Mercer County Chapter of NJSCPA –Half-Day Audit & Accounting Seminar

1. Mercer County Chapter of NJSCPA –Half-Day Audit & Accounting Seminar November 6, 2009

2. Table of Contents • I. Introduction • II. FASB Statements • Codification • Business Combinations • Noncontrolling Interests • Accounting for Convertible Debt Instruments that may be Settled in Cash Upon Conversion • Uncertainty for Tax Positions • Fair Value Measurements and Disclosures • Subsequent Events • Variable Interest Entities • Other Than Temporary Impairments (OTTI) • III. “Hot Audit and Accounting Topics” • Impairment of Goodwill and Other Intangible Assets • Going Concern • IV. IFRS for U.S. Companies • V. Compilations and Reviews

3. “FASB Accounting Standards Codification” FASB ASC 105-10

4. The FASB Accounting Standards Codification TM and the Hierarchy of GAAP (FASB 168) (Replacement of FASB 162) • Introduction to Codification • Source of Authoritative US GAAP recognized by the FASB to be applied by nongovernmental entities • Effective Date • Effective for financial statements issued for interim and annual periods ending after September 15, 2009 • Example • SFAS 123(R) – Stock Based Compensation  FASB ASC 718-10

7. “Business Combinations” FASB ASC 805-10

8. Business Combinations (FASB 141(R)) Executive Summary • Purpose of standard is to improve reporting for business combinations • Significant Differences between FASB 141 and FASB 141(R) • Treatment of Acquisition/Restructuring Costs • Negative goodwill – do not reduce applicable assets under FASB 141(R) • Purchase less than 100% but more than 50% • Effective Date • Years beginning after December 15, 2008 • Early adoption is not permitted

9. Business Combinations Executive Summary • Acquisitions prior to December 15, 2008 are should not be adjusted to reflect new requirements • Requires all business combinations to be accounted for using the acquisition method of accounting

10. Business Combinations Accounting under SFAS 141(R): • Treatment of Acquisition and Restructuring Costs • Transaction costs are expensed • Legal • Appraisal accounting fees • Negative Goodwill (Bargain Purchases) • Do not reduce applicable assets on pro rata basis • If acquire less than 100% but more than 50% • Fair value 100% of all assets Accounting under SFAS 141: • Treatment of Acquisition and Restructuring Costs • Transaction costs are capitalized • Legal • Appraisal accounting fees • Negative Goodwill (Bargain Purchases) • Reduce applicable long-term assets on a pro rata basis • If acquire less than 100% but more than 50% • Fair value percent of assets purchased

11. Business Combinations Consistencies between FASB 141 and FASB 141(R): • Measurement Values • All assets acquired, liabilities assumed, and any noncontrolling interest must be valued at fair value on the acquisition date

12. Business Combinations • Note - Standard states that disclosures noted do not include all necessary information and the acquirers should disclose whatever information is necessary • Disclosure Requirements • Highlights of Disclosures • Name of the entity acquired • Description of business acquired • Acquisition date • Percentage of voting interest acquired • Major reasons for the acquisition • How the acquirer gained control • Description of goodwill • Description of Acquisition Date Fair Value • Any contingent considerations • Additional Disclosure Considerations • Highlights of Disclosures • Incompleteness of Initial Accounting • Disposal of Contingent Asset or Liability by Acquiree • Disposal of Contingent Asset or Liability by Acquirer • Reconciliation of Goodwill at the beginning and end of period

13. “Noncontrolling Interests in Consolidated Financial Statements” FASB ASC 810-10

14. Noncontrolling Interests in Consolidated Financial Statements (FASB 160 ) Executive Summary • Amends ARB 51 to incorporate the changes to be consistent with FASB 141(R) • Effective for annual and interim periods beginning on or after December 31, 2008 • Does not apply to not-for-profits • Standard changes financial statement presentation for noncontrolling interests • Financial statements are presented retrospectively upon adoption • Deconsolidation – subsidiaries not meeting the consolidation criteria

15. Noncontrolling Interests in Consolidated Financial Statements • Financial Statement Presentation • Noncontrolling interest component of stockholders’ equity should be presented separate and distinct from parent’s equity • Noncontrolling interest cannot be presented as a liability or in the mezzanine section of the balance sheet • Noncontrolling interest can be a deficit and requires all income and losses be presented on the financial statements • Prior to ASC 810, losses would be absorbed by the parent corporation • Noncontrolling interest formally known as “minority interest”

16. Noncontrolling Interests in Consolidated Financial Statements

17. Noncontrolling Interests in Consolidated Financial Statements • Financial Statement Presentation • Comprehensive items related to noncontrolling interests are presented separately on the financial statements

