Tag Archives: Audit

SEC Updates Revenue Recognition Guidance – We Knew It Was Coming!

By: George M. Wilson & Carol A. Stacey

More than a quarter in advance of the effective date of the FASB’s new revenue recognition guidance the SEC has made necessary changes in their own revenue recognition guidance. As you can read here, the Commission and Staff have addressed three areas:

 

  1. SAB Topic 13 and other Staff revenue recognition guidance
  2. Bill-and-hold guidance
  3. Vaccines for Government Stockpiles

 

SAB 116 rescinds SAB Topic 13, which contained much of the Staff’s legacy GAAP revenue recognition guidance. In addition, SAB Topic 8, Retail Companies, and Section A, Operating-Differential Subsidies of SAB Topic 11, Miscellaneous Disclosure, have been updated to conform with the new FASB revenue recognition model.

 

To update bill-and-hold guidance, this Commission Release rescinds existing bill-and-hold guidance, which interestingly was from an Accounting and Auditing Enforcement Release (AAER No. 108, In the Matter of Stewart Parness). Upon adoption of ASC 606 companies will instead use the guidance in ASC 606-10-55 paragraphs 81 to 84.

The third update relates to vaccines sold into government stockpiles under the Vaccines for Children Program or the Strategic National Stockpile. The new guidance replaces a 2005 release and continues the practice of recognizing revenue at the time a vaccine is placed in a stockpile program. In this release the commission states that in such arrangements revenue should be recognized at the time of the transfer of the vaccine to the stockpile because the customer will have obtained control of the vaccine and the criteria for revenue recognition under the new bill-and-hold guidance will be met.

As always, your thoughts and comments are welcome!

Join us at the 13th Annual SEC Reporting & FASB Forum for Mid-sized & Smaller Companies

SEC REPORTING
SEPTEMBER 14-15 – Las Vegas – Four Seasons Hotel Las Vegas Co-Chairs: Carol A. Stacey, MSA, CPA – Director, SEC Institute, a Division of PLI George M. Wilson, MBA, CPA – Director, SEC Institute, a Division of PLI

With a specific focus for mid-size and smaller companies, this program will help prepare you for successful third-quarter and year-end reporting processes. Hear from industry and topic experts about the impact of the new leadership at the SEC; rulemaking and projects at the SEC, FASB and PCAOB; and more!

  • FASB’s Lease standard will require potentially significant implementation efforts to meet a 2019 effective date – understand the standard and implementation challenges and what steps to take now
  • Revenue Recognition adoption is less than four months away – hear the experiences of early adopters and understand key last-minute issues, including how to design the required disclosures
  • Learn about recent known-trend enforcement cases and understand the current focus areas of investors and regulators
  • Understand how the Financial Instrument Impairment standard affects all companies and its impact to the allowance for trade accounts receivable
  • A roundtable discussion of current events, such as the SEC’s rulemaking and enforcement agendas; FASB’s direction; PCAOB recent developments, including the new Auditor’s Report standard; and corporate governance updates

Register Here: http://www.pli.edu/Content/13th_Annual_SEC_Reporting_FASB_Forum_for/_/N-1z10lptZ4k?ID=298604

 

 

A New Look

Hey, if you haven’t been there in a while, go check out the SEC’s home page!

As always, your thoughts and comments are welcome!

 

  • We are the Investor's Advocate

    The SEC protects investors, promotes fairness in the securities markets, and shares information about companies and investment professionals to help investors make informed decisions and invest with confidence.

Icon: We Inform and Protect Investors
We Inform and Protect Investors
Icon: We Facilitate Capital Formation
We Facilitate Capital Formation
Icon: We Enforce Federal Securities Laws
We Enforce Federal Securities Laws
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We Regulate Securities Markets
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We Provide Data

 

 

 

Master SEC Reporting and Prepare to Tackle New Challenges – August & September Dates Announced

The complicated world of SEC reporting has now gotten even more complicated! Be sure you are prepared to comply with the recently enacted changes and have a plan in place to deal with the SEC staff “hot buttons”. Attend SECI’s live workshop SEC Reporting Skills Workshop 2017 being held August 17-18 in New York City, August 21-22 in Grapevine and September 25-26 in San Francisco with additional dates and locations listed on the SECI website.

