant and unusual transactions, and 3) Identify and evaluate
financial relationships and transactions with executives. The PCAOB is evaluating
comments and hoping to issue final guidance in 2014.
Again this year, Mr. Doty discussed the auditor report model (ARM). Last summer,
the first change in 70 years was proposed to the ARM. As business operations and the
business environment has changed significantly over the years, it is important to revisit
the ARM. The changes to the ARM will provide a framework to report critical audit
measures and require reporting on auditor’s evaluation of other areas outside of the
financial statements, including MDA and the annual report.
A very controversial initiative undertaken by the PCAOB is that of transparency.
The re-proposed standard would require firms to disclose the name of the engagement
partner as well as identify any other firms or experts used during the audit. Mr. Doty

believes that investors have always sought this information. He stated that this change
would not require any additional work by the audit team, but the result will enhance
transparency and quality. As an example, Mr. Doty cited the introduction of SOX
certifications by the executives of registrants. This step has increased the trust and
reliability of financial statements in the eyes of the investor.
Audit firms are generally opposed to the identification of engagement partner as
they feel the partner is already held accountable for audit quality and firm quality
controls provide system-wide quality assurances across engagements, regardless of
engagement partner. However, Mr. Doty stated that in the experience of the PCAOB,
some firms’ quality controls are not consistently applied across engagements and some
engagement partners that have had multiple deficient audits are not held accountable
and in some cases, assigned to some of the more difficult audits. Mr. Doty further
states that audit firms at times do not give partner selection the care it requires.
To further substantiate the position, Mr. Doty indicated that the availability of partner
name on individual audits would allow interested parties, such as an audit committee,
to peruse the partner’s engagement history and determine if the selected partner would
provide the quality audit they seek. The unavailability of engagement partner name
hinders their decision making process.
Mr. Doty set forth the following certain near-term priorities:
ƒƒ Take a new look at fraud
ƒƒ Review and enhance existing quality control standards
ƒƒ Research and analyze the subject of audit quality indicators. Greg Jonas, Director
of Research and Analysis at the PCAOB spoke in greater detail on this topic at the
conference
PCAOB Standard Setting Update
PCAOB board members Martin Baumann, PCAOB Chief Auditor and Director of
Professional Standards, and Greg Jonas, Director of Research and Analysis, discussed
the PCAOB’s 2014 standard-setting agenda.
The PCAOB’s standard-setting agenda for 2014 includes the following projects:
ƒƒ The Auditor’s Report
ƒƒ Audits of Brokers and Dealers
ƒƒ Related Party Transactions
ƒƒ Audit Quality Indicator Project
ƒƒ Additional near-term standard-setting activities:
–– Going concern
–– Responsibilities concerning other firms and experts participating in an audit
–– Auditing accounting estimates
–– Audit firm quality control system

The Auditor’s Report
Mr. Baumann began his discussion by emphasizing that there is “global movement to
make meaningful change and meaningful improvement” to the audit report. The audit
report is one of the most viewed areas of financial statements, however one typically
only offers a quick view to determine whether the opinion was unqualified and perhaps
to see which firm was responsible for the audit. As the opinion contains only boilerplate
language, there is no time spent on reading something that is, arguably, one of the most
important parts of the financial statements. Mr. Baumann indicated that information
received from investors supports that the audit is extremely valuable, but that the
investors want to hear more about the audit, want to hear more from the firm. As a
result, the PCAOB has undertaken the challenge to make the audit report a more
valuable and meaningful communication tool for investors and other financial
statement users.
The PCAOB proposed two auditing standards in August 2013 — The “auditor reporting
standard” and the “other information standard.” The goal of both standards is to
improve significance and relevance of the audit report for all financial statement users.
Per Mr. Baumann, these proposed standards would do three things:
1) Require AR to include a discussion of critical audit matters specific to each audit
2) Require communication of the auditor’s responsibility of evaluation of other
information beyond the FS included in the annual report filed with SEC
3) Provide investors with information about auditor tenure. Number of years the
auditor has consecutively served as company auditor
In December 2013, the PCAOB proposed two transparency amendments. These
amendments would require:
1) Disclosure of the name of the engagement partner on the audit report
2) Disclosure of other audit firms that participated in the audit including the location
and the extent they participated in the audit
Mr. Baumann believes that the proposals and amendments “would significantly
enhance the usefulness of the auditor’s report. If adopted, the AR would no longer
be glanced at, it will be studied.”
The comment period for the August proposals closed on December 11, 2013.
The PCAOB will carefully analyze comments and plan to hold meetings in the
spring of 2014. The comment period ends on February 3, 2014 for the
transparency amendments.
Mr. Baumann once again emphasized that the proposals are the result of years of
outreach, analysis of public opinion and studies on the audit. The proposed changes
are an attempt to satisfy what investors have been seeking for years, and would result
in a higher quality audit and auditor report.

