June 24, 2010, Meeting Highlights

In addition, these highlights are not authoritative positions or interpretations issued by the SEC or its staff. The highlights were not transcribed by the SEC and have not been considered or acted upon by the SEC or its staff. Accordingly, these highlights do not constitute an official statement of the views of the Commission or of the staff of the Commission.

As available on this website, Highlights of Joint Meetings of the SEC Regulations Committee and its International Practices Task Force (IPTF) and the SEC staff are not updated for the subsequent issuance of technical pronouncements or positions taken by the SEC staff, nor are they deleted when they are superseded by the issuance of subsequent highlights or authoritative accounting or auditing literature. As a result, the information, commentary or guidance contained herein may not be current or accurate and the CAQ is under no obligation to update such information. Readers are therefore urged to refer to current authoritative or source material.

Mr. Carnall commented that material implications of both the recent environmental issues in the Gulf of Mexico and the healthcare legislation should be discussed in MD&A. For example, if a gulf coast hotel chain is reasonably likely to have materially reduced revenue because it is reasonably likely there will be decreased tourism, or if an energy company is reasonably likely to experience material changes in results of operations because it is reasonably likely there will be an offshore drilling moratorium, those entities should evaluate the need to disclose that information in their MD&A.

Under SEC rules, non-accelerated filers are required to comply with the auditor attestation requirement of Section 404(b) of the Sarbanes-Oxley Act of 2002 with respect to reports on internal control over financial reporting in annual reports for fiscal years ending on or after 15 June 2010. The financial regulatory reform bill in House-Senate Conference includes a permanent exemption from Section 404(b) for non-accelerated filers. If the bill becomes law with the permanent exemption, Mr. Carnall expects the SEC would act quickly to modify existing SEC rules to make them consistent with the law.

In the absence of a change in rules, Mr. Carnall confirmed that a voluntary filer would be required to have an audit of its internal control over financial reporting after the current SEC deferral ends.

NOTE: The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Obama on July 21, 2010.

The Committee noted that the detail XBRL tagging required in the second year of XBRL compliance is expected to be especially time consuming with respect to the guarantor condensed consolidating financial information footnote required by S-X Rule 3-10. The Committee questioned whether the SEC staff had considered allowing block tagging that footnote. Mark Green commented that the SEC’s final rule, Interactive Data to Improve Financial Reporting (Release Nos. 33-9002, 34-59324) requires detail tagging of footnotes in the second year of a phase-in group’s XBRL compliance. Mr. Green also stated that the condensed consolidating footnote is permitted by S-X Rule 3-10 as an exception to full financial statements of guarantors. Under that relief, a registrant has the benefit of only detail tagging the guarantor footnote as opposed to full guarantor financial statements. Joel Levine stated that the majority of the XBRL tags of elements in the guarantor footnote are consistent with the XBRL tags used in the primary financial statements.

Regarding XBRL transition, Mr. Green noted that a transcript of the XBRL Public Education Seminar, which discussed transition, is now available on the SEC website (see http://www.sec.gov./news/otherwebcasts/2010/xbrlseminar032310-transcript.pdf). Mr. Green commented there are no new XBRL transition interpretations to communicate.

Mr. Carnall noted that he expects the FRM update as of March 31, 2010 to be issued soon. The update will include revisions to Section 2805 on general partner financial statements and the incorporation of selected topics included in Highlights of previous Joint Meetings of the Regs Committee and the SEC staff (Highlights). Additional selected topics from previous Highlights will be included in future FRM updates. Jill Davis reported on the project to compile 25 years of Highlights to allow the Division staff to incorporate current and relevant information into the FRM and Compliance and Disclosure Interpretations. [Note: On July 7, 2010 an updated version of the FRM as of March 31, 2010 was posted to the SEC website.]

Mr. Carnall addressed the Division’s Compliance and Disclosure Interpretations (CDIs) on the use of non-GAAP financial measures. He reiterated that the SEC staff generally would not require an SEC filing to include a non-GAAP financial measure. However, the company does have an obligation to ensure the information in the filing is not misleading. For example, the disclosure of non- 6 GAAP information outside of the filing should not contradict the information included in the filing.

Mr. Kronforst noted that registrants have received SEC staff comments about inconsistencies within their SEC filings or inconsistencies between the SEC filing and information outside of the SEC filing. Such comments are not limited to non-GAAP financial measures.

Mr. Carnall noted the Division staff has not performed an analysis to determine whether more non-GAAP financial measures are being included in SEC filings subsequent to the CDIs release, but acknowledged many registrants with December year-ends may not have had the opportunity to fully reassess their disclosures with respect to non-GAAP financial measures based upon the January 2010 release date of the CDIs.

Regulation S-K CDI 119.24 notes that an equity incentive plan award with a service period preceding the grant date, resulting from the compensation committee’s ability to exercise discretion to reduce the award, should be reported in the Summary Compensation Table (SCT) and Grants of Plan-Based Awards Table (GPAT) as compensation in the year in which the service inception date begins. Notwithstanding the accounting treatment for the award, the SEC staff believes reporting the award in this manner better reflects the compensation committee’s decision to establish the award arrangement. The amount reported in both tables should be the fair value of the award at the service inception date, based upon the then-probable outcome of the performance conditions. The award should also be included in total compensation for the purposes of determining whether the executive officer is a named officer.

