All posts by George Wilson

New Smaller Reporting Company Rules with an Interesting Revenue Twist

SEC/FASB/PCAOB

On June 28, 2018, the SEC met and adopted new rulesincreasing the public float threshold for use of the smaller reporting company (SRC) system from $75 million to $250 million.  These new rules also contain a significant change that will allowcompanies with revenues of less than $100 million to use the SRC system if their public float is less than $700 million.

About this expansion of the SRC system Chair Jay Clayton commented“I want our public capital markets to be a place where smaller companies can thrive and thereby provide our Main Street investors with more access to investing options where our public company disclosure rules and protections apply…”

The old SRC rules were based on the requirement of having a public float of less than $75 million. The old rules included a test that applied only to companies with a public float of zero.  Under this old test, if a company had public float of zero, (for example a debt only issuer), then the company could use the SRC system if their revenues were less than $100 million.  This test accomplished goals such as keeping large companies with public debt and hence zero float from using the SRC system.

The new SRC definition changes this revenue test to require that revenues must be less than $100 million and that public float must be zero or below $700 million.  Under this new version of the test companies such as bio-tech entities with a large public float but zero or small revenues may still be eligible to use the SRC system.

According to the press release announcing the change:

“Commission staff estimates that 966 additional companies will be eligible for SRC status in the first year under the new definition.  These include: 779 companies with a public float of $75 million or more and less than $250 million; 161 companies with a public float of $250 million or more and less than $700 million and revenues of less than $100 million; and 26 companies with no public float and revenues of $50 million or more and less than $100 million.”

If you are not familiar with the SRC system you can find out more in S-K Item 10(f)and S-X Article 8.  Two of the significant disclosure simplifications are in the executive compensation disclosures (including only three named executive officers and no CD&A) and the financial statement requirements (only two years of financial statements with only US GAAP disclosures).

At the meeting where the change to the definition of an SRC was approved there were no changes to the definition of accelerated filer definition and the requirements for the auditor’s ICFR attestation required by SOX 404(b) and S-K Item 308(b), but the commission requested the staff to develop recommendations for such a change.

We will discuss the rule change to require the use of inline XBRL, the elimination of the separate XBRL exhibits and the removal of the requirement for website posting requirements for XBRL next week.

As always, your thoughts and comments are welcome!

An Open Meeting Notice and Perhaps Some Rule-Making Momentum?

Hot Topic

On June 28, 2018, the SEC will meet to consider a variety of rule-making actions.  Now that all five of the commission positions are filled, this is hopefully a good sign that we will see progress on a number of fronts. Two areas to be addressed at the June 28 meeting are:

  1. Possible amendments to the smaller reporting company definition. The commission has proposed to increase the threshold to qualify for the smaller reporting company system from $75 million in “public float” to $250 million.
  1. To change reporting requirements to require the use of the Inline eXtensible Business Reporting Language (iXBRL) format for company financial statement information and fund risk/return summary information. If you haven’t yet dug into inline XBRL you can review a sample filing from the SEC here.  Some companies have voluntarily used inline XBRL. Here is a Form 10-Q.

You can read the rest of the meeting notice here.

As always, your thoughts and comments are welcome!

June 2018 Quarter End Post One – A Picky Reminder – Attention to Detail and the Compliance and Disclosure Interpretations

10-K/10-Q Tips

In our SEC Reporting Skills Workshop we always mention the importance of getting details right in your periodic and current reports.  Little picky mistakes could give an experienced reader a negative impression of your overall reporting.

One simple example of such a detail is the Form 10-K cover page check-box S-K Item 405 disclosures about Section 16 reporting by insiders.  It is surprising how many companies don’t get this check box right. The box should be checked if all Section 16 people filed all their required reports on a timely basis.  A knowledgeable reader, when they see a mistake with this cover page item, may ask “what else did this company not get right?”  (As a side note, thank goodness this confusion may finally be eliminated if this part of the FAST Act Modernization and Simplification of Regulation S-K proposal is made final!   You can check out page 33 in this proposed rule release.)