Audits of Broker-Dealers
The SEC adopted rule 17a-5 on July 30, 2013, which includes a requirement that audits
of brokers and dealers are to be conducted in accordance with the standards of PCAOB
standards, rather than AICPA standards. This will be required for years ending on or
after July 1, 2014.
The PCAOB adopted two attestation standards: the examination standard and the
review standard, which if approved by the SEC would be active for the reports under
PCAOB standards for years ending on or after July 1, 2014.
Related Party Transactions
The Board expects to adopt a new standard regarding auditor responsibilities for
related party transactions in the first quarter of 2014. The standard with amendments
was re-proposed on May 7, 2013. The standard would require the auditor to: 1) Identify
related parties, 2) Identify and evaluate significant and unusual transactions, and 3)
Identify and evaluate financial relationships and transactions with executives. As many
financial reporting frauds have been the result of unusual or related party transactions,
the PCAOB has researched and proposed an auditing standard to direct more focus to
this area.
Audit Quality Indicator (AQI) Project
Greg Jonas of the Office of Research and Analysis discussed the Audit Quality Indicator
Project (AQI). The Board will issue a Concept Release in the first quarter of 2014 that
will seek public input on the following questions:
ƒƒ Is it possible to develop a portfolio of quantitative measures that could provide
new or different insight into audit quality?
ƒƒ If it is possible, how can these measures be deployed in a way that would promote
quality within the profession?
The thought behind AQI project is that there is much beneath the surface of an audit
that users do not see, due to lack of visibility or lack of knowledge about what may even
exist beneath the surface. The knowledge of this fact could provide incentive to bury or
conceal some of items just below the surface for management or auditors. As auditors
are the gatekeepers of management information, the users that only see what is above
surface rely on the auditors to tell them what they need to know about what is below.
The PCAOB has determined that there may be ways to assure this link or “flow” is
uninterrupted and not affected by any other incentives or shortcuts. The PCAOB has
begun a project to determine what indicators dictate quality of an audit. Thus, the team
has begun to discuss and evaluate a series of AQIs in an attempt to determine what if
any dictates audit quality.

Mr. Jonas indicates that some may be “no-brainers” such as: Partner to staff leverage
or industry expertise. However, some potential AQIs could be a bit more controversial,
such as those related to percentage of work outsourced to service centers or the results
of a survey of the audit firm regarding “tone at the top.” Mr. Jonas estimates that about
15 indicators may be what they choose to be sufficient to present a balanced idea of
the quality of an audit. Mr. Jonas does point out that the results of the AQI will not be
sufficient on its own to judge audit quality. The AQIs must be taken with context of the
audit, the company and the environment to provide any real insight.
As mentioned above, the PCAOB will issue a concept Release in the first quarter of
2014 and the Board will carefully consider and deliberate over any next steps related
to this project.

