Monthly Archives: March 2015

SEC Focus Area – Critical Accounting Estimate Disclosures

In recent speeches SEC Staff members have emphasized the importance of appropriate disclosure of Critical Accounting Estimates. In this blog entry we will go a bit further. We will:

  1. Review some typical comments the staff has been including in comment letters, and
  1. Show you how to find and use the actual guidance for disclosure of Critical Accounting Estimates.

In our workshops we unfortunately find a fair amount of confusion about the SEC’s requirements in this area.

Just what is the SEC Staff saying to registrants about this disclosure? Here are some representative comments. (Fortunately most of these comments are “fix in future filings” comments!)

First, a comment that simply tells a registrant what they are, and where to find the guidance. Note the language that makes it clear this is very different from the Summary of Significant Accounting Policies!

  1. We note your response to our prior comment 3. The proposed disclosure for your Critical Accounting Policies within Management’s Discussion and Analysis appears to be a duplication of the accounting policies already disclosed in the footnotes to your financial statements. Please note that the objective of the Critical Accounting Policies within Management’s Discussion and Analysis is different from that of the Summary of Significant Accounting policies included in the footnotes to your financial statements; the objective of the Critical Accounting Policy disclosure is to address material implications of uncertainties associated with the methods, assumptions and estimates underlying the (application of) your critical accounting measurements. Refer to FR-72, which can be found on our website at: Please modify your proposed disclosure within Management’s Discussion and Analysis to eliminate repetition of the accounting policies disclosed elsewhere in your filing and, to the extent not disclosed elsewhere, include disclosure that addresses the specific methods, assumptions and estimates underlying the your critical accounting measurements

Next, here are three comments to illustrate the level of analysis that the SEC Staff expects in your discussion of the historical and potential future variability in financial results related to Critical Accounting Estimates.

  1. We refer to the following disclosures from your Critical Accounting Policies found on page 53, “In establishing our credit practices, we seek to strike an appropriate balance between prudent learner credit policies and learner retention. Accordingly, we periodically review and alter learner credit policies to achieve that objective by restricting or expanding the availability of credit we extend.” Please tell us in detail about the facts and circumstances that have caused you to review and alter learner credit policies in the past.

Goodwill impairment uncertainty is a frequent comment area:

  1. We note your response to prior comment 4 indicating that you will include additional related disclosures if any of your reporting units are at risk of failing step one of the impairment test. If none of your reporting units are at risk of failing step one, please tell us what consideration you gave to disclosing that conclusion. In addition, tell us whether the estimated fair values of any of your reporting units substantially exceed the carrying values, and consider disclosing any such determination. Tell us your threshold for determining that the excess is substantial.

And this last comment is just good, sound analysis:

  1. We note the reduction in your allowance for doubtful accounts as a percentage of total accounts receivable from July 31, 2013 (18.1%) to July 31, 2014 (14.7%). Please describe to us the factor(s) that resulted in the reduction (e.g. changes in the category of outstanding receivables, the composition of the aging or the Company’s accounting policy or methodology with respect to the allowance from the prior period). Also confirm to us that you will clearly describe any significant factor(s) that influenced management’s judgment with respect to the estimate of allowance for doubtful accounts in future filings.

So, just where is the current guidance for Critical Accounting Estimate disclosure? There is a bit of confusion here! This all started in the post-Enron period with FR 60 (the FRs are Financial Reporting Releases, interpretations that are approved by the SEC Commissioners). This release addressed the aggressive use of accounting principles and required disclosure of “Critical Accounting Policies”. It also required that this disclosure be made in plain English. It was issued very quickly in order to apply to year-end 2001 financial statements, and was called a “Cautionary Advice”. As this disclosure was a very new concept, it did not describe in great detail exactly what a critical accounting policy was or what disclosures should be made. You can find this brief FR, for perhaps historical purposes, at:

The key reason the FR was short was that the SEC planned to make a formal rule concerning this disclosure. The rule was proposed, but was never actually finalized.

The reason the rule was never finalized is that the SEC instead addressed this disclosure in FR 72. You can find the current guidance in FR 72 way towards the end in Section V. Here is the release, just scroll way down:

(Note the evolution in terminology from Critical Accounting Policy to Critical Accounting Estimate.)

