Category Archives: Comment of the Week

Year End Planning Topic 3 – The New Item 16 Form 10-K Summary (and Disclosure Philosophy!)

Everyone who works with SEC periodic reports knows that making changes to disclosure is not a simple process. Reporting involves so many stakeholders and so many approval points that without an early start it is almost impossible to make improvements (or even simple changes such as formatting!).

This post is about one possible change that will need some time for consideration, adding the new Item 16 summary. With this reminder hopefully you will have enough time to consider whether this optional item makes sense for you.

This kind of summary has always been permitted, or at least never prohibited. However, in the process of making periodic reports more about communication than compliance, the FAST Act required the SEC to formally put a summary into Form 10-K, hence new Item 16. You can read the text of Item 16 in this post.

Your Communication Philosophy

If you read a lot of Form 10-K’s (and what is more fun than that?) you will see a variety of communication styles. We discuss different communication styles or “philosophies” in our workshops. We encourage companies to articulate their “philosophy” of disclosure.

To simplify a bit, some companies adopt a very “compliance” based philosophy for disclosure. In this model companies disclose what the SEC requires to be disclosed and essentially nothing more. This can be done in a fairly mechanical fashion and is usually very simple and direct, if not almost terse.

At the other end of a disclosure spectrum some companies adopt a more “communications” based philosophy where they disclose more than the bare bones requirements in an effort to tell a more complete “story” of how their company operates.

A simple example of this difference can be found in Form 10-K Item 1. This is the description of the business and the required disclosures are in Regulation S-K Item 101. Nowhere in Item 101 is there any requirement to disclose a company’s business strategy. And many companies do not say anything about the strategic orientation of their business. And yet, many companies discuss their strategy at length. Check out the differences in these two companies:

Here is a very well done example for an SRC (Golden Enterprises) of the compliance approach. Golden makes snack foods and does a simple, direct presentation. (Also, best potato chips ever!)

Here is another well-done example of a company (Square) that uses a more communications oriented approach. Square is a payment processor and supports businesses in many ways.

To be clear, there is no right or wrong way in this discussion; we are talking about a judgment you need to make. So, why do some companies disclose more than the S-K requirement?   These companies are considering disclosure as more than a compliance process. They are using the reporting process as a communications tool.

If you are going to focus more on communication the SEC’s Interim Final Rule about a Form 10-K summary could be a new element in your communication strategy. Almost every business writer will suggest that an executive level overview for a long document is a good communication strategy.

FR 72 suggested this for MD&A way back in 2003:

Many companies’ MD&A could benefit from adding an introductory section or overview that would facilitate a reader’s understanding. As with all disclosure, what companies would appropriately include in an introduction or overview will depend on the circumstances of the particular company. As a general matter, an introduction or overview should include the most important matters on which a company’s executives focus in evaluating financial condition and operating performance and provide the context for the discussion and analysis of the financial statements. Therefore, an introduction or overview should not be a duplicative layer of disclosure that merely repeats the more detailed discussion and analysis that follows.

In recent remarks the SEC staff has said they are seeing more companies using their filings as communication documents and this trend certainly fits into the SEC’s disclosure effectiveness program.

So, as you get into your annual reporting process, be sure you articulate this overall strategy for disclosure, and if you think it appropriate, put consideration of the new Item 16 summary into your thought process.

As always, your thoughts and comments are welcome!

Summertime Planning Topic Two – Evaluating and Auditing ICFR

As we blogged about (or perhaps nagged about), in our last post it is never too soon to start planning for year-end. That post suggested some proactive steps to avoiding some commonly occurring problems in the statement of cash flows. In this post we will discuss another frequently problematic issue, the annual management’s assessment and external audit of ICFR. It is likely an understatement to say that in recent years there has been substantial change in how management assesses and auditor’s audit ICFR. Areas such as management review controls, how to use system generated information, what are appropriate scopes for testing and how to evaluate whether a control deficiency is a material weakness are all in play.

 

In our annual reporting process it makes sense to get out in front of these issues!

 

Here are two resources that we hope can help in your ICFR evaluation and auditing process.