Hot Accounting and Reporting
Topics for 2014 and Beyond
Management’s Discussion and Analysis Disclosures
The SEC is proactive in its approach to issuing comments on MDA in an effort to
improve the quality of these disclosures. Before beginning a filing review of MDA
disclosures, the SEC Staff attempts to obtain a thorough understanding of current
trends and uncertainties where investors would focus and find useful related to the
registrant’s industry and the registrant itself.
During the panel discussion on MDA, Thomas Timko, CAO and Controller of General
Motors, discussed the process undertaken to create the MDA at GM. MDA is a
continuous process that builds throughout the year. During the year, a management is
constantly assessing how the company is doing vs. prior year, vs. plan, and vs. forecast.
GM holds frequent open issues meetings to discuss accounting issues and concerns
with multiple parties, in an effort to take any surprises out of the crunch time at period
close. Many parties have a seat at the table at these meetings, including regional
controllers. This ensures that all issues are captured timely. The information from these
meetings then feeds into disclosure committee, and serves as a basis for a solid MDA.
Top MDA Insights and Best Practices
1. Use plain English — use tables, less jargon.
2. The overview is just that — leave it at that.
3. Look to your competitors for how they are handling an area, particularly related to
comment letters.
4. If a paragraph answers the question “why,” then you have a good disclosure.
5. Ensure that your risk factors really relate to your business — make them less
boilerplate and more specific to your operations.
6. Multi-factor quantifications: If there are multiple factors that contribute to a result,
make sure to quantify their effect, if possible.
7. Reduce the size of your previous years’ comparisons. Combine the results, add a
table or a chart and compress the information.
8. Use your disclosure committee as a gateway. Implement use of checklist with
questions such as:
–– Financial covenants — are we ok on these or are we getting close to
breaking any?
–– What is our cash runway? How is our burn rate compared to our intake?

–– Have there been any changes in regulations or legislation that affect our
business, i.e., conflict minerals, Iran?
–– Do we have any problems with customers or suppliers?
–– Is there a disproportionate contribution of one product or one segment to
our results?
–– Do we have significant swings in results?
–– Have there been any developments in litigation?
–– Is there any issue that is bothering you or any business unit head?
–– What good news is on the horizon that we should share with our investors?
The SEC also indicated the MDA should not be a roll-forward process and prior
information that is no longer applicable should be removed.
Disclosures in Consideration of the
Current Economic Environment
SEC Corporation Finance Division Staff and Comments
Again this year, the Corporation Finance (Corp Fin) Staff strongly recommended that
registrants ask any questions they may have before filing. In their words, it is “better to
seek permission than forgiveness.” Registrants may pre-clear questions via a formal
request in writing or may request informal interpretive guidance from the Staff on a
name or no name basis via a telephone; however, informal requests cannot be relied
on as formal positions. Staff will generally respond to formal written requests within 10
business days. If a response has not been received, the Staff suggested the registrant
call the SEC for a status.
Once a comment letter is received, if the registrant has any issues or concerns, the
Staff advises that it is best to call and clarify to expedite resolution. For complex issues,
it may be best to set a conference call with all applicable parties. If additional time is
needed to respond, it is suggested that the registrant request an extension as early as
possible, rather than immediately before the deadline.
The SEC Staff shared their top-ten best practices for handling reviews and comments,
as follows:
10. All responses need to be Edgarized.
9. Amendments are not always required.
8. Document, document, document.
7. Keep EDGAR filing information current.
6. Don’t cut and paste or boiler-plate responses from other respondents.
5. Respond promptly within 10 business days.
4. Involve your accounting and legal firms and other applicable specialists.

3. Use all resources in preparing your financial statements and responding
to comments.
2. Make your first response your last response.
1. Call the Staff with any questions.
Responses should focus on each comment and be supported with facts and relevant
guidance. They should be checked for accuracy internally and by all applicable
professional advisers. Registrants should maintain contemporaneous documentation
of significant accounting issues. Finally, registrants may contact the Staff if additional
clarification is needed.
Frequent areas of comment include income taxes, pensions and other post-
employment benefit (OPEB) disclosures, business combinations, goodwill and
segments. In addition to frequent areas of comment, the Staff highlighted some
financial reporting concerns related to other areas such as non-GAAP disclosures,
operational metrics, guarantees, and material operations in China.
Income Taxes
The Staff focused its comments related to income taxes on three key areas: Statutory
tax rate reconciliation, valuation allowances, and indefinite foreign reinvestment
assertions. In regards to the reconciliation of tax rates, the Staff reminded registrants
of the importance of clear and non-confusing labeling. In addition, the Staff has noted
that registrants have inappropriately aggregated some material reconciling items. Also,
the Staff emphasized the importance of complete and consistent disclosure throughout
both the reconciliation and in MDA. In reference to valuation allowances, the Staff
believes a company must continually evaluate its unique facts and circumstances in
evaluating all positive and negative evidence in assessing the realizability of deferred
tax assets. The Staff also advocated the consistency of all assumptions and disclosures
related to any allowances. Finally, the Staff reminded registrants that U.S. GAAP
requires disclosure of the tax obligation that would be required if foreign investments
are repatriated. If it is not possible to estimate that amount, the registrant must include
a statement that it is not possible to determine the amount of tax obligation on any
permanently reinvested funds.
Pensions and Other Post-employment Benefit (OPEB) Plans
The Staff discussed the effects of the current economic environment on MDA
disclosures about pension and other post-employment benefit plans and the
importance of transparency when discussing pension and OPEB policies and
methodology. The Staff noted that it focuses on the discount rate used and the
assumptions made about the expected return on assets (EROA). It may be appropriate
to include 1) a sensitivity analysis with discussion of effect on EROA, 2) reasonable
alternatives for assumption, 3) historical performance, and 4) any reasons for expected

changes to the EROA as well as its effect. Due to the significant assumptions used in
accounting measurement of the liability and the diversity in how registrants account
for their pensions, the Staff stressed the importance of clarity in disclosure.
Business Combinations
One of the initial items that must be determined is whether the acquisition was that of
assets or of a business. This is particularly applicable in the real estate industry. The
Staff reminded participants to pre-clear any potential questions with the Office in order
to avoid any potential comments.
The Staff noted that they have seen some post-acquisition adjustments that were
improperly classified as a measurement period adjustment rather than an error.
The Staff reminded the conference of the three criteria that must be met in order to
qualify as a measurement period adjustment. They are 1) The acquirer obtained new
information about facts or circumstances that existed at the time of the acquisition,
that if known, would have affected the amounts recognized, 2) the fact that the initial
accounting for the acquisition was incomplete at the that time and may be subject to
future adjustment, and 3) the measurement period must not have ended.
Goodwill Impairment Analysis
The Staff noted that it may issue comments in cases where it notices a potential
impairment indicator, but not related impairment. For example, if a registrant was
subject to an adverse business change or market capitalization falls below carrying
value. The Staff further noted that when impairment does occur, the registrant should
avoid vague language and “boilerplate” disclosure. The Staff is looking for discussion
that answers questions such as: What has changed in the current period and what has
caused the change? What other known uncertainties or developments could affect the
measurement of fair value of this asset?
Segment Reporting
The SEC Staff continues to focus on segment reporting, as it continues to see
misapplications of ASC 280, Segment Reporting related to a registrant’s identification
and aggregation of operating segments. The Staff believes quality segment reporting
is critical to improving investor relations as investors have communicated that they find
disaggregated information more useful in understanding a company’s operations.
The Staff routinely expands its review of public information available about a registrant
beyond information in public filings (such as corporate websites and earnings calls)
and may ask the registrant to explain any perceived inconsistencies in the manner its
business is described between its segment footnote and its website. The Staff also
highlighted the need for improved segment disclosures, with more thoughtful disclosure
about how a company is managed and its effect on segment reporting. The Staff has
observed entity-wide disclosures about products and services and revenues from major
customers are often omitted or inadequate.

The SEC Staff said operating segments should be aggregated only if the aggregation
would provide users with the same understanding of the registrant’s performance and
future prospects as if the segments were reported separately. The Staff’s comments on
aggregation focus primarily on whether operating segments have similar economic
characteristics. The Staff emphasized that this analysis may vary by company and
industry and that they do not employ any bright lines when evaluating economic
similarity. While similarity of economic characteristics should be evaluated both on
future projections and current indicators, the Staff places significant weight on
historical similarity.
Non-GAAP Measures
The SEC Staff noted registrants continue to provide more non-GAAP information in their
filed documents. The Staff cautioned registrants to remember:
ƒƒ The need to maintain GAAP / IFRS prominence within filings.
ƒƒ If non-GAAP information was thought to be important enough to discuss outside
of a filing, registrants should consider providing enough information within their
filings for a consistent message.
ƒƒ The use of cash flow per share or other similar non-GAAP measure is not allowed.
ƒƒ If non-GAAP measures are used in relation to pension disclosures or OPEB-
related adjustments, the Staff emphasized that clear disclosure and labeling as
to what the adjustment represents is mandatory as well as quantitative context
for the actual and expected asset returns.
ƒƒ Stay true to the definition of what is being disclosed and how it is labeled in order
to avoid confusion.
Operating Metrics
Many registrants include operating metrics within its MDA and the Staff acknowledged
that some metrics are useful in helping the company tell the story of its results. The
Staff did caution that such metrics should include proper disclosure in order to define
them or describe how they are computed. In addition, registrants should disclose any
known limitations to using the particular metric. The Staff expects that the registrant will
provide enough information to help the user make the connection between the metric
and revenue or results.
Guarantees
The Staff discussed guarantees under Regulation S-X, Rule 3-10, which requires
registrants to provide full financial statements for each of its subsidiary issuer and
guarantor of registered debt or preferred securities, unless relief is available. A
registrant can provide more limited information in lieu of full financial statements if
the guarantees are “full and unconditional.” The Staff reminded participants that

