The guidance for the related parties is covered in FASB’s Accounting Standards Codification (ASC) 850, Related Party Disclosures (formerly FAS 57, Related Party Disclosures).

A company needs to analyze and consider all of the related party relationships to determine who would actually consolidate a variable interest entity. Details for these considerations are provided in ASC 810, Consolidation (formerly FIN 46R, Consolidation of the Variable Interest Entities).

You can access the AICPA guide at the following link:
http://ftp.aicpa.org/public/download/news/relpty_toolkit.pdf

[References: AICPA’s Accounting and Auditing for Related Parties and Related Party Transactions - A Toolkit for Accountants and Auditors, FAS 57, ASC 850, FIN 46R, ASC 810]

The article in the the Journal of Accountancy provides all the changes that we expect to see over the next year. This article also provides a discussion and summary of the proposed changes in the IFRS and U.S. GAAP. Click here to read the article that appeared in the March 2010 issue of the Journal of Accountancy.

The new edition of IFRS and US GAAP: similarities and differences will help companies develop a broad understanding of the major differences between IFRS and US GAAP today as well as an appreciation for the level of change on the horizon.

While retaining the primary successful attribute of earlier editions – succinct, clear descriptions of the similarities and differences between the reporting methods and subsequent impacts on companies – the 2009 edition has been updated to include:

• Commentary and insight on recent and proposed guidance, including developments pertaining to the overall convergence agenda;
• More detailed analysis of current differences between the frameworks including an assessment of the impact embodied within the differences;
• An overview of the new IFRS for Small and Medium-sized Entities (IFRS for SMEs) standard;
• Report on the US GAAP codification project; and
• Updates incorporating authoritative standards and interpretive guidance issued through June 30, 2009.

Click to access the full publication

Source: PWC

What is a share lending arrangement?
In a typical arrangement, the corporate entity (share lender) issues shares to the investment bank (share borrower) for a nominal fee. In turn, the investment bank uses the shares to enter into equity derivative contracts (for example, options, forwards, and total return swaps) with the ultimate investors of the convertible debt. The equity derivative contracts allow the investors to hedge the long position in the corporate entity’s stock that is held via the embedded conversion option in the convertible debt instrument. Upon maturity or conversion of the convertible debt, the investment bank is required to return the loaned shares to the corporate entity.

What is changing?
• Debt issuance costs: A share lender should record as debt issuance cost the fair value of a share lending arrangement (amortization of the debt issuance costs will increase the overall implied cost of the related convertible debt arrangement).
• Earnings per share (EPS) impact: The outstanding shares should be excluded from basic and diluted EPS, unless the counterparty defaults.
• What happens when default probable: When a default is probable (i.e. 70% or more), expense should be recognized (with an offset to equity) for the fair value of the shares less estimated recoveries.

Effective date:
The guidance is effective for new share lending arrangements for interim and annual periods beginning on or after June 15, 2009. For existing arrangements, the guidance is effective for fiscal years beginning on or after December 15, 2009 and must be applied retrospectively for arrangements outstanding as of the effective date.

More details:
ASU 2009-15 has been updated to provide share lenders with guidance on how to account for these arrangements. To obtain a copy ASU 2009-15, visit the FASB’s website.

Source: PWC

Get the full article (PDF format)

PwC has developed a Quick Reference Guide to help you make the transition to the Codification.

This user-friendly Guide includes:
• The structure of the Codification, including examples of the citation format
• How new authoritative guidance will be released and incorporated into the Codification
• Where to locate other PwC information and resources on the Codification
• Listings of the Codification’s “Topics” and “Sections”
• A list of over 30 frequently-referenced accounting standards and the corresponding Codification Topics where they now primarily reside.
The Quick Reference Guide is only two-pages, making it ideal to print double-sided and keep nearby to help you navigate the Codification.

Download this document – (PDF-46.1 k)

Now it is the Public Company Accounting Oversight Board (PCAOB), which oversees auditors of U.S.-traded companies.  Bloomberg reported that last year PCAOB examined the Indian arm of PricewaterhouseCoopers, Satyam’s auditor since 2000.  Satyam, the nation’s fourth-largest software exporter, is one of 14 Indian companies with a combined value of $63 billion that trade on U.S. exchanges, according to Bloomberg data.      

Bloomberg’s article provides the comments made by Richard Dietrich, an accounting professor at Ohio State University in Columbus and a former member of a PCAOB advisory group.“There are gaping holes in the inspection process, …… as an investor, I can’t rely on the inspections.”

Price Waterhouse (PWC) maintain that they complied with the Indian accounting standards.  In any event, India’s regulatory system is weaker than that in the U.S.

So what went wrong at Satyam - Raju, 54, on Jan. 7 told Satyam’s board that he had falsified accounts for “several years” to stave off a takeover. More than US$1 billion of cash and assets that were reported at the end of September didn’t exist, he said in a letter to the Bombay Stock Exchange. So where were the auditors all these years?  Ask any auditor, the first thing they check is the cash balances to mitigate any fraud risk.  Further, it might be interesting to note that majority of the analysts focus on cash flows to determine the valuation of the companies.  So the bottom line is that Satyam’s stocks have been overvalued for all these years that have also resulted in the Indian stock market being overvalued all these years.  So now you know why everyone says there is a risk in investing in the emerging markets?

