Tag Archives: form 10-k

Why, Oh Why, Is It Always Segments?

By: George M. Wilson & Carol A. Stacey

If you have been involved with SEC reporting for more than say, five minutes, you have heard about or discussed with someone the SEC’s focus on operating segments. Segment related disclosures are included in several Form 10-K Items, including:

Item 1 – Description of the business,

Item 2 – Properties,

Item 7 – MD&A, and of course

Item 8 – Financial Statements.

Almost every SEC conference or workshop addresses the importance of segment disclosures.

The latest segment “message” from the SEC is in the November 7, 2016 Accounting and Auditing Enforcement Release dealing with PowerSecure.

It is the same familiar message we heard in the Sony case in 1998 and the PACCAR case in 2013. When companies avoid making proper GAAP disclosures for operating segments to try and bury problems in one part of a business with profits from another part of their business, trouble will result.

In the “classic” Sony case the company used profits from its music business to mask problems in its movie business. This case also has a great known trend disclosure problem and becomes an almost scary “double trouble” example. To escalate this case to “triple trouble” the SEC also made it clear that Sony’s assignment of MD&A to the IR manager was not appropriate by naming that person in the case and forcing Sony to reassign this responsibility to the CFO. With all that was going on with Sony the SEC went so far as to require the company to engage its auditors to “examine” MD&A. Surprisingly, under the attest standards, auditors can issue a full opinion report on MD&A!

In the PACCAR case problems in new truck sales were hidden with profits from truck parts sales. This SEC Complaint includes a very detailed summary of the operating segment disclosure requirements, discussing in detail how PACCAR’s management viewed the business and how, in the SEC’s judgement, PACCAR was not following the GAAP requirements. It includes this language:

“However, in reporting its truck and parts results as a single segment, PACCAR did not provide investors with the same insight into the Company as PACCAR’s executives.”

This story line repeats in PowerSecure. For the periods in question PowerSecure reported one segment when that was not how management actually viewed the business:

“PowerSecure also misapplied ASC 280 by concluding that its CODM – who was determined to be the Chief Executive Officer (“CEO”) – did not regularly review operating results below the consolidated level to make decisions about resource allocations and to assess performance. This was inconsistent with the way in which the CEO regularly received, reviewed, and reported on the results of the business and how the company was structured. On a monthly basis, the CEO received financial results that reflected a measure of profitability on a more disaggregated level than the consolidated entity. Further, on a quarterly basis, the CEO met with each business unit some of the business unit leaders had business unit level budgets and forecasts and received incentive compensation based, at least in part, upon the results of their business unit.“

The message is clear, don’t use segments to try and hide problems! As a last reminder, don’t forget that these disclosure requirements may go to an even lower level than operating segments in MD&A. Regulation S-K Item 303 makes this clear:

“Where in the registrant’s judgment a discussion of segment information or of other subdivisions of the registrant’s business would be appropriate to an understanding of such business, the discussion shall focus on each relevant, reportable segment or other subdivision of the business and on the registrant as a whole.”

As always, your thoughts and comments are welcome!

 

Third Annual Form 10-K Tune-Up

As you draft your annual Form 10-K it is always a challenge to be sure that you deal effectively with new and emerging issues and the ever-evolving focus areas of the SEC. Register for our January 23rd One Hour Briefing, Form 10-K Tune-Up. Review the key issues to address in this year’s Form 10-K, including the latest in SEC Staff comments about non-GAAP measures; new accounting standards, revenue recognition, leases and financial instruments.

http://www.pli.edu/Content/Seminar/Third_Annual_Form_10_K_Tune_Up_/_/N-4kZ1z10jog?Ns=sort_date%7c0&ID=301955

A Control Environment and History Follow-Up

By: George M. Wilson & Carol A. Stacey

 

This famous quote has been in our thoughts over the last several months:
“Those who cannot remember the past are condemned to repeat it.”

