Tag Archives: FORM 10-Q

A Very Picky Reminder – ICFR and Accounting Standard Implementation Reporting

By: George M. Wilson & Carol A. Stacey

SAB 74 (SAB Codification 11-M) disclosures surrounding the new revenue recognition, leasing and financial instrument impairment standards have been receiving a lot of attention lately, especially with the SEC Staff announcement about them at the September EITF meeting.

This is not the only reporting that a new accounting standard might involve. Since these new standards could have an impact on ICFR, this is a good time to remember the requirements to report material changes in ICFR. These requirements apply to both Item 9A in Form 10-K and Part I Item 4 in Form 10-Q. They begin with S-K Item 308(c):

(c) Changes in internal control over financial reporting. Disclose any change in the registrant’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of §240.13a-15 or 240.15d-15 of this chapter that occurred during the registrant’s last fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

With changes to ICFR for revenue recognition for information about contracts and estimates, like stand-alone selling price and when control transfers, and changes to ICFR for capitalization of all leases, these new standards could require material changes to ICFR. Is this the type of change included in the S-K 308(c) disclosure requirement?

This is an excerpt from the ICFR C&DI’s, number 7, about SOX reporting which you can find here:

After the registrant’s first management report on internal control over financial reporting, pursuant to Item 308 of Regulations S-K or S-B, the registrant is required to identify and disclose any material changes in the registrant’s internal control over financial reporting in each quarterly and annual report. This would encompass disclosing a change (including an improvement) to internal control over financial reporting that was not necessarily in response to an identified material weakness (i.e. the implementation of a new information system) if it materially affected the registrant’s internal control over financial reporting. Materiality, as with all materiality judgments in this area, would be determined upon the basis of the impact on internal control over financial reporting and the materiality standard articulated in TSC Industries, Inc. v. Northway, Inc. 426 U.S. 438 (1976) and Basic Inc. v. Levinson, 485 U.S. 224 (1988). This would also include disclosing a change to internal control over financial reporting related to a business combination for which the acquired entity that has been or will be excluded from an annual management report on internal control over financial reporting as contemplated in Question 3 above. As an alternative to ongoing disclosure for such changes in internal control over financial reporting, a registrant may choose to disclose all such changes to internal control over financial reporting in the annual report in which its assessment that encompasses the acquired business is included.

The SEC Regulations Committee of the CAQ has also discussed a particularly intricate issue in this transition. What if you change your ICFR this year, but the change is for future reporting when you begin to report under the new standard next year? This issue is still in play, as this excerpt from the minutes discusses:

  1. Changes in ICFR in preparation for the adoption of a new accounting standard

Item 308(c) of Regulation S-K requires disclosure of changes in internal control over financial reporting (“ICFR”) during the most recent quarter that have materially affected or are reasonably likely to materially affect the registrant’s ICFR. The Committee and the staff discussed how this requirement applies to changes in ICFR that are made in preparation for the adoption of a new accounting standard when those changes are in periods that precede the date of adoption and do not impact the preparation of the financial statements until the new standard is adopted.

The staff indicated that they are evaluating whether additional guidance is necessary for applying the requirements of Item 308(c) in connection with the transition to the new revenue standard.

So, as you begin implementing systems and processes for these new standards, don’t forget this part of the reporting!

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!

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!

Disclosures About Risks and Uncertainties

All the news about Apple’s international tax situation, a significant uncertainty that they and many other companies face, presents a great opportunity to review how uncertainties and the big questions they pose should be disclosed.

Developing disclosures about uncertainties is never simple. One reason for this complexity is how many areas they can affect in a 10-K or 10-Q. The key places to focus are:

Risk Factors

Financial statements – GAAP contingency disclosures

MD&A – possible known trend disclosures

The key disclosures will be in the three above items, and that is where we will focus for now. It is important to remember though that other areas could be involved. Disclosure might be included for example in legal proceedings in Item 3 (which would generally be similar to the financial statement disclosures but would likely include more details) and perhaps even the business description in Item 1 if the uncertainty was a significant general development.

Risk Factor Disclosure

S-K Item 503(c) contains this requirement:

(c) Risk factors. Where appropriate, provide under the caption “Risk Factors” a discussion of the most significant factors that make the offering speculative or risky. This discussion must be concise and organized logically.

Clearly a material uncertainty could fall into this disclosure requirement. Apple talked about tax issues in their most recent Form 10-Q Part II Item 1A disclosure (emphasis added):

The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities.

