All posts by George Wilson

Focus on SEC Comments – Non-GAAP Measure EBITDA Adjustments – Part Two

Hot Topic, SEC Comment of the Week

As we discussed in the preceding post in this series, non-GAAP measures have been at or near the top of frequent SEC comment letter topics for several years.  The earlier post explored Rite Aid’s adjustment for “facility exit and impairment charges” in its computation of Adjusted EBITDA along with a first round SEC comment about this presentation and the company’s initial response.

As a reminder, here is Rite Aid’s reconciliation for adjusted EBITDA:

After receiving the company’s first response, the SEC issued this follow-on comment on March 30, 2023:

With regard to the adjustment to exclude facility exit charges, you state that your presentation of Adjusted EBITDA eliminates charges that “do not reflect ongoing operations and underlying operational performance.” We note, however, that you have incurred facility exit charges, inventory write-downs related to store closings, and restructuring-related costs for the last 6, 6, and 4 years, respectively, and in the 39 week period ending November 26, 2022. We also note from your response that your 2022 strategic initiative resulted in the expectation of closing 195 stores, of which only 48 were closed in 2022. In your third quarter 2023 earnings call, you indicated that in building out your plans for 2024, you will continue to look at opportunities to close stores. Based on the consistency with which you have incurred such costs in the past and the apparent expectation that such costs will be incurred in the future, it appears these costs are normal for your business. Had an investor disregarded such costs several years ago on the basis that they would not be reflective of your future ongoing operations, it appears their expectations would have varied significantly from your actual subsequent results. To the extent you continue to adjust for facility exit charges, inventory write-downs related to store closings, and restructuring-related costs, please revise to disclose a substantive reason, specific to you, of usefulness to investors, to disclose your history of incurring such costs, and to provide appropriate cautionary language regarding the likelihood of you incurring such costs in the future.

The language in this follow-on comment clearly articulates CorpFin’s concerns about how investors could interpret and potentially be misled by this adjustment.

In the company’s next response, it appears there were further discussions with the staff and the company stated:

In response to the Staff’s additional feedback on the Company’s disclosure around continued adjustments to Adjusted EBITDA and Adjusted Net Income (Loss), as applicable, related to facility exit charges, inventory write-downs related to stores closings, and restructuring charges, the Company acknowledges and confirms that in future filings the Company will provide the requested enhanced disclosure. The Company will also continually evaluate the appropriateness of adjustments to its non-GAAP measures based upon the nature of the activity within the specific period presented within the purview of the Company’s current financial reports. Please find attached, as Exhibit A, the supplemental non-GAAP measures disclosure for the upcoming Form 10-K for the fiscal year ended March 4, 2023, which illustrates the Company’s intended revised disclosure, in accordance with the Staff’s comment, in addition to existing reconciliation and related disclosures.

Here is the updated disclosure the company presented to the staff:

We present these non-GAAP financial measures in order to provide transparency to our investors because they are measures that management uses to assess both management performance and the financial performance of our operations and to allocate resources. In addition, management believes that these measures may assist investors with understanding and evaluating our initiatives to drive improved financial performance and enables investors to supplementally compare our operating performance with the operating performance of our competitors including with those of our competitors having different capital structures. While we have excluded certain of these items from historical non-GAAP financial measures, there is no guarantee that the items excluded from non-GAAP financial measures will not continue into future periods. For instance, we expect to continue to experience charges for facility exit and impairment charges and inventory write-downs related to store closures as the Company continues to complete a multi-year strategic initiative designed to improve overall performance. We also expect to continue to experience and report restructuring-related charges associated with continued execution of our strategic initiatives.

Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share or other non-GAAP measures should not be considered in isolation from, and are not intended to represent an alternative measure of, operating results or of cash flows from operating activities, as determined in accordance with GAAP. Our definition of these non-GAAP measures may not be comparable to similarly titled measurements reported by other companies, including companies in our industry.

With this explanation, the SEC issued its closing letter and the company, with the additional disclosure, was not required to change its presentation.

As always, your thoughts and comments are welcome.

Focus on SEC Comments – Non-GAAP Measure EBITDA Adjustments – Part One

Reporting, SEC Comment of the Week

Non-GAAP measures have been at or near the top of frequent SEC comment letter topics for several years.  While some non-GAAP comments deal with straightforward issues such as not presenting the related GAAP measure with equal or greater prominence, other comments focus on more complex issues.