George Santayana, the poet and essayist, wrote these famous words in his book The Life of Reason. Many other people including Winston Churchill have thoughtfully incorporated this fundamental principle of life in speeches and remarks.

Another favorite variation of the idea comes from Mark Twain:
“History doesn’t repeat itself, but it does rhyme.”

The lesson here is that if we learn history we can hopefully avoid making the same or similar mistakes in the future. As we discussed a couple of posts back, recent public company news shows that many organizations have not been learning from the past.

 

One person who can help us learn about history we do not want to repeat is Cynthia Cooper. She was the WorldCom head of internal audit who built and lead the team that worked almost “under cover” to find the largest fraud ever discovered. This was a tone at the top fraud, involving the CEO, CFO and CAO. Her book is a sometimes-chilling story of how bad tone at the top results in fraud.

 

Sharron Watkins is another person who can help us learn how to not repeat history. She was the Enron Vice President, a direct report to Andy Fastow, who blew the whistle about Enron’s accounting irregularities. And we all know perhaps too much about that fraud which was even the subject of a book and related movie “Enron: The Smartest Guys in the Room”.

 

Corporate ethics will never be easy, but as history and current events show, it does matter. If leadership of an organization sends the message that making money is the most important thing an organization does, if it sends the message that if you don’t make money you will be fired, if it sends the message that other values can be sacrificed if you make money, the ultimate result is inevitable. In countless frauds over centuries, from Ivar Kreuger, the match king in the early 1900s, to Equity Funding in the 1970s, to Madoff, to Enron, to the companies we are talking about today, this lesson has been proven time and time again.

 

These stories can help us learn and avoid the mistakes others have made. They can be the focus of training and learning. They can be the foundation for building awareness and support for these issues in organizations large and small.

 

As always, your thoughts and comments are welcome.

Three Years of Fun – Planning the “Big Three” New FASB Statement Transitions

by: George M. Wilson & Carol A. Stacey, SEC Institute

We have all heard about the major projects the FASB has completed in recent years. Together with their implementation dates for public companies and allowed transition methods they are:

Revenue recognition: January 1, 2018. (F/Y’s beginning after December 15, 2017)

Early adoption is allowed to the original effective date, F/Y’s beginning after 12/15/16). Either a retrospective or modified retrospective with a cumulative effect adjustment transition may be used.
Leases: January 1, 2019. (F/Y’s beginning after December 15, 2018)

Early adoption is allowed. A retrospective transition must be used. The retrospective approach includes several practical accommodations.

Financial Instrument Impairment: January 1, 2020 (F/Y’s beginning after December 15, 2019)

Early adoption to years beginning after December 15, 2018 is allowed. The transition method is essentially a “modified retrospective approach with a cumulative effect adjustment” with adjustments for certain types of financial instruments.
The revenue recognition and lease changes have been widely discussed, but the financial instruments impairment change has not been as “hot” a topic. It could be problematic for some companies as it will apply to all financial instruments, including accounts receivable. Many companies could face significant challenges gathering the information to move from the current incurred loss model to the new expected loss model.
While the impact of each new standard will vary from company to company, every company needs to think about how to manage these three transitions. Will it be best for your company to adopt all three at once, or will it be best to adopt them sequentially? Or perhaps mix and match a bit?
There are several considerations in these implementation date decisions. How they will affect investor relations is a major issue. The time and other resources required, systems issues and ICFR impact are among the other inputs to this decision. Each company has to evaluate these considerations based on their own circumstances.
Given the potential magnitude of these changes and their widespread discussion in the reporting environment, disclosures about these changes have become more and more important to users. With the recent SEC Staff Announcement at the September EITF meeting about SAB 74 (SAB Codification Topic 11-M) disclosures, disclosing where you are in this process has become almost required. The more or less simple “standard” disclosures about “we have not selected a transition method” and “we do not yet know the impact” may not be enough. Qualitative information about where you are in the process may be a required disclosure.

