The long-awaited final standard from the FASB and IASB’s revenue recognition convergence project was issued on May 28, 2014. You can download ASU 2014-09 Revenue from Contracts with Customers (Topic 606) from this page on the FASB website: http://www.fasb.org/cs/ContentServer?c=Page&pagename=FASB%2FPage%2FSectionPage&cid=1176156316498 .

The standards are touted as being converged, and all who have followed the project for years know what a challenge that was. Now the process of implementation must begin.  The Boards have established a joint transition group, in part to ensure a smooth transition, and in part to try to effect consistent application – a key to successful convergence.

To help you start learning and planning, we have scheduled a one-hour briefing, Revenue Recognition Revolution is Here: Highlights of the New Standard and What to do Now, on June 11, 2014 at 10:30 a.m E.D.T. The briefing, which will be a webcast, will be led by Carol Stacey and George Wilson and will provide you with an overview of the standard, as well as get you started on the path to implementation. You can register at:

http://www.pli.edu/Content/Seminar/Revenue_Recognition_Revolution_is_Here_Highlights/_/N-4kZ1z12a55?&ID=224795

For an in-depth dive into the new revenue recognition standard, you can also attend one of our upcoming workshops, held in several different locations:

Implementing the FASB/IASB New Revenue Recognition Standard Workshop 2014 

http://www.pli.edu/Content/Implementing_the_FASBIASB_New_Revenue_Recognition/_/N-1z12celZ4k?ID=214938]

June 18-19 in New York City

June 25-26 in San Francisco

August 21-22 in Dallas

September 15-16 in Las Vegas

We hope you can join us!

As we approach the June 2, 2014 deadline for the first conflict minerals report on Form S, there is still substantial uncertainty about what the report should look like and what it should contain.

A few companies have actually already filed, and just in case it might help, here is one of the recent filings.

It is a company called Affymetrix, Inc. and you can see their From SD at:

http://www.sec.gov/cgi-bin/browse-edgar?company=&match=&filenum=0-28218&State=&Country=&SIC=&myowner=exclude&action=getcompany

We all know someone who works, or worked, in public service, possibly even ourselves. This is the week set aside to recognize them for their efforts on behalf of all of us. We hope you will join us in thanking the thousands of people in all levels of government who work in a myriad of capacities on our behalf. The SEC has a nice tribute in the form of list of 50 Ways Government Works for us – go to:

http://www.sec.gov/spotlight/sec-employees/psrw50ways.pdf.

We’d like to add another to the list, borrowing from a January 2014 speech by SEC Chair, Mary Jo White:

“For nearly 80 years, the Securities and Exchange Commission has been playing a vital role in the economic strength of our nation. Year after year, the agency has steadfastly sought to protect investors, make it possible for companies of all sizes to raise the funds needed to grow, and to ensure that our markets are operating fairly and efficiently.”

The recently announced error in Bank of America’s computation of their regulatory capital requirement provided the financial press with a typical “sensation of the moment”.  In searching for ways to discuss the error some commentators even characterized it as an “accounting error”, the kind of thing sure to get a bit of sensational notice.

However, the nature of this error is a bit more complex, and has different lessons to teach.  Here is an excerpt from the B of A press release:

“Bank of America Corporation today announced a downward revision to the company’s previously disclosed regulatory capital amounts and ratios due to an incorrect adjustment related to the treatment of certain structured notes assumed in the Merrill Lynch & Co., Inc. acquisition in 2009. The reduction in the regulatory capital amounts and ratios has no impact on the company’s historical consolidated financial statements or shareholders’ equity, which were properly stated in accordance with accounting principles generally accepted in the United States of America (GAAP).”

(See more at: http://investor.bankofamerica.com/phoenix.zhtml?c=71595&p=irol-newsArticle&ID=1922893&highlight=)

What really happened here was an error in a disclosure that is not from the accounting system per se, the computation of regulatory capital.  Regulatory capital, a key indicator of financial health and strength, starts from financial statement information, but is actually a very complex numerical exercise that goes well beyond the financial statements.  It is an important disclosure for financial institutions, and in fact is disclosed in the notes to the financial statements.  But it was in all the complex and fancy computations outside the financial statements that the error occurred.

So, the lesson here is not really about the accounting for the financial statements, it is about what sort of care, and more importantly what sort of controls are necessary for the information disclosed in the notes that is not lifted directly from the accounting system, but rather that starts with information from the accounting system.

This is a far more complex issue, and one that has tripped up other companies in the past.

Two notable examples:

As far back as 1995, Fidelity had a major error in a spreadsheet that caused them to announce that their Magellan fund would have to pay a taxable dividend.  When the error was caught, they had to deal with the embarrassment of having to correct their earlier announcement.  The error?  A wrong sign in a computation in a spreadsheet.  You can google search for articles and also check out:

http://catless.ncl.ac.uk/Risks/16.72.html

In 2005 SunTrust Bank dealt with a very similar situation when a math error in a spreadsheet used to compute part of the allowance for loan losses came to light.  This one was more serious, as the financial statements were misstated and a restatement was required.  In fact, three people lost their jobs in this messy spreadsheet error case!

So, what is the lesson?  It is to take care to design and test controls over information that goes beyond the financials and review all that information very, very carefully!

