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Overview

New SEC Corporate Disclosures Southern Gas Association Accounting & Financial Executives Conference April 28, 2003 Robert E. Jensen Trinity University San Antonio, TX 78212. Overview. Overview of Sarbanes-Oxley Act of 2002

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Overview

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  1. New SEC Corporate Disclosures Southern Gas Association Accounting & Financial Executives ConferenceApril 28, 2003Robert E. JensenTrinity UniversitySan Antonio, TX 78212

  2. Overview • Overview of Sarbanes-Oxley Act of 2002 • Disclosure in MD&A About Off-Balance Sheet Arrangements and Aggregate Contractual Obligations • Conditions for Use of Non-GAAP Financial Measures • Disclosure in MD&A About the Application of Critical Accounting Policies

  3. Sarbanes-Oxley Act of 2002 • Overview • 2001-2002 news dominated by corporate scandals and financial reporting restatements • Several Congressional committees held hearings on Enron and other corporate misdeeds • Culminated in Sarbanes-Oxley Act of 2002 • Signed into law July 30, 2002 by President Bush • Required significant rulemaking activities on the part of the Commission

  4. Sarbanes-Oxley Act of 2002 • Components of the SOA • Title I – Public Company Accounting Oversight Board • Title II – Auditor Independence • Title III – Corporate Responsibility • Certifications by CEO and CFO • Audit committee standards • Improper influence of auditors • Insider trading during pension fund blackouts • Conduct standards for attorneys

  5. Sarbanes-Oxley Act of 2002 • Components of the SOA - Continued • Title IV – Enhanced Financial Disclosures • MD&A disclosures • Non-GAAP financial measures • Reporting on internal controls • Disclosures about code of ethics • Disclosures of audit committee financial expert • Accelerated reporting deadlines • Title V – Analysts Conflict of Interest • Regulation Analyst Certification (Reg AC)

  6. Sarbanes-Oxley Act of 2002 • Components of the SOA - Continued • Title VI – Commission Resources and Authority • Title VII – Studies and Reports • Title VIII – Corporate and Criminal Fraud and Accountability • Title IX – White Collar Crime Penalty Enhancements • Title X – Corporate Tax Returns • Title XI – Corporate Fraud Accountability

  7. MD&A Disclosure • Disclosure in MD&A About Off-Balance Sheet Arrangements and Aggregate Contractual Obligations • Related to Section 401(a) of Sarbanes-Oxley • Built on FRR 61 • Adopted by Commission January 22, 2003 • Effective April 7, 2003

  8. Off-Balance Sheet Arrangement Disclosure Threshold Disclose arrangements “that have, or are reasonably likely to have, a current or future effect . . . that is material . . . “ • Identify off-balance sheet arrangements • Assess likelihood of occurrence of known trend, demand, uncertainty, etc • Assessment must be objectively reasonable at time determination is made

  9. Definition of Off-Balance Sheet Arrangement • Any contract to which an unconsolidated entity is a party, under which the registrant may have: • Any obligation under a guarantee contract (as referenced in FIN 45); • A retained or contingent interest that serves as financial support for assets transferred; • Any obligation under a derivative that has been classified as equity (as referenced in paragraph 11a of SFAS 133); and • Any obligation under a material variable interest (as referenced in FIN 46) held by the registrant in certain entities.

  10. Off-Balance Sheet Arrangement Disclosure Requirements Required Disclosures • The nature and business purpose; • The importance to the registrant for liquidity, capital resources, market or credit risk support, or other benefits; • The financial impact on the registrant; • Known trends or events that affect the availability or benefits of the arrangements; and • Any other information that the registrant believes is necessary for an understanding of its off-balance sheet arrangements.

  11. Off-Balance Sheet Disclosure Transition Transition • Start in SEC filing that contains annual financial statements for fiscal year ending on or after June 15, 2003 • Quarterly updates for material changes (consistent with current MD&A)

  12. Tabular Disclosure of Contractual Obligations • Required Disclosures • Tabular disclosure required • Long-term debt obligations (SFAS 47) • Capital lease obligations (SFAS 13) • Operating lease obligations (SFAS 13) • Purchase obligations • Other long-term liabilities • Payments due by periods • Less than year • 1-3 years • 3-5 years • Greater than 5 years

  13. Contractual Obligations • Definitions • Purchase obligation - Agreement to purchase goods or services that is enforceable and legally binding that specifies all significant terms, including: • Fixed or minimum quantities • Fixed, minimum or variable price provisions • Approximate timing • Other long term liabilities – As reflected on balance sheet under GAAP

  14. Table of Contractual Obligations Transition Transition • Start in SEC filing that contains annual financial statements for fiscal year ending on or after December 15, 2003 • Quarterly updates for material changes (consistent with current MD&A) • Does not apply to small business issuers

  15. Non-GAAP Financial Measures • Conditions for Use of Non-GAAP Financial Measures • Related to Section 401(b) of Sarbanes-Oxley • Adopted by Commission January 15, 2003 • Effective March 28, 2003

  16. Non-GAAP Financial Measures • Impact of Adopted Rule • Adopts Regulation G which applies whenever a company publicly discloses or releases material information that includes a non-GAAP financial measure • Amends Item 10 of Regulations S-K and S-B to address use of non-GAAP financial measure in filings with SEC • Adds Item 12 to Form 8-K related to releases and announcements disclosing certain material non-public information

  17. Definition of Non-GAAP Financial Measures • A non-GAAP financial measure is . . . • A numerical measure of historical or future performance, financial position or cash flows that: • Excludes amounts, or is subject to adjustments with effect of excluding amounts, that are included in the most directly comparable GAAP measure • Includes amounts, or is subject to adjustments with effect of including amounts, that are excluded in the most directly comparable GAAP measure

  18. Regulation G • General Provisions • Information shall not contain an untrue statement of a material fact or omit to state a material fact • Present with and reconcile to the most directly comparable GAAP measure • If made orally, telephonically, etc, can post required information on website and disclose location and availability during presentation

  19. Item 10 • General Provisions • Present most directly comparable GAAP measure with equal or greater prominence • Reconcile with most directly comparable GAAP measure • Disclose why management believes non-GAAP financial measure provides useful information • Disclose additional purposes for which management uses the non-GAAP financial measure if not otherwise disclosed

  20. Item 10 • Prohibitions – Entity may not . . . • Exclude cash-settled charges or liabilities from a non-GAAP liquidity measure (excluding EBIT and EBITDA) • Adjust non-GAAP performance measure to eliminate or smooth items when nature of item is reasonably likely to recur within two years or did occur within prior two years • Present non-GAAP financial measure on face of financial statements or in footnotes • Present non-GAAP financial measure on face of pro forma information required under Article 11 0f Reg S-X • Use titles for non-GAAP financial measure the same as or confusingly similar to those used for GAAP measures

  21. Disclosure of Critical Accounting Policies • Disclosure in MD&A About the Application of Critical Accounting Policies • Proposed May 10, 2002 • Approximately 85 comment letters received • Not mandated under Sarbanes-Oxley • Continue to look to FR 60 and FR 61

  22. Conclusion • A Few Final Thoughts On . . . • International convergence • Principles-based accounting standards

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