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Ford Motor Company, 1990 Annual Report, p. 26.
Opinions of the Accounting Principles Board No. 20, para. 12.
Bristol-Myers Squibb Company, 1990 Annual Report, p. 56.
312 Reviewing Accounting Policy Disclosures

ments requiring subjective determinations.”20 Hence the major objective of the
committee is to review management™s choices of accounting principles and
methods with the external auditor in order to obtain assurance that its choices not
only are in compliance with the current accounting standards but also are properly

General Approach
In reviewing the accounting policy disclosures, the audit committee should adopt
a systematic review approach. Such an approach should include:

1. Preliminary review Before meeting with management and the external audi-
tors, the committee should be familiar with such matters as:
a. The nature of the accounting practices of the business and its industry. It
should request a summary of the entity™s financial reporting require-
ments. If necessary the committee may wish to review the accounting
policies and procedures manual and other documented information re-
garding the relationship between the accounting system and internal ac-
counting controls. Are such accounting practices in line with the industry
b. A summary of the minutes of the meetings of the stockholders, board of
directors, and other standing committees of the board, particularly the
finance committee. The accounting policies should reflect the board™s
authorization regarding the financial accounting affairs of the entity.
c. The prior year™s financial statements and audit reports and a summary of
the effect of accounting pronouncements of the FASB, AICPA, and SEC
on the statements. Are there any trends that have a disproportionate effect
on the financial status of the entity?
d. The impact of accounting changes and the rationale for such changes in
the previous accounting periods.
e. The prior years™ government reports, such as the SEC and IRS report
filings. The committee may wish to engage the services of tax counsel or
legal counsel concerning such matters.

In addition to the preceding matters, the committee should request a written
summary of an annual review of the accounting policy disclosures from the chief
financial officer, executive audit partner, and executive internal auditor. Such a
summary review will enable the committee to identify major financial reporting
problems that affect the accounting policies. Obviously, the committee can expe-
dite its review through the use of such summaries and thus maximize its review

Schornack, “The Audit Committee,” pp. 75“76.
Guidelines for Reviewing Accounting Policy Disclosures 313

time. Much of the preliminary review activities can occur during the initial and
preaudit segments of the auditing cycle, as discussed in Chapters 6 and 7.

2. Postaudit review During the committee™s review of the drafts of the financial
statements, it should give consideration to the following matters with the afore-
mentioned parties:
a. Proposed management changes in accounting policies, such as a change
in the inventory pricing methods and the external auditor™s concurrence.
Also, proposed changes in such policies concerning the new reporting
requirements of the FASB, SEC, and other regulatory agencies.21
b. Changes in the entity™s operations, such as a merger with an acquisition of
another entity and the related effects on the existing accounting policies.
Certain accounting standards govern the accounting treatment for the
basis of valuing such investments (e.g., equity versus cost method of
accounting). In view of the recommendations of the other standing com-
mittees and the approval of the board, the accounting policies should
reflect such resolutions. An example of the committee™s involvement and
a change in accounting policy is reflected in the Bristol-Myers Squibb
Annual Report shown in Exhibits 10.5 and 10.6.
c. The committee should judge the existing accounting policies in light of
the objectives of financial reporting discussed in Chapter 3. Such finan-
cial reporting objectives serve as a criterion for judging management™s
selection of accounting methods.22
d. Since many independent accounting firms engaged in auditing publicly
held corporations implement quality control review programs, the com-
mittee should ask the external auditor to review the disclosure checklist
items applicable to the significant accounting policies. As a basis for
discussion, the committee can use the auditor™s summary review memo,
previously requested, in order to reconcile significant disclosure matters.
Moreover, the committee may wish to request a copy of the accounting
firm™s disclosure checklist concerning the financial statements. Such
disclosure checklists are usually cross-referenced to the disclosure re-
quirements in the accounting pronouncements. An illustrative accounting
policy disclosure checklist in Exhibit 10.7 shows how the audit committee
might document its review.23

