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June 2018 Quarter-End Post Two – More SEC Comments with Quarter-End Reminders – Be Thoughtful About Non-GAAP Disclosure Requirements

Now that we are past the July 4thholiday (hope you had fun!)  and far enough past quarter-end close to be getting ready for reporting, here are a few things to be thinking about as we work on 10-Q’s or 10-K’s.

It was, in the SEC reporting world, a long time ago (but not in a galaxy far, far away), that the SEC issued its “revised” guidance about the use of non-GAAP measures.  (The updated May 2016 C&DI’s are here.) Even with the passage of time, there are still some pretty basic and some more complex problem areas that the SEC discovers in the comment process.  Here are a few example comments to use as reminders to make sure you are following the guidance in Reg Gand S-K Item 10(e), the two primary sources of SEC guidance in this area.

For this first comment, here is a part of S-K Item 10(e):

 (ii) A registrant must not:

……………

 (B) Adjust a non-GAAP performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual, when the nature of the charge or gain is such that it is reasonably likely to recur within two years or there was a similar charge or gain within the prior two years;

 Now, this requirement from S-K Item 10(e) applies to non-GAAP measures in filed documents, but it is augmented and expanded by this C&DI:

 Question 102.03

 Question: Item 10(e) of Regulation S-K prohibits adjusting a non-GAAP financial performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual when the nature of the charge or gain is such that it is reasonably likely to recur within two years or there was a similar charge or gain within the prior two years. Is this prohibition based on the description of the charge or gain, or is it based on the nature of the charge or gain?

Answer: The prohibition is based on the description of the charge or gain that is being adjusted. It would not be appropriate to state that a charge or gain is non-recurring, infrequent or unusual unless it meets the specified criteria. The fact that a registrant cannot describe a charge or gain as non-recurring, infrequent or unusual, however, does not mean that the registrant cannot adjust for that charge or gain. Registrants can make adjustments they believe are appropriate, subject to Regulation G and the other requirements of Item 10(e) of Regulation S-K. See Question 100.01. [May 17, 2016]

The C&DI mentioned at the end of 103.03 is:

Question 100.01

Question: Can certain adjustments, although not explicitly prohibited, result in a non-GAAP measure that is misleading?

Answer: Yes. Certain adjustments may violate Rule 100(b) of Regulation G because they cause the presentation of the non-GAAP measure to be misleading. For example, presenting a performance measure that excludes normal, recurring, cash operating expenses necessary to operate a registrant’s business could be misleading. [May 17, 2016]

These pieces of guidance build a framework that in any non-GAAP measure, if you say it is unusual or infrequent, it has to meet a logical definition of those terms.

These requirements are behind the following comment:

Non-GAAP Financial Measures

  1. We note your disclosure under this section, describing certain adjustments to your non- GAAP measures, stating “these non-recurring items are excluded because, by their nature, they are not indicative of our business or economic trends.” However, it appears that several of these items have occurred in sequential years. Please refrain from referring to charges as non-recurring when such charges have occurred within the prior two years or are reasonably likely to recur within two years. You may refer to our Non- GAAP Financial Measures Compliance and Disclosure Interpretation (C&DI) 102.03 if you require further clarification or guidance.

 

This second example is based on the following C&DI:

 Question 102.11

 Question: How should income tax effects related to adjustments to arrive at a non-GAAP measure be calculated and presented?

 Answer: A registrant should provide income tax effects on its non-GAAP measures depending on the nature of the measures. If a measure is a liquidity measure that includes income taxes, it might be acceptable to adjust GAAP taxes to show taxes paid in cash. If a measure is a performance measure, the registrant should include current and deferred income tax expense commensurate with the non-GAAP measure of profitability. In addition, adjustments to arrive at a non-GAAP measure should not be presented “net of tax.” Rather, income taxes should be shown as a separate adjustment and clearly explained. [May 17, 2016]

 

Attention to this kind of detail is important.  This is a comment from a March 2018 comment letter:

  1. Within the reconciliations of GAAP net income to non-GAAP adjusted net income attributable to XXXXXX and of related GAAP diluted earnings per share (EPS) to non- GAAP adjusted diluted EPS, you present a number of reconciling items net of income taxes. Please present such adjustments before tax and show the related income tax as a separate adjustment to comply with Non-GAAP Financial Measures C&DI 102.11.

 

last, here is an interesting comment about the intersection between the use of non-GAAP measures and operating segment disclosures.  The non-GAAP disclosure requirement involved is from S-K Item 10(e):

(i) The registrant must include the following in the filing:

………………

(C) A statement disclosing the reasons why the registrant’s management believes that presentation of the non-GAAP financial measure provides useful information to investors regarding the registrant’s financial condition and results of operations; and

That said, if a non-GAAP measure is used in evaluating segment performance then its disclosure is essentially required by GAAP and reconciliation is not required.  This company went one step beyond the segment disclosure requirements:

  1. We note your presentation of Total Segment Adjusted EBITDA included as part of your tables which outline your sales and Segment Adjusted EBITDA for each of your reporting segments. You state on page 29 that Segment Adjusted EBITDA is a meaningful measure as it is used to assess business and operating performance of the segments, and for operational planning and decision-making purposes. However, it is unclear from your disclosures why management believes the presentation of Segment Adjusted EBITDA on a consolidated basisis useful to investors regarding your financial condition and results of operations. Please revise to disclose and to the extent material, include the additional purposes, if any, for which you use the non-GAAP measure in accordance with Item 10(e)(1)(i)(C)-(D) of Regulation S-K. Refer to the guidance outlined Question 104.04 of the C&DIs on the use of non-GAAP financial measures which can be found on the SEC’s website.