 

http://www.pli.edu/Content/SEC_Reporting_Skills_Workshop_2017/_/N-1z10oe8Z4k?ID=290537

 

The MD&A Know Trend Test – Staying Out of Trouble!

By: George M. Wilson & Carol A. Stacey

 

In our last post we reviewed a recent MD&A enforcement case focused on failure to disclose bad news. This forward looking “known-trend” disclosure requirement arises when management is aware of some “trend, demand, commitment, event or uncertainty” that could cause a material problem and fails to disclose this information to shareholders.   The S-K Item 303(a)(3)(ii) language creating this requirement is:

 

Describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.

 

One of the challenging parts of this requirement is the “reasonably expects” probability threshold. What exactly does this mean? The Staff addressed this requirement in FR 36 with this language:

 

Where a trend, demand, commitment, event or uncertainty is known, management must make two assessments:

 

(1) Is the known trend, demand, commitment, event or uncertainty likely to come to fruition? If management determines that it is not reasonably likely to occur, no disclosure is required.

 

(2) If management cannot make that determination, it must evaluate objectively the consequences of the known trend, demand, commitment, event or uncertainty, on the assumption that it will come to fruition. Disclosure is then required unless management determines that a material effect on the registrant’s financial condition or results of operations is not reasonably likely to occur.

Each final determination resulting from the assessments made by management must be objectively reasonable, viewed as of the time the determination is made.

 

The language that makes this test challenging is the first part of paragraph (2). In essence, if management cannot make the assumption that a known trend is “not reasonably likely to come to fruition” in step one it must assume that it will come to fruition.

 

What would this mean if there were a 50/50 chance of something bad happening? As an example, suppose that your goodwill is not impaired this year-end, but the numbers in step one of the impairment test have been deteriorating with this trend:

 

                                                                                                                                                                                                                                                                         2014              2015              2016

Fair value of reporting unit                $3,000             $2,500             $1,900

Carrying value of reporting unit         $1,800             $1,800             $1,800

Excess of FV over CV                                 $1,200             $   700             $   100

 

 

There is clearly a trend here, and while management is likely doing all they can to make the business work, what if their assessment is that there is a 50/50 chance that the goodwill may be impaired next year? While there is no accounting recognition, the MD&A known trend disclosure requirement would say that this potential impairment, if it is material, should be disclosed.

 

This is not an easy determination, but the enforcement case in the last post makes it clear that it is crucial to get this disclosure right!

 

As always, your thoughts and comments are welcome!

Revenue Recognition – The Clock is ticking!

Are you ready to implement the FASB/IASB New Revenue Recognition Standard? With just a handful of months to go – The countdown is on! SECI is conducting training workshops throughout the U.S. to prepare filers for the changes and arm them with the tools for implementation. Workshop leaders use interactive lecture, examples and case studies to impart solid knowledge of the provisions of the FASB’s and IASB’s new revenue recognition standard and build an understanding of how the new standard changes revenue recognition accounting and also how it affects the related estimates and judgements. Upcoming workshops include August 24-25 in Grapevine, September 11-12 in Las Vegas and December 13-14 in New York City.

http://www.pli.edu/Content/Implementing_the_FASBIASB_New_Revenue_Recognition/_/N-1z10od3Z4k?ID=290619

MD&A: A New Known-Trend Enforcement Case

By: George M. Wilson & Carol A. Stacey

 

One of the “golden rules” of MD&A we discuss in our workshops is “no surprise stock drops”. (Thanks to Brink Dickerson of Troutman Sanders for the rules!) Actually, it is OK if management is surprised with a stock drop. However, it can be problematic if management previously knew of some issue that, when disclosed, causes a surprise stock drop for investors.

 

The classic start to a known trend enforcement case is a company announcement that results in a stock price drop. On February 26, 2014, UTi, a logistics company, filed an 8-K with news of a severe liquidity problem. UTi’s shares fell to $10.74, a decline of nearly 30% from the prior day’s close of $15.26.

