An Open Meeting Notice and Perhaps Some Rule-Making Momentum?

On June 28, 2018, the SEC will meet to consider a variety of rule-making actions.  Now that all five of the commission positions are filled, this is hopefully a good sign that we will see progress on a number of fronts. Two areas to be addressed at the June 28 meeting are:

  1. Possible amendments to the smaller reporting company definition. The commission has proposed to increase the threshold to qualify for the smaller reporting company system from $75 million in “public float” to $250 million.
  1. To change reporting requirements to require the use of the Inline eXtensible Business Reporting Language (iXBRL) format for company financial statement information and fund risk/return summary information. If you haven’t yet dug into inline XBRL you can review a sample filing from the SEC here.  Some companies have voluntarily used inline XBRL. Here is a Form 10-Q.

You can read the rest of the meeting notice here.

As always, your thoughts and comments are welcome!

June 2018 Quarter End Post One – A Picky Reminder – Attention to Detail and the Compliance and Disclosure Interpretations

In our SEC Reporting Skills Workshop we always mention the importance of getting details right in your periodic and current reports.  Little picky mistakes could give an experienced reader a negative impression of your overall reporting.

One simple example of such a detail is the Form 10-K cover page check-box S-K Item 405 disclosures about Section 16 reporting by insiders.  It is surprising how many companies don’t get this check box right. The box should be checked if all Section 16 people filed all their required reports on a timely basis.  A knowledgeable reader, when they see a mistake with this cover page item, may ask “what else did this company not get right?”  (As a side note, thank goodness this confusion may finally be eliminated if this part of the FAST Act Modernization and Simplification of Regulation S-K proposal is made final!   You can check out page 33 in this proposed rule release.)

In the world of SEC reporting we all get to learn as we make mistakes and also from the mistakes of others. Here is a kind of unfortunate example of a company that made a mistake in one of the pickier parts of a filing, the certifications, and then missed a detail in the follow-up.

S-K Item 601, paragraph 31, which sets out the form of the certifications, contains this language:

(31)(i) Rule 13a-14(a)/15d-14(a) Certifications. The certifications required by Rule 13a-14(a) (17 CFR 240.13a-14(a)) or Rule 15d-14(a) (17 CFR 240.15d-14(a)) exactly as set forth below:

Certifications* I, [identify the certifying individual], certify that:

  1. I have reviewed this [specify report] of [identify registrant]; (remainder omitted)

Well, as you can see on Exhibit 31of this Form 10-K, this company made a simple mistake.  They forgot to update the language in the certification, unfortunately referring to a Form 10-Q rather than Form 10-K.  OK, these kinds of things happen to all of us, and this situation is at least easy to fix.  It would appear, from the order of the company’s filings, that they found the mistake on their own, and filed this amendment.

Unfortunately, the company forgot to check one of the sources of guidance we emphasize in our workshops, the CorpFin Compliance and Disclosure Interpretations.  This is the relevant C&DI, which is included in the S-K Item 601 Exhibits section of the C&DI’s:

246.14 The following errors in a certification required by Item 601(b)(31) are examples of errors that will require the company to file a corrected certification that is accompanied by the entire periodic report: (1) the company identifies the wrong periodic report in paragraph 1 of the certification; (2) the certification omits a conformed signature above the signature line at the end of the certification; (3) the certification fails to include a date; and (4) the individuals who sign the certification are neither the company’s principal executive officer nor the principal financial officer, or persons performing equivalent functions. [July 3, 2008]

That lead to the company getting this comment from the SEC:

Amendment No. 1 to Form 10-K for the Fiscal Year Ended December 29, 2017

  1. Please file an amendment to your Form 10-K that includes the entire filing. Refer to Compliance & Disclosure Interpretation No. 246.14 on Regulation S-K.

It is always a bit embarrassing to have to amend an amendment.  And, this is a great reminder that when you are dealing with issues that are not part of your regular reporting process to always check all the sources of guidance from the SEC. The C&DI’s in particular deal with a huge variety of process questions, disclosures and tactical issues and are always a good resource to check.