 

  1. In our August 5, 2016 PLI Smartbrief (you can learn more and sign-up to receive the SmartBrief here) we referenced an Accounting Web article about a Protiviti SOX Compliance survey. The findings can help inform your own SOX planning and the evolution of your ICFR. According to the survey SOX related audit costs are generally increasing. Here is a telling quote from the executive summary:

 

“Sarbanes-Oxley compliance once was thought to be a relatively stable, predictable process that organizations could rely on to be routine and, for the most part, static. Yet market and regulatory changes continue to make this a more dynamic process, with costs and hours continuing to rise for many organizations. The good news is that more organizations are recognizing the benefits of their compliance efforts through improved internal control structures and business processes.”

 

 

  1. The PCAOB has published a helpful resource in planning your SOX ICFR evaluation and audit. In their most recent Staff Inspection Brief they discuss the plan, scope and objectives for the coming cycle of inspections. As expected ICFR is one of the points of focus:

 

“During the 2016 inspection cycle, Inspections staff will, among other things, consider the sufficiency of auditors’ procedures performed to identify, test and evaluate controls that address the auditors’ assessed risk of material misstatement, and auditors’ testing of controls that contain a review element. “

 

As always, your thoughts and comments are welcome!

Cash Flows Topic One – Comment of the Week and EITF Fun!

High risk accounting and reporting areas, those most prone to problems and the risk of amendment or restatement, are discussed in all our conferences and workshops. We always encourage folks to be aware of these risks and to address them in their reporting processes.

 

Now that we are into August, is it fair to put some of these issues on the planning calendar for year-end? Yes, because many of them require significant amounts of time and work to address. (For example, have you ever tried to make improvements in your MD&A?) So, even though it is only August, we are going to start a series of posts with some considerations for year-end planning! We will also bring all of them together later in the fall.

 

Perhaps surprisingly, one of these frequent problem areas is preparation of the statement of cash flows. For a variety of reasons the statement of cash flows is the source of many SEC comments and even restatements. Perhaps this is because the statement of cash flows is usually prepared late in the reporting process, perhaps because it is sometimes viewed as a mechanical process, perhaps because it is sometimes prepared by less experienced professionals and/or perhaps controls are not effective in this area. There are likely many underlying causes for the statement of cash flows being a frequent problem area, but if we are forewarned there is no reason that we should have problems here.

 

As a starting point, here are some example SEC comments.

 

Statement of Cash Flows

We note your presentation on the statement of cash flows of sales and maturities of short- term investments as one combined line item. In light of the fact that short term investments represent a significant part of your balance sheet, please revise to present sales and maturities of these investments as separate line items within the investing section in accordance with ASC 320-10-45-11.

The comment above is a great example of where a seemingly logical combination of similar cash flows runs afoul of the codification guidance. The referenced paragraph is not even in the ASC section about the statement of cash flows! What it says is:

Cash flows from purchases, sales, and maturities of available-for-sale securities and held-to-maturity securities shall be classified as cash flows from investing activities and reported gross for each security classification in the statement of cash flows. Cash flows from purchases, sales, and maturities of trading securities shall be classified based on the nature and purpose for which the securities were acquired.

Here is another example:

Please tell us how you determined it was appropriate to classify restricted cash collateralizing your outstanding letter of credit and cash secured loans as investing activities in the statement of cash flows. Please reference the authoritative accounting literature management relied upon.

This is an area where there may be no clear guidance. The distinction between operating and investing seems like an easy question to ask here. And, as you will see below, this is a question that was taken to the EITF.

 

Here are a few more comments with similar issues. This first one is pretty darn long!

Consolidated Statements of Cash Flows, page F-8

Please tell us your basis for recording the deposit related to the acquisition of land use right as operating activities as opposed to investing activities. Refer to ASC 230.

We note your line item, advances to suppliers, in your balance sheets and other trade receivables included in Note 4 on page F-30 related to your lending provided to some of your suppliers. Please tell us the nature of your lending activities to your suppliers and the difference in amounts included in the two accounts. Additionally, please tell us your basis for recording amounts in operating activities as opposed to investing activities in your statements of cash flows. Refer to ASC 230.