If you read this brief Commission interpretation and keep in mind the comments above, you will create meaningful disclosure in this area. A few points to consider:

  1. Critical accounting estimate disclosure is NOT the same as accounting policy disclosures.
  2. You could start with the idea that you have far fewer Critical Accounting Estimates than accounting policies, perhaps three to five as a starting point.
  3. Be sure to address what makes the estimate critical and uncertain, and why the impact could be material.
  4. Include quantified sensitivity analysis that will help investors understand the potential impact if the estimate were to change.

We hope this helps, and as always, your thoughts and comments are appreciated!

Planning on an IPO?

One of the great things going on in the economy right now is the increase in IPO activity. Working with a company through the IPO process is one of the most challenging and rewarding experiences SEC reporting professionals can have. It is always a huge learning process, and since no two deals are ever exactly the same, also very exciting!

Companies have to do significant preparation to be ready for an IPO, and the IPO process itself can be all consuming. Both these phases of the project are only prelude to all the additional work as a public company. With so much change involved, training and preparation are crucial.

To help with all the phases of the IPO process we offer a variety of courses through PLI’s Corporate and Securities practice area. You can check this area out on our webpage, .

For near-term IPO training we are offering our “How to Prepare an Initial Public Offering” program on April 10. You can attend live in New York City at our conference center or participate via webcast. You can learn more at:

As always, your thoughts, comments and questions are welcome!

Heads-Up – A Revisit of Current vs. Non-Current Debt Restatements

Heads-Up – A Revisit of Current vs. Non-Current Debt Restatements

In our discussions with Workshop participants we are hearing about a trend in how banks and companies are structuring new and revised lines of credit. And, one of the issues we are seeing is evoking a strong feeling of déjà vu!

You may remember that in the early days of the post-SOX era there was a wave of restatements relating to errors in the current versus non-current classification of revolving lines of credit.

The issues centered on an old EITF abstract – EITF 95-22 – Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements That Include both a Subjective Acceleration Clause and a Lock-Box Arrangement. The EITF abstract was about 10 years old when all the restatements happened. The issue involved is very arcane, and since it was very old, it almost seemed like we had all forgotten about this abstract. (This was pre-Accounting Standards Codification of course, so the original abstract is superseded with the guidance contained in ASC 470.)

The portion of the guidance that is relevant is in ASC 470-10-45 paragraphs 4, 5, 14(a) and other locations. It essentially requires that if a revolving line of credit has a bank-required lock-box arrangement where the bank controls the lock-box and a “subjective acceleration clause” then the debt is to be considered current. The issue here is that paragraph 14(a), which contains the guidance for short-term obligations expected to be refinanced long-term, contains a condition that the debt only be cancelable within one year of the borrower’s balance-sheet date by the lender if the borrower violates an objectively determinable or measurable provision of the agreement. The subjective acceleration clause does not meet this requirement, and therefore the related debt cannot be classified as non-current.

We know this is a pretty techy issue, but if you are negotiating a new or revised line of credit, watch out for this one! A very careful review of ASC 470-10-45 paragraphs 4 and 5 will be appropriate. The language here is very complex, and if you have the issue you will likely require some time to properly address!

Two other considerations:

First, for MD&A, it would likely be appropriate to discuss the nature of this financing in the Liquidity and Capital Resources section.

Second, this debt should be included in the table of contractual obligations. As frequently happens with the table, the question of where to include it arises. The likely appropriate answer may vary from company to company, and as the SEC says in FR 83:

“The purpose of the contractual obligations table is to provide aggregated information about contractual obligations and contingent liabilities and commitments in a single location so as to improve transparency of a registrant’s short-term and long-term liquidity and capital resources needs and to provide context for investors to assess the relative role of off-balance sheet arrangements”It then goes on to say:

“Uncertainties about what to include or how to allocate amounts over the periods required in the table should be resolved consistent with the purpose of the disclosure”

So, use of judgment is appropriate. Including the cash flows in the period you expect them to occur and a footnote could be one approach.

As always, your thoughts and comments are appreciated!

Tips for Your Form 10-K Review

Welcome to the last half of March! For all of us with 90 day deadlines for our Form 10-K, it is getting close to time to file!

As you prepare for the final reviews of your Form 10-K we thought we would share a list of “Hot-Button Topics” to make sure they are addressed appropriately in your filing.

We developed this list while presenting on-site workshops with CPA firms, and think it may be valuable for all of us who are preparers too.

