Monthly Archives: January 2016

Keeping up with the IPO Market – An IPO Resource Update

Last December the US Government passed the Fixing America’s Surface Transportation Act or FAST Act……um, wait, isn’t this an SEC Reporting Blog? Well, as frequently happens when a “must pass” bill is in the legislative process congress members and senators add many amendments that are unrelated to the original bill. One of those ride-along areas in the FAST Act turns out to be SEC reporting related.

Several of the provisions relate to Emerging Growth Companies and their path through the IPO process. Others relate to disclosure effectiveness and improving the reporting system. Check the last section of this post and you can read a summary of these legislative changes.

Congress tinkering with the IPO process raises the question, just what is the state of the IPO market?

One great resource that provides a weekly update about the IPO market with details by industry and other factors is PWC’s weekly newsletter “Capital Markets Watch”. You can find the current and past issues at:

The IPO market here in the US was fairly strong last year. That said, uncertainty and market volatility have a strong impact on IPO demand and given this year’s start in the capital markets it is difficult to predict how IPO’s will fare this year. One thing for sure, it will be interesting to watch!

One of the things you learn as you watch the ebb and flow of IPO’s is that there is a clear seasonal pattern in this market, which companies should allow for in their planning. Fall is usually a strong period in this market. Which means it is important to begin the process early in the year.

If you are in the process of considering an IPO, PLI has a wealth of resources. Our treatise “Initial Public Offerings: A Practical Guide to Going Public” will help you build a thorough understanding of the process. You can learn about it at:

Our full-day conference “Securities Offerings 2016: A Public Offering: How It Is Done”, which will be on March 11 this year, is a good deep-dive into the process. The program will be presented live in New York and is available via webcast also. You can learn all about the program at:

Lastly, here is a brief summary of the major SEC related provisions of the FAST Act.

This Act:

Updates certain provisions of the Jumpstart Our Business Startups Act (JOBS Act), and

Requires the SEC to review and update certain SEC reporting requirements.

The Act’s goal is to make capital raising by smaller companies easier. Some of the changes are self implementing and will take effect immediately, others will require SEC rulemaking.

Under the original provisions of the JOBS Act a company could lose EGC status during the IPO process. This would happen for example if revenues exceeded $1 billion before the effective date of a registration statement. The FAST Act allows a company in the IPO process to “lock in” its EGC status. This status will last for up to one year after the company fails to qualify as an EGC. In this case a company will be treated as an EGC through its IPO date, or one year after it ceases to meet the EGC criteria, whichever is earlier. This provision is effective immediately.

The original provisions of the JOBS Act require that all confidential submissions be made public at least 21 days before marketing the company’s stock. The FAST Act changes this to 15 days before marketing, or effectiveness if there isn’t a road show. (Typically marketing begins with the road show.)   This provision is effective immediately.

Under the FAST Act an EGC may omit financial information from a confidential submission or public filing if the company reasonably believes that it will not be required under the rules when the registration statement is declared effective. For example, prior year F/S would not be required if a company believes they will not be required when the registration statement is declared effective. This could be true for certain interim information also. The SEC has already considered extending this provision to all companies.

The Act also requires the SEC to amend its rules to allow a summary page in Form 10-K. Each item should include a cross-reference to where the relevant information is included in the annual report.  This may be a hyperlink. While the SEC is required to do this within 180 days a company could actually do this now.

The Act also requires the SEC to review and amend Regulation S-K to provide additional scaling or eliminate requirements for accelerated filers, EGCs, SRCs and other smaller issuers to reduce reporting burdens while still providing all material information to investors. This review is also designed to remove redundant, outdated or unnecessary disclosures for all issuers. The SEC is required to do this within 180 days

The Act requires a second S-K study to be done in conjunction with the SEC’s:

Investor Advisory Committee and

Advisory Committee on Small and Emerging Companies

The focus of this review is to:

Modernize and simplify requirements

Reduce costs and burdens

Still provide all material information to investors


This review should:

Emphasize a “company-by-company” disclosure model

Reduce boilerplate language

Maintain completeness

Provide for comparability across companies

Evaluate methods of information delivery and presentation

Explore methods for reducing repetition and the disclosure of immaterial information

The SEC must complete the study and issue a report to Congress including detailed recommendations with 360 days and then propose rules 360 days after the first study is issued.

The FAST Also includes a new exemption for private companies, Section 4(a)(7) of the Securities Act, which will provide for private re-sales of restricted securities. Purchasers will have to be accredited investors and general solicitation and advertising will not be permitted.

The FAST Act also provides for forward incorporation in Forms S-1 and F-1 by smaller reporting companies. This will obviate the need to file prospectus supplements or post-effective amendments.

Savings & loan holding companies now have the same registration thresholds as banks and bank holding companies.

The SEC has already update some JOBS Act FAQs and has even discussed broadening some of the provisions.

There is a lot here, and if you would like to learn more about the FAST Act we have a recorded program with details at:

As always, your thoughts and questions are welcome!


10-K Tip Number Two for 2016


The second tip from our January 7th One-Hour Briefing “PLI’s Second Annual Form 10-K Tune-up” (which will also be available in an On-Demand version soon) is under the category of New and Emerging Issues – PCAOB Auditing Standard 18 Related Parties (Release No. Release 2014-002, and PCAOB Auditing Standard 17 Auditing Supplemental Information Accompanying Audited Financial Statements (Release No. 2013-008

A warning for those who see “PCAOB” and assume they can skip this one. AS 18 will require auditors to do more work, which could be significant depending on the facts and circumstances. This will likely trickle down to companies and their audit committees causing more work in the areas outlined below in the form of more inquiry, documentation, and testing, including ICFR. So read on…

AS 18


The PCAOB adopted AS 18 in Release 2014-002 mainly to strengthen auditor performance in the areas of:

Related party transactions,

Significant transactions that are outside the normal course of business, and

Financial relationships and transactions with executives


Collectively these areas are referred to as “critical areas”, essentially high-risk areas, and the new Audit Standards require specific audit procedures for each area. The adopting release cited increased risks of material misstatement and fraudulent financial reporting involving these areas as motivating factors in issuing AS 18.


AS 18 addresses:


  • Relationships and transactions with related parties: Related party transactions may involve difficult measurement and recognition issues as they are not considered to be arms-length transactions. Therefore these transactions could lead to fraud or misappropriation of assets, and in turn result in errors in the financial statements, and could increase the risk of a material misstatement.


  • Significant unusual transactions: Significant unusual transactions can create complex accounting and financial statement disclosure issues that could cause increased risks of material misstatement and fraud. Another risk cited is the potential for inadequate disclosure if the form of the transaction is disclosed over its substance.


  • Financial Relationships and Transactions with Executive Officers: Financial relationships and transactions with executive officers can create incentives and pressures for executive officers to meet financial targets, resulting in risks of material misstatement to the financial statements.


So, what hasn’t changed:

  • The definition of related party, which the PCAOB pegged to the definition in the applicable GAAP the company uses
  • The accounting for related party transactions
  • The financial statement or regulatory (SEC) disclosure requirements


So, what has changed?:

  • The procedures are more specific and risk-based
  • Additional required communications with the audit committee have been added, see paragraph 19 of Release 2014-002
  • Three matters were added to the auditor’s evaluation of significant unusual transactions (see paragraph AU 316.67 as amended by this AS, which is paragraph AS 2401.67 in the reorganized PCAOB Audit Standards)
  1. The transaction lacks commercial or economic substance, or is part of a larger series of connected, linked, or otherwise interdependent arrangements that lack commercial or economic substance individually or in the aggregate (e.g., the transaction is entered into shortly prior to period end and is unwound shortly after period end;
  2. The transaction occurs with a party that falls outside the definition of a related party(as defined by the accounting principles applicable to that company), with either party able to negotiate terms that may not be available for other, more clearly independent, parties on an arm’s-length basis
  3. The transaction enables the company to achieve certain financial targets.


What companies should do now:

  • Become familiar with AS 18
  • Document the company’s process and related controls over (see paragraph 4 of Release 2014-002) :
  • Identifying related parties and relationships and transactions with related parties,
  • Authorizing and approving transactions with related parties, and
  • Accounting for and disclosing relationships and transactions with related parties
  • Gather and document the information auditors are required to inquire about, (see PCAOB Release No. 2014 -002, page A1-3, starting at par. 5)


Audit committees should:

  • Become familiar with AS 18 and AS 17
  • Understand the company’s process and related controls over identifying related party transactions and
  • Be prepared for the auditor’s inquiry that is outlined in paragraph 7 on page A1-4 of Release 2014-002.


AS 17


The PCAOB adopted AS 17 to improve the quality of audit procedures performed and related reports on supplemental information that is required by a regulator when that information is reported on in relation to financial statements that are audited under PCAOB standards. The standard requires an audit for certain supplemental information, such as:

  • the schedules in Form 11-K (employee benefit plans) where the plan financial statements and schedules are prepared in accordance with the financial reporting requirements of ERISA, and
  • the supplemental schedules required by broker-dealers under SEC rule 17a-5


Paragraphs 3 & 4 of Appendix 1 specifies audit procedures that the auditor should perform, and paragraph 5 contains the management representations the auditor will be asking for. The auditor may provide either a standalone auditors report on supplemental information accompanying audited financial statements will or may include the auditor’s report on the supplemental information in the auditor’s report on the financial statements.