As a PS, the company did get the Section 16 box right!  The box is checked, and their proxy indicates that to the best of the company’s knowledge everyone filed all required reports on time.

As always, your thoughts and comments are welcome!


Lease Accounting Early Adopters – On Target!

As many of us work on implementing the new ASC 842 lease accounting standard it is always helpful to learn from early adopters.  As we have mentioned before, Microsoft early adopted as of July 1, 2017.  You can find their adoption disclosures in this Form 10-Q.

Thanks to Reed Wilson, who leads our “Implementing the FASB’s New Lease Accounting Standard Workshop,” here is another early adopter example,Target.  As you review this Form 10-Q, you will see that they have included extensive disclosure about the impact of adoption of the lease and revenue recognition standards.  They have also made decisions to include operating lease assets in other assets on the balance sheet.

It is always nice to have a trail-blazer to follow!

And, as always, your thoughts and comments are welcome!

Faulty Cybersecurity Disclosures and a Big Fine

Here is an issue to focus on as we draw to the end of the second quarter and plan our periodic reporting.

Rarely does a month pass without dramatic news stories about cybersecurity breaches.  Targets include large companies such as Equifax, not-for-profits such as hospitals and even government agencies like the SEC.

Earlier this year the SEC augmented their 2011 cybersecurity disclosure guidance in CorpFin Disclosure Topic Twowith a formal Commission Release.  As we blogged,the Release in large part reinforced the Disclosure Topic Two guidance and added guidance about control and insider trading issues.

When the SEC issues new guidance one of the ways they sometimes emphasize its importance is with an enforcement case.  And, that has happened here.  Altaba, Inc, which was formerly Yahoo, has been fined $35 million for failure to make timely and accurate disclosures about their major cybersecurity breach. As you may have read, there was a significant delay in disclosure of the breach on the part of Altaba (Yahoo), and the enforcement release highlights several other disclosure issues surrounding the breach, including the fact that Yahoo’s disclosure controls and procedures were not effective.  Here is a quote from Jina Choi, the San Francisco Regional Office Director:

“Yahoo’s failure to have controls and procedures in place to assess its cyber-disclosure obligations ended up leaving its investors totally in the dark about a massive data breach.  Public companies should have controls and procedures in place to properly evaluate cyber incidents and disclose material information to investors.”

You can read details here.

As always, your thoughts and comments are welcome!

Non-GAAP and other Updates from the CAQ’s SEC Regulations Committee

As we blogged about, the Center for Audit Quality’s SEC Regulations Committee’s quarterly meetings are a great resource for keeping up with emerging issues in SEC reporting. The minutes of these meetings provide insight into the SEC staff’s positions as these issues arise and evolve.

The Committee’s latest meeting was on March 13, 2018 and the meeting highlights discuss the following issues:

Financial reporting implications of tax reform legislation

Waivers of financial statements required by Rule 3-09 of Regulation S-X

New Accounting Standards

Use of most recent year-end financial statements in assessing Regulation
S-X, Rule 1-02(w) significance in an IPO

Audit requirements for pre-transaction periods following a reverse merger
involving two operating companies

Two of the discussion areas dealt with non-GAAP measure issues that we blogged about in March.  For tax reform discussions the staff provided this advice:

Some registrants may adjust for the impact of the Tax Cuts and Jobs Act (Tax Act) in their non-GAAP financial measures. Depending on the registrant’s specific facts and circumstances, certain adjustments for tax reform may be appropriate. The staff indicated that such adjustments, however, should be balanced (i.e., both revenue and expense impacts should be disclosed). For example, adjusting for only one impact, such as the adjustment of deferred taxes upon the change in corporate tax rates, but not other impacts, such as the deemed repatriation transition tax, would not be appropriate.

