Tag Archives: FINRA

Going Concern Reporting – The Gap in GAAP Versus GAAS- Part Two

By: George M. Wilson & Carol A. Stacey

 

In our last post, we looked at Sears Holdings’ disclosures about its going concern issues and saw that the company used the language “substantial doubt exists related to the Company’s ability to continue as a going concern” in the footnotes to their financial statements. We also saw that Sears Holdings’ auditors did not mention this issue in their report.

 

While this might seem like a bit of a disconnect, it turns out that there is a gap between the disclosure requirements for companies and the reporting requirements for auditors. (Actually, there are multiple gaps!)

 

This post reviews the GAAP requirements of ASU 2015-15, which became effective for companies for years ending after December 15, 2016.

 

In the third and last post of this series we will explore the auditor’s reporting requirements and the “gaps” between company requirements and auditor’s requirements.

 

Company Requirements

 

Here is a brief summary with some excerpts from the requirements for companies in ASC 205-40-50:

In connection with preparing financial statements for each annual and interim reporting period, an entity’s management shall evaluate whether there are conditions and events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable).

 

……………………………..

 

Management shall evaluate whether relevant conditions and events, considered in the aggregate, indicate that it is probable that an entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. The evaluation initially shall not take into consideration the potential mitigating effect of management’s plans that have not been fully implemented as of the date that the financial statements are issued (for example, plans to raise capital, borrow money, restructure debt, or dispose of an asset that have been approved but that have not been fully implemented as of the date that the financial statements are issued).

 

……………………………..

 

When relevant conditions or events, considered in the aggregate, initially indicate that it is probable that an entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (and therefore they raise substantial doubt about the entity’s ability to continue as a going concern), management shall evaluate whether its plans that are intended to mitigate those conditions and events, when implemented, will alleviate substantial doubt about the entity’s ability to continue as a going concern.

 

……………………………..

 

With this as the general requirement for an evaluation, the disclosure requirement comes with a binary determination about the impact of management’s plans:

 

Disclosures When Substantial Doubt Is Raised but Is Alleviated by Management’s Plans (Substantial Doubt Does Not Exist)

 

ASC 240-40-50-12

 

If, after considering management’s plans, substantial doubt about an entity’s ability to continue as a going concern is alleviated as a result of consideration of management’s plans, an entity shall disclose in the notes to financial statements information that enables users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the notes):

 

  1. Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans)
  2. Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
  3. Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.

 

 

 

Disclosures When Substantial Doubt Is Raised and Is Not Alleviated (Substantial Doubt Exists)

 

ASC 240-40-50-13

 

If, after considering management’s plans, substantial doubt about an entity’s ability to continue as a going concern is not alleviated, the entity shall include a statement in the notes to financial statements indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Additionally, the entity shall disclose information that enables users of the financial statements to understand all of the following:

 

  1. Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern
  2. Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
  3. Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

 

An interesting difference between these two levels of disclosure is that there is no requirement to use the terminology “substantial doubt” when management’s plans alleviate the uncertainty.

 

The language Sears Holdings used was:

 

Our historical operating results indicate substantial doubt exists related to the Company’s ability to continue as a going concern. We believe that the actions discussed above are probable of occurring and mitigating the substantial doubt raised by our historical operating results and satisfying our estimated liquidity needs 12 months from the issuance of the financial statements.

 

 

The company used the term “substantial doubt” even though they believed their plans mitigated this “substantial doubt”. Their disclosure went beyond the requirements of the standard.

 

In our next post, we will explore how this interacts with GAAS for auditors.

 

As always, your thoughts and comments are welcome!

Broker – Dealer Regulation Update

By: George M. Wilson & Carol A. Stacey

The pace of change challenged many broker-dealers and their auditors when the PCAOB became the standard setter for audits of broker-dealers. This is illustrated by the topics addressed in this PCAOB “Annual Report on the Interim Inspection Program”. Problems were found in areas including independence rules, auditing revenue recognition and auditing the Net Capital Rule.