The presentation that Rite Aid used for “facility exit and impairment charges” in its presentation of Adjusted EBITDA presents one of these complex issues.  Below is Rite Aid’s  reconciliation for its presentation of adjusted EBITDA:

Rite Aid also included this narrative disclosure about adjusted EBITDA:

In addition to net income (loss) determined in accordance with GAAP, we use certain non-GAAP measures, such as “Adjusted EBITDA”, in assessing our operating performance. We believe the non-GAAP measures serve as an appropriate measure in evaluating the performance of our business. We define Adjusted EBITDA as net income (loss) excluding the impact of income taxes, interest expense, depreciation and amortization, LIFO adjustments (which removes the entire impact of LIFO, and effectively reflects the results as if we were on a FIFO inventory basis), charges or credits for facility exit and , goodwill and intangible asset impairment charges, inventory write-downs related to store closings, gains or losses on debt modifications and retirements, and other items (including stock-based compensation expense, merger and acquisition- related costs, non-recurring litigation settlements, severance, restructuring-related costs, costs related to facility closures, gain or loss on sale of assets, the gain or loss on Bartell acquisition, and the change in estimate related to manufacturer rebate receivables). We reference this particular non-GAAP financial measure frequently in our decision-making because it provides supplemental information that facilitates internal comparisons to the historical periods and external comparisons to competitors. In addition, incentive compensation is primarily based on Adjusted EBITDA and we base certain of our forward-looking estimates on Adjusted EBITDA to facilitate quantification of planned business activities and enhance subsequent follow-up with comparisons of actual to planned Adjusted EBITDA.

While these disclosures are detailed, the SEC focused on facility exit and impairment charges in a letter dated February 21, 2023:

  1. We note in calculating Adjusted EBITDA you excluded facility exit charges. The adjustment appears to remove a normal, recurring, operating expense. Additionally, we note you exclude the change in estimate related to manufacturer rebate receivable which appears to result in an individually tailored recognition and measurement method. Please tell us how these adjustments are appropriate or revise your presentation to omit these adjustments. Refer to Questions 100.01 and 100.04 of the Staff’s Compliance and Disclosure Interpretations on Non-GAAP Financial Measures. Our comment also applies to Adjusted Net Income (Loss).

In this post we will discuss the issue surrounding the facility exit charges.  We will explore the manufacturer rebate issue in a later post.  With respect to the facility exit charges, the C&DI that the staff is referring to about this adjustment was updated in December 2022:

Question 100.01

Question: Can certain adjustments, although not explicitly prohibited, result in a non-GAAP measure that is misleading?

Answer: Yes. Certain adjustments may violate Rule 100(b) of Regulation G because they cause the presentation of the non-GAAP measure to be misleading. Whether or not an adjustment results in a misleading non-GAAP measure depends on a company’s individual facts and circumstances.

Presenting a non-GAAP performance measure that excludes normal, recurring, cash operating expenses necessary to operate a registrant’s business is one example of a measure that could be misleading.

When evaluating what is a normal, operating expense, the staff considers the nature and effect of the non-GAAP adjustment and how it relates to the company’s operations, revenue generating activities, business strategy, industry and regulatory environment.

The staff would view an operating expense that occurs repeatedly or occasionally, including at irregular intervals, as recurring. [December 13, 2022]

The company’s response on March 13, 2023, reviewed the calculation and explained their rationale for the adjustment for facility exit costs:

