Monthly Archives: September 2014

Form 4, Form 4, Where Are Ye Form 4? The SEC Wants to Know

The SEC recently identified a new SEC enforcement initiative which “focuses on two types of ownership reports that give investors the opportunity to evaluate whether the holdings and transactions of company insiders could be indicative of the company’s future prospects.” The 2 ownership reports are Form 4, which is required of company insiders, officers, directors, and certain others when they buy or sell company stock, and Schedule 13D & 13G, which is required of beneficial owners of more than 5% of a registered class of company stock to report their holdings or intentions re: the company.

The Division of Enforcement brought charges against 28 officers, including some that were responsible for SEC Reporting, directors, or major shareholders for violating federal securities laws requiring them to promptly report information about their holdings and transactions in company stock. Six public companies were charged for contributing to filing failures by insiders or failing to report their insider delinquencies. The SEC Enforcement staff used “quantitative data sources and ranking algorithms [DERA at work again] to identify these insiders as repeatedly filing late”, some by years. The orders that were issued reinforced that even inadvertent failures to file are still violations of the rules. The initiative resulted in fines totaling $2.6 million from 33 individuals and companies.

While the 5% test can be challenging for some, the misses in filing Form 4s are surprising, as the rules are fairly clear, and take 10 minutes at the most, to digest, based on our experience in our SEC Reporting Skills Workshop. However, whether to check the 10-K cover page box for delinquent filer of Forms 3, 4, or 5 befuddles many; a hint – if everyone did what they were supposed to and filed as they should, the box is checked.

See the SEC’s Press Release at:

As always, we would love to hear your comments!

Happy Anniversary?

It was six years ago today, September 15, 2008, that Lehman Brothers filed for bankruptcy.  And the day before that, the deal was hashed for Bank of America to buy Merrill Lynch.  What a long strange trip we have all been on, and are all still traveling.  You know what they say about past mistakes…

Back in the present, we are all anticipating the biggest IPO ever, or is it? – stay tuned.

As always, we would love to hear your comments!

Revenue Recognition Changes and the SEC’s Five-Year Summary

One of the open questions in adoption of the new Revenue Recognition Standard for public companies has been whether or not the SEC would require companies that adopt ASU 2014-09 retrospectively to apply it to all five years required in Form 10-K – Item 6 – Selected Financial Data.

Yesterday, September 11, 2014, at a Financial Accounting Standards Advisory Committee meeting the SEC Staff said they “would not object” if companies did not apply the standard to the fourth and fifth year back. As you know, S-K Item 301 for the five year summary requires clear disclosure when there are issues that affect comparability between years. In fact, S-K 301 says in Instruction 2:

Briefly describe, or cross-reference to a discussion thereof, factors such as accounting changes, business combinations or dispositions of business operations, that materially affect the comparability of the information reflected in selected financial data. Discussion of, or reference to, any material uncertainties should also be included where such matters might cause the data reflected herein not to be indicative of the registrant’s future financial condition or results of operations.

So, companies must address this lack of comparability, but at least we do not need to run parallel for revenue recognition for a five full years.

So, in a nutshell, the two choices in adopting the new standard are (adoption is required for years beginning after 12/15/2016 for public companies, one year later for non-public companies).

1. Full retrospective for all years presented, that is three years in a non-SRC or non-EGC 10-K. For this choice a company must “run parallel” for 2015 and 2016, and apply the new standard to 2017. (There are a few practical accommodations if you chose this option.)

2. Retrospective with a cumulative effect at the beginning of the year of adoption, 2017. However, if you use this method you must disclose the effect of the new standard on each line of the F/S affected. This means in essence you must run parallel for 2017 to provide comparative disclosures

So, now we know the choice with more clarity, and we can choose to double account for one or two years.

As always, welcome your comments and thoughts!

SEC Institute Comment of the Week

More Analysis in MD&A

One of the recurring issues in SEC comment letters that sometimes creates substantial discomfort for preparers of MD&A is how much detail to provide in the analysis of why financial statement line items have changed.

These comments are about building an MD&A that helps people understand quality of earnings and the extent to which past performance predicts future performance (part of the overall objective of MD&A as spelled out in FR 72). That said, the knife edge between what the SEC’s rules say we must tell investors and trying to keep competitively sensitive information private is never easy to walk.