The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland, where a number of the Company’s subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. The Company’s effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation, including in the U.S. and Ireland. For example, in June 2014, the European Commission opened a formal investigation of Ireland to examine whether decisions by the tax authorities with regard to the corporate income tax to be paid by two of the Company’s Irish subsidiaries comply with European Union rules on state aid. If the European Commission were to conclude against Ireland, it could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid, and such amount could be material.

The Company is also subject to the examination of its tax returns and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations. If the Company’s effective tax rates were to increase, particularly in the U.S. or Ireland, or if the ultimate determination of the Company’s taxes owed is for an amount in excess of amounts previously accrued, the Company’s financial condition, operating results and cash flows could be adversely affected.

 

Financial Statement Disclosures

After the risk factor, where perhaps we use an “everything including the kitchen sink” approach, Apple goes further. In the notes to the financial statements they included this disclosure. Note here that ASC 450 dealing with contingencies and the three levels of probability — probable, reasonably possible and remote — would apply, along with guidance about uncertain tax positions. Here, along with disclosure about other tax issues, Apple discloses the issue again (check out the last paragraph in particular).

Note 5 – Income Taxes

As of June 25, 2016, the Company recorded gross unrecognized tax benefits of $7.6 billion, of which $2.8 billion, if recognized, would affect the Company’s effective tax rate. As of September 26, 2015, the total amount of gross unrecognized tax benefits was $6.9 billion, of which $2.5 billion, if recognized, would have affected the Company’s effective tax rate. The Company’s total gross unrecognized tax benefits are classified as other non-current liabilities in the Condensed Consolidated Balance Sheets. The Company had $1.5 billion and $1.3 billion of gross interest and penalties accrued as of June 25, 2016 and September 26, 2015, respectively, which are classified as other non-current liabilities in the Condensed Consolidated Balance Sheets.

Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. Although timing of the resolution and/or closure of audits is not certain, the Company believes it is reasonably possible that its gross unrecognized tax benefits could decrease (whether by payment, release or a combination of both) in the next 12 months by as much as $800 million.

On June 11, 2014, the European Commission issued an opening decision initiating a formal investigation against Ireland for alleged state aid to the Company. The opening decision concerns the allocation of profits for taxation purposes of the Irish branches of two subsidiaries of the Company. The Company believes the European Commission’s assertions are without merit. If the European Commission were to conclude against Ireland, the European Commission could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid. While such amount could be material, as of June 25, 2016 the Company is unable to estimate the impact.

One of the areas the SEC focuses on in reviewing contingency disclosures is the “reasonably possible” probability level. In this situation disclosure is required and an amount must be disclosed if it can be estimated. If it can’t be estimated disclosure is still required.

 

MD&A

 

And, lastly MD&A requires disclosure of known trends and uncertainties. The language in S-K Item 303 includes this requirement:

 

 

(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.

 

Here is an excerpt from Apple’s MD&A.

 

 

On June 11, 2014, the European Commission issued an opening decision initiating a formal investigation against Ireland for alleged state aid to the Company. The opening decision concerns the allocation of profits for taxation purposes of the Irish branches of two subsidiaries of the Company. The Company believes the European Commission’s assertions are without merit. If the European Commission were to conclude against Ireland, the European Commission could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid. While such amount could be material, as of June 25, 2016 the Company is unable to estimate the impact.

 

 

Uncertainty disclosures are never easy, and with all the areas that can potentially be involved, a place to be very careful!

 

As always, your thoughts and comments are welcome!

How Prepared are you for SEC Annual Reporting Season or your next 10-Q?

It has been a very active time at the SEC, FASB and PCAOB. Have you stayed on top of recent developments, activities and proposals? For example, the Leases Standard is final and the FASB is awash in simplification and other projects. Register now for our upcoming live seminar and webcast, 32nd Annual SEC Reporting & FASB Forum being held November 14-15 in Dallas, December 12-13 in New York City and December 19-20 in San Francisco. Prepare for year-end and reporting season by attending this highly anticipated and popular annual seminar and hear a roundtable discussion of current events, including simplification overload, disclosure effectiveness, juggling Rev. Rec., Leases, CECL adoptions and more. Our expert faculty will also discuss the new CDIs on non-GAAP measures, the Regulation S-K Concept Release, frequent accounting and disclosure comments, Revenue Recognition and guidance on lease accounting, MD&A disclosure and much more.