As always, your thoughts and comments are welcome!




10-K Tip Number One for 2016

Happy New Year from all of us at the SEC Institute Division at PLI! We hope your new year is beginning well and if you are working on closing year-end December 31, 2015 that all is proceeding smoothly.

Last week, on January 7, 2016, Carol and George (that being us of course, the bloggers you are reading now!) presented a One-Hour Briefing, “PLI’s Second Annual Form 10-K Tune-up”. In the briefing we discussed three broad groups of issues to think about this year-end. These were New and Emerging Issues, Recurring Issues, and SEC Staff Focus Areas. Here is the complete list of the topics we discussed in the One-Hour Briefing:

  • New and Emerging Issues
    • Customer accounting for fees paid for cloud computing arrangements
    • PCAOB AS 18 Related Parties – impacts both auditors & registrants
    • PCAOB AS 17 Auditing Supplemental Info Accompanying Audited F/S
    • Audit Committee disclosure
    • ICFR and COSO
  • Recurring Issues
    • SAB 74 disclosures for Revenue Recognition and others
    • Disclosure effectiveness
    • Cybersecurity
    • Conflict minerals & Form SD disclosure
  • SEC Staff Focus Areas
    • Segments – focus on ASU 280
    • Statement of Cash Flows
    • Income taxes
    • Fair value
    • Foreign Exchange Rates, Commodity Prices, and Interest Rates


You can hear everything we discussed in an On-Demand version of the Briefing that will be available soon.

To augment the Briefing we are writing a series of blog posts to dive more deeply into each of the areas we discussed than the one-hour time limit allowed.

The first issue, customer accounting for fees paid for cloud computing arrangements, relates to ASU 2015-5. This ASU is effective for public business entities for periods beginning after December 15, 2015. For other entities the effective date is one year later.

One of the major issues in this new standard is that costs associated with a contract may be accounted for differently depending on whether the contract involves a software license or is only a service contract.

To get to that issue we need to review the major provisions of the ASU.

This project arose with the increase in the use of “cloud” based computing systems. These generally include “software as a service agreements” (SaaS) and other types of “software hosting” arrangements. There was no clear guidance about how customers should account for such arrangements. As a consequence, it was unclear whether these were software contracts subject to software accounting guidance or simply service contracts or perhaps a hybrid of the two accounting areas.

The ASU puts paragraph 350-40-15-4A into the ASC section dealing with internal use software:

“The guidance in this Subtopic applies only to internal-use software that a customer obtains access to in a hosting arrangement if both of the following criteria are met:

  1. The customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty.
  2. It is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software.”

If the above criteria are not met then the contract does not involve a software license and is a service contact.

The key issue here is that if the two criteria are met, then the agreement is treated as a multiple element arrangement and the costs are allocated between the software license and a service element associated with the hosting contract. The costs associated with the software license fall into the guidance for costs related to internal use software, or if appropriate, another software model such as software to be used in research and development.

On the other hand, if there is no software license element, then the contract is treated as any other service contract.

The financial reporting implications of this distinction can affect issues such as balance sheet classification, since a software license would be accounted for as an asset in appropriate circumstances, i.e. if it was paid for in advance. Income statement geography can also be affected as software amortization versus service contract expense could be in different income statement line items. And, it is possible that the amount of costs recognized in each period could be different.

This perhaps more complex issue depends on whether the arrangement includes a software license. If it does include a software license the internal use software guidance applies. The expense recognition part of this guidance is articulated in ASC 350-40-30:

30-1     Costs of computer software developed or obtained for internal use that shall be capitalized include only the following:

  1. External direct costs of materials and services consumed in developing or obtaining internal-use computer software. Examples of those costs include but are not limited to the following:
  2. Fees paid to third parties for services provided to develop the software during the application development stage
  3. Costs incurred to obtain computer software from third parties
  4. Travel expenses incurred by employees in their duties directly associated with developing software.
  5. Payroll and payroll-related costs (for example, costs of employee benefits) for employees who are directly associated with and who devote time to the internal-use computer software project, to the extent of the time spent directly on the project. Examples of employee activities include but are not limited to coding and testing during the application development stage.
  6. Interest costs incurred while developing internal-use computer software. Interest shall be capitalized in accordance with the provisions of Subtopic 835-20.

These costs can even include the costs of data conversion.

For service contracts, there is no such guidance. And here in fact lies the more problematic issue. If a cloud based computing arrangement includes a software license the internal use software guidance for costs may require capitalization of costs that would not be capitalized if the contract is only a service contract. Thus the amount of expense recognized for an arrangement could be different if it has a software license or does not have a software license. If you have this situation, careful analysis is crucial!

As always, your thoughts and comments are welcome!