guarantors may continue to rely on the relief even if its guarantee is released
automatically under a customary release provision. However, the disclosures must
be appropriate and complete and continue throughout the life of the debt.
China
The Staff noted that registrants with significant operations in China or a material
variable interest entity (VIE) need to consider adding additional risk factors. The Staff
would expect to see additional risk factors if any of the following are applicable to
the registrant:
ƒƒ If a significant concentration of all the registrant’s operation exists in China
ƒƒ If the registrant depends on its contractual agreement with a VIE to consolidate
the foreign operations. In other words, if the registrant loses control of the VIE, it
would need to deconsolidate
ƒƒ If only limited legal protection is offered for its operations in China
ƒƒ If any conflicts of interest exist between the investors in a VIE in China
ƒƒ Restrictions of cash transfers into or out of the region
Although the discussion centered on operations in China, the Staff indicated that the
discussion relates to other foreign jurisdictions as well.
Disclosure Overload and Redundancy
The SEC Staff stated it typically does not comment on disclosures that may be
redundant or otherwise not required due to immateriality, however disclosure
overload is an issue that has implications for investors. The Staff once again
emphasized that immaterial matters do not require disclosure. This includes
disclosure of new accounting standards that are not anticipated to have a material
effect on a registrant’s financial statements as well as accounting estimates and
accounting policies that are not material to the registrant. The Staff has identified
several instances where registrants have retained disclosures that arose as a result
of prior Staff comments, even after those disclosures are no longer relevant.
The SEC Staff recommends that registrants challenge disclosures within the filing that
may be redundant. If a registrant makes identical disclosures in the footnotes and in
MDA, for example, it should challenge its compliance with the requirements of both
sections. The SEC Staff noted that, in general, footnote disclosures provide historical
information, and MDA is intended to provide forward-looking information. If a
registrant concludes that identical disclosures can satisfy both disclosure requirements,
it may consider cross-referencing to the footnote disclosure. The Staff clarified that the
audited financial statements need to stand alone. Therefore, information required in the
financial statements should not be included solely in MDA with only a cross-reference
in the footnotes, unless expressly permitted.

SEC Considerations of Foreign Private Issuers (FPI)
Mr. Craig Olinger, Deputy Chief Accountant in the Division of Corporate Finance of the
SEC, continued to emphasize that the financial statements of all SEC registrants are
subject to the same level of review, regardless of whether they are prepared in
accordance with U.S. GAAP, IFRS or home country GAAP. There are almost 950 FPIs
currently filing with the SEC, including about 500 which file under IFRS. In order for
registrants who use IFRS to be compliant with the SEC’s requirements for reporting,
the FPI must do the following:
ƒƒ Provide a statement of compliance with the IFRS, as issued by the IASB.
ƒƒ Include the concept of “substantial doubt” in the going concern language of a
PCAOB auditors’ report.
ƒƒ Ensure any opening balance sheet that might be required by IFRS is audited.
FPIs that use IFRS for reporting are not required to submit its filings using XBRL, as the
SEC has not yet approved IFRS XBRL taxonomy for use.
As the amount of FPIs has increased substantially, the SEC staff highlighted some of the
frequent comment areas for FPIs:
1. Presentation of financial statements
2. Income taxes (IAS 12)
3. Provisions, contingent liabilities (IAS 37)
4. Operating segments (IFRS 8)
5. Impairment of assets (IAS 36)
6. Consolidated financial statements and joint ventures (IAS 27, 28 and 31)
7. Business combinations (IFRS 3)
8. Revenue recognition (IAS 18)
Cross Border Transactions
Cross border transactions have become increasingly popular in recent years. A cross
border transaction generally consists of taking a U.S. operating company and a foreign
operating company and creating a new operating company. This is typically done to
take advantage of tax and operating synergies that may exist within the new jurisdiction
or structure. Although this type of transaction may be quite advantageous for the
ending company, “new co,” many challenges arise related to accounting and reporting
and regulations.
1. Who is the acquirer for accounting purposes?
2. What is the tax structure? What is the legal structure?
3. If one or both companies were publicly traded in their own jurisdiction, what does
the final structure look like and where will it be listed?