In the world of SEC reporting we all get to learn as we make mistakes and also from the mistakes of others. Here is a kind of unfortunate example of a company that made a mistake in one of the pickier parts of a filing, the certifications, and then missed a detail in the follow-up.

S-K Item 601, paragraph 31, which sets out the form of the certifications, contains this language:

(31)(i) Rule 13a-14(a)/15d-14(a) Certifications. The certifications required by Rule 13a-14(a) (17 CFR 240.13a-14(a)) or Rule 15d-14(a) (17 CFR 240.15d-14(a)) exactly as set forth below:

Certifications* I, [identify the certifying individual], certify that:

  1. I have reviewed this [specify report] of [identify registrant]; (remainder omitted)

Well, as you can see on Exhibit 31of this Form 10-K, this company made a simple mistake.  They forgot to update the language in the certification, unfortunately referring to a Form 10-Q rather than Form 10-K.  OK, these kinds of things happen to all of us, and this situation is at least easy to fix.  It would appear, from the order of the company’s filings, that they found the mistake on their own, and filed this amendment.

Unfortunately, the company forgot to check one of the sources of guidance we emphasize in our workshops, the CorpFin Compliance and Disclosure Interpretations.  This is the relevant C&DI, which is included in the S-K Item 601 Exhibits section of the C&DI’s:

246.14 The following errors in a certification required by Item 601(b)(31) are examples of errors that will require the company to file a corrected certification that is accompanied by the entire periodic report: (1) the company identifies the wrong periodic report in paragraph 1 of the certification; (2) the certification omits a conformed signature above the signature line at the end of the certification; (3) the certification fails to include a date; and (4) the individuals who sign the certification are neither the company’s principal executive officer nor the principal financial officer, or persons performing equivalent functions. [July 3, 2008]

That lead to the company getting this comment from the SEC:

Amendment No. 1 to Form 10-K for the Fiscal Year Ended December 29, 2017

  1. Please file an amendment to your Form 10-K that includes the entire filing. Refer to Compliance & Disclosure Interpretation No. 246.14 on Regulation S-K.

It is always a bit embarrassing to have to amend an amendment.  And, this is a great reminder that when you are dealing with issues that are not part of your regular reporting process to always check all the sources of guidance from the SEC. The C&DI’s in particular deal with a huge variety of process questions, disclosures and tactical issues and are always a good resource to check.

As a PS, the company did get the Section 16 box right!  The box is checked, and their proxy indicates that to the best of the company’s knowledge everyone filed all required reports on time.

As always, your thoughts and comments are welcome!

 

Lease Accounting Early Adopters – On Target!

FASB NEW LEASE ACCOUNTING STANDARD

As many of us work on implementing the new ASC 842 lease accounting standard it is always helpful to learn from early adopters.  As we have mentioned before, Microsoft early adopted as of July 1, 2017.  You can find their adoption disclosures in this Form 10-Q.

Thanks to Reed Wilson, who leads our “Implementing the FASB’s New Lease Accounting Standard Workshop,” here is another early adopter example,Target.  As you review this Form 10-Q, you will see that they have included extensive disclosure about the impact of adoption of the lease and revenue recognition standards.  They have also made decisions to include operating lease assets in other assets on the balance sheet.

It is always nice to have a trail-blazer to follow!

And, as always, your thoughts and comments are welcome!

Faulty Cybersecurity Disclosures and a Big Fine

10-K/10-Q Tips

Here is an issue to focus on as we draw to the end of the second quarter and plan our periodic reporting.

Rarely does a month pass without dramatic news stories about cybersecurity breaches.  Targets include large companies such as Equifax, not-for-profits such as hospitals and even government agencies like the SEC.

Earlier this year the SEC augmented their 2011 cybersecurity disclosure guidance in CorpFin Disclosure Topic Twowith a formal Commission Release.  As we blogged,the Release in large part reinforced the Disclosure Topic Two guidance and added guidance about control and insider trading issues.