Interestingly, Satyam’s financials are audited by PWC.   Investigation is still on to understand how this fraud could continue on for years.  Below is the letter written by the CEO of Satyam, B. Ramalinga Raju.

Satyam Computer Services Ltd.

Dear Board Members,

It is with deep regret, at tremendous burden that I am carrying on my conscience, that I would like to bring the following facts to your notice:

1. The Balance Sheet carries as of September 30, 2008
   • Inflated (non-existent) cash and bank balances of Rs.5,040 crore (as against Rs. 5361 crore reflected in the books)
   • An accrued interest of Rs. 376 crore which is non-existent
   • An understated liability of Rs. 1,230 crore on account of funds arranged by me
   • An over stated debtors position of Rs. 490 crore (as against Rs. 2651 [cr.] reflected in the books)
2. For the September quarter (02) we reported a revenue of Rs.2,700 crore and an operating margin of Rs. 649 crore (24% Of revenues) as against the actual revenues of Rs. 2,112 crore and an actual operating margin of Rs. 61 Crore ( 3% of revenues). This has resulted in artificial, cash and bank balances going up by Rs. 588 crore in Q2 alone.

The gap in the Balance Sheet has arisen purely on account of inflated profits over a period of last several years (limited only to Satyam standalone, books of subsidiaries reflecting true performance). What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years. It has attained unmanageable proportions as the size of company operations grew significantly (annualized revenue run rate of Rs. 11,276 crore in the September quarter, 2008 and official reserves of Rs. 8,392 crore). The differential in the real profits and the one reflected in the books was further accentuated by the fact that the company had to carry additional resources and assets to justify higher level of operations — thereby significantly increasing the costs.

Every attempt made to eliminate the gap failed. As the promoters held a small percentage of equity, the concern was that poor performance would result in a take-over; thereby exposing the gap. It was like riding a tiger, not knowing how to get off without being eaten.

The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones. Maytas’ investors were convinced that this is a good divestment opportunity and a strategic fit. Once Satyam’s problem was solved, it was hoped that Maytas’ payments can be delayed. But that was not to be. What followed in the last several days is common knowledge.

I would like the Board to know:

1. That neither myself, nor the Managing Director (including our spouses) sold any shares in the last eight years — excepting for a small proportion declared and sold for philanthropic purposes.

2. That in the last two years a net amount of Rs. 1,230 crore was arranged to Satyam (not reflected in the books of Satyam) to keep the operations going by resorting to pledging all the promoter shares and raising funds from known sources by giving all kinds of assurances (Statement enclosed, only to the members of the board). Significant dividend payments, acquisitions, capital expenditure to provide for growth did not help matters. Every attempt was made to keep the wheel moving and to ensure prompt payment of salaries to the associates. The last straw was the selling of most of the pledged share[s] by the lenders on account of margin triggers.

3. That neither me, nor the Managing Director took even one rupee/dollar from the company and have not benefitted in financial terms on account of the inflated results.

4. None of the board members, past or present, had any knowledge of the situation in which the company is placed. Even business leaders and senior executives in the company, such as, Ram Mynampati, Subu D, T.R. Anand, Keshab Panda, Virender Agarwal, A.S. Murthy, Han T, SV Krishnan, Vijay Prasad, Manish Mehta, Murali V. Sriram Papani, Kavale, Joe Lagioia, Ravindra Penumetsa, Jayaraman and Prabhakar Gupta are unaware of the real situation as against the books of accounts. None of my or Managing Director’s immediate or extended family members has any idea about these issues.

Having put these facts before you, I leave it to the wisdom of the board to take the matters forward. However, I am also taking the liberty to recommend the following steps:

1. A Task Force has been formed in the last few days to address the situation arising but of the failed Maytas acquisition attempt. This consists of some of the most accomplished leaders of Satyam; Subu D, T.R. Anand, Keshab Panda and Virender Agarwal , representing business functions; and A.S. Murthy, Han T and Murali V representing support functions. I suggest that Ram Mynampàti be made the Chairman of this Task Force to immediately address some of the operational matters on hand. Ram can also act as an interim CEO reporting to the board.

2. Merrill Lynch can be entrusted with the task of quickly exploring some Merger opportunities.

3. You may have a testatement of accounts’ prepared by the auditors in light of the facts that.I have placed before you.

I have promoted and have been associated with Satyam for well over twenty years now I have seen it grow from few people to 53,000 people, with 185 Fortune 500 companies as customers and operations in 66 countries. Satyam has established an excellent leadership and competency base at all levels. I sincerely apologize to all Satyamites and stakeholders, who have made Satyam a special organization, for the current situation. I am confident they will stand by the company in this hour of crisis.

In light of the above, I fervently appeal to the board to hold together to take some important steps Mr T R Prasad is well placed to mobilize support from the government at this crucial time. With the hope that members of the Task Force arid the financial advisor, Merrill Lynch (now Bank of America) will stand by the company at this crucial hour, I am marking copies of this statement to them as well.

Under the circumstances, I am tendering my resignation as the chairman of Satyam and shall continue in this position only till such time the current board is expanded. My continuance is just to ensure enhancement of the board over the next several days or as early as possible.

I am now prepared to subject myself to the laws of the land and lace consequences thereof.

(B. Ramalinga Raju)
Copies marked to:
1. Chairman SEBI
2. Stock Exchanges

Source: track.in

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