4. Will the resulting “new cos” will have a dual listing? If so, it will continue to
have ongoing U.S. GAAP and IFRS reporting requirements. Requires the
understanding of the U.S. requirement and its intersection with the IFRS
(or foreign) requirement.
5. As a result of the transaction, will prior period statements be required under all
standards (U.S. GAAP and IFRS)?
6. What will the new audit framework look like? If continues as a U.S. listed
company, it will continue to have a PCAOB requirement, but are there other
frameworks to be considered for other jurisdictions as well?
The panel advised that along with these items, it is important to remember that when a
company is organized outside the U.S. it does NOT necessarily make it a FPI. This is
significant because a U.S. domestic registrant cannot report to the SEC in anything BUT
U.S. GAAP and a company cannot easily just get a waiver for U.S. GAAP reporting.
From the SEC’s perspective, they advise to request pre-filing consultations in order to
address many of these questions and concerns. The SEC offered the following items to
consider in preparation for a cross border transaction:
ƒƒ Contact staff in advance — International Corporate Finance
ƒƒ Be aware of potential jurisdictional conflicts and differences
ƒƒ Conflicts and differences can and will also arise after the transaction is
completed, for example in regards to reporting
ƒƒ Know that there will be challenges that may have significant impact on the
transaction and subsequent reporting
ƒƒ Keep track of filer status and respective requirements
ƒƒ Proforma requirements
ƒƒ Independence rules
COSO Update
The original Committee of Sponsoring Organizations (COSO) framework was published
in 1992. As expected, organizations and operations have changed significantly in
the past 20 years. The COSO determined that the original framework needed to be
reviewed and revised in order to address not only the dramatic change in organization
practices and policies, but also in an effort to address and answer the needs of the
investors and users of financial statements. Those that are seeking to learn and
understand more about a business and want to know that the controls are in place
to allow their reliance on the answers they find in the financial statements. As a result,
the COSO undertook the project to update its framework and discussed the process
and the impact during the conference.
The new framework was driven by 3 “refresh” objectives:
1. Reflect changes in business and operating environments — updates context

2. Expand operations and reporting objectives — broadens application
3. Articulate principles to facilitate effective internal control — clarifies requirements
As listed above, the focus is on the refreshed guidance within each of the components
of internal control to reflect the significant changes. The core definition of internal
control is not changed by the update, nor does the construction of the framework, with
its three categories of objectives and five components of internal control. In addition,
all five of the components are still required for effective control. The most significant
update is the incorporation of 17 principles to explicitly articulate and describe the
components of internal control. The establishment of these principles, or fundamental
concepts, is an effort to better articulate what is required for effective functioning of
the five components. A company needs to demonstrate that each principle is working
effectively in order to assure that the components are effective.
COSO Framework
Control Environment 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
Risk Assessment 6. Specifies suitable objectives
7. Identifies and analyzes risk
8. Assesses fraud risk
9. Identifies and analyzes significant change
Control Activities 10. Selects and develops control activities
11. Selects and develops general controls over technology
12. Deploys through policies and procedures
Information and
Communications
13. Uses relevant information
14. Communicates internally
15. Communicates externally
Monitoring Activities 16. Conducts ongoing and/or separate evaluations
17. Evaluates and communicates deficiencies