When the SEC issues new guidance one of the ways they sometimes emphasize its importance is with an enforcement case.  And, that has happened here.  Altaba, Inc, which was formerly Yahoo, has been fined $35 million for failure to make timely and accurate disclosures about their major cybersecurity breach. As you may have read, there was a significant delay in disclosure of the breach on the part of Altaba (Yahoo), and the enforcement release highlights several other disclosure issues surrounding the breach, including the fact that Yahoo’s disclosure controls and procedures were not effective.  Here is a quote from Jina Choi, the San Francisco Regional Office Director:

“Yahoo’s failure to have controls and procedures in place to assess its cyber-disclosure obligations ended up leaving its investors totally in the dark about a massive data breach.  Public companies should have controls and procedures in place to properly evaluate cyber incidents and disclose material information to investors.”

You can read details here.

As always, your thoughts and comments are welcome!

Non-GAAP and other Updates from the CAQ’s SEC Regulations Committee

Uncategorized

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!

SECI Annual Forum Returns to Dallas, New York City & San Francisco!

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Annual reporting season is here and the Division of Corporate Finance has been busy! Revisions to non-GAAP guidance is being finalized as well as the pay ratio rule and thousands of 10-Ks are being reviewed.

Revenue Recognition and Leasing Standards have been finalized and companies are faced with implementing compliance.

Register today for our 32nd Annual SEC Reporting & FASB Forum being offered November 14-15 in Dallas, December 12-13 in New York City and December 19-20 in San Francisco.

  • Get the latest updates on What’s Happening NOW in World of SEC Reporting
  • Earn CPE credit
  • Network with other Practitioners

Our Reporting Roundtable will lead a lively discussion of current events including simplification overload, disclosure effectiveness, juggling Rev. Rec., Leases, CECL adoptions and more.

Follow this link to Register today and reserve your spot!

http://www.pli.edu/Content/32nd_Annual_SEC_Reporting_FASB_Forum/_/N-1z11c8sZ4k?ID=262904

 

 

 

 

 

 

 

Disclosure Effectiveness – Looking for A Deeper Dive?

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Last week we lightheartedly posted about the fun of listening to a live webcast of an SEC meeting and being “cool” and “in the know”. The meeting we mentioned is on April 13th and includes this agenda item:

 

The Commission will consider whether to issue a concept release seeking comment on modernizing certain business and financial disclosure requirements in Regulation S-K.

 

Concept releases explore issues and very frequently provide insight into the direction that future policy making will take. As an example you could check out the SEC’s recent concept release about audit committee disclosures in this post:

 

seciblog.pli.edu/?p=462

 

Also, in some words that may be familiar to folks who have attended our SEC Workshops, here is a quote about MD&A from FR 36:

 

The MD&A requirements are intended to provide, in one section of a filing, material historical and prospective textual disclosure enabling investors and other users to assess the financial condition and results of operations of the registrant, with particular emphasis on the registrant’s prospects for the future. As the Concept Release states:

 

The Commission has long recognized the need for a narrative explanation of the financial statements, because a numerical presentation and brief accompanying footnotes alone may be insufficient for an investor to judge the quality of earnings and the likelihood that past performance is indicative of future performance. MD&A is intended to give the investor an opportunity to look at the company through the eyes of management by providing both a short and long-term analysis of the business of the company. The Item asks management to discuss the dynamics of the business and to analyze the financials.

 

Most importantly, the SEC listens and very often thoughtfully takes into account the issues discussed in comment letters in their subsequent rulemaking.   All this leads us to the conclusion, especially since the Disclosure Effectiveness process has been underway for quite a while, that this could be an important meeting!

 

If you would like to learn a bit more after the meeting, PLI will be presenting a One-Hour Briefing titled “SEC’s New Concept Release on Modernizing Regulation S-K” on April 25, 2016. Four speakers, including former CorpFin staffers, will present the briefing to help build a deeper understanding of the process. You can learn more at:

 

www.pli.edu/Content/Seminar/SEC_s_New_Concept_Release_on_Modernizing/_/N-4kZ1z10szo?Ns=sort_date%7c0&ID=283018

 

As always, your thoughts and comments are welcome!