July 8, 2008, Meeting Highlights

 John Wolfson, Chair

 Chris Holmes, Vice Chair

 Doug Bennett

 Leonard Brams

 Jack Ciesielski

 Michael Cinalli

 Brad Davidson

 Melanie Dolan

 Karin French

 Leonard Gatti

 Bob Laux

 Jeff Lenz

 Steve Meisel

 Scott Pohlman

 Amy Ripepi

 Tom Weirich

 Kurtis Wolff

 Office of the Chief Accountant

 Jim Kroeker, Deputy Chief Accountant

 Division of Corporation Finance

 Wayne Carnall, Chief Accountant

 Craig Olinger, Deputy Chief Accountant

 Louise Dorsey, Associate Chief Accountant

 Michael Fay, Associate Chief Accountant

 Stephanie Hunsaker, Associate Chief Accountant

 Todd Hardiman, Associate Chief Accountant

 Steven Jacobs, Associate Chief Accountant

 Joel Levine, Associate Chief Accountant

 Cheryl Linthicum, Academic Fellow

 Leslie Overton, Associate Chief Accountant

 Michael Stehlik, Staff Accountant

 Division of Enforcement

 Susan Markel, Chief Accountant

 Annette Schumacher Barr

 Nedra Downing, D&T

 John May, PwC

 With great sadness, Mr. Kroeker announced the passing of Brett Williams who died at the age of 33 from heart failure. Brett was a Professional Accounting Fellow (PAF) in OCA assisting with CIFiR activities.

 Mr. Carnall introduced Michael Fay as a new Associate Chief Accountant in the Division’s Chief Accountant’s Office. Michael will serve as liaison with the Telecommunications Group within the Division. He has been with the Commission for over 10 years and has been a branch chief since 2004. In addition to being a CPA, he is a member of the bar.

 Susan Markel noted that two Enforcement staff members have left the Commission and the staff is currently reviewing applicants to fill the vacancies. She added that Robert Bayless, long-time SEC staff member and former Chief Accountant of the Division of Corporation Finance, will be retiring in August. She noted that Mr. Bayless served the Commission and the public with hard work and dedication for many years.

 Wayne Carnall noted that the Commission will host a roundtable on July 9, 2008, to facilitate an open discussion of the benefits and potential challenges associated with existing fair value accounting and auditing standards. The archived video webcast of the roundtable can be found at http://www.connectlive.com/events/secroundtable070908/

 First Quarter Filings — Staff Observations Regarding Valuations and Credit Environment.

 The staff summarized the following observations regarding fair value disclosures in first quarter filings:

• In March, the Division of Corporation Finance sent a “Dear CFO” letter to certain public companies identifying a number of disclosure issues they may wish to consider in preparing Management's Discussion and Analysis (MD&A) for their upcoming quarterly reports on Form 10-Q. The staff reviewed 29 10-Qs of the issuers who received the letter directly. Of the 29 companies reviewed, all provided some information, but none of the 29 companies provided all the disclosures the staff suggested for consideration. In particular, the staff noted that none of the companies disclosed a range of estimates of a fair value or disclosure about any expected recovery in fair value during the expected holding period. Wayne Carnall observed that, although not required by U.S. GAAP, some of the suggested disclosures are required under IFRS 7.
• Companies generally did a good job of disclosing the effect of changes in their own credit risk on the fair value of structured notes, however, the staff expressed concern regarding the level of disclosure of the effect of changes in a company's own credit risk on the fair value of derivative liabilities.
• In their reviews of first quarter filings, the staff asked registrants for information on the valuation techniques and assumptions used in arriving at the fair value (including the impact of any related discount adjustments for the lack of liquidity) of auction rate securities.
• The staff indicated that they have noted situations in which registrants have disclosed the fact that fair values have declined but failed to quantify the decline or provide the assumptions that were used in measuring the decline. The staff encourages registrants to consider whether additional information would be useful to investors.
• In situations where registrants have determined fair values based on broker quotes (including non-binding broker quotes), the staff asked registrants for information on how they validated such quotes (e.g., how have they evaluated the models used by the brokers) and the quality of the data underlying non-binding quotes.
• Jim Kroeker observed that if the application of fair value accounting standards results in counter-intuitive results (e.g., recognizing income from writing down an issuer’s liabilities due to deterioration in its credit quality), those results should be explained so investors are aware and understand the reasons.
• Wayne Carnall emphasized that companies have “the freedom and the responsibility to provide disclosure in MD&A to facilitate the transparency and understandability of the financial statements.”
• Susan Markel stated that Enforcement would be “interested” in any lack of adequate disclosure in this area

