The SEC recently identified a new SEC enforcement initiative which “focuses on two types of ownership reports that give investors the opportunity to evaluate whether the holdings and transactions of company insiders could be indicative of the company’s future prospects.” The 2 ownership reports are Form 4, which is required of company insiders, officers, directors, and certain others when they buy or sell company stock, and Schedule 13D & 13G, which is required of beneficial owners of more than 5% of a registered class of company stock to report their holdings or intentions re: the company.

The Division of Enforcement brought charges against 28 officers, including some that were responsible for SEC Reporting, directors, or major shareholders for violating federal securities laws requiring them to promptly report information about their holdings and transactions in company stock. Six public companies were charged for contributing to filing failures by insiders or failing to report their insider delinquencies. The SEC Enforcement staff used “quantitative data sources and ranking algorithms [DERA at work again] to identify these insiders as repeatedly filing late”, some by years. The orders that were issued reinforced that even inadvertent failures to file are still violations of the rules. The initiative resulted in fines totaling $2.6 million from 33 individuals and companies.

While the 5% test can be challenging for some, the misses in filing Form 4s are surprising, as the rules are fairly clear, and take 10 minutes at the most, to digest, based on our experience in our SEC Reporting Skills Workshop. However, whether to check the 10-K cover page box for delinquent filer of Forms 3, 4, or 5 befuddles many; a hint – if everyone did what they were supposed to and filed as they should, the box is checked.

See the SEC’s Press Release at: http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370542904678

As always, we would love to hear your comments!

One of the open questions in adoption of the new Revenue Recognition Standard for public companies has been whether or not the SEC would require companies that adopt ASU 2014-09 retrospectively to apply it to all five years required in Form 10-K – Item 6 – Selected Financial Data.

Yesterday, September 11, 2014, at a Financial Accounting Standards Advisory Committee meeting the SEC Staff said they “would not object” if companies did not apply the standard to the fourth and fifth year back. As you know, S-K Item 301 for the five year summary requires clear disclosure when there are issues that affect comparability between years. In fact, S-K 301 says in Instruction 2:

Briefly describe, or cross-reference to a discussion thereof, factors such as accounting changes, business combinations or dispositions of business operations, that materially affect the comparability of the information reflected in selected financial data. Discussion of, or reference to, any material uncertainties should also be included where such matters might cause the data reflected herein not to be indicative of the registrant’s future financial condition or results of operations.

So, companies must address this lack of comparability, but at least we do not need to run parallel for revenue recognition for a five full years.

So, in a nutshell, the two choices in adopting the new standard are (adoption is required for years beginning after 12/15/2016 for public companies, one year later for non-public companies).

1. Full retrospective for all years presented, that is three years in a non-SRC or non-EGC 10-K. For this choice a company must “run parallel” for 2015 and 2016, and apply the new standard to 2017. (There are a few practical accommodations if you chose this option.)

2. Retrospective with a cumulative effect at the beginning of the year of adoption, 2017. However, if you use this method you must disclose the effect of the new standard on each line of the F/S affected. This means in essence you must run parallel for 2017 to provide comparative disclosures

So, now we know the choice with more clarity, and we can choose to double account for one or two years.

As always, welcome your comments and thoughts!

If there is any issue that is a hot topic in the business world today (and as a consequence in SEC reporting), it is cybersecurity. It seems we can’t go a week without hearing about a major cybersecurity event. From Target’s major attack last year and its consequences, to hospital records being breached, to even Apple possibly having a cybersecurity breach in it’s iCloud, cybersecurity continues to grow in complexity and impact.

One of the benefits of the SEC Institute programs now being part of PLI is that we have resources we could only have dreamed of before. One program that is particularly valuable today is our Cybersecurity 2014: Managing the Risk. This program is being held on September 10, 2014, and will be available in many cities and via webcast. You can learn more at our web page:

http://www.pli.edu/Content/Seminar/Cybersecurity_2014_Managing_the_Risk/_/N-4kZ1z12f7s?ID=178332

Meanwhile back on the disclosure front, as a reminder, the SEC’s guidance on cybersecurity disclosures (so far) is in Corp Fin’s Disclosure Guidance Topic 2. It discusses disclosures in varying levels of risk, more or less starting with risk factors, progressing to discussion of the impact of cybersecurity events in MD&A, and possibly including discussion in the Description of the Business and Legal Proceedings.

For risk factors the Disclosure Guidance Topic suggests, among other factors, considering:

 “Discussion of aspects of the registrant’s business or operations that give rise to      material cybersecurity risks and the potential costs and consequences;

To the extent the registrant outsources functions that have material cybersecurity risks, description of those functions and how the registrant addresses those risks;

Description of cyber incidents experienced by the registrant that are individually, or in the aggregate, material, including a description of the costs and other consequences;

Risks related to cyber incidents that may remain undetected for an extended period; and

Description of relevant insurance coverage.”