There are strong incentives to move diligently on these transitions and to tell investors where you are in the process. And, anyway, who really wants to look unprepared?
Three years of sequential fun or big change? Spread it out or rip off the Band-Aid? Slow burn or big bang? We all get to decide what will be best for our company and our investors, the key issue is to make this decision on a timely basis!

 

As always, your thoughts and comments are welcome!

SECI Annual Forum Returns to Dallas, New York City & San Francisco!

Annual reporting season is here and the Division of Corporate Finance has been busy! Revisions to non-GAAP guidance is being finalized as well as the pay ratio rule and thousands of 10-Ks are being reviewed.

Revenue Recognition and Leasing Standards have been finalized and companies are faced with implementing compliance.

Register today for our 32nd Annual SEC Reporting & FASB Forum being offered November 14-15 in Dallas, December 12-13 in New York City and December 19-20 in San Francisco.

  • Get the latest updates on What’s Happening NOW in World of SEC Reporting
  • Earn CPE credit
  • Network with other Practitioners

Our Reporting Roundtable will lead a lively discussion of current events including simplification overload, disclosure effectiveness, juggling Rev. Rec., Leases, CECL adoptions and more.

Follow this link to Register today and reserve your spot!

http://www.pli.edu/Content/32nd_Annual_SEC_Reporting_FASB_Forum/_/N-1z11c8sZ4k?ID=262904

 

 

 

 

 

 

 

Revenue Recognition – How Much Time Will You Really Need?

By: George M. Wilson & Carol A. Stacey, SECI Institute

Much has been written and said about the resources and time that will be required to implement the new revenue recognition standard. All public companies must implement the new standard for fiscal periods beginning after December 15, 2017, roughly 15 months from now. For calendar year-end companies, the first report on Form 10-Q using the new model will be filed in about 18 months. Time is, well, short.

Even the SEC has expressed their concerns about this transition. If you have not seen their comments, check out their expansion of SAB 74 disclosures announced at the September EITF meeting in this post.

Now, we are not writing this post to nag people. Our goal is to help you assess your particular situation with a deeper understanding of the areas you will need to address and the time and resources you will need. Armed with appropriate information you can build a plan and obtain the requisite resources.

Amidst all the commentary there isn’t much detail about the specific challenges in transitioning to the new revenue recognition model. Obviously a single blog post can’t do that either! But what we can do is help you with some starting points that your situation analysis will have to address to determine the resources your company will need. So, here are highlights of three of the more involved areas.

 

  1. As you likely know the new standard is contract based. Step one in the five step revenue recognition model is to identify contracts with customers. This means you need processes and controls to assure all contracts with customers are identified and tracked. And, perhaps more complex, modifications to contracts will need to be tracked and recorded. How much work and time will be required to build the systems to capture and control this information flow?

 

  1. The new standard requires many judgments, including, what are your performance obligations, how you will estimate variable consideration and how you will estimate stand-alone selling price to allocate consideration. How much time will you need to build these processes and the controls surrounding these processes?

 

  1. Even if the timing of your revenue recognition will not change, you will need to make substantially more disclosures including what are your performance obligations, how and when they are satisfied, how you estimate variable consideration and how you estimate stand-alone selling price. Perhaps the most subjective of all the new disclosures is the requirement to disaggregate revenue based on how different revenue streams are affected by “economic factors”. How much time will you need to assess “economic factors” and make these kinds of judgments about disclosures?

 

This process will be different for every company. For a retailer the process will likely need less time than for a custom manufacturer. But all companies will need some time. The time to analyze the new standard, build the policies for how the new standard will apply to your business, do the proper documentation, build processes and establish controls is what this is all about. And while it may not change how or when some companies recognize revenue, it will affect how and when you make disclosures.

This discussion does not even begin to address a raft of other issues companies face such as the decision about which transition method to use or how you will assess when customers “obtain control” of a product or service to determine the time revenue is recognized under the new standard.

