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.

Are you tired of the winter weather we have been dealing with?  New Hampshire, where Carol resides, and Minnesota, where George resides, have not had so much snow in years, and the cold has been relentless.   Even Atlanta has had its share of crazy winter weather, although as Northerners, we are amazed to see what snow does to that city.

Now that we are finally done with January and into mid-February, perhaps we can begin to believe that winter will eventually end.  As we go from February to March, hopefully into the last phases of this extreme winter, we are thinking about an old saying about March – “In like a lion, out like a lamb.”  With luck this old saw will be true this year and a wintery early March might give way to a warmer, almost spring like late March.

How does all this relate to SEC reporting?  Well, the SEC Enforcement Division has definitely come in this year like a lion.  There have been several high-profile cases and campaigns in the enforcement division.

One of our favorite programs even has a cool name, “Operation Shell-Expel.”  This program suspended trading in 255 dormant shell companies.  We are often asked about the viability of using shell company reverse mergers as a means of becoming a public company and our advice is – beware, shell companies are easy tools of market fraud, and their registrations are not often clean.  The SEC’s press release calls them “ripe for abuse in the over-the-counter markets.”  You can read all about it at:

http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540714936

In another action earlier this February the enforcement staff moved against 20 “purported” mining companies, all alleged to be including false information in registration statements.  Interestingly, all of them were also apparently connected to an individual who had been the subject of an earlier enforcement action and who is suspended from practice before the SEC.  You can read about this one at:

http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540716442

In January the SEC settled a case with KPMG involving auditor independence and other issues, a lesson for registrants and their audit committees, in addition to audit firms.  The settlement involved a large fine, and details are at:

http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540667080

And, of course, insider trading cases continue to be a major focus of the enforcement division, with several big wins in recent years.  The latest is the conviction of Mathew Martoma, the eighth win by the SEC and DOJ against former SAC Capital employees.  Mr. Martoma faces prison for his actions.

As a last “in like a lion” thought, and as a cheap tie to a new movie, don’t forget the SEC’s new Financial Reporting and Audit Task Force.  This group, one of the prime users of the technology-based tools such as the “Accounting Quality Model,” or the SEC’s RoboCop tool, is already watching reporting carefully.

You can read about the Accounting Quality Model at:

http://www.sec.gov/News/Speech/Detail/Speech/1365171491988

So, while hopefully March comes in like a lion and goes out like a lamb, I suspect this year the enforcement division which has already come in like a lion, will also go out like a lion!

Carol Stacey and George Wilson,

Directors of The SEC Institute, a Division of Practising Law Institute®

Do you ever feel like our profession goes around in circles with the issues we face?  We talk about a major issue, it creates all kinds of sound and fury, it goes away for a while and then returns?  The SEC’s consideration of IFRS for domestic issuers is an issue that has been “going around” for years.    The FASB’s projects on leases, financial instruments, and revenue recognition are not the first time the board has addressed these areas.

I think one of the theme songs of our profession could be Joni Mitchell’s “Circle Game”:

“We can’t return, we can only look behind from where we came, and go round and round and round in the circle game”

(BTW, here is a great youtube video of her performing the song live: http://www.youtube.com/watch?v=AbIuC9hTY9Y&feature=kp )

I think the number of times an issue goes around this circle is directly related to complexity and the level of controversy it creates.

One hugely controversial and complex issue which many hope will move to the low end of the cycle is mandatory auditor rotation.

The PCAOB moved auditor rotation to the high end of the cycle back in August of 2011 with its Concept Release on Auditor Independence and Audit Firm Rotation.  While it was only a concept release it stirred enormous discussion and controversy.  Congress even got involved with the House passing a bill, although no Senate action occurred.

We have all been going round and round the auditor rotation circle.

As we come around the circle this month, the latest news on this front is that in the SEC’s hearings about the PCAOB’s budget last Thursday, in response to a question from Commissioner Gallagher, PCAOB chairman James Doty told the SEC:

“We don’t have an active project or work going on within the board to move forward on a term limit for auditors or mandatory rotation project.  It is not part of the budget – not budgeted in what you are approving today.”

However, Doty added, the PCAOB would “continue to think about what impacts independence.”

(BTW, you can listen to the recorded video webcast at: http://www.sec.gov/news/openmeetings/2014/020514openmeeting.shtml It is entertaining and suspenseful as, …, well, I am not sure what, but you should try it once!)

Perhaps this means that for the time being we will not be seeing any action on this front, at least for a while!

I suppose that this is not the last time this issue will come around.  As you may have heard, the EU is moving forward with a rotation proposal.

Considering how all this works, maybe the theme song should be “The Wheels on the Bus go Round and Round….”

Many years ago, when I was a young boy (and yes, this was MANY years ago), I watched a TV show called The Jetsons.  The show featured a family in the future, and one of the coolest things about them was that their car flew!  I assumed that by the time the 21^st Century started, we would all have flying cars!  Well, I am still waiting, and kind of disappointed. Seriously, every time I am stuck in traffic I ask, “Where is my flying car?”

As challenging as the flying car wait has been, I am not sure if the wait for the FASB and IASB’s new revenue recognition standard has been any easier!  We have seen this project on the FASB’s agenda for over a decade, and I have to say, as an accounting geek, I am not sure which I am really more excited about, this new standard, or my flying car…

It is understandable why this new standard is taking so long.  The scope of the project is immense and the challenge of finding a model that applies to all types and forms of revenue is enormous.  And in the end, we will all likely be very glad that this project has been done without undue rush and with due care.

Thankfully, with the effective date of periods beginning after December 15, 2016 for public companies (periods beginning after December 15, 2017 for private companies), we will have time to plan and implement the new standard.

So, here are a few heads-up issues to think about as we wait for the final standard to be issued sometime soon!

1.  A key point to see is that this guidance supersedes virtually all existing revenue recognition guidance, including software and percentage of completion revenue recognition standards in effect today.  The new five-step contract-based model will require all companies to analyze whether and how the new standard will affect your revenue recognition.

2.  Even if the new standard does not change much about the way you recognize revenue, it will affect you.  Implementing the new disclosures will require significant work, and given the SEC’s focus on revenue disclosures, disaggregation of revenues and MD&A disclosures about revenues, both the notes to the financial statements and MD&A will be affected.

3.  For counsel, the form of revenue related contracts might need to be revised to better fit into the five-step contact based mode in the standard.

4.  We will all be learning a lot as discussion of the new standard evolves, and the FASB/IASB task force to deal with implementation issues will be a process to watch.

So, watch for the excitement of the new standard.  Our workshops and conferences to help you deal with it will be announced soon.  And, let’s hope for news on the flying car front soon also!