 

To help broker-dealers and their auditors and attorneys keep up to date with this complex regulatory landscape we are offering our Fundamentals of Broker-Dealer Regulation program on July 17, 2017. The program will be presented in New York at our PLI Center. It will be webcast and groupcasts are available in several locations.

 

This program will help you build a solid foundation in the regulatory regime applying to broker-dealers, including what to expect next regarding broker-dealer regulation.  You will learn how the Securities Exchange Act of 1934, FINRA rules and state securities laws interact in governing the brokerage industry.

 

Significant focus will also be placed on recent exam and regulatory enforcement activity by the SEC, FINRA, and the states and about how broker-dealers are responding to these developments and the challenges ahead for the industry.

 

As always, your thoughts and comments are welcome!

Year-End Topic 6 – Should You Consider Any Issues for OCA Consultation?

As we approach year-end another issue to plan well in advance is whether or not you should ask OCA to pre-clear any extremely complex or subjective accounting decisions. This is a well-established process and when you are faced with a complex transaction, extremely subjective accounting determinations or an area where GAAP is not clearly established it makes sense to pre-clear the issue and avoid the possibility of restatement, amendment, or getting hung up in the CorpFin comment process. This is especially true when we know we will all be reviewed at least once every three years.

 

OCA’s process for consultation is outlined here. The process does need a significant amount of preparation and usually requires a few weeks to complete, sometimes more, so advance planning is important.   The document link above has a very detailed list of what needs to be included in your correspondence with OCA and what to expect from the process.

 

Since this is a consultation with the Office of the Chief Accountant, the answer you get will be definitive and cannot be over-ridden in the review process.

 

There is also a telephone consultation service you can use to consult with the CorpFin Chief Accountants office, a different process of course, but sometimes a good starting point. You can find out about this less formal process here.

 

Lastly, here is a recent list of frequent OCA consultation areas you can use to access whether your issues would benefit from this process:

 

Revenue Recognition, gross vs net etc.

Business combinations, who is the acquirer, business vs assets, contingent consideration

Financial assets, impairments valuation

Segments and aggregation

Consolidation VIE

Long lived assets, e.g. goodwill impairment

Taxes,

Leases

Pension

Debt vs equity

 

As always, your thoughts and comments are welcome!

Keeping Up With FINRA

FINRA, the Financial Industry Regulatory Authority and how this Self-Regulatory Organization affects us are less well known aspects of being a public company.   Perhaps you have seen a “FINRA list”, the list of people who have bought and sold your stock in the period surrounding a major change in your stock price. This is one of the tools that regulators use to search for insider trading. Or maybe you have read about how FINRA’s fines for broker/dealers are on a pace to set new records.

One way or another, we should all know about FINRA. You can find out a lot about them on their web page. Here is how FINRA describes their mission in the “About” section of their web page:

“FINRA is dedicated to investor protection and market integrity through effective and efficient regulation of the securities industry.

FINRA is not part of the government. We’re an independent, not-for-profit organization authorized by Congress to protect America’s investors by making sure the securities industry operates fairly and honestly.

We do this by:

writing and enforcing rules governing the activities of 3,895 securities firms with 641,761 brokers;

examining firms for compliance with those rules;

fostering market transparency; and

educating investors.”

Our independent regulation plays a critical role in America’s financial system—by enforcing high ethical standards, bringing the necessary resources and expertise to regulation and enhancing investor safeguards and market integrity—all at no cost to taxpayers.

FINRA’s role does go beyond broker/dealers. They also say:

FINRA uses technology powerful enough to look across markets and detect potential abuses. Using a variety of data gathering techniques, we work to detect insider trading and any strategies firms or individuals use to gain an unfair advantage.

In fact, FINRA processes, on average, 50 billion—and up to 75 billion—transactions every day to build a complete, holistic picture of market trading in the United States.

We also work behind the scenes to detect and fight fraud. In addition to our own enforcement actions, in 2015, we referred more than 800 fraud and insider trading cases to the SEC and other agencies. When we share information with other regulators, it leads to important actions that prevent further harm to investors.”

With this level of referrals, they are clearly a proactive watchdog of the markets! We all need to know who they are and what they do.

As always, your thoughts and comments are welcome.