 Mr. Carnall provided an update of the staff’s efforts in updating the Staff Training Manual. The staff is committed to issuing a successor to the current document (under a new title) by the end of September. The document will be a comprehensive source of staff interpretations on financial reporting matters. The document will also include many staff positions contained in discussion documents addressed in joint meetings of the SEC Regulations Committee and the staff. The goal of the staff is to make future updates to this document on a real-time basis.

 [NOTE: Subsequent to the meeting, the Division of Corporation Finance Financial Reporting Manual was posted to the SEC website at http://sec.gov/divisions/corpfin/cffinancialreportingmanual.shtml.]

 Mr. Carnall noted that the SEC staff was invited to participate in the PCAOB’s Forum on Auditing in the Small Business Environment. These presentations are geared toward registered accounting firms and public companies in the small business community. The SEC staff presentations, which focus on “common problems” facing the auditor of smaller companies, have been very well received. Wayne noted that the SEC staff’s involvement in the Forum provides them with an invaluable opportunity to communicate with smaller auditing firms, which is very beneficial to the staff. After the Forum is complete, the staff plans to post the slide deck (along with detailed speaker notes) to the SEC website.

 [NOTE: Subsequent to the meeting, the slides and detailed speaker notes from the staff presentations were posted to the SEC website at http://www.sec.gov/news/speech/2008/spch111708wc-slides.pdf.]

 The staff announced that the Division of Corporation Finance has established an electronic mailbox for the submission of pre-filing letters and other correspondence intended for the Division’s Chief Accounting Office. Instructions for using the electronic mailbox will be posted to the SEC website (under the “Contact Us” section of the SEC homepage and “Information about the Division” on the Corp Fin homepage) in the near future. The address of the mailbox: DCAOLetters@sec.gov

 The staff discussed the question of whether a reference to an expert (e.g., a valuation professional) in an SEC filing requires the expert to be specifically named and a consent be obtained. Mr. Carnall noted that this is a legal (versus accounting) issue and as such it will be addressed by the Office of Chief Counsel who expects to publish interpretive guidance later this year that will be posted to the SEC website.

 [NOTE: Subsequent to the meeting, this question was addressed by the staff in an update to the Division’s Compliance and Disclosure Interpretations (“C&DIs”) — see Questions 141.01 and 141.02.]

 Mr. Kroeker stated that the staff is working on a codification of the Commission’s independence requirements.

 On June 25 the Commission issued proposed rulemaking entitled Modernization of the Oil and Gas Reporting Requirements. Mr. Carnall encouraged those interested to respond to the request for comments, and the staff is looking forward to reviewing the responses. Comments are due September 8.

 Mr. Carnall noted that there are a number of pre-clearance issues that are routinely submitted to the Division of Corporation Finance. The staff hopes to issue guidance on these routine issues that will provide certain criteria that, if met, will allow registrants to proceed without submitting pre-clearance requests.

 The Committee asked the staff to clarify whether financial statements incorporated by reference in a new registration statement on Form S-8 need to be updated to reflect a material discontinued operation, change in reportable segments or accounting change that requires retrospective application. The staff is continuing to discuss this issue internally.