As a brief reminder, S-K Item 303 Instruction 4 says:

4. Where the consolidated financial statements reveal material changes from year to year in one or more line items, the causes for the changes shall be described to the extent necessary to an understanding of the registrant’s businesses as a whole; Provided, however, That if the causes for a change in one line item also relate to other line items…….

The key issue of course is understanding causal factors, and the SEC emphasized this issue in FR72:

4. Focus on Analysis

MD&A requires not only a “discussion” but also an “analysis” of known material trends, events, demands, commitments and uncertainties. MD&A should not be merely a restatement of financial statement information in a narrative form. When a description of known material trends, events, demands, commitments and uncertainties is set forth, companies should consider including, and may be required to include, an analysis explaining the underlying reasons or implications, interrelationships between constituent elements, or the relative significance of those matters.

Identifying the intermediate effects of trends, events, demands, commitments and uncertainties alone, without describing the reasons underlying these effects, may not provide sufficient insight for a reader to see the business through the eyes of management. A thorough analysis often will involve discussing both the intermediate effects of those matters and the reasons underlying those intermediate effects. For example, if a company’s financial statements reflect materially lower revenues resulting from a decline in the volume of products sold when compared to a prior period, MD&A should not only identify the decline in sales volume, but also should analyze the reasons underlying the decline in sales when the reasons are also material and determinable. The analysis should reveal underlying material causes of the matters described, including for example, if applicable, difficulties in the manufacturing process, a decline in the quality of a product, loss in competitive position and market share, or a combination of conditions.

With those thoughts as starting points, here are some comments dealing with this issue:

1. We note that you do not quantify the impact of the various factors that affected your revenues from period to period. For example, on page 21, you state that the sales of precious metals were negatively impacted by the exit of solar pastes and lower sales in your North American and Asian metal powders product lines prior to being sold, but you do not quantify the impact. Similarly, you state on page 27 that gross profit in Pigments, Powders and Oxides increased in 2013 primarily due to favorable raw material costs, but do not indicate either the change in raw material costs or the impact of this change. These are just examples. In future filings please quantify the effects of such factors (emphasis added), and also discuss whether you believe these factors are the result of a trend, and, if so, whether you expect it to continue and how it may impact your financial condition and results of operations. See Item 303 of Regulation S-K and SEC Release No. 33-8350. Please also see comment 3 of our letter dated August 19, 2009.

This next comment goes even further, actually discussing issues the company addressed in earnings releases but not in MD&A:

1. We note your response to comment 6 in our letter dated August 8, 2013. We appreciate that you have made efforts to provide investors with an understanding of the material causes behind the factors impacting sales. However, your discussion and analysis as it relates to operating profit for each of your segments could be improved. For example, continuing with your use of the North America segment, you state the increase is driven by higher pricing and volumes without any further analysis. For volume, we note there was a shift in product mix from your discussion and analysis of sales. However, you do not explain how this shift in product mix impacted operating profit and operating margin. For example, do the sales to the energy, manufacturing and metals end-markets generally earn higher profit margins than the electronics and chemical end-markets? We further reviewed your fiscal year 2012 earnings call transcript in which you provide analysts with additional analysis of the material factors impacting your operating results that are not carried forward to MD&A in your periodic reports. Examples include the following:

Budget anxiety and deferral of capital spending resulting from poor business confidence was strongly evident in Europe, South America and the U.S. Demand for packaged gases, primarily from the metal fabrication and machinery industries, slowed markedly in December as customers took extended holiday shutdowns in the U.S., Canada and Mexico, Europe and particularly South America.

Our on-site and merchant customers maintained solid demand through the year end as production from efficient steel mills, chemical plants and refinery runs continued strong. Moreover, we’re clearly seeing a strong rebound in China now that the new Communist Party has taken hold and some delays in decision making that we have seen in 2012 have ended.

During 2012, for the fourth year in a row, we achieved more than 6% savings in our cost stack through productivity. This amount was higher than our ongoing targeted 5% per year as the Praxair businesses accelerated initiatives during the year in production, procurement and distribution. Approximately 25% of our savings came from sustainable productivity initiatives, with the largest being energy efficiency improvement in our plant.

This level of analysis was not provided in your MD&A but appears to provide material information that would be useful for investors. Please refer to Item 303(a)(3) of Regulation S-K and Sections 501.06.a and 501.12.b. of the Financial Reporting Codification for guidance.

