BDO SEIDMAN, LLP

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BDO SEIDMAN, LLPSMay 2006FINANCIAL REPORTING
UPDATE
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Speakers and Replay Information

• Speakers
• Jeff Lenz
• Jay Howell
• Ben Neuhausen
• Replay Access
• www.bdo.com/about/publications/assurance

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Agenda

• SEC Update
• PCAOB Update
• New Independence Rules
• Internal Control Reporting Update
• GAAP Update
• Questions and Answers

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SEC UPDATEMay 2006
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SEC Update Agenda

• Proposed Rules Executive Compensation
  Disclosures
• Other SEC Activities
• SEC Practice Issues

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Proposed Rules Executive Compensation Disclosures

• Release 33-8655 (http//www.sec.gov/rules/proposed
  /33-8655.pdf)
• Goal is a clearer and more complete picture of
  comp.
• Provide compensation discussion and analysis
• Report all compensation
• Provide a total compensation figure
• Value stock based awards at grant date fair value
• More complete post-employment compensation
  disclosure
• More complete director compensation disclosure
• Use plain English
• SEC hopes to have new rules in place for spring
  2007 proxy season

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Other SEC Activities

• Chairman Cox Congressional Testimony
• Improving Financial Disclosure for Individual
  Investors (http//www.sec.gov/news/testimony/ts04
  2506cc.htm)
• Making disclosure understandable for ordinary
  investors
• Improving disclosure via interactive data
• Reducing the complexity of accounting rules and
  regulations
• Financial education for retirees and elderly
  investors
• New Division of Corporation Finance Director
  John White (http//www.sec.gov/news/press/2006-18.
  htm)

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SEC Practice Issues

• Reporting cash flows from discontinued operations
• AICPA Center for Public Company Audit Firms
  E-Alert 98
• Updates E-Alert 90 for companies with fiscal
  year-ends
• http//www.aicpa.org/cpcaf/download/news/CPCAFAler
  t98_041906.pdf
• Interaction between retrospective application
  under Statement 154 and significance calculations
  under SEC rules (3-05, 3-09, 3-14)
• Form S-8 Updating considerations when filing
  new Form S-8s

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PCAOB Update May 2006
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New Independence Rules

• SEC Release 34-53677
• http//www.sec.gov/rules/pcaob/2006/34-53677.pdf
• PCAOB Release 2005-14
• http//www.pcaobus.org/Rules/Docket_017/2005-07-26
  _Release_2005-014.pdf
• Rule 3521 Contingent fees
• Rule 3522 Tax transactions
• Rule 3523 Tax services for persons in financial
  reporting oversight roles
• Rule 3524 Audit committee pre-approval of
  certain tax services

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Section 404 Update Topics

• Advisory Committee on Smaller Public Companies
• Roundtable on Implementation of Internal Control
  Reporting Provisions
• Auditing Standard 4 Reporting on Whether a
  Previously Reported Material Weakness Continues
  to Exist

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Advisory Committee on Smaller Public Companies

• Draft report issued February 28, 2006
• Final report submitted to SEC on April 20, 2006
• Recommendations issued in the following areas
• Internal Controls
• Accounting Standards
• Corporate Governance and Disclosure
• Capital Formation

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Advisory Committee Definitions
Market Capitalization Cutoff Percentage of Total U.S. Equity Market Capitalization Percentage of All U.S. Public Companies
Microcap Companies lt128.2 million 1 52.6
Smallcap Companies 128.2 to 787.1 million 5 25.9
Smaller Public Companies lt787.1 million 6 78.5
Larger Public Companies gt787.1 million 94 21.5
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Advisory Committee Recommendations Section 404

• 1. Exempt Microcaps from Section 404
• Revenues no greater than 125M
• 2. Exempt smaller public companies from the audit
  requirements of Section 404
• Revenues no greater than 250M
• 3. Alternatively to 2, develop a right-sized
  audit approach focused on the design of internal
  controls

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Advisory Committee RecommendationsAccounting
Standards

• Reduce the number of years of financial
  statements required in SEC filings from 3 to 2
• Implement a de minimis provision for auditor
  independence rules
• Permit microcap companies to apply the same
  effective dates as the FASB provides for private
  companies
• Consider additional guidance with respect to
  materiality related to previously issued
  financial statements
• Develop a safe harbor protocol for accounting

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Advisory Committee RecommendationsCorporate
Governance Disclosure

• As a condition to the relief from 404 reporting
  recommended by the 404 subcommittee, require
• Additional disclosure regarding internal controls
  and
• Additional audit committee corporate governance
  standards
• Increase the thresholds requiring registration
  under Section 12(g) and 15(d)
• Allow smaller public companies to use Form S-3
  and eliminate timely filing requirements

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Advisory Committee RecommendationsCapital
Formation

• Adopt a new private offering exemption that does
  not prohibit general solicitation and advertising
  for transactions with certain purchasers
• Make it easier for microcap companies to go
  private

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Roundtable on Implementation of Internal Control
Reporting Provisions

• To be conducted jointly on May 10 by the SEC and
  PCAOB
• Broad mix of distinguished participants
• The five panel topics include
• Introduction
• Managements evaluation and assessment
• The audit of internal control over financial
  reporting
• The effect on the market
• Next steps
• A major focus of the day will be audit efficiency