Adjusted EBITDA has long been used by the Company’s management and investors as one of the primary measures to evaluate both Company and management performance. The Company believes that the current methodology in calculating Adjusted EBITDA appropriately eliminates certain charges that do not reflect ongoing operations and underlying operational performance. The Company’s facility exit charges are costs associated with the closure of stores, distribution centers and corporate facilities and include establishing, at net present value, a liability for future costs associated with the exit activity pursuant to ASC 420-10. During fiscal year 2022, the Company announced a Board-approved multi-year strategic initiative designed to improve overall performance by reducing costs, driving improved profitability, and ensuring that the Company has a healthy foundation to grow from by eliminating underperforming stores. This initiative resulted in the expectation of closing 195 stores, of which 48 were closed in FY22 with the remainder expected to close in future periods. In addition, the strategic plan also included plans to exit certain corporate facilities as the Company moved toward its remote-first workplace strategy. Because the decision to close these facilities was part of a significant strategic project, the magnitude of the store closures was greater than what would be expected as part of ordinary business, and these facilities no longer have an impact on the Company’s present and go-forward operations, revenue generating activities or business strategy, the Company has determined that these costs do not constitute normal operating activities represented by Adjusted EBITDA and that excluding facility exit charges from its calculation of Adjusted EBITDA does not result in a non-GAAP measure that is misleading under the criteria in Question 100.01 of the Staff’s Compliance and Disclosure Interpretations on Non-GAAP Financial Measures. In addition to using Adjusted EBITDA as a primary measure to evaluate Company and management’s performance, the Company’s senior secured credit facility agreement (“SSCF”) defines Consolidated EBITDA as excluding facility exit charges and, as the calculation of its key credit ratios in the agreement are tied to Consolidated EBITDA, the Company believes that it is appropriate for its publicly disclosed measurement of Adjusted EBITDA to closely conform with the definition of Consolidated EBITDA in its SSCF to provide investors with clear line of sight into its credit metric calculations.

After Rite Aid made this response, the SEC issued a follow-on comment.  Our next post will explore the follow-on comment, the company’s response, and the resulting change in disclosure.

As always, your thoughts and comments are welcome!

SEC Approves NYSE and NASDAQ Clawback Listing Standards

Hot Topic, Reporting

As we discussed in this blog post, as part of implementing the Dodd-Frank clawback provisions, the SEC required the NYSE and NASDAQ to adopt appropriate clawback listing standards.

On June 9, 2023, the SEC approved the NYSE’s and NASDAQ’s clawback listing standards, which will be effective on October 2, 2023.  Companies listed on the NYSE and NASDAQ will be required to adopt appropriate clawback policies by December 1, 2023.  These policies will apply to any incentive-based compensation paid after October 2, 2023.

As always, your thoughts and comments are welcome.

Focus on SEC Comments – Metrics and Related Disclosures

Comment of the Week, Reporting

Metrics and other key performance indicators present complex disclosure considerations that are similar to issues surrounding the use of non-GAAP measures.  It is important to remember that disclosure of metrics may be required, particularly in MD&A.  Regulation S-K Item 303 makes this clear:

“The discussion and analysis must be of the financial statements and other statistical data that the registrant believes will enhance a reader’s understanding of the registrant’s financial condition, cash flows and other changes in financial condition and results of operations.”

If management uses metrics and believes this information is important to an understanding of financial condition and financial performance, disclosing metrics could be a necessary part of providing “management’s perspective” as discussed in S-K Item 303:

“A discussion and analysis that meets the requirements of this paragraph (a) is expected to better allow investors to view the registrant from management’s perspective.”

When companies disclose metrics, the SEC focuses on them in almost the same way it focuses on non-GAAP measures.  Financial Release 87, issued in 2020, addresses disclosure requirements for metrics and key performance indicators:

“…the company should consider what additional information may be necessary to provide adequate context for an investor to understand the metric presented.  We would generally expect, based on the facts and circumstances, the following disclosures to accompany the metric:

      • A clear definition of the metric and how it is calculated;
      • A statement indicating the reasons why the metric provides useful information to investors; and
      • A statement indicating how management uses the metric in managing or monitoring the performance of the business.

The company should also consider whether there are estimates or assumptions underlying the metric or its calculation, and whether disclosure of such items is necessary for the metric not to be materially misleading.”

The Walt Disney Company’s Form 10-K for the year ended October 1, 2022, included an important metric for streaming services, revenue per paid subscriber, along with this narrative:

The average monthly revenue per paid subscriber for domestic Disney+ was comparable to the prior year, as an increase in retail pricing and a lower mix of wholesale subscribers was essentially offset by a higher mix of subscribers to multi-product offerings.

The average monthly revenue per paid subscriber for international Disney+ (excluding Disney+ Hotstar) increased from $5.31 to $6.10 due to increases in retail pricing, partially offset by an unfavorable foreign exchange impact.

