Current Developments in Financial Reporting

1. Current Developments in Financial Reporting American Accounting Association Annual Diversity Section Conference October 2011 Presented by Terry Iannaconi Partner Department of Professional Practice KPMG LLP

2. Agenda • Recent SEC staff comments and areas of interest • Contingent losses and liabilities • Non-GAAP measures • Stranded cash from foreign operations • SEC current projects of interest • Disclosures about “conflict minerals” • Dodd-Frank mandated rulemaking re compensation clawbacks following restatements • IFRS convergence and SEC workplan • SEC staff workpaper re “endorsement approach” • FASB projects including accounting for leases • PCAOB initiatives • Auditor reporting enhancements • Independence enhancements including possible mandatory rotation

3. SEC Commentsand Projects

4. Loss Contingencies • Staff observation – The requirements of Regulation S-K with respect to commitments and contingencies are different from the requirements of ASC 450. • January/February 2011 staff interaction/ comments to financial institutions resulted in expanded quantitative disclosures re loss contingencies in connection with credit losses / mortgage foreclosure exposures in Forms 10-K for fiscal year ended 12/31/2010 • The Staff expects disclosure of ranges of reasonably possible losses when known or disclosure that a range cannot be estimated • The standard is not the ability to estimate “with certainty”, “with precision” or“with confidence” • The Staff expects companies to go through the process of estimation; “have to try” • The Staff expect that disclosures regarding a specific contingency would be updated with the passage of time and they are skeptical if the contingency cannot be estimated years after the contingency arises • Review of settlements and comparison with previous disclosures and accruals

5. Loss Contingencies • Excerpt from JP Morgan’s 12/31/10 Form 10-K: • The Firm believes the estimate of the aggregate range of reasonably possible losses, in excess of reserves established, for its legal proceedings is from $0 to approximately $4.5 billion at December 31, 2010. This estimated aggregate range of reasonably possible losses is based upon currently available information for those proceedings in which the Firm is involved, taking into account the Firm’s best estimate of such losses for those cases for which such estimate can be made. For certain cases, the Firm does not believe that an estimate can currently be made. The Firm’s estimate involves significant judgment, given the varying stages of the proceedings (including the fact that many of them are currently in preliminary stages), the existence of multiple defendants (including the Firm) in many of such proceedings whose share of liability has yet to be determined, the numerous yet-unresolved issues in many of the proceedings (including issues regarding class certification and the scope of many of the claims), and the attendant uncertainty of the various potential outcomes of such proceedings. Accordingly, the Firm’s estimate will change from time to time, and actual losses may be more than the current estimate.

6. Non-GAAP Measures • Staff interpretive guidance in January 2010 intended to “rationalize” disparity between metrics used in earnings calls and in filings • Recent SEC staff experience is that some issuers may attempt to use “irrational” metrics • Securities laws prohibit any disclosure that may be misleading

7. Stranded Cash from Foreign Earnings • Companies may have foreign earnings for which income tax is not provided due to intention not to repatriate • Ability of company to avoid repatriation must be considered • Consider liquidity needs in various jurisdictions • Are cash requirements in foreign jurisdiction the likely use of stranded cash? If stranded cash is likely to be used in a manner that will avoid tax, disclosure of stranded cash may not be material • If earnings may become subject to income tax due to cash needs in other jurisdiction, disclosure of potential liquidity and tax consequences may be material information

8. Disclosures about “conflict minerals” • Not a financial reporting issue; disclosure related to humanitarian considerations in certain African countries (Democratic Republic of Congo) • Dodd-Frank requires SEC to make rules requiring disclosure about country of origin of certain minerals used in production • Rule proposed in December 2010; Dodd-Frank required final rules by April 2011 • Requires tracing source of 4 minerals including gold • Requires independent audit of issuer’s “Conflict Minerals Report” • Audit may be done by any independent qualified entity: e.g. supply chain consultant, auditor • If audit is done by independent auditor of financial statements, service is permitted as non-audit service • Public roundtable held October 18, 2011 • Final rule expected by year end 2011

9. Compensation clawback following restatements • Dodd-Frank requires rulemaking to provide for clawback of management compensation if financial statements are restated and based on restatement compensation target would not have been met • Division of Corporation Finance regards this as most difficult rulemaking required by Dodd-Frank • Must consider how to effect clawback if • money has already been spent by recipient • Recipient is no longer employed by company • SEC staff believes audit committees would need to be vigilant to force appropriate restatements recognizing management disincentive to bringing restatement information forward

10. SEC – IFRS Work Plan

11. May 26, 2011 – SEC staff paper discusses endorsement approach to IFRS Convergence of local standards with IFRS vs. endorsement of specific new standards issued by IASB Retain U.S. GAAP framework and incorporate aspects of IFRS over a 5 to 7 year transition period Consider endorsement of specific new IASB standards as issued End point is ability to state that U.S. issuers financial statements are in compliance with both U.S. GAAP and IFRS SEC Staff Paper Explores Endorsement Approach to IFRS

12. Convergence of US GAAP and IFRS • SEC is continuing to evaluate the IFRS Work Plan and plans to consider an approach to convergence later in 2011 • DCF has been reviewing large sample of IFRS financial statements to evaluate the consistency and application of IFRS standards in practice • Possible approaches to incorporation: • US GAAP could remain authoritative and joint projects could be completed • All new FASB projects could have a convergence objective • FASB could consider new standards issued by IASB and adopt as appropriate

13. FASB/IASB Exposure Draft – Leases

14. Proposed Accounting Models – Lesseeand Lessor “Right to use” leased property LesseeRight-of-Use Model LessorModels Performance Obligation Model Lease payments Recognize liability to make estimated future lease payments Recognize lease liability to permit use of leased property Recognize leased property + right to receive estimated future lease payments Recognize “right-of-use” asset Derecognition Approach Recognize right to receive estimated future lease payments + residual asset Derecognize leased property

15. PCAOB Activities

16. Possible Changes to Auditor’s Reporting Model Auditor Independence and Audit Firm Rotation Communications with the Audit Committee PCAOB Activities

17. Explores alternatives to auditor’s report that “could increase its transparency and relevance to financial statement users, while not compromising audit quality” Identifies four new auditor report alternatives: Auditor’s discussion & analysis (AD&A) to supplement existing auditor’s report Required and expanded use of “emphasis paragraphs” Auditor assurance on other information outside the financial statements (e.g., MD&A, non-GAAP information, earnings releases) Clarification of the auditor’s standard report Timing Proposed standard expected in early 2012 PCAOB Roundtable held September 15 Comment period ended September 30 – 147 comment letters received PCAOB Concept Release – Possible Changes to Auditor’s Reporting Model

18. Explores ways to enhance auditor independence, objectivity, and professional skepticism Key elements: Mandatory audit firm rotation Alternatives to mandatory rotation Enhanced audit committee oversight Mandatory tendering of audit after certain period Improved PCAOB inspections Joint audits Timing: December 14, 2011 deadline for submitting comments to PCAOB – 28 comment letters received as of 10/11/11 March 2012: PCAOB Public Roundtable PCAOB Concept Release – Auditor Independence and Audit Firm Rotation

19. Presenter’s contact detailsTerry IannaconiPartner in Charge, Departmentof Professional Practice – Knowledge Sharing212-909-5426tiannaconi@kpmg.com