18. Noncontrolling Interests in Consolidated Financial Statements

19. Noncontrolling Interests in ConsolidatedFinancial Statements • Upon deconsolidation of subsidiary: • Parent is required to deconsolidate the subsidiary when the entity ceases to have controlling interest and record at fair value the gain or loss of the sum of: • Fair value of consideration received • Fair value of any retained noncontrolling subsidiary at date parent is no longer required to consolidate • Carrying amount of noncontrolling interest at date parent is no longer required to consolidate

20. “FASB Accounting for Convertible Debt Instruments that may be Settled in Cash Upon Conversion” FASB ASC 470-20 (formerly) APB 14-1 Applies to Convertible Debt Instruments that may be settled in cash upon conversion

21. “Uncertainty for Certain Tax Positions” FASB ASC 740-10

22. Uncertainty for Certain Tax Positions (FIN 48) Executive Summary • Clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, Accounting for Income Taxes • Prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return • Provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition • ASC 740-10-65-1 (FSP FIN 48-3) deferred the effective date for almost all privately held companies until fiscal years beginning after December 15, 2008 (effective for 2009 year ends)

23. Uncertainty for Certain Tax Positions • Definition of “Tax Positions” in FIN 48 • A position in a previously filed tax return or a position expected to be taken in a future tax return that is reflected in measuring current or deferred income tax assets and liabilities

24. Uncertainty for Certain Tax Positions • A Tax Position can result in a: • permanent reduction of income taxes payable • deferral of income taxes otherwise currently payable to future years • change in the expected realizability of deferred tax assets

25. Uncertainty for Certain Tax Positions • The term tax position also encompasses, but is not limited to: • A decision not to file a tax return • An allocation or a shift of income between jurisdictions • The characterization of income or a decision to exclude reporting taxable income in a tax return • A decision to classify a transaction, entity, or other position in a tax return as tax exempt

26. Uncertainty for Certain Tax Positions • The evaluation of a tax position in accordance with this Interpretation is a two-step process: • Recognition • Measurement

27. Uncertainty for Certain Tax Positions First Step – Recognition • The enterprise determines whether it is “more-likely-than-not” that a tax position will be sustained upon examination • “More-likely-than-not” • Likelihood greater than 50 percent • In evaluating whether a tax position has met the “more-likely-than-not” recognition threshold, the enterprise should presume that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information

28. Uncertainty for Certain Tax Positions Second Step – Measurement • A tax position that meets the “more-likely-than-not” recognition threshold is measured to determine the amount of benefit to recognize in the financial statements • The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement

29. Uncertainty for Certain Tax Positions • Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in one of the following: • a. An increase in a liability for income taxes payable or a reduction of an income tax refund receivable • b. A reduction in a deferred tax asset or an increase in a deferred tax liability • c. Both (a) and (b)

30. Uncertainty for Certain Tax Positions Reporting Requirements • Payments anticipated to be made within one year or operating cycle, should be classified as a current liability on a classified statement of financial position • An income tax liability should not be classified as a deferred tax liability unless it results from a taxable temporary difference • Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent financial reporting period in which that threshold is met • Previously recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be derecognized in the first subsequent financial reporting period in which that threshold is no longer met • Use of a valuation allowance as described in Statement 109 is not an appropriate substitute for the derecognition of a tax position

31. Uncertainty for Certain Tax Positions • Adoption of FIN 48: • Liabilities arising from tax positions prior to beginning of period • Record FIN 48 liability, plus accrued interest and penalties, and adjust opening retained earnings balance and disclose • Liabilities arising from tax positions during the current period • Record FIN 48 liability, plus accrued interest and penalties, and related income tax expense

32. Uncertainty for Certain Tax Positions Instructive Example: • The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2009. As a result of the implementation of Interpretation 48, the Company recognized approximately a $100 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2009, balance of retained earnings. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: Balance at January 1, 2009 $100,000 Additions based on tax positions related to the current year 5,000 Additions for tax positions of prior years 50,000 Reductions for tax positions of prior years (20,000) Balance at December 31, 2009 $135,000

33. Uncertainty for Certain Tax Positions • ASU No. 2009-06 - Uncertainty in Income Taxes and Disclosure Amendments for Nonpublic Entities, amends Subtopic 740-10 to: • Eliminate certain disclosure requirements for non-public entities • Does not eliminate disclosures for public companies • Provides implementation guidance on accounting for uncertainty in income taxes. The guidance clarifies: • Whether the income tax paid by the entity attributable to the entity or its owners • What constitutes a tax position for a pass-through entity or a tax-exempt not-for-profit entity • How accounting for income taxes be applied when a group of related entities comprise both taxable and nontaxable entities

34. “FASB Fair Value Measurements” FASB ASC 820-10

35. Fair Value Measurements (FASB 157) Executive Summary • Originally effective for fiscal years beginning after November 15, 2007 • Differences between This Statement and Current Practice • The definition of fair value • The expanded disclosures about fair value measurements • However, this statement does not change measurement • Valuation Techniques • Market • Income • Cost