The average monthly revenue per paid subscriber for Disney+ Hotstar increased from $0.68 to $0.88 driven by higher per-subscriber advertising revenue and increases in retail pricing, partially offset by a higher mix of wholesale subscribers.

The average monthly revenue per paid subscriber for ESPN+ increased from $4.57 to $4.80 primarily due to an increase in retail pricing, a lower mix of annual subscribers and higher per-subscriber advertising revenue, partially offset by a higher mix of subscribers to multi-product offerings.

The average monthly revenue per paid subscriber for the Hulu SVOD Only service decreased from $12.86 to $12.72 driven by lower per-subscriber advertising revenue, a higher mix of subscribers to multi-product offerings and, to a lesser extent, to promotional offerings, partially offset by an increase in retail pricing.

The average monthly revenue per paid subscriber for the Hulu Live TV + SVOD service increased from $81.35 to $87.62 driven by an increase in retail pricing and higher per-subscriber advertising revenue, partially offset by a higher mix of subscribers to multi-product offerings.

Clearly, the “higher mix of subscribers to multi-product offerings” is a significant issue for Disney.  This led the SEC staff to issue this comment focused on the level of detail provided for this metric:

  1. We note from your disclosure that average monthly revenue per paid subscriber was negatively impacted “by a higher mix of subscribers to multi-product offerings.” Similarly, in your Q4 2022 earnings release furnished on Form 8-K, certain Direct-to- Consumer platforms experienced decreasing quarterly period over period average monthly revenue per subscriber which was attributed to “a higher mix of subscribers to multi-product offerings.” We also noted from your Q4 earnings call, bundled and multi-product offerings now account for over 40% of your fiscal year-end domestic Disney+ subscriber count. It appears that customers participating in bundled and multi-product offerings has both an impact on your subscriber growth and revenues, please enhance your disclosures to include the total customers participating in bundled and multi-platform offerings for the periods presented for both your domestic and international DTC offerings. While your definition of “Paid subscribers” explains that bundled/multi- offering subscribers are counted as paid subscribers for each service listed in the table on page 40, please consider separately quantifying total subscribers for all DTC services in the aggregate and parenthetically highlighting in the introduction to the table that amounts for specifically listed offerings do not aggregate to the number of total DTC subscribers. (April 4, 2023)

The company’s response was direct and to the point:

The Company appreciates the Staff’s comment and respectfully advises that in future filings, starting with its next quarterly report, the Company will enhance its disclosure to include total customers participating in our bundled and multi-platform offerings for the periods presented for our domestic and international offerings, as requested by the Staff. The Company will also consider separately quantifying total subscribers for all DTC services in the aggregate and parenthetically highlighting that amounts for specifically listed offerings do not aggregate to the number of total DTC subscribers in future filings, as requested by the staff.

After this response CorpFin issued their normal closing letter.

As always, your thoughts and comments are welcome.

SEC’s Spring 2023 Regulatory Agenda Released

Hot Topic, Reporting

On June 13, 2023, the Office of Information and Regulatory Affairs, of the U.S. Government’s Office of Management and Budget, released the “Spring 2023 Unified Agenda of Regulatory and Deregulatory Actions,” which includes the short-term and long-term projects on the SEC’s regulatory agenda.

In a Statement about the agenda, Chair Gary Gensler said:

“Taken together, the items on this agenda would advance our three-part mission: to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

Technology, markets, and business models constantly change. Thus, the nature of the SEC’s work must evolve as the markets we oversee evolve.

In every generation since President Franklin Roosevelt’s, our Commission has updated its ruleset to meet the challenges of a new hour. Consistent with our legal mandate, guided by economic analysis, and informed by public comment, this agenda reflects the latest step in that long tradition. Thus, I am pleased to support it.”

As you review the short-term agenda, you will find that both the SEC’s climate-related disclosures and cybersecurity risk projects are scheduled for the final rule process in October 2023.

As always, your thoughts and comments are welcome!

Focus on SEC Comments – MD&A Material Change Disclosures

Comment of the Week, Reporting

MD&A is consistently at or near the top of most frequent SEC comment areas.  As we discussed in this post, one frequent comment area is robust disclosure of both quantitative and qualitative information about material changes in financial statement line items.  This requirement is clear in Regulation S-K Item 303:

“Where the financial statements reflect material changes from period-to-period in one or more line items, including where material changes within a line item offset one another, describe the underlying reasons for these material changes in quantitative and qualitative terms.”

