Update by the Office of the Chief Accountant: Interacting with OCA

1. Update by the Office of the Chief AccountantWesley R. BrickerProfessional Accounting FellowU.S. Securities and Exchange Commission

2. Discussion Topics • Who We Are: Interacting with OCA • What We’ve Been Doing: Rule-Making and Policy Developments • How We Think: Recent Hot Topics

3. Disclaimer The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. Therefore, the views expressed today are my own, and do not necessarily reflect the views of the Commission or the other members of the staff of the Commission.

4. Who We Are: Interacting with OCA

5. Office of the Chief Accountant Chief Accountant: James L. Kroeker • Appointed August 25, 2009 • Principal advisor to the Commission on accounting and auditing matters • Deputy Chief Accountants: Paul Beswick, Brian Croteau & Julie Erhardt Main groups in OCA • Accounting • Professional Practice (Audit and Independence) • International Affairs Responsibilities • Rulemaking, interpretive guidance and reports • Oversight of standard setting • Consultations

6. Avenues for Consultations Pre-filing basis – requests from registrants • Guidance posted on the SEC’s website: http://www.sec.gov/info/accountants/ocasubguidance.htm • Submit GAAP questions by email to OCA@sec.gov • Submit 404 questions by email to 404smallbusiness@sec.gov Post-filing basis – • Internal consultations from Divisions of Corporation Finance and Enforcement • Requests from registrants Informal discussion with OCA staff members • (202) 551-5300

7. What We’ve Been Doing: Rule-Making and Policy Developments

8. What We’ve Been Doing • IFRS in the U.S. • Monitoring Major Convergence Projects • Dodd-Frank and Related Rulemaking

9. Rule-Making and Policy Developments IFRS in the U.S.

10. Commission Statement in Support of Convergence and Global Accounting Standards • Issued February 2010 • Explains history of Commission’s steps to foster a single set of high-quality globally accepted accounting standards • Summarizes feedback on proposed “Roadmap” • Provides an approach forward for U.S. capital markets • Directs staff of the Office of the Chief Accountant, in consultation with other Divisions and Offices of the commission, to develop and carry out a work plan • Progress reports beginning in October 2010

11. Key Areas of the Work Plan Whether to incorporate IFRS for U.S. issuers Sufficient development and application of IFRS for the U.S. financial reporting system The independence of standard setting for the benefit of investors

12. Key Areas of the Work Plan How to incorporate IFRS for U.S. issuers (transition) Investor understanding and education regarding IFRS Examination of the U.S. regulatory environment that would be affected by a change in accounting standards The impact on issuers, both large and small, including changes to accounting systems, changes to contractual arrangements, corporate governance considerations, and litigation contingencies Human capital readiness

13. Sources of Information Investors Issuers (both U.S. and foreign) Auditors Attorneys Other regulators Standard setters Academics Work Plan Execution • Methodology • Staff research • Survey of academic research • Outreach through: • Comment letter requests • Roundtables • Targeted interviews Status Report – October 2010

14. Requests for Comment – Work Plan Aspects of the impact on U.S. investors (Release 33-9133) U.S. investors' current knowledge of IFRS and preparedness for IFRS How investors educate themselves on changes in accounting standards The extent of and time needed to undertake changes to improve investors' understanding of IFRS and the related education process. Aspects of the impact to issuers (Release 33-9134) Compliance with contractual arrangements based on U.S. GAAP (e.g., financial covenants) Compliance with corporate governance requirements (e.g., audit committee financial expert and other stock exchange listing requirements) Application of certain legal standards tied to amounts determined for financial reporting purposes. Comments on both releases are requested by October 18

15. Lease Classification Under IFRS IAS 17, Leases • Operating vs. Financing • Principle: A lease is a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an asset. • Indicators of a finance lease (par. 10): • Lease transfers ownership by the end • Bargain purchase that is reasonably certain • Lease term covers major part of economic life • PV of minimum lease payments equal substantially all of the FV of the leased asset • Leased assets are of a specialized nature • Lease classification is made at inception