Although COSO has no authority as a standard-setter, it has encouraged companies
to transition and adapt the updated framework as soon as possible, but no later than
December 15, 2014, which is the end of the transition period. During the period, users
must state whether they use the original or updated version of the framework. During
a joint meeting on September 25, 2013, between the CAQ and the SEC staff, the SEC
indicated, “the longer issuers continue to use the 1992 framework, the more likely
they are to receive questions from the staff about whether the issuer’s use of the 1992
framework satisfies the SEC’s requirement to use a suitable, recognized framework
(particularly after December 15, 2014 when COSO will consider the 1992 framework
to have been superseded by the 2013 framework).”
SEC AQM and XBRL
Craig Lewis, SEC’s Chief Economist and Director of the Division of Economic and Risk
Analysis (DERA) discussed the SEC’s initiative to develop the Accounting Quality Model
(AQM). The AQM is an automated tool used by the SEC to analyze interactive data of a
registrant’s filing (XBRL) to determine trends and identify outliers. This tool can analyze
the interactive data within a registrant’s filing (XBRL) and identify deviations from
previous filings and also among the peer group of the company. The AQM is only in
its developmental stage, but DERA is hopeful that it may eventually be a useful tool to
improve the effectiveness of reviews, identify filings that need more detailed reviews,
and also to support the SEC’s Enforcement Division in its efforts.
Mike Starr, Director of Strategic Initiatives with Web Filings, discussed XBRL relative
to its ability to enhance the usability of financial statements. He believes that XBRL
has not been fully embraced, much of it due to the concern over data accuracy and
assurance. Mr. Starr believes that these notions must be overcome if interactive data is
ever to be used as it was intended — as a method to make information more usable and
available to the public. He suggests that the SEC should enforce compliance with XBRL
rules, expand its internal use of XBRL data, require registrants to tag additional financial
information, and simplify the XBRL taxonomy. Mr. Starr believes that if the SEC took
these steps, it would enhance reliability and confidence in the data and would increase
its usefulness, allowing interactive data to serve its original purpose.
Other SEC Updates for the 2013 Annual Reporting
Season and Beyond
Staff Reminders
As the guidance distributed (including CFO letters) by the SEC Staff may have
applicability to registrants other than those that receive them, the SEC Staff reminded
constituents of the continued use of Compliance and Disclosure Interpretations (CDI)
and Corporate Finance Disclosure Guidance (CFDG).

The SEC Staff has reminded constituents that the Financial Reporting Manual (“FRM”)
continued to be updated quarterly throughout 2013, and should be referenced as
necessary throughout the financial reporting periods.
Conflict Minerals — Conflict minerals are discussed in section 1502 of the
Dodd-Frank Act. It includes reporting requirements for SEC registrants about the
sources of “conflict minerals.” The “covered countries” currently are Democratic
Republic of Congo, Angola, Burundi, Central African Republic, the Republic of the
Congo, Rwanda, Sudan, Tanzania, Uganda, and Zambia.
The SEC’s final rule regarding conflict minerals is to follow a nationally or internationally
recognized framework, which requires that registrants must currently follow the
framework of the Organization for Economic Cooperation and Development (OECD),
as it has the only framework currently recognized. The rule applies to registrants
where conflict minerals are necessarily to the functionality or production of a product
manufactured by the company.
The OECD framework is based on 5 steps:
1. Establish management systems
2. Assess the supply chain
3. Respond to supply chain risk
4. Obtain an audit opinion that addresses conflict minerals
5. Annually report on supply chain due diligence policies and practices
The audit report must cover whether the registrant designed its framework consistent
with an internationally or nationally recognized framework and whether the registrant’s
description of its due diligence is consistent with actual steps taken by the company.
Note that the report does not assess whether the steps taken were actually in
accordance with the framework, nor does it assess the accuracy of the registrant’s
assessment of whether the minerals are conflict free.
This requirement was effective for the calendar year beginning January 1, 2013, with
the first report due May 31, 2014.

Appendix A — Highlighted
Speeches — Linked to Full Text
2013 AICPA National Conference on Current SEC and
PCAOB Developments
December 9, 2013 Center for Audit Quality Update
http://www.thecaq.org/docs/perspectives/13_cf_aicpa_
sec.pdf?sfvrsn=2
Presented by: Cynthia Fornelli
December 9, 2013 Remarks at the AICPA 2013 Conference on Current SEC
and PCAOB Developments
http://www.sec.gov/News/Speech/Detail/
Speech/1370540472145#.UsTrsfRDtqU
Presented by: Julie A. Erhardt
December 9, 2013 Remarks Before the 2013 AICPA National Conference on
Current SEC and PCAOB Developments — Audit Policy
and Current Auditing and Internal Control Matters
Speech/1370540472057#.UsTsTvRDtqU
Presented by: Brian T. Croteau
December 9, 2013 Remarks at the AICPA 2013 Conference on Current SEC
and PCAOB Developments
Speech/1370540488257#.UsTsW_RDtqU
Presented by: Paul Beswick
December 10, 2013 Remarks of FASB Chairman Russel G. Golden at the
AICPA Conference on Current SEC and PCAOB
Developments
http://www.fasb.org/jsp/FASB/Document_C/
DocumentPagecid=1176163675405
Presented by: Russel Golden