 [NOTE: Subsequent to the meeting, the staff provided the following position with respect to this issue:

 The staff understands that there has been confusion regarding the need to provide restated financial statements in a Form S-8 for certain events occurring after the filing of a Form 10-K that result in differences between the financial presentation in the Form 10-K and subsequent Form 10-Qs that are incorporated by reference into the S-8. Item 11 of Form S-3 has two provisions — paragraph “a” that requires the registrant to describe all material changes in the registrant’s affairs which have occurred since the end of the latest annual report. Paragraph “b” requires the company to file restated financial statements for certain events — such as when there is a change in accounting principle that requires material retroactive restatement. The staff has analogized the specifics points in Item 11(b) to other fact patterns that require retroactive application — such as disc ops, changes in segment presentations, etc. Form S-8 has the same concepts as Form S-3 regarding the need to describe material changes. However, it does not contain a similar requirement included in paragraph b of Item 11 Form S-3 regarding restated financial statements. It is the responsibility of the Company and their counsel to determine if there has been a material change that is required to be disclosed in a Form S-8. Likewise, it is the responsibility of the auditor to determine if they will issue a consent to the use of their report if there has been a change in the financial statements that is reflected in the 10-Q but the annual accounts have not been retroactively restated.]

 Mr. Kroeker acknowledged that there are a number of areas in which published accounting and disclosure positions of the SEC or the staff might conflict with Statement 141R and Statement 160. The SEC staff is in the process of updating its codification of SEC Staff Accounting Bulletins by the adoption date of the new standards. Additionally, the staff indicated that they are working on a recommendation to the Commission for technical amendments to Regulations S-X and S-K. The Committee offered to share input regarding items that should be included in this update.

 [OPEN ITEM to add URLs to documents when documents are finalized and posted.]

 Background: Rule 4-08(e)(3) of Regulation S-X requires certain disclosures about restricted net assets of subsidiaries. These disclosures are required if “the restricted net assets of consolidated and unconsolidated subsidiaries and the parent’s equity in the undistributed earnings of 50 percent or less owned persons accounted for by the equity method together exceed 25 percent of consolidated net assets as of the end of the most recently completed fiscal year.” The rule specifically states that “restricted net assets of subsidiaries shall mean that amount of the registrant’s proportionate share of net assets (after intercompany eliminations) reflected in the balance sheets of its consolidated and unconsolidated subsidiaries as of the end of the most recent fiscal year which may not be transferred to the parent company” and “Redeemable preferred stocks (Rule 5-02.28) and minority interests shall be deducted in computing net assets for purposes of this test.” Rule 5-04(c) follows a similar approach to determine whether Schedule I (condensed parent company financial statements) is required.

 Statement 160 amended ARB 51 by adding paragraph 26, which requires that a “noncontrolling interest shall be reported in the consolidated statement of financial position within equity.” However, noncontrolling interest is reported “separately from the parent’s equity.” In addition, under paragraph 30, “Net income or loss and comprehensive income or loss, as described in paragraph 10 of FASB Statement No. 130, Reporting Comprehensive Income, shall be attributed to the parent and the noncontrolling interest.” Statement 160 also amended paragraph 9 of Statement 128 to exclude income from noncontrolling interests from earnings per share: “For purposes of computing EPS in consolidated financial statements (both basic and diluted), if one or more less-than-wholly-owned subsidiaries are included in the consolidated group, income from continuing operations and net income shall exclude the income attributable to the noncontrolling interest in subsidiaries.”

 Questions: After Statement 160 is implemented, how should registrants compute restricted net assets percentages? If the percentages should be computed differently, should Regulation S-X be amended?

 Discussion: Consider the example of a registrant with an 80% owned subsidiary. The subsidiary has equity of $100. All of its assets are restricted. Prior to adopting Statement 160, the registrant reported equity of $330 and minority interest of $20. Under Statement 160, the registrant would report equity of $350, including the noncontrolling interest of $20.