In summary, as Russell E. Palmer, former managing partner of Touche Ross
and Co. (now Deloitte & Touche), points out, “Committee members need not be
auditors, or even accountants, but they must understand the financial reporting

SEC matters regarding proxy materials should be discussed at this point, particularly compliance
with the rules of the AICPA™s SEC Practice Section. See Chapter 7.
The reader should review in Chapter 5 such concepts as consistency, full disclosure, materiality, and
fairness in financial statement presentation as well as certain enhanced financial disclosures sections
of the Sarbanes-Oxley Act in Chapter 2.
This checklist is not all-inclusive; and additional matters may be inserted based on the committee™s
314 Reviewing Accounting Policy Disclosures

Exhibit 10.5 Illustrative Disclosure of Management™s Financial Reporting Re-

Report of Management
Management is responsible for the preparation, presentation and integrity of the financial
information presented in this Report. The accompanying consolidated financial statements
have been prepared in conformity with accounting principles generally accepted in the
United States of America, applying certain estimates and judgments as required. In man-
agement™s opinion, the consolidated financial statements present fairly the Company™s fi-
nancial position, results of operations and cash flows.
The Company maintains a system of internal controls and procedures to provide reason-
able assurance that transactions are properly authorized and that they are appropriately
recorded and reported in the financial statements and that Company assets are adequately
safeguarded. The system consists, in part, of the careful selection, training and develop-
ment of financial managers, the dissemination of written internal accounting policies and
an organizational structure that segregates responsibilities. The Company™s internal audi-
tors continually evaluate the adequacy and effectiveness of this system of internal ac-
counting, policies, procedures and controls, and actions are taken to correct deficiencies as
they are identified. As set forth in the Company™s Standards of Business Conduct and
Ethics and in the Company™s Pledge, the Company is committed to adhering to the high-
est standards of moral and ethical behavior in all of its business activities.
PricewaterhouseCoopers LLP, the Company™s independent accountants, have audited the
annual financial statements in accordance with auditing standards generally accepted in the
United States of America. Their report appears on this page.
The Audit Committee of the Board of Directors, composed solely of outside directors,
meets regularly with the internal auditors, the independent accountants and management
to review accounting, auditing, internal control structure and financial reporting matters.
The internal auditors and independent accountants have full and free access to the Audit

Peter R. Dolan
Chairman of the Board and
Chief Executive Officer

Andrew R.J. Bonfield
Senior Vice President and
Chief Financial Officer

March 26, 2003

Source: Bristol-Myers Squibb, 2002 Annual Report, p. 58.
Guidelines for Reviewing Accounting Policy Disclosures 315

Exhibit 10.6 Illustrative Changes in Accounting Policy

Impairment of Long-Lived Assets
Effective January 1, 2002, the Company adopted the provisions of SFAS No. 144, Ac-
counting for the Impairment of Long-Lived Assets. The adoption of SFAS No. 144 did not
have a material effect on the consolidated financial statements of the Company. SFAS No.
144 establishes the accounting for impairment of long-lived tangible and intangible assets
other than goodwill and for the disposal of a segment of a business. Pursuant to SFAS No.
144, the Company periodically evaluates whether current facts or circumstances indicate
that the carrying value of its depreciable assets to be held and used may not be recoverable.
If such circumstances are determined to exist, an estimate of undiscounted future cash
flows produced by the long-lived asset, or the appropriate grouping of assets, is compared
to the carrying value to determine whether an impairment exists. If an asset is determined
to be impaired, the loss is measured based on quoted market prices in active markets, if
available. If quoted market prices are not available, the estimate of fair value is based on
various valuation techniques, including a discounted value of estimated future cash flows.
The Company reports an asset to be disposed of at the lower of its carrying value or its es-
timated net realizable value.

Capitalized Software
Certain costs to obtain internal use software for significant systems projects are capitalized
and amortized over the estimated useful life of the software, which ranges from four to ten
years. Costs to obtain software for projects that are not significant are expensed as in-
curred. Capitalized software, net of accumulated amortization, as of December 31, 2002
and 2001 was $370 million and $333 million, respectively.