Appendix B — Abbreviations
AICPA American Institute of Certified Public Accountants
AOCI Accumulated Other Comprehensive Income
ASC FASB Accounting Standards Codification
ASU FASB Accounting Standards Update
CAQ Center for Audit Quality (affiliated with the AICPA)
CODM Chief Operating Decision Maker
CDI SEC’s Division of Corporation Finance Compliance and Disclosure
Interpretation
DTA Deferred Tax Asset
EDGAR SEC’s Electronic Data Gathering, Analysis, and Retrieval system
FAF Financial Accounting Foundation (FASB’s parent organization)
FASB Financial Accounting Standards Board
FPI Foreign Private Issuer
FRM SEC Financial Reporting Manual
GAAP Generally Accepted Accounting Principles
G20 Group of 20 finance ministers and central bank governors
IAASB International Auditing and Assurance Standards Board
IAS International Accounting Standard
IASB International Accounting Standards Board
ICFR Internal Control over Financial Reporting
IFRS International Financial Reporting Standards
MDA Management’s Discussion and Analysis
MoU Memo of Understanding
OCI Other Comprehensive Income
OPEB Other Post-employment Benefits
PCAOB Public Company Accounting Oversight Board
PCSIC Private Company Standards Improvement Council
SAB SEC Staff Accounting Bulletin
SEC Securities and Exchange Commission
VIE Variable Interest Entity
XBRL eXtensible Business Reporting Language

About SolomonEdwards
SolomonEdwards is a privately held National Professional Services firm,
operating from strategically located U.S. markets to serve domestic and
multinational clients in a variety of industries.
SolomonEdwards’ strength lies in its ability to tactically assist clients with program,
project, change and communications management across initiatives related to finance
accounting, risk advisory, transaction support integration, business process
optimization initiatives and regulatory compliance requirements.
The Transaction Regulatory Advisory Services practice at SolomonEdwards works
closely with private equity firms and private equity-owned portfolio company clients
to meet their business objectives along the full cycle of a deal. Our services include:
ƒƒ SEC filing preparation and review
ƒƒ Regulation research and interpretation
ƒƒ U.S. GAAP IFRS technical position
memos
ƒƒ Policy procedure development,
documentation and integration
ƒƒ Audit readiness / IPO readiness
ƒƒ Transaction support for mergers
acquisitions and public offerings
ƒƒ Sarbanes-Oxley compliance
ƒƒ Tax accounting and compliance
We remain dedicated to offering our constituents the very latest insight into the trends
that are shaping our profession. Through our Thought Leadership Series, we have
delivered live seminars, web based training programs, and topical whitepapers to our
national client base for over a decade.
To hear our experts more thoroughly explore the topics addressed in this booklet,
please email info@solomonedwards.com for information on our 2014 series.
For more information on Current SEC and PCAOB Developments, please contact your
local SolomonEdwards office.
Atlanta | 404-497-4141
Chicago | 312-466-0101
Houston | 713-960-8880
Iselin, NJ | 732-603-5260
New York | 212-545-9500
Philadelphia | 610-902-0440
San Francisco | 415-391-1038
Washington, DC | 703-738-9600
www.solomonedwards.com
SolomonEdwardsGroup, LLC is not a registered public accounting firm.

Tras seg 2014 accounting guide 02.19.14 final (digital)

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Tras seg 2014 accounting guide 02.19.14 final (digital)

Similar to Tras seg 2014 accounting guide 02.19.14 final (digital) (20)

More from Veronica McKee

More from Veronica McKee (14)

Recently uploaded

Recently uploaded (20)

Tras seg 2014 accounting guide 02.19.14 final (digital)