So, again, not to nag, we do urge you to begin your planning process and if you have not yet done so, begin to learn how the new standard works and assess how it will apply to your business.

If you would like to let us know where are you in the process, we will share aggregate status reports in future posts.

Here are some example status updates.

Aware of the new standard.

Studying the new standards to learn how it works.

Reviewing how the new standard will apply to your business.

Drafting the policy white paper for the new standard.

Modifying accounting systems and processes for the new standard.

Updating IT systems or acquiring IT systems for the new standard.

Implementing new IT systems.

Currently running parallel between the old and new standard.

 

As always, your thoughts and comments are welcome!

Year-End Planning Topic Number 5 – Disclosure Effectiveness

Our year-end conferences have begun with the presentation of our 12th Annual SEC Reporting & FASB Forum for Mid-sized & Smaller Companies in Las Vegas last week and will continue with our 32nd Annual SEC Reporting & FASB Forums in November and December.

Disclosure effectiveness is a theme that is already emerging from CorpFin at these conferences.

As we think about how we communicate with shareholders this is another year-end planning consideration. We have done a number of posts about disclosure effectiveness and how the SEC (and FASB) are working on projects to make disclosure more effective. This project has roots that go back a good way, and both the JOBS Act and the FAST Act have helped it build momentum.

You can find a nice review of the SEC’s Concept Releases and related proposals about disclosure effectiveness here. All this rule making will, of course, require time as the SEC requests comments and revises its proposals based on constituent feedback.

In the meantime, the Staff is sending a clear message to make disclosures more effective right now. At our recent conference, CorpFin reminded everyone that SEC reports are intended to be communication documents as well as compliance documents and suggested actions we can all take in the context of current rules to make communication more effective:

 

Streamline disclosures,

Eliminate outdated information,

Tailor disclosures, focusing on factors unique to the company,

Don’t use comment letters in a generic sense.

 

These ideas fit nicely with the Staff’s previously discussed ideas we have been discussing for quite a while:

 

Reduce repetition,

Focus disclosure,

Eliminate outdated and immaterial information.

 

All of this dovetails together with a speech by Keith Higgins that started the initiative in 2014. And, with this much mention by the Staff, clearly change is in the wind, and we all have an opportunity to get ahead of the change and make communication better.

 

Making changes to annual and quarterly report disclosure is never a simple process, as the number of stakeholders and reviewers make change very challenging. And, thinking about how best to meet the information needs of investors is never easy.

 

However, many companies are already making changes to disclosure. If you want to find examples, check out American Express and GE. Both have been very proactive in this arena.

 

Now is a good time to consider and search for opportunities to make current disclosure more effective!

 

As always, your thoughts and comments are welcome!

News From the CAQ – Still no Simple Answer for the RevRec/S-3 Issue!

Back in June of 2015 we posted about the Center for Audit Quality, or CAQ. This organization, which has its roots with the AICPA, advocates for issues surrounding public company auditing with the goal of building and maintaining the public’s trust in the auditing process. You can learn more about the CAQ at their web page.

One important part of the CAQ is the SEC Regulations Committee. This group meets regularly with the SEC Staff to discuss emerging issues in practice. The summaries of their meetings are generally very useful resources and reviewing them on a periodic basis can help deal with complex and emerging issues.

In their June meeting the Committee and the SEC Staff discussed one of the issues we have blogged about earlier in the summer, the impact of retrospective adoption of a new accounting standard (revenue recognition and leases of course!) on a registration statement filed after you file a 10-Q in the year of adoption but before the end of the year. It is conceivable that the S-3 could require applying the new accounting standard to an additional earlier year. (Check out this post if you need to refresh your memory.)