Please reconcile for us the purchase of property and equipment for 2014 in the amount of $256,027,300 to the change of $301,716,262 derived from your disclosure in Note 7.

 

This one seems fairly straightforward:

We note cash flows from financing activities include non-cash transactions consisting of common shares issued for debt conversions and as compensation for services as well as losses on settlement of debt through equity issuances. Please refer to ASC 230 and revise to separately disclose non-cash financing transactions in supplemental disclosure of noncash investing and financing activities and to disclose losses on debt settlements in cash flows from operating activities. Please note that this comment also applies to Form 10-Q filed February 2, 2016.

 

The Need For Clarification – The EITF to the Rescue!

 

Because of the frequent nature of these issues and diversity in practice surrounding many of them the EITF has two projects that are at the Exposure Draft stage and should finish before year end:

 

EITF Issue 16-A: Restricted Cash would require the statement of cash flows to reconcile the total change in cash including restricted cash.

 

EITF Issue 15-F: Statement of Cash Flows: Classification of certain cash receipts and cash payments deals with a variety of issues in the cash flow statement, including:

 

Issue 1—Debt Prepayment or Debt Extinguishment Costs

Issue 2—Settlement of Zero-Coupon Bonds

Issue 3—Contingent Consideration Payments Made after a Business Combination

Issue 4—Proceeds from the Settlement of Insurance Claims

Issue 5—Proceeds from the Settlement of Corporate-Owned Life Insurance Policies, including

Bank-Owned Life Insurance Policies

Issue 6—Distributions Received from Equity Method Investees

Issue 7—Beneficial Interests in Securitization Transactions

Issue 8—Predominant Cash Receipts and Cash Payments

 

 

With all of this comment activity and related standard setting going on, it is advisable to “scrub” your process for preparing the statement of cash flows in your upcoming periodic filings.

 

As always your thoughts and comments are welcome!

A Busy Summer for the SEC!

The SEC has been busy on many fronts this summer. If you review the summary of proposed rules here on their web site you will see they have proposed five rules so far this summer and the summary of final rules here has another six rules issued in final form.

 

That is a busy summer!

 

The proposed rules contain some of the first concrete, early steps in the SEC’s disclosure effectiveness project. The proposal will “clean-up” some areas where the SEC’s rules overlap or are redundant with GAAP, IFRS or other guidelines. They also include a proposal to change the threshold to use the Smaller Reporting Company system to $250,000,000 in public float.

 

You can see the details of each proposal below:

 

Disclosure Update and Simplification

 

Amendments to Smaller Reporting Company Definition

 

Modernization of Property Disclosures for Mining Registrants

 

 

The final rules range from the final resource extraction payment rules required by Dodd/Frank, which replace the earlier version overturned in the courts, to the FAST Act 10-K summary.

 

You can see the details of each final rule below:

 

Disclosure of Payments by Resource Extraction Issuers

 

Adoption of Updated EDGAR Filer Manual

 

Form 10-K Summary

 

 

As always, your thoughts and comments are welcome!

Comment of the Week – Be Consistent in All Communications

One of the themes we discuss in our workshops is how the SEC does not limit their review process to information in a company’s SEC filings. Here is an example of a comment (which also deals with known trends and uncertainties, another favorite topic) that demonstrates how the Staff finds issues by looking in places such as earnings releases, conference call recordings and web pages:

 

Results of Operations, page 23

 

  1. Please expand your discussion to address any known trends or uncertainties that are reasonably expected to have a material impact on revenue, cost of revenue, or income from operations. For example, we note that during your 2015 fourth quarter and full year earnings call on February 11, 2016, your management quantitatively described the volume increase, as well as discussed your customer mix changes by segment and certain trends in 2016. In addition, disclosure appearing on page 11 of your filing on Form 10-K under your risk factors indicates that extended periods of low fuel prices can also have an adverse effect on your results of operations and overall profitability, as well as on the valuation of inventory to the extent your hedges are not effective at mitigating fluctuations in fuel prices. However, you have not provided a discussion in your filing with respect to an analysis of known material trends, demands and uncertainties.