Mr. Carnall commented that the staff understands that situations in which the service inception date precedes the grant date are not common and when it does exist is frequently limited to the top executives. In these situations, preparers and auditors should evaluate the terms to determine the appropriate accounting.

Steven Jacobs noted the treatment specified by the CDI could apply to other situations based upon specific facts and circumstances. He added that the basis for the treatment specified by the CDI was to report compensation in the period of the compensation committee’s decision to authorize and establish the award arrangement. However, the CDI would not apply to an equity award grant that requires shareholder or some additional level of approval, which should be reported in the SCT and the GPAT in the period that approval has been obtained.

Mr. Carnall noted that the pending financial regulatory reform legislation, and the resulting requirements for extensive SEC rulemaking, may delay the Division’s planned core disclosure project.

The table below sets forth the source of equity method investee disclosure guidance, the number of significance tests, the disclosure threshold and the determination of significance for interim and annual reporting by smaller reporting companies and other reporting companies.

In determining whether summarized financial information is required in either annual or interim financial statements, Mr. Carnall commented that a smaller reporting company may elect to apply the significance tests applicable to smaller reporting companies or other reporting entities and select the least onerous significance calculation for each significance test.

Mr. Carnall indicated that the chart in FRM 4110.5 would be revised to clarify the requirements of when the auditor of an equity affiliate needs to be registered with the PCAOB. Specifically, if the "substantial role" test is not met, the auditor of the equity affiliate does not need to be registered.

Mr. Carnall also noted that a Form 8-K filing by a special purpose acquisition company (SPAC) to report the acquisition of a predecessor entity (or by a public company to report an acquisition accounted for as a reverse merger) is deemed equivalent to an IPO registration statement that requires both a PCAOB registered firm and PCAOB standards with respect to the acquired company.

S-X Rule 11-02(b)(6) requires that pro forma adjustments related to a pro forma condensed income statement be computed assuming the transaction was consummated at the beginning of the fiscal year presented and include adjustments that give effect to events that are (i) directly attributable to the transaction, (ii) expected to have a continuing impact on the company, and (iii) factually supportable.

ASC 805 (formerly SFAS No. 141(R)) requires that contingent consideration issued in a business combination be recorded at its fair value on the acquisition date, and classified as either an asset, as a liability or as equity. Subsequent changes in fair value for asset- and liability-classified contingent consideration are usually recognized in earnings until the arrangement is settled.

The Committee questioned how a pro forma income statement that is being updated in connection with a new or amended registration statement or proxy/information statement should reflect known changes in the fair value of contingent consideration in post-acquisition periods. Mr. Carnall noted that the SEC staff does not believe such statements should reflect any pro forma adjustments to give effect to changes in the fair value of contingent consideration in periods different than those in which such changes were recognized in the acquirer’s post-acquisition income statements. The SEC staff expects the pro forma financial information to include transparent disclosure about the contingent consideration arrangement and known changes in its fair value.

When a public company has completed a business combination, the accounting literature (ASC 805) requires disclosure of pro forma information in the notes to the financial statements. If comparable financial statements are presented, the 10 GAAP pro forma information reflects two alternative (and mutually exclusive) scenarios: prior year earnings as if the transaction occurred at the beginning of the prior year and current year earnings as if the transaction occurred at the beginning of the current year.

Under Regulation S-X Rule 11-02(c)(2)(i), when there has been a significant business combination, the registrant should present a pro forma condensed statement of income for the most recent fiscal year and for the period from the most recent fiscal year end to the most recent interim date for which a balance sheet is required. In effect, the Article 11 pro forma reflects just one scenario: prior year and year to date earnings as if the transaction occurred at the beginning of the prior year.

Item 303 of Regulation S-K (MD&A) requires the registrant to analyze the three-year period covered by the financial statements using year-to-year comparisons based on the financial statements included in the filing. The SEC staff has acknowledged that “there may be situations where comparisons other than those of the historical financial information may provide valuable supplemental and in certain cases, more relevant analyses, to fully discuss trends and changes.” When a registrant determines that a supplemental discussion in MD&A based on pro forma information is appropriate and will enhance the discussion, FRM 9220.7 states that the pro forma financial information generally should be presented in a format consistent with S-X Article 11 but acknowledges that other formats may be appropriate depending on the facts and circumstances.

The Committee questioned whether a registrant may utilize GAAP pro forma information as the basis for a supplemental discussion in MD&A. Mr. Carnall stated that if Article 11 pro formas are included in a filing, it makes the most sense to use the Article 11 pro formas as the basis for any MD&A supplemental disclosures. If the filing includes both Article 11 and GAAP pro formas, the filing should explain the differences in the two pro forma presentations. If the GAAP pro formas are used as a basis for any MD&A supplemental disclosures, MD&A should include clear disclosure of the basis of the pro forma comparison. The SEC staff noted that in some cases, the registrant may choose to limit its supplemental discussion to the effect of the business combination on revenues; in these circumstances, the adjustments to arrive at the pro forma amount of revenue may be limited and easy to explain. In other cases the registrant may believe it is appropriate to also discuss the effect of the business combination on earnings. In these circumstances, the registrant may need to provide more detail regarding the nature and amount of the adjustments so that investors understand how the pro forma earnings amount was computed.