 To illustrate this comment, here is a revenue disclosure from Rite Aid’s Form 10-K for its year-end February 26, 2022:

(Here is the narrative disclosure in larger type:)

Revenues

Pharmacy Services segment revenues decreased $647.0 million in fiscal 2022 compared to fiscal 2021. The decrease in the fiscal 2022 revenues was primarily the result of a planned decrease in Elixir Insurance membership and a previously announced client loss due to industry consolidation.

The SEC staff issued this comment asking Rite Aid to provide more robust disclosure surrounding the change in revenue for this segment:

Management’s Discussion and Analysis of Financial Condition and Results of Continuing Operations
Pharmacy Service Segment Results of Operations, Revenues, page 58

    1. We note “[t]he decrease in the fiscal 2022 revenues was primarily the result of a planned decrease in Elixir Insurance membership and a previously announced client loss due to industry consolidation.” We were not able to obtain an understanding of these events or their impact on your results from your disclosure. Please provide more robust disclosure surrounding these events or indicate where these events are previously disclosed within your document. Reference is made to Item 303 of Regulation S-K. (February 21, 2023)

The company’s response was simple and direct:

Although the Company believes that its existing disclosures are adequate, in light of the Staff’s comment, in future filings that reference this decrease, the Company will modify its disclosure to reflect the following:

Pharmacy Services segment revenues decreased $647.0 million in fiscal 2022 compared to fiscal 2021. Approximately $42 million of the decline was the result of a decrease in Elixir Insurance membership due to a change in the Company’s pricing structure. Approximately $500 million of the decline was the result of a loss of a large commercial client, which the Company had previously announced in June 2021.

This is an easily avoidable comment given that the requirement for both quantitative and qualitative discussion of the reason for material changes in lines items is clearly articulated in S-K Item 303.

As always, your thoughts and comments are welcome.

Plan Your SEC Training Using Our Comprehensive Curriculum

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Corp Fin Clarifies Transition to New Rule 10b5-1 Plan Disclosures

Hot Topic, Reporting

In the SEC’s December 14, 2022, Final Rule, Insider Trading Arrangements and Related Disclosures, the transition provisions provided:

    • Issuers that are SRCs will be required to comply with the new disclosure and tagging requirements in Exchange Act periodic reports on Forms 10-Q, 10-K and 20-F and in any proxy or information statements that are required to include the Item 408, Item 402(x), and/or Item 16J disclosures in the first filing that covers the first full fiscal period that begins on or after October 1, 2023.
    • All other issuers will be required to comply with the new disclosure and tagging requirements in Exchange Act periodic reports on Forms 10-Q, 10-K and 20-F and in any proxy or information statements that are required to include the Item 408, Item 402(x), and/or Item 16J disclosures in the first filing that covers the first full fiscal period that begins on or after April 1, 2023.

This language is clear with respect to which quarter would start this reporting for Form 10-Q, but was a bit unclear about when an annual report on Form 10-K or 20-F would require the annual disclosures.  On May 25, 2023, the staff issued three Compliance and Disclosure Interpretations to clarify this timing issue and address when proxy statements will require these disclosures and explain when a situation where a person with two plans may create an “effective cooling off period.”

As you read these C&DI’s, you will note that the transition for the quarterly disclosures is in fact different from the transition for annual disclosures.  Generally, the quarterly disclosures include information about officer and director 10b5-1 plans and the annual disclosures include information about insider trading policies and grants of equity awards made close in time to the release of material non-public information.

Question 120.26

Question: When are companies required to begin providing the quarterly Item 408(a) disclosures and the annual Item 402(x) and Item 408(b) disclosures (Item 16J of Form 20-F disclosures for foreign private issuers) in periodic reports?

