NARUC SEC Update – March 2008

1. NARUCSEC Update – March 2008

2. Disclaimer • The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. Therefore, the views expressed today are my own, and do not necessarily reflect the views of the Commission or the other members of the staff of the Commission.

3. Office of the Chief Accountant • Chief Accountant • Principal advisor to the Commission on accounting and auditing matters • Three main groups in OCA • Accounting • Professional Practice (Audit) • International Affairs

4. Improving Financial Reporting –Standard-Setters • Replace Complex Standards • Leasing • Derecognition • Make Sure Standards are Principles-based • Recent standards have moved in this direction • Replace Standards that Produce Information That is not Transparent • Pensions • Financial instruments

5. Objectives-Oriented Standards What We’re Striving For • Standards grounded in conceptual framework with few alternatives or exceptions • Guidance still to be provided, but principles/ objectives govern • More professional judgment • Expedite standard setting process • Facilitate international convergence • Emphasis on substance over form • Fewer structuring possibilities

6. Complexity in Accounting • What does complexity mean? • Difficult to figure out what you’re supposed to do (preparer) or what’s been done (investor) • Not just things that are difficult to do; for example: • Application of fair value measurement may be difficult but not necessarily complex to present or understand • Application of standards with choices and bright lines are often complex to understand, present and compare

7. Complexity in Accounting Potential Causes/Drivers • Desire for certainty in interpretations • Example: Stock option grant date • Exceptions to Principle • Example: QSPEs • Potential Dangers/Problems • Confusing for investors • Example: Methods of accounting for financial assets • Restatements due to improper application • Example: Short-cut method

8. Improving Financial Reporting –Regulators • Accept reasonable differences in judgment • Reasonable people can have different views • Disclosure can explain treatment used • Stamp out accounting-motivated structures • These often are not consistent with the principles of a standard • Impose requirements only when needed • Market-led solutions are generally preferable • In some cases, regulatory solutions are needed to create a level playing field

9. Improving Financial Reporting –Preparers • Use professional judgment • Unbiased, neutral judgments • Consider all available information • Don’t seek the “most advantageous” treatment, but the most transparent • Voluntarily improve disclosures • Works better than waiting for regulators to mandate changes • You know what’s important in understanding your business – tell the markets • Work with users to find out what they need

10. Improving Financial Reporting –Auditors • Use professional judgment • The “safe” answer isn’t always the best • Focus on principles of standards • Don’t ask for every issue to be covered in a standard or by the SEC • We’ve gone from “Where does it say this is wrong?” to “Where does it say this is OK?” • Don’t get involved with accounting-motivated transactions

11. Structured Transactions • Problems arise when transactions are designed around accounting literature • Transactions undertaken or redesigned to obtain particular accounting treatment • Transactions that don’t appear to make economic sense on their own • Look for a true (non-accounting) purpose • At issue in many enforcement cases • Evident in many “off-balance sheet” areas

12. Advisory Committee on Improvements to Financial Reporting (CIFiR) • Background: Important initiative for Commission • Emanates from concerns raised by accounting scandals and restatements • Plan: Examine the U.S. financial reporting system and identify possible improvements • Duration and Composition: 12 months (through August 2008) • Preparers, investors, audit committee representatives, auditors, attorneys and regulators • Observers include FASB, PCAOB, IASC, Federal Reserve Board and Department of Treasury Refer to SEC website for further information, future meetings, and opportunities to comment (www.sec.gov/about/offices/oca/acifr.shtml)

13. Advisory Committee on Improvements to Financial Reporting (CIFiR) Areas of Emphasis: • Principles vs. rules-based standards; • Exceptions, bright lines, and safe harbors; • Processes for standard setting and interpretation; • Processes for regulating compliance; • Restatements; • Use of professional judgment; Systems for delivering financial information • Environmental factors that may drive unnecessary complexity, such as: • Second-guessing; • Transaction structuring. • International considerations

14. Advisory Committee on Improvements to Financial Reporting (CIFiR) Subcommittee I – Substantive Complexity: Subcommittee is considering: • Definitions of complexity to guide its work, as well as the work of the full committee • Whether accounting standards should focus on business activities, rather than specific assets or liabilities • Whether similar activities should be accounted for similarly, minimizing the use of industry guidance and alternative accounting policies • The use of a “pro rata” notion of accounting to account for transactions according to their economic substance, in place of detailed rules and bright lines • The mixed attribute model and the role of fair value, as well as the impact of scope exceptions, competing models and the conceptual framework

15. Advisory Committee on Improvements to Financial Reporting (CIFiR) Considerations of Subcommittee II – Standard Setting Process: Subcommittee is considering whether: • More user representation in the standard setting and regulatory processes will ensure the outputs meet user needs • An Agenda Committee could assist the SEC/FASB/EITF manage standard setting and interpretive priorities • Roles and responsibilities should be clarified between SEC and FASB to reduce uncertainty in the marketplace • The flattening of the GAAP hierarchy is critical to reducing interpretations from multiple parties and controlling the second-guessing environment • New standards should have extended 2-3 year implementation periods and post-adoption effectiveness reviews by FASB

