By: George M. Wilson, SEC Institute

We periodically post information from the FASB’s agenda to get a sense of the direction of accounting standard setting. When it comes to SEC rulemaking however it can be a bit harder to get a sense of what is in process. The SEC’s webpage does not have as straightforward a list of projects in process as the FASB’s agenda. The SEC’s agenda is compiled and included in the semiannual Unified Agenda of Federal Regulatory and Deregulatory Actions which is compiled by the Regulatory Information Service Center, a component of the U.S. General Services Administration along with the Office of Management and Budget’s Office of Information and Regulatory Affairs.

One issue in past SEC agenda setting is that the lists in the Unified Agenda were perhaps a bit of a “wish list” and might include more than could be done in the Unified Agenda’s regulatory one-year time horizon. The current leadership at the SEC has taken a different tack with this list and tried to build an agenda that can, hopefully, be accomplished in a one-year time horizon.

This agenda is maintained in the government’s Office of Information and Regulatory Affairs. As you can see the agenda is not encyclopedic, but does touch on a variety of areas. It is also worth noting how many of the areas on the agenda deal with disclosure effectiveness and modernization.

As always, your thoughts and comments are welcome!

By: George M. Wilson, SEC Institute

In a meeting on Wednesday, February 21, 2018, the SEC adopted an Interpretive Release titled “Commission Statement and Guidance on Public Company Cybersecurity Disclosures.” The release reinforces and expands upon the staff’s 2011 cybersecurity guidance in Corporation Finance Disclosure Guidance Topic Two. In this post from January 31, 2018, we briefly reviewed Disclosure Topic Two and the possibility of moving this guidance from a staff document to a commission release.

In addition, the new release addresses two issues that have been important in recent cybersecurity breaches, the importance of cybersecurity policies and procedures and the application of insider trading prohibitions in the cybersecurity context.

Disclosure Guidance Topic Two was a very principles-based disclosure model, and as you read the new Interpretation you will see it incorporates those principles. The release emphasizes the role of disclosure controls and procedures and the importance of board of directors involvement in cybersecurity disclosures. One significant change is that Disclosure Guidance Topic Two was staff guidance, and the Interpretive Release is formal guidance from the Commission, and in essence moves towards the authority of a rule.

In the release the Commission also states that they will continue to monitor company disclosures and cybersecurity developments to assess whether further guidance or rulemaking in necessary.

As always, your thoughts and comments are welcome!

By: George M. Wilson, SEC Institute

Materiality is one of the most challenging judgments we have to make in our period-end reporting. Few areas in our financial reporting world are as subjective and difficult to interpret. An issue that makes materiality judgments even more complex is that if, in a later period, someone (the SEC for example!), wants to evaluate or second guess our judgment, it is always with 20-20 hindsight.

We need to be thoughtful and complete in our analysis and documentation for every materiality judgment we make.

Where is the official guidance we should cite in our white paper to document materiality decisions?

From a US GAAP perspective you may remember that as part of its Conceptual Framework project the FASB was considering making some changes to the definition of materiality in the GAAP literature. At the Board’s November 8, 2017 meeting they decided not to make changes and instead use the existing definition from old, now superseded, Concept Statement 2:

Materiality

Materiality is a pervasive concept that relates to the qualitative characteristics, especially relevance and reliability. Materiality and relevance are both defined in terms of what influences or makes a difference to a decision maker, but the two terms can be distinguished. A decision not to disclose certain information may be made, say, because investors have no need for that kind of information (it is not relevant) or because the amounts involved are too small to make a difference (they are not material). Magnitude by itself, without regard to the nature of the item and the circumstances in which the judgment has to be made, will not generally be a sufficient basis for a materiality judgment. The Board’s present position is that no general standards of materiality can be formulated to take into account all the considerations that enter into an experienced human judgment. Quantitative materiality criteria may be given by the Board in specific standards in the future, as in the past, as appropriate.

So, the Board’s new Concept Statement 8 will have a definition close to the words above.

As a next reference point, Regulation S-X, Rule 1.02(o) provides this definition of material:

(o) Material. The term material, when used to qualify a requirement for the furnishing of information as to any subject, limits the information required to those matters about which an average prudent investor ought reasonably to be informed.