Answer: Release No. 33-11138 states that companies other than smaller reporting companies will be required to comply with the new disclosure and tagging requirements in Exchange Act periodic reports on Forms 10-Q, 10-K and 20-F “in the first filing that covers the first full fiscal period that begins on or after April 1, 2023.” Therefore, the following compliance dates apply:

      • December 31 fiscal year-end company – Quarterly disclosures must first be provided in the Form 10-Q for the period ended June 30, 2023, and should continue to be provided in the Form 10-Q for the period ended September 30, 2023 and the Form 10-K for the fiscal year ended December 31, 2023.
      • June 30 fiscal year-end company – Quarterly disclosures must first be provided in the Form 10-K for the fiscal year ended June 30, 2023.
      • December 31 fiscal year-end company – Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended December 31, 2024.
      • June 30 fiscal year-end company – Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended June 30, 2024.

Smaller reporting companies must comply with these new disclosure and tagging requirements in the first filing that covers the first full fiscal period that begins on or after October 1, 2023. Therefore, the following compliance dates apply:

      • December 31 fiscal year-end company – Quarterly disclosures must first be provided in the Form 10-K for the fiscal year ended December 31, 2023.
      • June 30 fiscal year-end company – Quarterly disclosures must first be provided in the Form 10-Q for the period ended December 31, 2023.
      • December 31 fiscal year-end company – Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended December 31, 2024.
      • June 30 fiscal year-end company – Annual disclosures must first be provided in the Form 10-K or 20-F for the fiscal year ended June 30, 2025. [May 25, 2023]

Question 120.27 

Question: When are companies required to begin providing the disclosures in proxy or information statements?

Answer: For transition purposes only, companies other than smaller reporting companies must first provide this information in proxy statements for the first annual meeting for the election of directors (or information statements for consent solicitations in lieu thereof) after completion of the first full fiscal year beginning on or after April 1, 2023. Smaller reporting companies must first provide this information in proxy statements for the first annual meeting for the election of directors (or information statements for consent solicitations in lieu thereof) after completion of the first full fiscal year beginning on or after October 1, 2023.[May 25, 2023]

Question 120.28

Question: The Rule 10b5-1(c) affirmative defense generally is not available if a person has multiple Rule 10b5-1 contracts, instructions, or plans in place. However, Rule 10b5-1(c)(1)(ii)(D)(2) permits a person (other than the issuer) to maintain two separate Rule 10b5-1 plans at the same time so long as trading pursuant to the later-commencing plan is not authorized to begin until after all trades under the earlier-commencing plan are completed or have expired without execution. If an individual terminates the earlier-commencing plan (i.e., the earlier-commencing plan does not end by its terms and without any action by the individual), when can trading begin under the later-commencing plan?

Answer: Pursuant to Rule 10b5-1(c)(1)(ii)(D)(2), if an individual terminates the earlier-commencing plan, the later-commencing plan will be subject to an “effective cooling-off period.” The effective cooling-off period will begin on the termination date of the earlier-commencing plan and will last for the time period specified in Rule 10b5-1(c)(1)(ii)(B). On the other hand, if the earlier-commencing plan ends by its terms without action by the individual, the cooling-off period for the later-commencing plan is not reset and trading may begin as soon as the plan’s original cooling-off period is satisfied. Depending on when the later-commencing plan was adopted, this could be as soon as immediately after the earlier-commencing plan ends. See Footnote 180 of Release No. 33-11138.[May 25, 2023]

As a reminder, the Final Rule requires that Section 16 reporting persons comply with the amendments to Forms 4 and 5 filed on or after April 1, 2023.

The staff has prepared a very helpful Small Entity Compliance Guide which provides a good overview of the rule.

As always, your thoughts and comments are welcome!

Four Projects to Watch at the FASB

Hot Topic, Reporting

While the FASB’s current technical agenda does not include landmark projects like revenue recognition and lease accounting, the Board is working on several projects that may significantly impact company reporting.  Four projects to watch are:

Segment Reporting Improvements

On October 6, 2022, the Board issued a proposed Accounting Standard Update to ASC 280 – Segment Reporting, that would expand segment disclosure requirements for public business entities.  While the new standard would not change how operating segments are identified or aggregated, it would require:

    • Disclosure, on an annual and interim basis of significant segment expenses that are regularly provided to the CODM and included within each reported measure of segment profit or loss,
    • Disclosure, on an annual and interim basis, of an amount for other segment items by reportable segment and a description of its composition. The other segment items category is the difference between segment revenue less the significant expenses disclosed under the significant expense principle and each reported measure of segment profit or loss, and
    • Disclosure of all annual information about a reportable segment’s profit or loss and assets currently required by Topic 280 in interim periods.

