Tuesday, November 17, 2009

Wayne's World: Carnall Tells FEI Conf. What's In Store From Corp Fin

If you remember the old 'SEC Regs' Committee of the AICPA (now called the 'CAQ Regs' Committee, under the aegis of AICPA-affiliate, the Center for Audit Quality) you may have heard of it referred to as one of the so-called 'secret societies' in accounting. Based on remarks of SEC Division of Corp Fin Chief Accountant Wayne Carnall at an FEI conference earlier today, the SEC Regs/CAQ Reg's quarter-century-old vault is about to be opened - or rather, made more readily available, on the SEC's website, as part of an update to Corp Fin's Financial Reporting Manual.

Guidance From SEC Regs/CAQ Regs Committee To Be Incorp Into Corp Fin Fin. Reporting Manual
The term 'secret society' is a tongue-in-cheek reference to groups of experts that meet with SEC or FASB staff privately on complex issues, and a kind of mythology grows around such groups, since there is sometimes a black box aspect to the unofficial, quasi-official, or nonauthoritative guidance that is said to have arisen from such meetings.

References to 'secret societies' can be found in transcripts of two meetings of the SEC Advisory Committee on Smaller Public Companies, June 15, 2005, (in a discussion about arcane accounting rules, and the need for guidance, such as FAQs, particularly for smaller public companies) and Feb. 21, 2006 (during a discussion about 'speech GAAP,' or setting Generally Accepted Accounting Principles through speeches by SEC staff, which are not subject to FASB due process, or to SEC due process under the Administrative Procedures Act).

As an aside, SEC Chief Accountant Jim Kroeker also made a reference to 'secret societies' in his remarks at the FEI conference. Referring to FASB's Codification, issued on July 1, which brought all U.S. GAAP into one place, organized by topic, he said, "You don't have to be a member of a secret society" any more to locate guidance on a particular issue.

Carnall explained that the Corp Fin Financial Reporting Manual - written by Corp Fin staff, for Corp Fin staff, which "reflects our views on reporting issues" and "provides guidance for complying with the rules" - and was originally available only through FOIA requests until the SEC decided to make it available on SEC.gov, was updated for the first time in nine years a year ago. He added the Division is committed to updating it quarterly, with the next update coming in December.

With respect to updating the Manual regarding material included in SEC Regs Committee/CAQ Regs Committee minutes, Carnall said:

We meet frequently with the CAQ Regs committee; we have been meeting with them close to forever - they put [minutes] of the meetings on their website. You can have an issue dating back to a meeting in 1995, and have no idea SEC staff expressed a view on it [at a meeting with the SEC Regs/CAQ Regs committee].

We are going through the past 25 years and looking at which information is still relevant, and putting it in the [Corp Fin] Financial Reporting Manual.

There are about 780 or so distinct issues [in the SEC Regs/CAQ Regs committee material] we hope to have done some time in the spring or summer, which means by September [2010].

Coming Soon: Clarification Re: Non-GAAP Disclosures

Carnall also told attendees at the FEI conference (FEI's 28th annual Current Financial Reporting Issues Conference) that Corp Fin plans to issue something "in the near future" regarding non-GAAP disclosures. Specifically, he said:

We are looking at some guidance we have issued, FAQs, other guidance, to determine if we should modify some of our guidance to make more clear what our expectations are - you should look for that in the near future.

During a Q&A session later in the day, he added:

What we have found... a little concerning to myself and our new Division Director [Meredith Cross], we find information on a company website, [but] not in [the company's SEC] filings.

There are very limited situations where we have prohibitions [on certain non-GAAP information] - we are looking at ways we have worded our interpretations.

The overall objective is for the 10-K to be an information document, not a compliance document.

Kroeker added the requirements are, in general:

If you are using [non-GAAP disclosures], explain why they are important, and reconcile to GAAP.

During a session with the press at the conference, Carnall expanded on the reasons why the SEC staff want to issue clarifications in the area of non-GAAP disclosure. He said:

The rule is fine, we have issued FAQs, and [guidance is contained in] the Financial Reporting Manual, but there is a concern that perhaps the way we have worded them has perhaps been more restrictive than intended. People would like to provide more information, and are concerned [whether they are permitted to, based on the current guidance].... [staff is considering] whether to modify that [guidance] to make it more clear what our intent is.

Arnold Hanish, Chairman of FEI's Committee on Corporate Reporting, serving as moderator of the Q&A session with FASB and SEC staff at the conference, said: "It has been brought to my attention a recent Enforcement action was around Reg G, about inappropriate inclusion or exclusion of certain operating expenses."

Although no recent case was specified by name, Carnall referenced an earlier case, noting: "There have been a couple of Enforcement cases involving non-GAAP, the first one, Trump Casinos, highlighted unusual losses but did not highlight [unusual gains]. Rule 12b-20 of the Exchange Act [says] you cannot have a material omission."

In general, he noted, issues with non-GAAP disclosures include whether the disclosure is simply wrong, and cautioned that you 'have to tell the whole story.'

Other Areas of Focus

Carnall noted some areas of focus in Corp Fin filing reviews - noting this is not an all-inclusive list, include impairment of goodwill, income taxes, valuation allownances, APB 23/undistributed earnings, liquidity, going concern, pension assumptions, segments, and other-than-temporary-impairment (OTTI).

Another subject of Carnall's remarks was Materiality. Specifically, he said:

In preparing support why an error is not material, companies take the 8 points in SAB 99 and say 'No' ... concluding the error is not material. Companies should provide company-specific information, go well beyond the 8 bullet points [to demonstrate why an error is not material].

There's More
Kroeker reviewed various SEC rulemaking and policy initiatives, and SEC Commissioner Kathleen Casey gave the closing address at the FEI conference. (If her remarks are posted on the SEC website we will provide a link here or in a separate blog post.)

A great deal of timely information was provided at the two-day FEI Current Financial Reporting Issues Conference; you can get a flavor of a few selected highlights through our blog posts this week, and through reporting by others in attendance from the press, including the WSJ, Bloomberg, BNA, Thomson-Reuters, CFO.com, Compliance Week, WebCPA, AccountingToday, Re: The Auditors, and more, but nothing compares - in terms of the quantity and quality of the experience - to being there in person. Visit FEI's website, http://www.financialexecutives.org/ to learn more about FEI and our upcoming events. If you join FEI by Dec. 31 as part of our Connection Through Association Campaign, you will receive complimentary registration to attend our Summit conference in Las Vegas in the spring.

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