 

Refer to Section III of Financial Reporting Release No. 72, codified in FRC §501.12 and Item 303 of Regulation S-K.

 

It is important to assure that all the vehicles you use to communicate with your shareholders and the rest of the public are consistent and that issues raised in one place are appropriately dealt with across all communication channels.

 

As always, your thoughts and comments are welcome!

Comment of the Week – Critical Accounting Estimates

It has been a while since we posted about critical accounting estimates. While this is now a normal part of MD&A it is surprising how many folks in our workshops don’t know where the “official” guidance for this disclosure is found.

 

There is a bit of confusion in the history of this disclosure. It all started in the post-Enron period with concerns about the quality of accounting principle selection discussed in FR 60 (the FRs are Financial Reporting Releases, interpretations that are approved by the SEC Commissioners). This release addressed the aggressive use of accounting principles and required disclosure in plain English of “Critical Accounting Policies”. FR 60 did not describe in great detail exactly what a critical accounting policy was or what disclosures should be made. You can find this brief FR, for perhaps historical purposes, here.

 

FR 60 was issued as a “quick fix” and the SEC planned to follow it with a formal rule for this disclosure. The rule was proposed, but it was never actually finalized. Instead the SEC dealt with this disclosure in FR72. If you scroll to Section V towards the end of FR 72 you will find the requirements for disclosure of critical accounting estimates.

 

www.sec.gov/rules/interp/33-8350.htm

 

(As you read this FR, note the evolution in terminology from Critical Accounting Policies to Critical Accounting Estimates.)

 

Don’t forget to look at the most recent Staff guidance in this area in FRM Section 9500, which gives guidance on disclosure of critical accounting estimates in the area of goodwill impairment.

 

Here are a few key issues about disclosure of Critical Accounting Estimates:

 

  1. Critical accounting estimates are not the same as significant accounting policies, and this part of MD&A should not simply duplicate this information from the financial statements. The focus should be on estimates and assumptions used in GAAP that have a material impact on financial condition and operating performance and on comparability over time.
  2. This disclosure should focus on why the estimate is “critical” and what is challenging about the estimate. Why is it difficult to make this estimate and what creates uncertainty about the precision of the estimate?
  3. Most companies won’t have that many of these “critical” estimates. Most companies start with a few and build from there. Often, lessons from past changes in estimates can help your identification process.
  4. The staff sometimes will ask about the quantified sensitivity analysis discussed in the last part of FR 72, so if information is available and will help investors understand the significance of the estimate and its uncertainty, consider disclosing it.

 

To help understand this disclosure, here is a recent comment from the SEC:

Critical Accounting Policies and Estimates

  1. In future filings please provide a more robust discussion of your critical accounting policies and estimates to focus on the assumptions and uncertainties that underlie your critical accounting estimates rather than duplicating the accounting policy disclosures in the financial statement footnotes. Please quantify, where material, and provide an analysis of the impact of critical accounting estimates on your financial position and results of operations for the periods presented. In addition, please include a qualitative and quantitative analysis of the sensitivity of reported results to changes in your assumptions, judgments, and estimates, including the likelihood of obtaining materially different results if different assumptions are applied. If reasonably likely changes in inputs to estimates would have a material effect on your financial condition or results of operations, the impact that could result given the range of reasonable outcomes should be disclosed and quantified. Please refer to SEC Release No. 33-8350. In your response, please show us what your disclosure would have looked like if these changes were made in your most recently filed Form 10-K.

 

 

As always, your thoughts and comments are appreciated!

Disclosure Effectiveness – Looking for A Deeper Dive?

Last week we lightheartedly posted about the fun of listening to a live webcast of an SEC meeting and being “cool” and “in the know”. The meeting we mentioned is on April 13th and includes this agenda item:

 

The Commission will consider whether to issue a concept release seeking comment on modernizing certain business and financial disclosure requirements in Regulation S-K.