As always, your comments and thoughts are welcome!

Cybersecurity – The Continuing Saga

If there is any issue that is a hot topic in the business world today (and as a consequence in SEC reporting), it is cybersecurity. It seems we can’t go a week without hearing about a major cybersecurity event. From Target’s major attack last year and its consequences, to hospital records being breached, to even Apple possibly having a cybersecurity breach in it’s iCloud, cybersecurity continues to grow in complexity and impact.

One of the benefits of the SEC Institute programs now being part of PLI is that we have resources we could only have dreamed of before. One program that is particularly valuable today is our Cybersecurity 2014: Managing the Risk. This program is being held on September 10, 2014, and will be available in many cities and via webcast. You can learn more at our web page:

Meanwhile back on the disclosure front, as a reminder, the SEC’s guidance on cybersecurity disclosures (so far) is in Corp Fin’s Disclosure Guidance Topic 2. It discusses disclosures in varying levels of risk, more or less starting with risk factors, progressing to discussion of the impact of cybersecurity events in MD&A, and possibly including discussion in the Description of the Business and Legal Proceedings.

For risk factors the Disclosure Guidance Topic suggests, among other factors, considering:

 “Discussion of aspects of the registrant’s business or operations that give rise to      material cybersecurity risks and the potential costs and consequences;

To the extent the registrant outsources functions that have material cybersecurity risks, description of those functions and how the registrant addresses those risks;

Description of cyber incidents experienced by the registrant that are individually, or in the aggregate, material, including a description of the costs and other consequences;

Risks related to cyber incidents that may remain undetected for an extended period; and

Description of relevant insurance coverage.”

 The Disclosure Topic also includes a reminder about disclosure controls and procedures surrounding this issue. You can find the disclosure topic at:

And, for the fun of it, here is an example of a current risk factor:

A significant disruption in our computer systems and our inability to adequately maintain and update those systems could adversely affect our operations and our ability to maintain guest confidence.

We rely extensively on our computer systems to manage inventory, process guest transactions, manage guest data, communicate with our vendors and other third parties, service ****** accounts and summarize and analyze results, and on continued and unimpeded access to the internet to use our computer systems. Our systems are subject to damage or interruption from power outages, telecommunications failures, computer viruses and malicious attacks, security breaches and catastrophic events. If our systems are damaged or fail to function properly, we may incur substantial repair or replacement costs, experience data loss and impediments to our ability to manage inventories or process guest transactions, and encounter lost guest confidence, which could adversely affect our results of operations. The Data Breach we experienced negatively impacted our ability to timely handle customer inquiries, and we experienced weaker than expected U.S. Segment sales following the announcement of the Data Breach. Similarly, we experienced a temporary network disruption not involving a data breach in June 2014 that prevented many of our point-of-sale registers from working in a limited geographic region. This disruption caused checkout delays and generated negative publicity, and we engaged in promotional activities to retain our customers during the delay.

We continually make significant technology investments that will help maintain and update our existing computer systems. Implementing significant system changes increases the risk of computer system disruption. Additionally, the potential problems and interruptions associated with implementing technology initiatives could disrupt or reduce our operational efficiency, and could impact the guest experience and guest confidence.

XBRL Next Steps

As we blogged about during the summer, the SEC has started to issue documents concerning XBRL issues. Two of our earlier posts dealt with the special study about the use of extensions and the “Dear CFO” letter about calculation relationships (links are below).

Another event that may elevate the visibility of XBRL issues in the reporting community is going to happen on September 9 at 1pm – the FASB is hosting a 90 minute XBRL webcast to discuss the 2015 Taxonomy, which was just released for public comment today, September 2.

The title of the webcast is:

IN FOCUS: Proposed 2015 GAAP Financial Reporting Taxonomy, ASU Taxonomy Changes, Taxonomy Implementation Guides, Taxonomy Simplification

Interestingly, SEC Staff from the Office of Interactive Date will be speaking.

How may of us are hoping the simplification topic is a major theme?

You can register for the webcast at:

And, just in case you want to find them again:

The special study by DERA, the Division of Economics and Risk Analysis about the use of custom tags, aka extensions, is at:

The Dear CFO letter about calculation relationships is at: