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!