 

Concept releases explore issues and very frequently provide insight into the direction that future policy making will take. As an example you could check out the SEC’s recent concept release about audit committee disclosures in this post:

 

seciblog.pli.edu/?p=462

 

Also, in some words that may be familiar to folks who have attended our SEC Workshops, here is a quote about MD&A from FR 36:

 

The MD&A requirements are intended to provide, in one section of a filing, material historical and prospective textual disclosure enabling investors and other users to assess the financial condition and results of operations of the registrant, with particular emphasis on the registrant’s prospects for the future. As the Concept Release states:

 

The Commission has long recognized the need for a narrative explanation of the financial statements, because a numerical presentation and brief accompanying footnotes alone may be insufficient for an investor to judge the quality of earnings and the likelihood that past performance is indicative of future performance. MD&A is intended to give the investor an opportunity to look at the company through the eyes of management by providing both a short and long-term analysis of the business of the company. The Item asks management to discuss the dynamics of the business and to analyze the financials.

 

Most importantly, the SEC listens and very often thoughtfully takes into account the issues discussed in comment letters in their subsequent rulemaking.   All this leads us to the conclusion, especially since the Disclosure Effectiveness process has been underway for quite a while, that this could be an important meeting!

 

If you would like to learn a bit more after the meeting, PLI will be presenting a One-Hour Briefing titled “SEC’s New Concept Release on Modernizing Regulation S-K” on April 25, 2016. Four speakers, including former CorpFin staffers, will present the briefing to help build a deeper understanding of the process. You can learn more at:

 

www.pli.edu/Content/Seminar/SEC_s_New_Concept_Release_on_Modernizing/_/N-4kZ1z10szo?Ns=sort_date%7c0&ID=283018

 

As always, your thoughts and comments are welcome!

 

 

Comment of the Week – Market Risk Reminder

 

We have been discussing the topic of Market Risk Disclosures a lot in this environment of volatile exchange rates, bumpy commodity prices and uncertain interest rates. This disclosure is one of the most confusing parts of Regulation S-K. Without going into a whole lot of details about S-K Item 305 (which we covered in an earlier blog at seciblog.pli.edu/?p=489), as we move towards the end of the first quarter it will continue to be important to focus on getting this disclosure right.

 

So, with this post as a reminder, here is a quick example in a recent comment:

Item7A. Quantitative and Qualitative Disclosures About Market Risk, page 63

  1. Please provide an analysis on whether your “cash flow hedges,” discussed in the second- to-last paragraph of page 63, are material, such that you would need to provide the disclosure in Item 305(a) of Regulation S-K. Please see General Instruction 5.B to Item 305(a) and (b).

 

As usual, your thoughts and comments are welcome!

Comment of the Week – The Mystery of Market Risk Disclosures

Market Risk Disclosures are one area that many participants in our workshops seem to shy away from. This Item is one of the less well understood disclosures in Forms 10-K and 10-Q. The mechanics of writing the disclosure are, well, at best, mysterious.

With all the volatility in exchange rates, oil prices and other markets in the current environment these disclosures will likely become more important for many companies this year end. Because of this, we thought “going to go back to the basics” of this disclosure would be helpful in many companies’ year end process. So, this post includes a review of the objective of the disclosure and some tips to navigate the requirements in S-K Item 305 as you prepare the disclosure.

Since this is a comment of the week post, there are also some comments at the end of the post. If you are already comfortable with what market risk disclosures are about and how they work, you can skip to the end!

Objective of the Disclosure

To prepare these disclosures well it is crucial to understand their objective, what they are supposed to tell a reader. To understand this objective the first step is to understand what kind of risk the term “Market Risk” means. Market risk is a term that can be interpreted in a number of different ways ranging from the market for a particular product to market driven rates such as interest rates or commodity prices.