 The Disclosure Topic also includes a reminder about disclosure controls and procedures surrounding this issue. You can find the disclosure topic at:

www.sec.gov/divisions/corpfin/guidance/cfguidance-topic2.htm

And, for the fun of it, here is an example of a current risk factor:

A significant disruption in our computer systems and our inability to adequately maintain and update those systems could adversely affect our operations and our ability to maintain guest confidence.

We rely extensively on our computer systems to manage inventory, process guest transactions, manage guest data, communicate with our vendors and other third parties, service ****** accounts and summarize and analyze results, and on continued and unimpeded access to the internet to use our computer systems. Our systems are subject to damage or interruption from power outages, telecommunications failures, computer viruses and malicious attacks, security breaches and catastrophic events. If our systems are damaged or fail to function properly, we may incur substantial repair or replacement costs, experience data loss and impediments to our ability to manage inventories or process guest transactions, and encounter lost guest confidence, which could adversely affect our results of operations. The Data Breach we experienced negatively impacted our ability to timely handle customer inquiries, and we experienced weaker than expected U.S. Segment sales following the announcement of the Data Breach. Similarly, we experienced a temporary network disruption not involving a data breach in June 2014 that prevented many of our point-of-sale registers from working in a limited geographic region. This disruption caused checkout delays and generated negative publicity, and we engaged in promotional activities to retain our customers during the delay.

We continually make significant technology investments that will help maintain and update our existing computer systems. Implementing significant system changes increases the risk of computer system disruption. Additionally, the potential problems and interruptions associated with implementing technology initiatives could disrupt or reduce our operational efficiency, and could impact the guest experience and guest confidence.

A couple of weeks ago we did a “Comment of the Week” blog posting about how the SEC has focused comments on the meaningfulness and reliability along with other issues in company developed metrics. You can find that post below; just scan down for the July 28 post.

Anyway, to help emphasize the importance of these metrics, and improving them as we go along, here is an example of how they need to be reviewed and improved. Twitter included this language as preliminary note in their 10-Q filed August 11, 2014. Check out the third and last paragraphs in particular.

NOTE REGARDING KEY METRICS

We review a number of metrics, including monthly active users, or MAUs, timeline views, timeline views per MAU and advertising revenue per timeline view, to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions. See the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Metrics” for a discussion of how we calculate MAUs, timeline views, timeline views per MAU and advertising revenue per timeline view.

The numbers of active users and timeline views presented in this Quarterly Report on Form 10-Q are based on internal company data. While these numbers are based on what we believe to be reasonable estimates for the applicable period of measurement, there are inherent challenges in measuring usage and user engagement across our large user base around the world. For example, there are a number of false or spam accounts in existence on our platform. We have performed an internal review of a sample of accounts and estimate that false or spam accounts represented less than 5% of our MAUs. In making this determination, we applied significant judgment, so our estimation of false or spam accounts may not accurately represent the actual number of such accounts, and the actual number of false or spam accounts could be higher than we have estimated. We are continually seeking to improve our ability to estimate the total number of spam accounts and eliminate them from the calculation of our active users. For example, we made an improvement in our spam detection capabilities in the second quarter of 2013 and suspended a large number of accounts. Spam accounts that we have identified are not included in the active user numbers presented in this Quarterly Report on Form 10-Q. We treat multiple accounts held by a single person or organization as multiple users for purposes of calculating our active users because we permit people and organizations to have more than one account. Additionally, some accounts used by organizations are used by many people within the organization. As such, the calculations of our active users may not accurately reflect the actual number of people or organizations using our platform.

Our metrics are also affected by third-party applications that automatically contact our servers for regular updates with no user action involved, and this activity can cause our system to count the users associated with such applications as active users on the day or days such contact occurs.  Historically we tracked and reported in this section all users who accessed Twitter through third-party applications. We have reviewed and refined our processes, however, to calculate a new metric that is comprised of only such active users who have used applications with the capability to automatically contact our servers for regular updates where there was no discernable user action involved.  In the three months ended June 30, 2014, approximately 11% of all active users solely used third-party applications to access Twitter.  However, only up to approximately 8.5% of all active users used third party applications that may have automatically contacted our servers for regular updates without any discernable additional user-initiated action.  The calculations of MAUs presented in this Quarterly Report on Form 10-Q may be affected as a result of automated activity.

In addition, our data regarding user geographic location for purposes of reporting the geographic location of our MAUs is based on the IP address associated with the account when a user initially registered the account on Twitter. The IP address may not always accurately reflect a user’s actual location at the time such user engaged with our platform.