16. Monitoring Major Convergence Projects

17. Commission Statement in Support of Convergence and Global Accounting Standards Recognizes ongoing convergence process between FASB and IASB Financial crisis has underscored importance of convergence Responses to crisis have been global Companies and their investments are globally interconnected Focus on quality of standards Challenges FASB / IASB Memorandum of Understanding

18. Selected Convergence Projects Leases and Revenue Recognition IASB / FASB published joint Exposure Drafts Financial Instruments FASB published its Exposure Draft FASB / IASB conducting outreach Insurance Contracts IASB published Exposure Draft FASB is preparing a Discussion Paper

19. Dodd-Frank and Related Rulemaking

20. Dodd-Frank and Related Rulemaking Financial Stability Oversight Council Accounting standard setting SEC’s approach to regulatory reform rulemaking Invitation to provide preliminary comments on (see links on SEC website): OTC derivatives Hedge funds Corporate disclosure Credit rating agencies Other areas Comments posted on website

21. How We Think: Recent Hot Topics

22. Accounting Estimates Accounting assumptions in the current environment Preparation of financial statements requires preparers to make assumptions about the future E.g. fair value measurements, impairment assessments Reminders Identify and follow objectives of the accounting standards Base assumptions on reasoned analysis and available information Current market data; expert forecasts Do not manipulate models or assumptions to achieve a desired outcome

23. Accounting Judgments Start with faithful application of accounting literature Where accounting literature does not address the situation: • Provide information useful to investors and creditors in their decision-making processes • Professional judgment • SEC staff will accept reasonable differences in judgment, coupled with transparent disclosure • Concurrent documentation enhances credibility of judgment • Economic substance • Problems arise when transactions are designed around accounting literature • Often not consistent with principles of standard • Transparent disclosures

24. Implementation – Consolidations Standard (FAS 167) Reporting enterprise should consolidate variable interest entities in which it has a controlling financial interest • Power over the activities that most significantly impact an entity's economic performance • Interest that either obligates the reporting enterprise to absorb losses of the entity or provides a right to receive benefits from the entity that could potentially be significant Economic substance is important in performing the evaluation

25. Implementation – Creditor Accounting for Debt Restructurings Commercial real estate loans • Creditor might modify loan terms to reduce or defer debtor’s or loan guarantor’s near-term cash payments • Restructuring into an A Note & B Note • Evaluate loans receivable for impairment (ASC 310-10-35 [FAS 114]) • Loan guarantees that are non-substantive should not be used to avoid recognizing loan impairments • Disclose restructuring activities

26. Equity Method Investment – Impairment Impairment model for equity method investment • Other-than-temporary declines in value • Holistic assessment of all factors described in the guidance • ASC 323-10-35-31, 32 [APB pars. 6(b), 19(h)] • Not a cost-recovery model, such as is applicable for long-lived assets

27. Post-Acquisition Accounting for Loans Acquired in Business Combinations AICPA Depository Institutions Expert Panel submission described two approaches: • Recognize interest income based on contractual cash flows as described in ASC 310-201 • Recognize interest income based on expected cash flows as described in ASC 310-302 Accounting policy: • Policy should be disclosed and applied consistently • Any change in accounting policy should be justified on the basis of preferability • If interest income is recognized based on expected cash flows, all accounting and disclosure guidance in ASC 310-30 should be followed 1 Formerly FAS 91 2 Formerly SOP 03-3

28. Subtopic 815-40-25*–Sequencing Considerations Determination of whether an EITF 00-19 instrument can be recorded in equity when there is a separate outstanding variable share-settled contract (unlimited shares) can be complex • Existence of a potentially variable share-settled contract will not always result in liability treatment of the Instrument • Key considerations include: • What is the Company’s sequencing policy? • Is the Company’s sequencing policy reasonable? • Are there sufficient unissued and authorized shares that can be allocated to the instrument following the Company’s sequencing policy? • What are the specific facts and circumstances of the Company? *Formerly EITF 00-19

29. Questions