Here is the summary of discussion about this issue from the SEC Regulations Committee June meeting:

Requirement to provide restated financial statements when a Form S-3 registration statement is filed after the registrant has filed its first Form 10-Q reflecting full retrospective adoption of the new revenue standard

As a follow-up to a topic discussed at the March 2016 Joint Meeting, the Committee and the staff discussed Deputy Chief Accountant Wes Bricker’s remarks at the 2016 Baruch College Financial Reporting Conference on transition activities for the new revenue recognition standard. Specifically, the Committee and the staff discussed the provision in ASC 250-10-45-5 which indicates that “[a]n entity shall report a change in accounting principle through retrospective application of the new accounting principle to all prior periods, unless it is impracticable to do so.” ASC 250-10-45-9 provides guidance on the term “impracticable.”

The staff indicated that they are available for consultation with registrants that have concluded it would be impracticable to revise one or more comparative prior periods, but they also noted that consultation is not required.

So, it is all still a bit grey!

As always, your thoughts and comments are welcome!

Developments for Foreign Private Issuers

In the SEC world Foreign Private Issuers (FPI’s) are companies organized outside the United States who have stock that trades on a US exchange. Foreign Private Issuers are permitted to use a special reporting system which includes the Form 20-F Annual Report and Form 6-K for other reporting. This system has a number of accommodations for companies organized outside the United States. For example, FPI’s are actually allowed to report to the SEC using IFRS and the volume of compensation disclosures can be substantially less than for domestic registrants.

 

Like all SEC reporting regimens, the FPI system has its own nuances and subtleties. For example, simply being organized outside the US does not entitle a company to use the FPI system. The more formal definition of a FPI is in an Exchange Act Rule:

 

  • 240.3b-4   Definition of “foreign government,” “foreign issuer” and “foreign private issuer”.

 

(Note: (a) and (b) omitted)

 

(c) The term foreign private issuer means any foreign issuer other than a foreign government except for an issuer meeting the following conditions as of the last business day of its most recently completed second fiscal quarter:

 

(1) More than 50 percent of the issuer’s outstanding voting securities are directly or indirectly held of record by residents of the United States; and

 

(2) Any of the following:

 

(i) The majority of the executive officers or directors are United States citizens or residents;

(ii) More than 50 percent of the assets of the issuer are located in the United States; or

(iii) The business of the issuer is administered principally in the United States.

 

This means that a company that is currently a FPI must monitor its status to see if it continues to meet this definition. If at some point it no longer meets the definition it must switch to the regular Form 10-K, Form 10-Q and Form 8-K reporting regimen. You may also find Topic 6 of the Financial Reporting Manual, Foreign Private Issuers & Foreign Businesses, helpful.

 

To help FPI’s deal with some of the unique aspects of this special system PLI is offering a One-Hour Briefing on October 6 entitled “Accessing the U.S. Capital Markets:  What Foreign Private Issuers Need to Know.” You can learn more about the briefing here.

 

Also, while we have offered our SEC Reporting Skills Workshop for 20-F Filers on an on-site basis over the past few years, we will have a public session of the workshop in New York late next year along with our Annual Forum in New York.

 

As always, your thoughts and comments are welcome!

$100 Million in Whistleblower Awards!

Way back in April of 2015 we did a post about whistleblowers and the upside financial risk in blowing the whistleblowing to the SEC. The Sarbanes-Oxley whistleblower process requires an anonymous path to the audit committee, but the Dodd-Frank process, which is direct to the SEC, is the whistleblower path that can result in financial rewards.

 

This week the SEC announced that awards under this program have now exceeded $100 million. This happened after the recent payment of the program’s second largest award, $22 million.

 

To add a bit of focus, in the related press release, Enforcement Division Director Andrew Ceresney said:

 

“The SEC whistleblower program has had a transformative impact on the agency, enabling us to bring high quality enforcement cases quicker using fewer resources,” said Andrew Ceresney, Director of the SEC Division of Enforcement. “The ultimate goal of our whistleblower program is to deter securities violations and paying more than $100 million in whistleblower awards demonstrates the value that whistleblowers have added to our enforcement program.”

 

As always, your thoughts and comments are welcome!