 

The reason this is an SEC reporting issue is this paragraph from the MD&A guidance in Regulation S-K Item 303 paragraph (a)(3)(ii):

 

Describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations. If the registrant knows of events that will cause a material change in the relationship between costs and revenues (such as known future increases in costs of labor or materials or price increases or inventory adjustments), the change in the relationship shall be disclosed. (emphasis added)

 

If management knows of some sort of uncertainty that could result in a material impact if it comes to fruition, they must evaluate whether they “reasonably expect” this to happen. If they do “reasonably expect” this to happen then it should be disclosed in MD&A.

 

When there is a surprise stock drop like the one experienced by UTi, the questions the SEC Enforcement Division will ask, to borrow from another context, are “what did management know about the problem” and “when did they know it?”

 

Enforcement Release, AAER 3877 revealed that the genesis of UTi’s liquidity problem was an issue in the implementation of a new IT system that created billing problems. And, it was clear from the facts, including an internal PowerPoint presentation, that management knew they had a problem well before they filed the 8-K.

 

However, in their 10-Q for their third quarter ended October 31, 2013, which was filed in December of 2013, UTi did not disclose the liquidity problem. In fact, they said:

 

Our primary sources of liquidity include cash generated from operating activities, which is subject to seasonal fluctuations, particularly in our Freight Forwarding segment, and available funds under our various credit facilities. We typically experience increased activity associated with our peak season, generally during the second and third fiscal quarters, requiring significant disbursements on behalf of clients. During the second quarter and the first half of the third quarter, this seasonal growth in client receivables tends to consume available cash. Historically, the latter portion of the third quarter and the fourth quarter tend to generate cash recovery as cash collections usually exceed client cash disbursements.

 

They also made no mention of the implementation problems with their new IT system. They actually said:

 

Freight Forward Operating System. On September 1, 2013, we deployed our global freight forwarding operating system in the United States. As of that date, based on a variety of factors, including but not limited to operational acceptance testing and other operational milestones having been achieved, we considered it ready for its intended use. Amortization expense with respect to the system began effective September 2013, and accordingly, we recorded amortization expense related to the new application of approximately $3.3 million during the third quarter ended October 31, 2013.

 

Hence the surprise when the 8-K disclosed the problems. Both the CEO and CFO are also named in the Enforcement Release and paid penalties.

 

As mentioned above, the probability standard for disclosure is “reasonably expects”. More about this complex probability assessment in our next post!

 

As always, your thoughts and comments are welcome!

Business Combinations Accounting Guidance Now Delivered in a Pragmatic, Practical Way

Gain an in-depth understanding of how to apply the FASB standard (codified in ASC 805) on business combinations, including recent related ASUs, how to make journal entries in specific situations, the areas where estimation and judgment is required, the SEC requirements for financial statements and pro forma information for significant business combinations, and the appropriate financial statement disclosure. Attend SECI’s live interactive workshop, Accounting for Business Combinations being held August 16th in New York City. http://www.pli.edu/Content/Accounting_for_Business_Combinations_Workshop/_/N-1z10od5Z4k?ID=290625&t=WLH7_ADDP

Master SEC Reporting and Prepare to Tackle New Challenges

The complicated world of SEC reporting has now gotten even more complicated! Be sure you are prepared to comply with the recently enacted changes and have a plan in place to deal with the SEC staff “hot buttons”. Attend SECI’s live workshop SEC Reporting Skills Workshop 2017 being held July 20-21 in Las Vegas, August 17-18 in New York City and August 21-22 in Grapevine with additional dates and locations listed on the SECI website.

http://www.pli.edu/Content/SEC_Reporting_Skills_Workshop_2017/_/N-1z10oe8Z4k?ID=290534

Revenue Recognition – The Clock is ticking!

Are you ready to implement the FASB/IASB New Revenue Recognition Standard? With just a handful of months to go – The countdown is on! SECI is conducting training workshops throughout the U.S. to prepare filers for the changes and arm them with the tools for implementation. Workshop leaders use interactive lecture, examples and case studies to impart solid knowledge of the provisions of the FASB’s and IASB’s new revenue recognition standard and build an understanding of how the new standard changes revenue recognition accounting and also how it affects the related estimates and judgements. Upcoming workshops include August 24-25 in Grapevine, September 11-12 in Las Vegas and December 13-14 in New York City.

http://www.pli.edu/Content/Implementing_the_FASBIASB_New_Revenue_Recognition/_/N-1z10od3Z4k?ID=290619