 View A: The registrant should compute the restricted net assets percentage in the same manner as before Statement 160 was implemented. The percentage is 24% (80 divided by 330). This approach continues to be required by Regulation S-X. Further, although the noncontrolling interest is measured and presented differently under Statement 160, it continues to be segregated within equity, and the calculation of earnings-per-share amounts in consolidated financial statements continues to be based on amounts attributable to the parent.

 View B: The numerator used to compute the restricted net assets percentage is defined by Regulation S-X and is not affected by the issuance of Statement 160. However, the registrant should compute the denominator using the equity classification called for by Statement 160. The percentage is 23% (80 divided by 350).

 View C: Under the single economic entity approach, noncontrolling interests are not relevant to the calculation. Therefore, neither the numerator nor the denominator used to compute the restricted net assets percentage should consider them. The percentage is 29% (100 divided by 350).

 SEC Staff Response: The staff indicated that it supports View A.

 View A: Pro forma financia information should prsent the expected impact of a transaction or event on a registrant’s financial statements. Pro forma financial information included in proxy or registration statement filed in 2008 for a business combination to be completed after the beginning of the first annual reporting period beginning on or after December 152008 (i.e., January 1, 2009 for a calendar year-end company) should reflect application of Statement 141R because that is the standard that will be used to account for the acquisition in the registrant’s financial statements. To ensure investors understanthe pro formas have been prepared, the notes to the pro forma financial statements should include disclosures of the accounting model used. This presentation is most useful to investors.

 View B: Pro forma financial information included in a proxy or registration statement filed in 2008 for a business combination to be completed after the beginning of the first annual reporting period beginning on or after December 15, 2008 should reflect the standaapplicable to business combinations (Statement 141) at the time the proformas are fileand should not reflect application of Statement 141R because that standard is not yet in effect and early adoption is not permitted. SAB 74 disclosure supplemental to the Article 11 pro forma information is the appropriate manner to disclose the impact of the adoption of Statement 141R on the financial statements.

 Question 2: After the adoption of Statement 141R in 2009, what pro forma presentation would be appropriate for an acquisition?

 Response: The following updates the guidance related to the transition for Statements 141 and 142 that was provided by the staff at the October 2001 meeting —

 Combinations completed before the first annaul period beginning on or after December 15, 2008 — Registrants should not retroactively apply the new accounting standards to combinations completed before January 1, 2009 (for calendar year registrants). Therefore, pro forma financial statements reflecting such combinations should prtheir effects in accordance with FAS 141 and 142.

 Combinations completed after the beginning of the first annual reporting period beginning on or after December 15, 2008 – The historical financial statements for the period in which the business combination is consummated will reflect these combinations in accordance with Statements 141R and 142. Because paragraph 68 of Statement 141R includes a requirement for pro forma presentation for the comparable prior annual reporting period, the pro forma financial statements for all periods presented should reflect the accounting that will be applied. Therefore, the pro forma financial statements should also reflect these combinations in accordance with Statements 141R and 142.

 Example 1: A business combination is consummated on June 1, 2009 and an automatic registration statement is filed on June 15, 2009. Under Article 11, the most recent fiscal year’s financial statements for a calendar year registrant would be the year ended December 31, 2008 and the most recent interim period would be the quarter ended March 31, 2009. The pro forma income statements for the year ended December 31, 2008 and the quarters ended March 31, 2008 and 2009 will reflect application of Statement 141R, which should be disclosed.

 Example 2: A business combination is consummated on February 1, 2009 and an automatic registration statement is filed February 10, 2009 Under Article 11, the most recent fiscal year’s financial statements for a calendar year registrant would be the year ended December 31, 2007. The pro forma income statement for the year ended December 31, 2007 will reflect application of Statement 141R, which should be disclosed.

 SEC Staff Response: The staff supports View A for Question 1 and does not object to the response to Question 2.