Some registrants may also include adjustments that attempt to depict a “normalized” tax rate (i.e., adjustments that apply the new tax rate to periods prior to enactment). The staff indicated that such adjustments to non-GAAP measures may not be appropriate as they may not reflect performance during the historical periods when the tax laws were different (for example, different tax strategies and changes in certain judgements or tax assertions).

And, when implementing the new revenue recognition standard, the staff provided the following:

The Committee and staff discussed the presentation of comparable prior periods under ASC 606 to facilitate MD&A, even if a company uses the modified retrospective transition method. If a registrant chooses to include supplemental MD&A disclosures for the comparable period(s) using ASC 606, the discussion should not be more prominent than the historical MD&A discussion and registrants should limit the discussion to only those items for which they are able to determine the impacts. For example, a registrant should not present a supplemental measure of gross profit or operating income adjusted for ASC 606 unless it is able to appropriately make adjustments to the impacted costs as well as the revenues. A full income statement, should not be presented. However, net income under ASC 606 for the prior periods may be discussed if a registrant is able to determine the impacts on all affected income statement line items.

In addition, a company adopting ASC 606 using the modified retrospective transition method is also permitted to present the 2018 results as determined pursuant to ASC 605 on a supplemental basis in MD&A. These disclosures should be comparable to those required to be included in the financial statement footnotes under ASC 250 and should only be included in the period of adoption (e.g. 2018 only). In addition, if a registrant chooses to include these disclosures in MD&A, prominence should be given to the ASC 606 results. Amounts determined using ASC 605 should only be discussed in a way that allows investors to understand changes for comparability purposes.

As always, your thoughts and comments are welcome!

Plaintiff Lawsuits – A Legal Proceedings Disclosure Tidbit

By: George M. Wilson, SEC Institute & Gary M. Brown, Partner, Nelson Mullins Riley & Scarborough LLP (Note: Gary Teaches our SEC Reporting and Practice Skills for Lawyers workshop)

In our Workshops, disclosures about legal proceedings are usually a hot topic for both lawyers and accountants. In these discussions we review the differences between the S-K Item 103 disclosures for legal proceedings and the ASC 450 GAAP disclosures for contingencies. The S-K Item 103 disclosures generally are more about the factual situation and include more details than the GAAP disclosures, including details such as the name of the parties, the court or jurisdiction where the action is taking place and the relief sought. The GAAP disclosures are more focused on expected impact.


One challenging aspect of these differences is what to disclose about plaintiff lawsuits. Generally, the GAAP disclosures focus on contingent liabilities, not the kind of contingent asset that would arise from a plaintiff lawsuit. The ASC guidance for gain contingencies is short and to the point:


450-30-25   Recognition



A contingency that might result in a gain usually should not be reflected in the financial statements because to do so might be to recognize revenue before its realization.  450-30-50   Disclosure



Adequate disclosure shall be made of a contingency that might result in a gain, but care shall be exercised to avoid misleading implications as to the likelihood of realization.


S-K Item 103 does not have this same focus on contingent liabilities. In fact, it starts with this language:


 Item 103 – Legal proceedings.


Describe briefly any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the registrant or any of its subsidiaries is a party or of which any of their property is the subject. Include the name of the court or agency in which the proceedings are pending, the date instituted, the principal parties thereto, a description of the factual basis alleged to underlie the proceeding and the relief sought. Include similar information as to any such proceedings known to be contemplated by governmental authorities.


The language “material pending legal proceedings” does not limit the disclosure to just defendant actions. And, to reinforce this conclusion, the SEC has issued the following Compliance and Disclosure Interpretation:

Section 205. Item 103 — Legal Proceedings

205.01 The bank subsidiary of a one bank holding company initiates a lawsuit to collect a debt that exceeds 10% of the current assets of the bank and its holding company parent. Due to the unusual size of the debt, Item 103 requires disclosure of the lawsuit, even though the collection of debts is a normal incident of the bank’s business. [July 3, 2008]

This C&DI also illustrates the application of the 10% disclosure threshold and an interesting interpretation about normal course of business issues. And, it clearly shows that Legal Proceedings disclosure should include material lawsuits in which the company is a plaintiff as well as a defendant.