We present and discuss timeline views in this Quarterly Report on Form 10-Q. We have estimated a small percentage of timeline views in the three months ended September 30, 2013 to account for certain timeline views that were logged incorrectly during the quarter as a result of a product update. We believe this estimate to be reasonable, but the actual numbers could differ from our estimate. Further, timeline views in 2012 exclude an immaterial number of timeline views for our mobile applications, certain of which were not fully tracked until June 2012. We present and discuss our total audience based on both internal metrics and data from Google Analytics, which measures unique visitors to our properties.

We regularly review and may adjust our processes for calculating our internal metrics to improve their accuracy. Our measures of user growth and user engagement may differ from estimates published by third parties or from similarly-titled metrics of our competitors due to differences in methodology.

As always, we would love to hear your comments!

Pick –up line for an accounting bar – So, what’s your favorite Item in Form 10-K?

A question that occasionally comes up, and can create confusion in the 10-K and 10-Q preparation process is what to do with item numbers that do not apply to your company.

For example, in Part One of the Form 10-K, Item 4 concerning mine safety disclosures frequently does not apply. So, what should you do with this Item number? Could you leave it out? Must you list it? Is it a style choice?

Well, as it turns out, the SEC has an Exchange Act Rule that answers this question: (And yes, we are into total SEC Geek territory here)

§240.12b-13   Preparation of statement or report.

The statement or report shall contain the numbers and captions of all items of the appropriate form, but the text of the items may be omitted provided the answers thereto are so prepared as to indicate to the reader the coverage of the items without the necessity of his referring to the text of the items or instructions thereto. However, where any item requires information to be given in tabular form, it shall be given in substantially the tabular form specified in the item. All instructions, whether appearing under the items of the form or elsewhere therein, are to be omitted. Unless expressly provided otherwise, if any item is inapplicable or the answer thereto is in the negative, an appropriate statement to that effect shall be made.

(Note that the bolding was added for this blog, and that this is also done below)

So, all Item numbers must be listed!

If you would like to look at the Exchange Act Rules, you can find them in our SEC handbook, or here on the web:

www.ecfr.gov/cgi-bin/text-idx?SID=8e0ed509ccc65e983f9eca72ceb26753&node=17:4.0.1.1.1&rgn=div5

That said, every rule has an exception, and the exception to this rule is in the Form 10-Q, Part Two, which has an instruction that says:

PART II—OTHER INFORMATION

Instruction. The report shall contain the item numbers and captions of all applicable items of Part II, but the text of such items may be omitted provided the responses clearly indicate the coverage of the item. Any item which is inapplicable or to which the answer is negative may be omitted and no reference thereto need be made in the report. If substantially the same information has been previously reported by the registrant, an additional report of the information on this form need not be made. The term “previously reported” is defined in Rule 12b-2 (17 CFR 240. 12b-2). A separate response need not be presented in Part II where information called for is already disclosed in the financial information provided in Part I and is incorporated by reference into Part II of the report by means of a statement to that effect in Part II which specifically identifies the incorporated information.

(Note that the bolding was added for this blog)

So, save those references, and we all hope your reporting goes well.

As usual, we would love to hear your thoughts and comments.

So, how good is your goodwill?

The staff in the Division of Corporation Finance, as it has over the last several years, continues to ask questions about goodwill recoverability.  And, more importantly, the staff frequently asks for incremental disclosures about the risks surrounding goodwill recoverability in MD&A.

Forewarning disclosures, the complex known trend disclosure that got Sony into trouble when it had an unexpected goodwill write-off, are never easy. And, of course, they are very different from a risk factor. If you want a brief reminder, the Sony case is at:

http://www.sec.gov/litigation/admin/3440305.txt

Here is a very recent comment dealing with this issue:

1. We note that for 2013 you performed a quantitative assessment for Europe, India & Southeast Asia, and Middle East reporting units. Please tell us if you believe these reporting units are at risk of failing step one of the impairment test and your basis for this conclusion. Please also tell us, and in future filings disclose, the following related to the reporting units at risk of failing step one:

The percentage by which fair value exceeded carrying value as of the date of the most recent impairment test; and

•  The amount of goodwill allocated to these reporting units.

Alternatively, if in your view your reporting units are not at risk please disclose that fact. Refer to Item 303(a)(3)(ii) of Regulation S-K and Section V of Release 33-8350 for further guidance.

And, here is another similar comment, which even asks for disclosure regarding valuation approaches and assumptions:

We note that QiG continues to operate in a loss position and generates minimal revenues. We reference the disclosure that goodwill allocated to QiG is not at risk of failing step one of future impairment tests. Please revise future filings to disclose the specific valuation approach and underlying assumptions you used in determining the fair value of the QiG reporting unit to assess goodwill impairment. Please also clarify how you concluded that the fair value of the QiG reporting unit is substantially in excess of carrying value as of the date of your last impairment test.

So, if you are getting, or could get close on an impairment test, don’t forget known trend disclosure in MD&A!

As always, we welcome your comments and thoughts!