16. Advisory Committee on Improvements to Financial Reporting (CIFiR) • Subcommittee III – Audit Process and Compliance: • Financial Restatements • Determination of when to restate • Interim materiality • Interpretation of quantitative and qualitative materiality factors • Disclosures about restatements • Use of Judgment • Exploring the potential for a “professional judgment framework”

17. Advisory Committee on Improvements to Financial Reporting (CIFiR) • Subcommittee IV: Delivering Financial information • Use of Summary Reports • Tagging of Financial Information (XBRL) • Press Releases and Website Disclosures • Disclosures of Key Performance Indicators and Enhanced Business Reporting

18. Interactive Disclosure & XBRL • XBRL(eXtensible Business Reporting Language) • ✔ XBRL is Tagged Data (Machine Readable) • Allows for user customization • Exchange of Interactive Business Information over the Internet • XML Based Language for defining information eXtensible Business Reporting Language

19. Interactive Disclosure & XBRL • Potential Benefits • Investors, analysts & other users • Direct, real-time access to instantly consumable data • Interactive, personalized analysis • Lower cost of more complete data set • Registrants and preparers of reports • Efficient preparation, internal data collection, analysis and release of information • Direct communication channel with investors and stakeholders

20. Interactive Disclosure & XBRL • Current Issues and Activities • August 2007 – All Mutual Fund Companies have furnished their risk and return analysis using XBRL • September 25, 2007 – Completion of the US GAAP Taxonomy • October 3, 2007 – Release of the open source code for the taxonomy viewer • October 9, 2007 - Office of Interactive Disclosure formed • December 5, 2007 – Planned release of the US GAAP Taxonomy for public review • Executive compensation XBRL project launching soon

21. Interactive Disclosure & XBRL • The Voluntary Filing Program • The Commission staff is actively seeking participants in the interactive data test group. • Companies that participate in the voluntary program's new test group will furnish financial data contained in their periodic and investment company reports in XBRL format for at least one year and provide feedback on their experiences, including the costs and benefits associated with reporting in the interactive data format. • The Commission staff will offer expedited reviews of voluntary statements and or annual reports to companies that volunteer for a test group as part of the Commission's interactive data initiative.

22. International Financial Reporting Standards • IFRS “Roadmap” Content: • The Case for a Single Set of Globally Accepted Accounting Standards • The Effect of IFRS on the US Capital Markets • Roadmap Related Activities: • SEC Staff Roundtable – March 2007 • Proposing Release on acceptance of IFRS financial statements without reconciliation to US GAAP for foreign private issuers – July 2007 • Concept Release on allowing IFRS for US issuers – August 2007 • Adopting Release on acceptance of IFRS financial statements without reconciliation to US GAAP for foreign private issuers – November 2007

23. International Financial Reporting Standards • SEC Staff’s ongoing involvement in IFRS: • Support FABS / IASB convergence projects • Participation in IOSCO • Foreign registrant matters with IFRS handled in OCA similar to domestic registrant matters

24. SEC’s New Interpretive Guidance for Management • Key Attributes of the Guidance • Principles-based • Directs efforts to highest risks of material misstatement of financial statements • Allows evaluation processes tailored to facts and circumstances • Provides guidance on supporting evidence and documentation • Provides guidance for evaluating deficiencies • Does not replace control frameworks • Voluntary

25. SAB 108 - Quantifying Misstatements The Concepts • Quantification of the effect of prior period misstatements • Weaknesses perceived in both the iron curtain and rollover approaches on a stand alone basis • Registrants should quantify errors using both a balance sheet (iron curtain) and income statement (rollover) approach • Importance of qualitative considerations • Does not amend SAB 99 • Not a general amnesty for prior period misstatements • The staff would expect a registrant to restate prior period financial statements for material errors if management failed previously to appropriately apply its previous approach, including the proper consideration of all relevant quantitative and qualitative factors.

26. SAB 108 - Quantifying Misstatements Upon Initial Application: • All errors are considered, not just those “on the sheet” • Existing errors that are immaterial under any approach should be recorded in the current period income statement • EACH INDIVIDUAL error included in the cumulative effect should be disclosed (when and how) – there is no “other” • Cumulative effect provision is a one-time allowance • Registrants with financial years ending after issuance of the SAB and before November 15, 2006 are permitted to early adopt • Registrants electing to correct prior period financial statements for immaterial errors, without amending, can correct interim financial statements next time they are filed

27. Other Materiality Topics Considering thoughts on: Interim Period Materiality: • APB 28 may be interpreted as considering interim periods as only a part of the annuals, however… • …Investors do react to quarterly results; • Should originating errors and carry-over errors be considered and assessed separately under SAB 99?

28. Other Materiality Topics Also considering thoughts on: Other aspects of SAB 99: • What other quantitative and qualitative metrics impact the SAB 99 analysis? • Can quantitatively large errors be deemed immaterial because of qualitative factors? In what circumstances is that likely to occur?

29. Issues Related to Current Credit Environment • Allowance for loan losses • Current credit trends may require adjustments to historical loss rates • FAS 140 restructuring of loans • Valuation issues • Disclosures • SOP 94-6 and FSP SOP 94-6-1 discuss relevant disclosures for uncertainties, credit concentrations, and significant estimates • Item 303 of Regulation S-K Item 303, Management’s Discussion & Analysis and Item 305, Market Risk

30. Questions