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

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!

More About S-3 and the Transition to the New Revenue Recognition Standard

In a recent post we explored a very complex securities registration issue within retrospective application of the new revenue recognition standard. (The issue arises with any retrospective application, so it will also arise in the new leasing standard.) In a nutshell the registration issue comes up when you:

 

(1) Adopt the new revenue recognition standard as of January 1, 2018 (assume a December 31 year-end), then

(2) File your March 31, 2018 10-Q and then

(3) File an S-3 to register to sell securities.

 

The S-3 incorporates your 2017 Form 10-K by reference which includes 2015 financial statements. The 2015 financial statements would not normally be retrospectively adjusted for the new revenue recognition standard. In this case though that could be necessary. You can read all the technical details here.

 

This first post led to a really interesting question from a reader. What happens if you file the S-3 before you file your March 31, 2018 10-Q? We explored the issue in this post.

 

This then led to a really great comment from another reader. In our workshops we always emphasize building research skills and using all the relevant SEC resources, especially the CorpFin Financial Reporting Manual (FRM). This really astute reader found this section in Topic 13 of the FRM:

 

13110.2  In the case of a registration statement on Form S-3, Item 11(b)(ii) of that form would specifically require retrospective revision of the pre-event audited financial statements that were incorporated by reference to reflect a subsequent change in accounting principle (or consistent with staff practice, discontinued operations and changes in segment presentation) if the Form S-3 also incorporates by reference post-event interim financial statements. If post-event financial statements have not been filed, the registrant would not revise the pre- event financial statements in connection with the Form S-3, however, pro forma financial statements in accordance with Article 11 of Regulation S-X may, in certain circumstances, be required. In contrast, a prospectus supplement used to update a delayed or continuous offering registered on Form S-3 (e.g., a shelf takedown) is not subject to the Item 11(b)(ii) updating requirements. Rather, registrants must update the prospectus in accordance with S-K 512(a) with respect to any fundamental change. It is the responsibility of management to determine what constitutes a fundamental change.

 

 

Here there is at least some relief for the S-3 filed after year-end but before the Form 10-Q is filed! As a reminder S-X Article 11 contains this requirement:

 

  • 210.11-01   Presentation requirements.

(a) Pro forma financial information shall be furnished when any of the following conditions exist:

………………….

(Note: (1) to (7) omitted)

(8) Consummation of other events or transactions has occurred or is probable for which disclosure of pro forma financial information would be material to investors.

 

Some judgment will be required to make that decision! If the effect of the new revenue recognition standard is large enough, it could well be material to investors.

 

Similarly, for the S-3 shelf takedown S-K 512(a) includes this requirement (in bullet ii):

 

(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement.

 

Again, some judgment will be required to make that decision!

 

Thanks to both the readers who contributed to this discussion, and as always your thoughts and comments are welcome!

 

Brexit and your Second Quarter 10-Q

In the massive press coverage about “Brexit” one of the most frequently used words is “uncertainty”. While the impact of Brexit will differ from company to company it is important, as we come to the end of the June 30, 2016 quarter (or whenever your next quarter end will be), to think about whether the vote and the resulting uncertainty should be dealt with in your SEC reporting.

 

The two most straightforward issues are likely risk factors and MD&A known trends.

 

The risk factor disclosure in Part II Item 1A of 10-Q refers back to S-K 503(c) and requires disclosure of what makes owning your company’s securities “speculative or risky”. Companies should consider whether the uncertainties and already known impacts of Brexit increase risk and deserve mention in risk factors.

 

When a risk factor becomes more probable of having a material impact the risk factor should transmogrify into an MD&A “known trend” disclosure. This disclosure is required when there are “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.” (S-K Item 303). There are similar known trend disclosures for liquidity and capital resources. If you could be affected by market uncertainty, reasonably possible changes in exchange rates or other impacts of Brexit this disclosure may be necessary in MD&A. Lots of judgment here.

 

It is always important to remember that the “reasonably expects” probabilistic test in FR 36 requires disclosure if you cannot say the trend is “not reasonably likely” to come to fruition. (Sorry for the double negative, but it is in the test!). So if there is a 50/50 chance of a material impact, disclosure should likely be made.

 

Lastly, beyond these two issues there are a wealth of other possible accounting and disclosure ramifications, ranging from issues such as possible elevated risk of impairment to tax consequences, depending on your circumstances.

 

As always, your thoughts and comments are welcome.