Category Archives: Hot Topic

Another Reminder to Watch the Details with Enforcement Emphasis!

As we blogged back in June, attention to detail is an important part of successful SEC reporting.  Regulation S-X Article 10 is the source of another important SEC reporting detail. This part of S-X contains the interim financial statement requirements for Form 10-Q.

(A quick side note – as we discussed in our previous postthis is where the new requirement for information about changes in shareholders’ equity in Form 10-Qwas added by the Disclosure Update and Simplification rule.)

Article 10, as it has been updated by Disclosure Update and Simplification, includes this fairly simple language concerning the auditor’s review of the financial statements in Form 10-Q:

(d) Interim review by independent public accountant. Prior to filing, interim financial statements included in quarterly reports on Form 10-Q (17 CFR 249.308(a)) must be reviewed by an independent public accountant using applicable professional standards and procedures for conducting such reviews, as may be modified or supplemented by the Commission. If, in any filing, the company states that interim financial statements have been reviewed by an independent public accountant, a report of the accountant on the review must be filed with the interim financial statements.

The language we bolded and underlined in this excerpt was in this paragraph before and after the update. And it is a fairly simple thing to confirm with your auditor, via email or other vehicle, that they are done with the review before you file.

As you will see in this enforcement division press release, paying attention to this detail is important.  In what is apparently a kind of “sweep” action, five companies paid fines averaging $50,000 each for failing to observe this requirement.  It is also interesting to note the SEC and the PCAOB worked together on these actions.

As always, your thoughts and comments are welcome!

Are You Ready to be Simplified?

On August 17, 2018, the SEC approved a 314-page Final Ruleto implement many parts of their disclosure effectiveness and simplification initiatives.  Included in the many changes made by the rule are updates to:

Regulation S-X

Regulation S-K

The instructions to the Forms

The changes focus on:

Removing redundant and duplicative requirements that are substantially similar to disclosures required by GAAP, International Financial Reporting Standards (IFRS), or other Commission disclosure requirements,

Eliminating overlapping requirements, which are related to, but not the same as GAAP, IFRS, or other Commission disclosure requirements,

Deleting outdated requirements which have become obsolete as a result of the passage of time or changes in the regulatory, business, or technological environment, and

Updating and superseding requirements which are inconsistent with recent legislation, more recently updated Commission disclosure requirements, or more recently updated GAAP.

You can read the final rule and find the related press release here.

We will post more about the details of some of the changes soon.

As usual, your thoughts and comments are always welcome!

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!

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).


The Tax Cuts and Jobs Act Evolution

By: George M. Wilson, SEC Institute

As we discussed in our February 2018 program “The Tax Cuts and Jobs Act: Navigating the New Landscape” and our accounting related One-Hour Briefing, “Tax Reform – Getting the Accounting and Disclosure Right!” there is much still to do as we grapple with this complex and intricate new tax law.


Our new program “Tax Cuts and Jobs Act Update 2018: Issues for U.S. Businesses and Individuals” is a great next step in this process. The program will be held on April 19, and while the New York location is sold out the webcast is still available.


As always, your thoughts and comments are welcome!

The Future of Revenue Recognition Fraud?

By: George M. Wilson, SEC Institute

Revenue recognition is an all-time favorite area for cooking a company’s books. For sixteen years Boston-based public company intelligence service Audit Analytics has consistently found revenue recognition near the top of the list in their annual restatement study.


An interesting question many accounting professionals (or geeks as the case may be!) have been wondering is how adoption of the new revenue recognition model in ASC 606 might affect revenue recognition fraud.


No one will know the answer to this question for a while, but a recent SEC enforcement case provides an interesting perspective. In an enforcement action against Maxwell Technologies, the SEC alleges that a former senior sales executive entered into secret side agreements with customers and acted to conceal these agreements from the company’s financial reporting personnel. The SEC also alleges that the former CEO and former CAO did not adequately respond to “red flags” surrounding this activity. All the parties paid fines and the sales executive consented to a five-year officer and director bar.


Software accounting under legacy GAAP was based in large part on contract form. Fraud surrounding contracts, and in particular undisclosed side agreements, was near the list of all-time favorite areas to cook the books under this old GAAP. However, California-based Maxwell manufactures energy storage and power delivery products and is clearly not a software company, but the opportunity to cook the books using contract manipulation still existed.


How does this relate to the new revenue recognition model? As most of us likely know, the first of the five steps in the new model is to identify a company’s contract with a customer. From ASC 605-10-05-4:


  1. Step 1: Identify the contract(s) with a customer—A contractis an agreement between two or more parties that creates enforceable rights and obligations. The guidance in this Topic applies to each contract that has been agreed upon with a customer and meets specified criteria.


In this new GAAP contracts have a significant impact on revenue recognition. Contract terms determine the amount and timing of revenue recognition. Even contract modifications can change the amount and timing of revenue recognition. If it is easy to conceal contract terms it will be easy to manipulate revenue recognition.


The Maxwell case points to the importance of considering the need for new or different kinds of controls over the new revenue recognition process. In the software industry controls over contracts have long been a focus area. For example, many software companies periodically require sales personnel to provide certifications dealing with contract completeness and disclosure of all arrangements with a customer. In the new revenue recognition process these and other kinds of controls may become more relevant for companies outside the software world. In particular, controls over estimates and judgments will become crucial to the reasonableness of revenue recognition. This could be a new challenge in many areas.


Lastly, here is one more cautionary note. As is becoming more and more common in these types of enforcements, there was also a disgorgement by an officer who was not named in the action. Maxwell’s former CFO Kevin Royal, reimbursed the company $135,800 for incentive-based compensation he received while the fraud was being committed.


As always, your thoughts and comments are welcome!