Deep in the body of Regulation S-K – Item 305, likely one of the most challenging reads in all of Regulation S-K, you find these instructions:

Instructions to paragraph 305(b): 1. For purposes of disclosure under paragraph 305(b), primary market risk exposures means:

  1. The following categories of market risk: interest rate risk, foreign currency exchange rate risk, commodity price risk, and other relevant market rate or price risks (e.g., equity price risk); and
  2. Within each of these categories, the particular markets that present the primary risk of loss to the registrant. For example, if a registrant has a material exposure to foreign currency exchange rate risk and, within this category of market risk, is most vulnerable to changes in dollar/yen, dollar/pound, and dollar/peso exchange rates, the registrant should disclose those exposures. Similarly, if a registrant has a material exposure to interest rate risk and, within this category of market risk, is most vulnerable to changes in short-term U.S. prime interest rates, it should disclose the existence of that exposure.

To paraphrase, these disclosures are not about the “market” for a product like computers or smartphones. They are about the risks a company faces from market driven prices like interest rates or commodity prices. So, while the market for smart phones could affect a company, the Market Risk Disclosures are about issues like how a change in interest rates could affect a company if the company has significant investments or borrowings.

And that brings us to the next step in understanding the objective of these disclosures. Once we know what sort of market risk we need to describe, what should we say about it?

In S-K Item 305(a)(1)(ii)(A) you will find this language:

“sensitivity analysis disclosure that expresses the potential loss in future earnings, fair values, or cash flows of market risk sensitive instruments resulting from one or more selected hypothetical changes in interest rates”

In other words, this disclosure is designed to help a reader assess how much a change in a market driven price, such as an interest rate or a commodity price, would affect the business.

Conceptually what this disclosure is about is fairly easy to understand. However, the application of S-K Item 305 is complex. It requires both qualitative and quantitative information   Our review here is fairly brief. S-K Item 305 has a maze of detailed rules. If you will be drafting or reviewing the disclosure you should refer to the actual S-K language. Also, the comments below illustrate several of the complexities in this rule.

Qualitative Disclosures

The logical place to start drafting is with qualitative disclosures. Knowing what a company’s market risks are is necessary before quantitative information will make sense to a reader. Unfortunately, in Item 305, the qualitative disclosures are sort of hard to find, as they are not the first thing listed. You can find them in paragraph (b), which says:

(b) Qualitative information about market risk.

(1) To the extent material, describe:

(i) The registrant’s primary market risk exposures;

(ii) How those exposures are managed. Such descriptions shall include, but not be limited to, a discussion of the objectives, general strategies, and instruments, if any, used to manage those exposures; and

(iii) Changes in either the registrant’s primary market risk exposures or how those exposures are managed, when compared to what was in effect during the most recently completed fiscal year and what is known or expected to be in effect in future reporting periods.

This qualitative information is really pretty simple; say what market driven prices such as interest rates, exchange rates, commodity prices or other types of prices affect the company; talk about how you manage them; and tell if they have changed. Note that the rules do not require that a company manage these risks, so if you don’t manage them, you should disclose that, along with the other information in (b) (10) above.  (Here is one place to review Item 305 in detail, as this disclosure needs to be broken down in pretty specific ways by type and source of risk.)

Quantitative Disclosures

The second part of this disclosure is quantitative, and is designed to help a reader understand how much a hypothetical change in market prices or rates could affect the business. Again, this is a very detailed requirement, but in essence starts with a choice among three alternatives:

Tabular Disclosure

S-K Item 305(a)(1)(i)(A)(1) describes a tabular presentation of information related to market risk sensitive instruments. This information includes fair values of the market risk sensitive instruments and contract terms sufficient to determine future cash flows from those instruments, categorized by expected maturity dates. In essence you are providing a reader with the input they could use to build a spreadsheet, make a price change assumption, and see how much the price change would affect the company’s income, cash flows or fair values.

Sensitivity Analysis

S-K Item 305(a)(1)(ii)(A) describes a sensitivity analysis disclosure that expresses the potential loss in future earnings, fair values, or cash flows of market risk sensitive instruments resulting from one or more selected hypothetical changes in interest rates, foreign currency exchange rates, commodity prices, and other relevant market rates or prices over a selected period of time. In essence, in this disclosure you build your own spreadsheet and assume a hypothetical change in rates or prices and compute the impact.