As always, your thoughts and comments are welcome!


It’s time to update your SEC Reporting Skills!

GO-4049_SEC_Reporting_Skills_Wksp_800x469                                              SEC Reporting Skills Workshop

Designed for accounting and financial reporting professionals, this Workshop will help you build the foundational knowledge and practical experience necessary to prepare and review the SEC’s periodic and current reporting forms.

Attend a class being held in a location near you!

Upcoming workshops include:




Helping Audit Committees Grapple with Change

By: George M. Wilson, SEC Institute

Few corporate governance roles are more complex than that of the audit committee member. To help audit committee members and their advisors keep pace with

  • new GAAP standards for major areas, such as revenue recognition, lease accounting and financial instrument impairment;
  • new and evolving PCAOB regulations, such as the new auditors report and discussion of critical audit matters; and
  • an increased focus on risk management practices, particularly cybersecurity risk

PLI is offering its “Audit Committees and Financial Reporting 2018: Recent Developments and Current Issues” program on June 11, 2018. The program will be held at PLI’s New York Center and will also available via webcast and groupcast.


As always, your thoughts and comments are welcome!

Rule 3-13 Requests for Waivers – Yes, the SEC Really Means It!


By: George M. Wilson, SEC Institute

Last December we blogged about the SEC actively encouraging companies to consider requesting waivers of certain financial reporting requirements using an historically little mentioned provision of Regulation S-X. Rule 3-13 says:


  • 210.3-13   Filing of other financial statements in certain cases.

The Commission may, upon the informal written request of the registrant, and where consistent with the protection of investors, permit the omission of one or more of the financial statements herein required or the filing in substitution therefor of appropriate statements of comparable character. The Commission may also by informal written notice require the filing of other financial statements in addition to, or in substitution for, the statements herein required in any case where such statements are necessary or appropriate for an adequate presentation of the financial condition of any person whose financial statements are required, or whose statements are otherwise necessary for the protection of investors.

The SEC Chairman and the Director of the Division of Corporation Finance have mentioned this “waiver process” in several public forums, and there is a substantial amount of “buzz” about this change in approach by the staff in the community of registrants.


This report from Orrick is one example. Another is this “To the Point” update from EY.


The staff has described what they consider a preferred process for requesting these waivers, and they are responding to these requests in a very timely fashion, frequently within a week or ten days. To facilitate this process the staff put the following language at the very beginning of the introductory material in the CorpFin Financial Reporting Manual:

  • (The Division of Corporation Finance) Acts on behalf of the Commission to grant relief under Rule 3-13 of Regulation S-X. The staff has authority, where consistent with investor protection, to permit registrants to omit, or substitute for, required financial statements. Requests for this relief should be submitted by email. Call (202) 551-3111 and ask for the appropriate person listed below to discuss questions about potential relief:

Rule 3-05 – Patrick Gilmore

Article 11 – Todd Hardiman

Rules 3-09 and 4-08(g) – Christy Adams

Rules 3-10 and 3-16 – Tricia Armelin

Rule 3-14 – Jessica Barberich


To the above guidance we would add the advice to involve your auditors in this process as they may have helpful advice along the way and their opinion may be relevant to the SEC.


So, what are some typical situations where we should stop and consider whether or not to approach the staff about such a waiver request? Here are a few examples.


Significance tests – When applying the three significant subsidiary tests, in particular the income test, if an acquirer has very small income this part of the test could be met for an acquisition that may not really be “significant”. If one of the three parts of this test seems out of the norm then there may be other, more appropriate, considerations in making a determination whether separate financial statements are useful. This would be a great time to consider a Rule 3-13 request.

Pre-and post-acquisition periods for S-X rule 3.05 – When appropriate it may be best to use an analysis that is less mechanical and focuses on trend issues that are meaningful and which help assess how an acquisition may impact on post-acquisition results.