The Company adopted SFAS No. 141, Business Combinations, in 2001. SFAS No. 141 re-
quires that companies use the purchase method of accounting for all business combina-
tions initiated after June 30, 2001.

The Company consolidates all majority (more than 50%) owned subsidiaries where it has
the ability to exercise control. The Company accounts for 50% or less owned companies
over which it has the ability to exercise significant influence using the equity method of
accounting. The Company™s share of net income or losses of equity investments is included
in minority interest in the consolidated statement of earnings. The Company periodically
reviews these equity investments for impairment and adjusts these investments to their fair
value when a decline in market value is deemed to be other than temporary. During 2002,
the Company recorded an asset impairment charge of $379 million for an other than tem-
porary decline in the market value of ImClone Systems Incorporated (ImClone).
Long-term investments in securities, which comprises marketable equity securities and
other securities and investments for which market values are not readily available, are in-
cluded in other assets. Marketable equity securities are classified as available-for-sale and
reported at fair value. Fair value is based on quoted market prices as of the end of the re-
porting period. Other securities and investments for which market values are not readily
available are carried at cost. Unrealized gains and losses are reported, net of their related
tax effects, as a component of accumulated other comprehensive income (loss) in stock-
holders™ equity until sold. At the time of sale, any gains or losses calculated by the specific

316 Reviewing Accounting Policy Disclosures

Exhibit 10.6 (Continued)

identification method are recognized in other (income)/expense. Losses are also recog-
nized in income when a decline in market value is deemed to be other than temporary.

The Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, on January
1, 2002, with certain provisions adopted as of July 1, 2001 with respect to amortization of
goodwill arising from acquisitions made after June 30, 2001. SFAS No. 142 addresses the
initial recognition and measurement of intangible assets acquired outside a business com-
bination and the recognition and measurement of goodwill and other intangible assets
subsequent to their acquisition. Under the new rules, goodwill is no longer amortized but
is subject to annual impairment tests. In connection with this accounting change, the
goodwill resulting from the Company™s acquisition of the DuPont pharmaceuticals busi-
ness and investment in ImClone is not amortized.
The goodwill arising from business acquisitions prior to July 1, 2001 was amortized on a
straight-line basis over periods ranging from 15 to 40 years. This goodwill is not amortized
effective January 1, 2002. In each of 2001 and 2000, goodwill amortization expense was
$75 million.
In accordance with SFAS No. 142, goodwill is tested for impairment upon adoption of the
new standard and annually thereafter. SFAS No. 142 requires that goodwill be tested for
impairment using a two-step process. The first step is to identify a potential impairment
and the second step measures the amount of the impairment loss, if any. Goodwill is
deemed to be impaired if the carrying amount of a reporting unit™s goodwill exceeds its es-
timated fair value. The Company has completed its goodwill impairment assessment
which indicated no impairment of goodwill.

Intangible Assets
Intangible assets, consisting of patents, technology and licenses, are amortized on a
straight-line basis over periods ranging from 3 to 17 years, representing the remaining life
of the assets. SFAS No. 142 requires that indefinite-lived intangible assets be tested for im-
pairment using a one-step process which consists of a comparison of the fair value to the
carrying value of the intangible asset. Intangible assets are deemed to be impaired if the net
book value exceeds the estimated fair value. All other intangible assets are evaluated for
impairment in accordance with SFAS No. 144 as described above.

Product Liability
Accruals for product liability are recorded, on an undiscounted basis, when it is probable
that a liability has been incurred and the amount of the liability can be reasonably esti-
mated, based on existing information. These accruals are adjusted periodically as assess-
ment efforts progress or as additional information becomes available. Receivables for
related insurance or other third-party recoveries for product liabilities are recorded, on an
undiscounted basis, when it is probable that a recovery will be realized. Insurance recov-
erable recorded on the balance sheet has, in general, payment terms of two years or less.
Amounts of receivables recognized, not in excess of related liabilities, as of December 31,
2002 and 2001 were $1 million and $158 million, respectively.
Guidelines for Reviewing Accounting Policy Disclosures 317


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