36. Fair Value Measurements • FSP 157-1 – States 157 does not apply to FASB 13 and other pronouncements that addresses measurement or classification of a lease (effective for fiscal years beginning after November 15, 2007) • FSP 157-2 – Defers 157 until fiscal years and interim periods beginning after November 15, 2008 for non-financial assets and non-financial liabilities • FSP 157-3 – Clarifies the application of 157 in a market that is not active (effective upon issuance – August 2008) • FSP 157-4 – Used to determine FV when the volume and level of activity for an Asset or Liability have significantly decreased and identifying transactions that are not orderly (effective for periods ending after June 15, 2009)

37. Fair Value Measurements Fair Value Hierarchy • Purpose of Hierarchy is to increase consistency and comparability in fair value measurements and related disclosures • Establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels • The level in the fair value hierarchy is determined based on the lowest level input that is significant to the measurement in its entirety

38. Fair Value Measurements Fair Value Hierarchy • Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. • Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly through corroboration with observable market data • Level 3 inputs are unobservable inputs for the asset or liability

39. Fair Value Measurements • Examples of Assets and Liabilities: • Level 1 • U.S. Government and Agency Securities • Stock – (i.e. – IBM) • Municipal Bonds • Level 2 • Money-market and enhanced cash funds • Long-lived assets • Interest-Rate Swaps (could also be Level 3) • Level 3 • Auction Rate Debt Securities • Participant Loans • Goodwill • Investments in private entities

40. Fair Value Measurements • Footnote for Recurring Fair Value Measurement

41. Disclosure Requirements: Fair Value Measurements • Since nonfinancial assets and liabilities are now recorded at “fair value” there are additional disclosures under SFAS 157, as follows • The fair value measurements recorded during the period and the reasons for the measurements • The level within the fair value hierarchy in which the fair value measurements in their entirety fall, segregating fair value measurements using quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3) • For fair value measurements using significant unobservable inputs (Level 3), a description of the inputs and the information used to develop the inputs • In annual periods only, the valuation technique(s) used to measure fair value and a discussion of changes, if any, in the valuation technique(s) used to measure similar assets and/or liabilities in prior periods • The quantitative disclosures required by this SFAS shall be presented using a tabular format • Note under SFAS 157 these would be considered fair value measurements measured on a “nonrecurring basis”

42. Fair Value Measurements Accounting Standard update (ASU) No. 2009-05, Measuring Liabilities at Fair Value, amends subtopic 820: • All entities that measure liabilities at fair value within the scope of Topic 820 are effected by this update • Effective for the first reporting period after issuance (August 2009) • Entity is required to measure fair value using one or more techniques • Quoted price of identical liability when traded as an asset • Income approach – present value technique • Market approach – based on measurement date reporting entity would pay to transfer or receive identical liability

43. Fair Value Measurements Accounting Standard update (ASU) No. 2009-12, Fair Value Measurements and Disclosures - Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), amends subtopic 820: • This update: • Amends Subtopic 820-10 – Fair Value Measurements to, permit a reporting entity to measure the fair value of certain investments on the basis of the net asset value per share of the investment (or its equivalent) • Requires new disclosures, by major category of investments, about the attributes includes of investments within the scope of this amendment to the Codification • Is effective for interim and annual periods ending after December 15, 2009 • Early application is permitted

44. “Subsequent Events” FASB ASC 855-10

45. Subsequent Events (FASB 165) • Introduction to Standard • An entity shall disclose the date through which subsequent events have been evaluated: • The date is the date the financial statements were issued (public) or; • The date the financial statements were available to be issued (private) • Effective Date • For interim and annual periods ending after June 15, 2009

46. Subsequent Events Disclosure Examples: • No Subsequent Event • ABC Company evaluated subsequent events through October 26, 2009 which is the date the financial statements were issued (or: available to be issued).  • Subsequent Event (from example above):  • ABC Company evaluated subsequent events through October 26, 2009 which is the date the financial statements were issued (or: available to be issued).  On October 19, 2009 one of ABC Company’s customers filed for bankruptcy.  An increase of $80,000 in the reserve for that customer’s account receivable balance was recorded as of the 12/31/08 balance sheet date based on this subsequent event, as the conditions resulting in bankruptcy existed at the balance sheet date.

47. “Amendment to FASB Interpretation No. 46(R)”

48. Amendment to FIN 46 (FASB 167) Executive Summary • Controlling Financial Interest • Ongoing assessment of Variable Interest Entities • Qualitative Assessment • Effective Date • Annual reporting periods that begin after November 15, 2009

49. Amendment to FIN 46 This Statement: • Requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity • This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both of the following characteristics: • a. The power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance • b. The obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity • Amends Interpretation 46(R) to require ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. • Before this Statement, Interpretation 46(R) required reconsideration of whether an enterprise is the primary beneficiary of a variable interest entity only when specific events occurred

50. “Other than Temporary Impairments” FASB ASC 320-10