Predecessor/Successor issues – In some cases stub periods may not be as relevant or reliable carve out F/S may not be possible to build. For example, it may be that abbreviated financial statements may provide the information that investors need in this type of situation.

IFRS financial statements may be acceptable for some acquisitions and equity method investees – if a company could be a foreign private issuer the staff may accept IFRS financial statements.

Mechanical compliance with a rule sometimes is not the best way to provide investors with the information they need. It is a good thing to know that there are alternatives. So, when you think you are in this situation, go talk to the staff!





A Post More for Lawyers – Words Are Important “Except” When They Are Not



By Gary M. Brown, Partner, Nelson Mullins Riley & Scarborough LLP (Note: Gary Teaches our SEC Reporting and Practice Skills for Lawyers workshop)

On March 20, 2018, the U.S. Supreme Court decided Cyan, Inc. et al. v. Beaver County Employees Retirement Fund. The question in this case was the extent to which SLUSA (the Securities Litigation Uniform Standards Act) preempts litigation of claims under the Securities Act of 1933 (the “’33 Act”) in state as opposed to federal courts. Short answer – it doesn’t – at all.

The decision is more of a grammatical exercise (and an example of poor Congressional draftsmanship) than it is a work of judicial scholarship. The decision focused on two sections of SLUSA found in section 16 of the ’33 Act and two sentences in Section 22 (Jurisdiction of Offenses and Suits) of the ’33 Act.

Sections 16(b) and 16(c) provide, respectively, that class actions based on state securities law claims[1] in connection with the purchase or sale of “covered securities”[2] may not be maintained in any state or federal court (the “State Law Bar”) and that any such suit (a class action based on state securities law claims) involving a “covered security,” if brought in state court, is removable to federal court where, presumably it will be dismissed (the “Removability Provision”).

NOTE – simply stated, the sections apply to class actions based on state securities law claims

Beaver County’s case, however, was not an action brought in state court based on state law claims – the case was based upon federal law (i.e., ’33 Act claims). But surely Congress meant to restrict litigation of those claims to federal court just like cases under the Securities Exchange Act of 1934 (the “’34 Act”) – right?

Well – Section 22 of the ’33 Act provides in part that “[Federal] courts . . . shall have jurisdiction of offenses and violations under [the ’33 Act] . . ., and, concurrent with State . . . courts, except as provided in [SLUSA] section 16 with respect to covered class actions, of all suits . . . brought to enforce any liability or duty created by [the ’33 Act]. Section 16’s State Law Bar provision, however, applies only to state law claims – not to claims created by the ’33 Act. Accordingly, the Supreme Court read the “except” clause essentially as a nullity, removing nothing from state court jurisdiction except the ability to hear class actions based on state law claims – and Beaver County’s case was based on federal claims.

Next considered was Section 22’s non-removal provision, which provides that “[e]xcept as provided in [SLUSA] section 16(c), no case arising under [the ‘33Act] and brought in any State court . . . shall be removed to [federal] court. . . .” Section 16’s Removability Provision was similarly dealt with as it applied (or did not apply) to Beaver County’s case. Because their case was based on federal claims, the Removability Provision simply did not apply – it again was a nullity and did not affect the Section 20’s prohibition on removal from state court of properly filed ‘33 Act cases.

Is this what Congress intended? Great question – but, as the Supreme Court pointed out, Congress knows how to create exclusive jurisdiction as it has done with the ’34 Act. The “except” clauses supposedly meant something to the drafters. The Supreme Court, however, could not ascertain the meaning nor was the Court willing to do more than take Congress at its words (which, interestingly enough were referred to as “gibberish” during oral argument).


[1] The case must allege untrue statements or omission of material facts in connection with the purchase or sale of a covered security; or that the defendant used or employed any manipulative or deceptive device or contrivance in connection with the purchase or sale of a covered security.

[2] “Covered securities” for these purposes are certain securities that satisfy certain specified standards for federal preemption of state authority under NSMIA (the National Securities Markets Improvement Act) – i.e., exchange listed securities, securities issued by investment companies).