While it does not eliminate all the uncertainties stemming from court action, the SEC’s Division of Corporation Finance has provided guidance about the first Form SD due June 2nd of this year.  The filing is still required, but with adjustments based on the appellate court decision.  You can find the details at:

http://www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370541681994#.U2D1E1429Fx

We will all keep watching for developments, and you can listen to the live version or the recorded version of our SEC Institute Form SD program.  Check it out here:

http://www.pli.edu/Content/Seminar/Preparing_the_2014_Form_SD_Conflict_Minerals/_/N-4kZ1z12bz4?fromsearch=false&ID=216613

We are all “conflicted” about what the heck is going on with the Dodd-Frank required conflict minerals disclosures. As you know, the SEC’s rules to implement this requirement were challenged in the courts, and at the appellate level a significant amount of uncertainty was created about certain disclosure provisions.

You can get details in an earlier post on this blog.

Well, where to go?

On April 30 PLI is presenting a program:

Preparing the 2014 Form SD (Conflict Minerals Disclosure)

This is a great example of how PLI brings so much to the SEC reporting world. As you know, this rule involves more than financial reporting, and the faculty for this program brings in experts from all the involved disciplines.

You can find out more about the program and see if it will help you in your efforts at:

http://www.pli.edu/Content/Seminar/Preparing_the_2014_Form_SD_Conflict_Minerals

As you may have heard, on April 14, to give us all a bit of a boost before the tax deadline, a divided panel of the US Court of Appeals for the District of Colombia Circuit issued a decision that finds that part of the SEC’s Conflict Minerals Rule violates the first amendment.

For those of us who have been hoping this Dodd-Frank imposed requirement would go away, this might not be all that we have been wishing for.

First, the rule is still in effect, it was not overturned at the appellate level. The matter was returned to the District Court, so more will follow.

Also, the ruling is very specific as to what part of the rule creates a problem with the first amendment, and in fact did not overturn the lower court ruling on a number of other issues.

The problem the court identified is the section that requires “regulated entities to report to the Commission and to state on their website that any of their products have ‘not been found to be “DRC conflict free’.”

Various other parts of the rule that deal with issues such as:

An exception for de minimis use,
The due diligence requirements,
Issues if companies contract to manufacture, and
The SEC’s cost – benefit analysis,

were not overturned by the appellate court.

What will happen? Stay tuned!

You can find the decision at:

Click to access 13-5252-1488184.pdf

As Carol used to emphasize when she was Chief Accountant in CorpFin, and still does every chance she gets, SAB 74 disclosures are an important issue to the Staff.  This disclosure requirement about recently issued accounting standards is codified in Topic 11-M of the SAB codification, which you can find here.

As we have recently passed first quarter end, and the FASB is actively working to finalize the new Revenue Recognition standard, this might be a good time to proactively begin drafting SAB 74 disclosures for this new standard, just in case it is issued before you file your 10-Q for the quarter ended March 31 (or whenever your next filing is due).

This posting will summarize the requirements and talk about a couple of the challenging issues they present.

In our next post we will talk about why they seem to be duplicated in the financial statements and MD&A, a frequent complaint about copy and paste disclosure duplication.

The SAB essentially considers a new standard to be a “known trend” in the context of the MD&A requirements, that is something that you can “reasonably expect” to have a future impact.  In essence the enactment of the standard by the FASB creates a requirement to make a forward-looking disclosure because you know it will make the past not be indicative or predictive of the future.

The SAB states that your disclosure could generally include four components:

“A brief description of the new standard, the date that adoption is required and the date that the registrant plans to adopt, if earlier.

A discussion of the methods of adoption allowed by the standard and the method expected to be utilized by the registrant, if determined.

A discussion of the impact that adoption of the standard is expected to have on the financial statements of the registrant, unless not known or reasonably estimable. In that case, a statement to that effect may be made.

Disclosure of the potential impact of other significant matters that the registrant believes might result from the adoption of the standard (such as technical violations of debt covenant agreements, planned or intended changes in business practices, etc.) is encouraged.”

These disclosures are generally pretty straightforward, but one issue that does come up frequently is companies saying they are not sure of the future impact of a new standard when they are in the period just before adoption is required.  If you are close to the adoption date, for example filing a 10-K in March when you are adopting in that quarter, seems likely you should have some idea of the impact.

Another issue that we hear from many participants is about including information about new standards that do not impact their companies at all.  And, there is no requirement to do this!  The SAB actually says:

“The staff believes that this disclosure guidance applies to all accounting standards which have been issued but not yet adopted by the registrant unless the impact on its financial position and results of operations is not expected to be material.”

So, if it does not have a material impact, it can be omitted.  In these days of reducing unnecessary disclosures, this is one to think about! We’ll give some tips on what to do if someone, aka your auditor, tells you that you need a complete list.

That is our brief review of SAB 74 issues in advance of the new revenue recognition standard.  Since we know it is out there, seems like we might as well get ready!

Meanwhile, any thoughts on why this disclosure is usually in both the financial statements and MD&A?  And we’ll answer the age old question: have you ever seen SAB 74 disclosure that is good, or at least decent? We will discuss both questions next time, so stay tuned!

Today the SEC issued additional FAQ’s dealing with the conflict mineral reporting requirements. They are located at:

http://www.sec.gov/divisions/corpfin/guidance/conflictminerals-faq.htm

(Both the May 30, 2013 and the new April 7, 2014 FAQ’s are at this link.)

The nine new FAQ’s deal in large part with the “independent private sector audit” or IPSA requirement.