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Auditing Standard No. 4 - Reporting on Whether a
Previously Reported Material Weakness Continues
to Exist

• Approved by the SEC in February 2006
• PCAOB directed to issue a clear concise outline
  of audit steps required.
• Registrants have not yet expressed significant
  interest in obtaining reports under AS 4

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Links

• Advisory committees final recommendations
  http//www.sec.gov/info/smallbus/acspc/acspc-final
  report.pdf
• BDOs recent comment letter on the above
  http//www.sec.gov/rules/other/265-23/bdoseidman92
  39.pdf
• Roundtable preparatory materials
• http//www.sec.gov/news/press/2006-22.htm
• http//www.pcaobus.org/News_and_Events/News/2006/
  05-01b.aspx
• BDOs recent public statement for the roundtable
• http//www.sec.gov/news/press/4-511.shtml

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GAAP Update May 2006
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Agenda

• FASB Statements
• FASB Exposure Drafts
• FASB Staff Positions
• Proposed FASB Staff Positions
• EITF Tentative Consensuses
• EITF Open Issues

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FASB Statement No. 155

• Fair value option for hybrid financial
  instruments
• Hybrid financial instruments have embedded
  derivatives. FAS 133 requires an embedded
  derivative to be split out from the host and
  accounted for in accordance with FAS 133, unless
  impracticable. If impracticable, then carry
  entire hybrid financial instrument at fair value
  with gains and losses in earnings.
• FAS 155 permits any hybrid financial instrument
  to be carried at fair value with gains and losses
  in earnings. Optional by instrument. Choice is
  irrevocable.
• Reason for changeoften simpler to estimate the
  fair value of the entire instrument than to split
  and estimate the fair value of the embedded
  derivative
• Applies to any hybrid, either held as investment
  or issued (for example, nonconventional
  convertible debt)
• Effective for fiscal years beginning after 9/15/06

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FASB Statement No. 156

• Servicing rights on financial assets
• All servicing rights to be measured initially at
  estimated fair value
• Thereafter, irrevocable option to carry at
  amortized cost or at fair value
• Reason for changedifficult to satisfy conditions
  for hedge accounting in FAS 133. Easier to carry
  both servicing rights and hedging instruments at
  fair value.
• Effective for fiscal years beginning after 9/15/06

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FASB Exposure Drafts

• Uncertain tax positions
• Pensions and postretirement benefits
• Earnings per share
• Amendments to sale accounting guidance in FAS 140
• Fair value option for all financial instruments
• Fair value measurements

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FASB Exposure Drafts

• Business combinations
• Consolidation procedures
• Hierarchy of GAAP
• Invitation to Commentassets and liabilities with
  uncertainties

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FASB Staff Positions--Final

• FAS 123R-3 Simplified method of computing APIC
  Pool
• FAS 123R-4 Classification of employee awards
  with contingent cash settlement
• FAS 115-1 and 124-1 Other-than-temporary
  impairment of securities
• FIN 46R-6 What variability should be considered
  in defining variable interests

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FASB Staff Positions--Final

• FAS 140-2 Derivatives in securitization
  transactions
• FIN 45-3 Minimum revenue guarantees
• FTB 85-4-1 Investments in life insurance
  contracts (viatical settlements)
• SOP 94-6-1 Disclosure of nontraditional loans
• AAG INV-1 and SOP 94-4-1 Benefit responsive
  investment contracts

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FASB Staff Positions--Proposed

• FAS 142-d Renewable intangible assets
• FAS 133-a Instant gains (losses) on derivatives
• FAS 13-a Tax contingencies and leverage leases

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EITF Update
SELECTED EITF ISSUES
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EITF Update

• New Procedures
• All consensuses considered tentative
• Cleared by FASB
• Exposed for public comment
• EITF reconsiders based on comments
• FASB ratifies

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EITF Update

• EITF agenda has been shorter in recent months
• Some meetings cancelled
• More issues handled as FASB Staff Positions

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Tentative Consensus

• 05-1, Convertible debt that becomes convertible
  upon issuers call
• Latest of several convertible debt issues
  discussed by EITF in last year
• Need to assess substance of conversion rightat
  issuance is it considered reasonably possible
  that the conversion right will become exercisable
  absent the issuers call
• If so, then conversion upon call is accounted for
  as a conversion with no gain or loss
• If not, then conversion upon call is accounted
  for as an extinguishment with gain or loss

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Tentative Consensus

• 06-2, Accounting for Sabbaticals
• Sabbatical for which an employee becomes eligible
  after a period of years are considered to
  accumulate as that term is used in FAS 43 and 112
• As a result, accrue estimated cost over service
  period

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Tentative Consensus

• 06-3, Accounting for Sales, Use, Value Added, or
  Excise Taxes
• Whether taxes should be presented gross as
  revenues and costs, or net
• Presentation gross or net is a policy decision
• If gross presentation, disclose amount included
  in revenues and costs

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Open Issues

• 05-4, Liquidated damages in equity derivative
  contracts
• 06-1, Consideration paid by manufacturer to
  retailer that is passed through to customer
• 06-4, Split-dollar life insurance
• 06-D, Measurement of cash surrender value