We hope these reminders help as you work towards quarter or year-end, and 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!

SEC News Items: Kyle Moffatt Named Chief Accountant in CorpFin and Cybersecurity Guidance in Process

By: George M. Wilson, SEC Institute

First, as you can read in this SEC press release, Kyle Moffatt has been named Chief Accountant in CorpFin, moving from the “Acting” to regular position of leadership in CorpFin’s accounting group. Our congratulations to Kyle!

 

Second, as you can see in this Sunshine Act notice, there is a meeting on Wednesday, February 21, 2018, where the SEC plans to issue new regulatory guidance about cybersecurity disclosures.

 

As always, your thoughts and comments are welcome!

 

 

 

More ASC 606 Comments from CorpFin

By: George M. Wilson

In this October post we reviewed comment letters that early adopters of the new revenue recognition model in ASC 606 received from CorpFin. The comments focused on issues surrounding the judgments this new principles-based model requires along with the related disclosures.

 

Another company, CBOE holdings, has joined the group of early adopters and in an August comment letter received these comments:

 

Financial Statements

  1. Organization and Basis of Presentation, page 6

Please explain to us how you determined that rebates paid to customers in accordance with published fee schedules should not be accounted for as a reduction of the transaction price. Refer to ASC 606 – 10 – 32 – 25 to 32 – 27.

  1. Revenue Recognition, page 8

We note your disclosure that you recognize revenue for certain services over time. Please tell us how you considered the requirements in ASC 606 – 10 – 50 – 13 to 50 – 15 to disclose information about remaining performance obligations or application of optional exemptions.

The same themes, explaining the judgments in applying the new principles and robust disclosure, come through in these comments and can help inform all of us as we implement the new standard.

 

As always, your thoughts and comments are welcome!

 

Visit SECI at AICPA’s “Current SEC & PCAOB Developments” Conference in D.C. Next Week!

SEC Institute is delighted to be participating in this year’s AICPA Conference “Current SEC & PCAOB Developments” being held December 4-6 in Washington, D.C.

SECI will be hosting the luncheon on Monday, December 4th and will have a display table in the exhibit hall.

Please join us for lunch on Monday and remember to stop by our table to enter your name in the raffle for a FREE ticket to a 2018 SECI Workshop or Forum of your choice. One ticket will be drawn each day.

 

We look forward to seeing you next week at the Marriott Wardman Park Hotel in Washington, D.C.

Form 10-K – Master the Requirements and Improve Disclosures

 

Form 10-K requirements and disclosures are undoubtedly challenging. Attend live program, Form 10-K In-Depth Workshop being held November 30-December 1 in San Francisco and December 11-12 in New York. Interactive discussions and exercises will enhance your understanding of each item, with particular focus given to the Management’s Discussion & Analysis (MD&A) section. The workshop leader will Review in detail each Form 10-K item and examine current FASB and SEC disclosure initiatives.

https://www.pli.edu/Content/Form_10_K_In_Depth_Workshop_2017/_/N-1z10od7Z4k?ID=290550

A Unique Workshop for Attorneys tasked with SEC Reporting

Many lawyers learn SEC reporting through on-the-job training that often is piecemeal at best. Attend SEC Reporting and Practice Skills Workshop for Lawyers January 11-12 in San Francisco with other 2018 dates and locations available. Develop a comprehensive and in-depth understanding of the structure, organization and details of the reporting requirements of the U.S. federal securities laws, including how to use the SEC’s online resources and all related sources of guidance.

https://www.pli.edu/Content/SEC_Reporting_and_Practice_Skills_Workshop/_/N-1z1011uZ4k?ID=320821

Master SEC Forms, Statements, Reporting Rules and “Hot Button” Issues

Attention Financial Reporting Professionals!

Sharpen Your Skills. Master how to accurately complete SEC Reporting Forms and how to comply with the Annual Proxy requirements. Build an understanding of the structure and use of the SEC’s guidance and knowledge of the key disclosure issues in the SEC’s periodic and current reports. Earn Up to 16 CPE Credits.

 

Register and Attend “SEC Reporting Skills Workshop”

  Upcoming October Live Meetings!

October 12-13 New York City

October 23-24 Chicago

http://www.pli.edu/Content/SEC_Reporting_Skills_Workshop_2017/_/N-1z10oe8Z4k?ID=290540&t=ZLC7

 

Additonal programs, locations and dates are listed on the SECI site:

http://www.pli.edu/Content/Static/SEC_Institute/_/N-1z12cux?Npp=25