Obviously, this is not a simple definition to interpret and apply. It emphasizes the need for thoughtful, careful judgment when evaluating materiality. The SEC issued SAB 99, codified as SAB Topic 1-M, to provide more guidance as we make materiality judgments. SAB 99 quotes a Supreme Court Decision that held that a fact is material if there is:

a substantial likelihood that the . . . fact would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available

This SAB also clearly articulates that materiality is not simply a quantitative concept:

“In the context of a misstatement of a financial statement item, while the “total mix” includes the size in numerical or percentage terms of the misstatement, it also includes the factual context in which the user of financial statements would view the financial statement item. The shorthand in the accounting and auditing literature for this analysis is that financial management and the auditor must consider both “quantitative” and “qualitative” factors in assessing an item’s materiality”

Not surprisingly, the CorpFin Staff writes comments about materiality. As you can see in this comment, the Staff will actually ask for your SAB 99 white paper:

We have the following comments on your use of incorrect translation rates for reporting U.S. Dollar value of goodwill held by foreign subsidiaries:

Please tell us the date you determined this error, clarify how this error arose, and identify the periods affected by this error;

Please clarify impact, if any, the correction of this error had on your reported $(287,524) foreign currency translation adjustment for the three months ended December 30, 2016;

Provide us with your sufficiently detailed SAB 99 materiality analysis to support how you determined that effected accounts were not quantitatively or qualitatively material to any of the affected periods; and

Tell us how the errors impacted the previous conclusions regarding disclosure controls and procedures and internal control over financial reporting.

Just in case you were wondering how far a materiality issue can go, check out this enforcement case involving Gemstar and its auditors. (Yes, it is a classic!) Here is a quote from the release:

The auditors’ materiality determinations were unreasonable in that they were based on a quantitative analysis and failed to consider whether the revenues at issue were qualitatively material.

When we make difficult decisions the 20-20 hindsight factor is always in our minds. The best way to deal with this hindsight factor is to make a thoughtful judgment using all the facts available to us in the moment, and then to document all our considerations. We need to clearly and completely articulate all the relevant facts and information, enumerate quantitative issues, describe qualitative issues, and come to an overall conclusion that is consistent with all the above guidance.

As always, your thoughts and comments are welcome!

By: George M. Wilson, SEC Institute

The FASB has a meeting scheduled for Wednesday, February 7 at 9 am (EST) that will deal with a broad array of topics and will be of interest to many of us. The agenda includes:

1. Collaborative arrangements—targeted improvements
2. Segment reporting
3. Ratification of an EITF consensus-for-exposure (cloud computing costs)
4. Reclassification of certain tax effects from accumulated other comprehensive income
5. Disclosure framework: disclosure review—fair value measurement
6. Open discussion

You can find more details about the meeting agenda here. And, in case you are looking for a super fun way to spend Wednesday morning (be sure to have coffee and donuts for the crowd you will attract), you can learn about how to watch the webcast of the meeting here!

As always, your thoughts and comments are welcome!

By: George M. Wilson, SEC Institute

Cybersecurity risk is an important “hot topic” in period-end reporting. In our workshops we sometimes find that many people are not aware that the SEC has issued guidance about cybersecurity disclosures.

As a period-end reporting reminder, don’t forget to review CorpFin Disclosure Guidance Topic 2 as you address cybersecurity risk. The SEC, both at the staff and Commission level, have recently reiterated that they believe this guidance from 2011 is on-point for disclosure in the current environment. There have been some discussions about whether to move this from a CorpFin document to a more official Commission Release, but there has been no formal activity to date.

As you read the Disclosure Guidance Topic you will see it suggests that you should tailor information to your circumstances. Disclosure in Risk Factors (likely applicable for almost all companies!) is one issue, but disclosure may also be relevant in the Description of the Business, Legal Proceedings, MD&A and the Financials Statements.

Another reminder, Chairman Clayton’s remarks about cybersecurity risk also provide valuable insight into making appropriate disclosures in this complex area.

And, as a last thought, PLI is presenting a One-Hour Briefing titled “Integrating Enterprise Risk Management, Cybersecurity and Compliance in an Era of Big Data Breaches and Vulnerability” on February 13, 2018.

As always, your thoughts and comments are welcome!

By: George M. Wilson, SEC Institute

Here is a thought to incorporate as you draft your year-end Form 10-K or next 10-Q. It involves a topic that arises in almost all our workshops. We all know how frustrating it is to find parts of a 10-K that are simply duplicates of other parts. The idea of simply cutting and pasting information from one section to another really serves no disclosure purpose and makes documents less readable for investors.

At SECI’s New York Annual Forum in December 2017, a speaker from the Division of Corporation Finance commented that “cross references are wonderful!”.

Now, as a reminder, when the staff speaks they only provide their opinion, not an official SEC position. That said, cross references really are wonderful!

As always, your thoughts and comments are welcome!