In addition, the proposed ASU would clarify that multiple measures of segment profit or loss may be disclosed in certain circumstances and require all current and proposed disclosures for a public entity that has a single reportable segment

Enhanced Income Tax Disclosures

The Board’s tax project has evolved over time and is now focused on two key disclosure areas for public business entities:

    • The effective tax rate reconciliation, and
    • Cash paid for income taxes.

The FASB’s deliberations have focused on providing detailed information in each of these areas.  The proposed disclosures for the effective rate reconciliation include addressing eight specific categories and related qualitative disclosures.  For taxes paid the proposals focus on providing disaggregated information about taxes paid by jurisdiction.  Developing appropriate disclosures, particularly for companies that operate in multiple tax jurisdictions could be challenging.  In March of 2023 the FASB issued this Proposed ASU and you can read more in this Tentative Board Decisions document.  The Proposed ASU would also require certain new disclosures for private entities.

Disaggregated Expense Disclosure

This project is now focused on “improving the decision usefulness of business entities’ income statements through the disaggregation of any relevant expense line items.”  As you can read in this Tentative Board Decisions document, it is likely a proposed standard would focus on disclosures about selling expenses, costs capitalized to inventory, employee compensation, depreciation, amortization and other details.  In March 2023, the Board directed the FASB staff to draft a proposed ASU and decided on a 90-day comment period.  This new standard would apply to public business entities.  Companies may face challenges to accumulate this information and provide appropriate controls for these disclosures.

Accounting and Disclosure for Crypto Assets

While this project may not affect as many companies as the three discussed above, for companies that hold crypto assets its impact could be significant.  This project would require that crypto assets, as defined by the Board, would be accounted for at fair value with unrealized gains and losses recognized in income.  This would be a major change from the existing indefinite lived intangible asset accounting model currently applied to these assets.  You can read more in this March 23, 2023, Proposed Accounting Standards Update and this Tentative Board Decisions document.

While these projects are in process companies can certainly provide their thoughts and input to the Board.  In addition, given how each of these projects would present challenges to gather information and build appropriate controls, putting them on the planning horizon now likely makes sense.

The board is working on several other projects, and you can find the Board’s current Technical Agenda here.

As always, your thoughts and comments are welcome!

Three Tips to Avoid Low-Hanging Fruit on the MD&A SEC Comment Tree

10-K/10-Q Tips, Reporting

As we discussed in this blog post, creating change in MD&A is a complex process.  The number of stakeholders involved in drafting and reviewing MD&A creates logistical and tactical challenges.  Old and obsolete beliefs that disclosure changes will attract negative attention from the SEC create resistance that is difficult to overcome.  This is true even when the changes are to implement new requirements that will help companies avoid comments.

There are three areas of change from the SEC’s 2020 MD&A update that have become frequent comment areas, likely because companies have not changed their MD&A to implement these rule changes:

    • Critical accounting estimate disclosures
    • Quantitative and qualitative disclosures about material changes
    • Meaningfully addressing liquidity and capital resources

To help understand the issues in these disclosures, below are links to blog posts with example disclosures and related SEC comments.

This post presents an example comment and company response for critical accounting estimate disclosures.  While the example, particularly the revised disclosure, is lengthy, the lesson is simple.  Critical accounting estimates are not the same thing as accounting policies.  This is a simple comment to avoid.

This post presents an example comment and company response about providing quantitative and qualitative disclosures about material financial statement changes.  The Regulation S-K Item 303 guidance for this disclosure is very direct:

“Where the financial statements reflect material changes from period-to-period in one or more line items, including where material changes within a line item offset one another, describe the underlying reasons for these material changes in quantitative and qualitative terms.”

This post examines an example comment and company response focused on meaningfully addressing liquidity and capital resources disclosures.

Given the complexity and challenges in improving MD&A, one strategy companies can adopt is to make incremental change as they work on quarterly reports during the year.  This could help in working toward a reasonable implementation of these rule changes in their next year-end MD&A.

As always, your thoughts and comments are welcome!