Value at Risk Analysis

S-K Item 305(a)(1) (iii)(A) describes value at risk disclosures that express the potential loss in future earnings, fair values, or cash flows of market risk sensitive instruments over a selected period of time, with a selected likelihood of occurrence, from changes in interest rates, foreign currency exchange rates, commodity prices, and other relevant market rates or prices. This is actually a complex econometric modeling process, and we won’t discuss it any further in this post. If your treasury or risk management group already uses this technique to assess risk it may well be a good disclosure option.

Again, this is very complex disclosure. You can choose one of the three alternatives for different risks, however you must disclose the most significant impact based on future earnings, fair values, and cash flows. Therefore, you must calculate the impact of a price change on income, cash flows and fair value to determine which has the greatest change, and thus is disclosed. Of course, If future earnings had the greatest impact last year, and this year the greatest impact is in fair value, then you would need to recast the prior year. These are only some of the judgments necessary to prepare this disclosure.
One last note, as you can see this disclosure is very forward looking, and is another reason the 1995 Private Securities Litigation Reform Act safe harbors are so important!
Example Comments

Last but not least, as this is a comment of the week post, here are some comments. Notice the focus on simple compliance with the S-K Item 305 disclosure requirements!

Foreign Currency Fluctuations, page 37

  1. We note from your disclosure on page 28 and in Note 26 that a substantial portion of your cash is held by foreign subsidiaries and 46% of your net sales to unaffiliated customers for fiscal 2014 were attributed to your foreign subsidiaries, respectively. We believe your market risk disclosures should be enhanced to provide a more robust discussion of the effects of foreign currency risk on your results of operations and financial condition. Additionally, your discussion of this market risk does not appear to comply with the guidance outlined in Item 305 of Regulation S-K. Please revise to expand your discussion of foreign currency risk to comply with one of the disclosure alternatives in Item 305(a) of Regulation S-K.

Quantitative and qualitative disclosure about market risk, page 70

  1. Please tell us how you considered the disclosures required by Item 305(a) of Regulation S-K with respect to your term loan.

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

Foreign Currency Risk, page 125

  1. Please tell us what consideration you gave to providing a sensitivity analysis for each currency (e.g., British Pounds and Euro) that may have an individually significant impact on future earnings.

Item 7A – Quantitative and Qualitative Disclosures About Market Risk, page 30

  1. We note your quantitative disclosure of interest rate risk associated with your investments in cash and cash equivalents and investment securities. We also note that your disclosure does not address market risk for other financial instruments such as the senior unsecured notes. Please revise to include qualitative and quantitative information about market risk in accordance with one of the three disclosure alternatives within Item 305 of Regulation S-K and that addresses the interest rate risk for the senior unsecured notes.

Revenue Recognition Help From FinREC

As you know the new FASB and IASB revenue recognition standards supersede all our existing revenue recognition guidance. Here in the US the new standard was such a major change that it was placed in a brand new codification section (ASC 606). One of the major changes with the new model is how it treats “specialized industries”. Many industries, such as software and construction, had specialized industry revenue recognition guidance. All those standards are also superseded. These industries now face many questions and uncertainties about how to apply the new revenue recognition model to unique and different transactions.

The new model, designed to make revenue recognition principles consistent across all industries, is much more general and does not include the detailed kind of guidance that old GAAP frequently provided. This potentially increases the risk that there could be diversity within industries in the application of the new standard.

FinREC, the Financial Reporting Executive Committee of the AICPA, and the AICPA’s Revenue Recognition Task Force have been working to help deal with these issues. They have established 16 industry groups and are developing a new “Accounting Guide for Revenue Recognition”. These resources will be developed with participation and review of standard setters, but will not be authoritative. The groups describe them as eventually providing “helpful hints and illustrative examples for how to apply the new Revenue Recognition Standard.”

They have published a list of potential implementation issues identified to date which you can find at:

www.aicpa.org/InterestAreas/FRC/AccountingFinancialReporting/RevenueRecognition/DownloadableDocuments/RRTF_Issue_Status.pdf

As always, your thoughts and comments are appreciated!