Here are the topics:

1. SAB 74 Disclosures (see Topic 11M in the codification at: – make sure your SAB 74 Recent Accounting Pronouncement disclosure for new standards includes all four points from the SAB and addresses all material new standards for your company, including revenue recognition.

2. Cybersecurity – Most likely almost every company should have a risk factor for cybersecurity, but perhaps more disclosure is appropriate for your company. Be sure to check out Corp Fin Disclosure Topic 2 (at

3. Take time now to be sure that your webpage and such other public disclosures are consistent with 10-K, 10-Q etc. (E.g. segment discussions)

4. Segments are always a big deal. Check out the speech by OCA Deputy Chief Accountant Dan Murdock (at: And, don’t’ forget the PACCAR enforcement action related in part related to segment disclosure (

5. Item 1 – S-K Item 101(a) – Big changes in “mode of conducting business”, even significant strategic changes, should be discussed.

6. Item 1 – S-K Item 101(c) – The description of the business must be by segment.

7. Review Item 1 discussion of distributions channels and methods etc. for consistency with Rev Rec Accounting.

8. Item 1A – For risk factors assure major risks from a manager’s perspective are included.

9. Item 2 – Relate to impairment risk and possible capex in future as applicable.

10. Item 3 – Not the same as the footnotes to f/S. More factual details, plaintiff suits etc.

11. MD&A – Quantification of changes is a major theme in SEC Comment Letters.

12. MD&A – Known trends – things that could make past not predictive of the future – No surprise stock drops!!

Hope all this helps, and if you have ideas for more topics, let us know!

XBRL Taxonomy Developments – Usually two or perhaps three for a while?

The SEC has formally approved the use of the 2015 XBRL Taxonomy. While this has not yet been generally announced in a press release it is highlighted with a “New” label on the SEC’s XBRL page at:

Generally, when a new taxonomy is approved the SEC discontinues use of the oldest taxonomy. They usually allow the use of two taxonomies, the newest year and the next newest year. (The FASB publishes a new taxonomy every year and submits it to the SEC who after review approves it for use by companies).

Now that the 2015 Taxonomy is approved for use the next earliest year, 2014 is also allowed, and the year before that, 2013, will be discontinued soon. Currently, as we approach quarter end, the SEC is allowing the use of all three of these taxonomies, 2015, 2014 and 2013. Likely the 2013 taxonomy will be discontinued soon, so if you are still using the 2013 Taxonomy it will be time to update soon. You should monitor the approved taxonomies at:

As mentioned, the FASB is now responsible for maintaining the US GAAP Taxonomy. At the FASB’s webpage you can find out about their project to simplify the taxonomy. It would be hard to find anyone who would not support that project!

And, just in case you have not heard about them yet, you can also find several implementation guides for specific tagging issues at the FASB’s webpage also. Check out:

Hope all this helps, and as usual your thoughts and comments are welcome!



Recent Happenings at the SEC

For those who have had their heads buried in their 10-K process, this is a hit list of things that the SEC has been working on that you might have missed.

FRM Update

The CorpFin staff updated the Financial Reporting Manual in early January. The only changes made related to the FASB’s adoption of pushdown accounting and the SEC’s rescission of the Staff Accounting Bulletin on that topic. You can find the updated manual at:

New C&DI

The CorpFin staff added a new compliance and disclosure interpretation that addresses the use of graphics in SEC filings. See the C&DI at:

Staff Review of Conflicting Shareholder Proposals

In light of the review of Exchange Act Rule 14a-8(i)(9) ordered by SEC Chair White, the CorpFin staff will express no views on shareholder proposals that directly conflict with a management proposal during the current proxy season. CD announcements at:—rule-14a-8i9-no-views.html#.VPC8Ryk0OJU and

Rule Proposal for Hedging Disclosure

In February, the SEC issued a rule proposal that would enhance corporate disclosure of company hedging policies for directors and employees, as mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposal would require disclosure about whether directors, officers and other employees are permitted to hedge or offset any decrease in the market value of equity securities granted by the company as compensation or held, directly or indirectly, by employees or directors.

You can find the rule proposal at:

Disclosure Effectiveness

As we discussed in our one hour briefing earlier this year, disclosure effectiveness is on the front burner of projects in CorpFin. What you may not have realized is that it is on the agenda of others at the SEC and outside the building. See for example: