Category Archives: Hot Topic

Federal Register Publication – Modernization of Regulation S-K Items 101, 103 and 105

Hot Topic, Reporting

Thanks to the eagle eye of Reed Wilson, who, along with Rich Alven, teaches our new Zoom based “SEC Form 10-K Disclosure Best Practices” virtual workshop, for spotting the October 8, 2020 Federal Register  publication of the SEC’s August 26 Final Rule “Modernization of Regulation S-K Items 101, 103, and 105”. The effective date of the rule is 30 days after publication in the Federal Register.

This means that the new rule will be effective for filings made 30 days after October 8, 2020.

For 10-Q’s filed after this date the changes to S-K Item 105, requiring a summary of risk factors if you have over 15 pages of risk factors, and the new requirements for legal proceedings disclosures, will be effective.

For 10-K’s filed after this date the changes to all the modernized S-K Items will be effective.

We will have more details about these changes in posts next week.

As always, your thoughts and comments are welcome!

An SEC Comment Challenge: Find the Non-GAAP Measure Issue – Post Two

Comment of the Week, Hot Topic

In this series of posts we are focusing on non-GAAP measure problems and related SEC comments in earnings releases.  As the first post in this series did, this post gives you an opportunity to see if you can spot the issue, and then provides the background and SEC guidance about the issue.

As a brief reminder, the SEC’s guidance about the use of non-GAAP measures is primarily in three places:

Regulation G for non-GAAP measures used anywhere,

S-K Item 10(e), for non-GAAP measures in filed documents, and

The related Compliance and Disclosure Interpretations.

 Just like the first post in this series, you can read the excerpt of the release behind the comment and try to spot the issue.  If you prefer, you can read straight through to the comment and explanation that follow.

This excerpt is from an 8-K filed by The Interpublic Group of Companies on April 22, 2020.  Can you spot the non-GAAP issue?

Interpublic One

The issue here goes back to the concept that companies should not try to create the impression that non-GAAP measures provide a better view of the company than GAAP.  Here is the related SEC comment:

Form 8-K filed April 22, 2020

Exhibit 99.1
Reconciliation of Adjusted Results, page 7

  1. Please tell us your consideration of the guidance in Question 102.10 of the Non-GAAP Compliance and Disclosure Interpretations related to your presentation of full non-GAAP income statements when reconciling non-GAAP measures in your earnings releases.

The C&DI mentioned states:

Question 102.10

Question: Item 10(e)(1)(i)(A) of Regulation S-K requires that when a registrant presents a non-GAAP measure it must present the most directly comparable GAAP measure with equal or greater prominence. This requirement applies to non-GAAP measures presented in documents filed with the Commission and also earnings releases furnished under Item 2.02 of Form 8-K. Are there examples of disclosures that would cause a non-GAAP measure to be more prominent?

 Answer: Yes. Although whether a non-GAAP measure is more prominent than the comparable GAAP measure generally depends on the facts and circumstances in which the disclosure is made, the staff would consider the following examples of disclosure of non-GAAP measures as more prominent:

  • Presenting a full income statement of non-GAAP measures or presenting a full non-GAAP income statement when reconciling non-GAAP measures to the most directly comparable GAAP measures;
  • Omitting comparable GAAP measures from an earnings release headline or caption that includes non-GAAP measures;
  • Presenting a non-GAAP measure using a style of presentation (e.g., bold, larger font) that emphasizes the non-GAAP measure over the comparable GAAP measure;
  • A non-GAAP measure that precedes the most directly comparable GAAP measure (including in an earnings release headline or caption);
  • Describing a non-GAAP measure as, for example, “record performance” or “exceptional” without at least an equally prominent descriptive characterization of the comparable GAAP measure;
  • Providing tabular disclosure of non-GAAP financial measures without preceding it with an equally prominent tabular disclosure of the comparable GAAP measures or including the comparable GAAP measures in the same table;
  • Excluding a quantitative reconciliation with respect to a forward-looking non-GAAP measure in reliance on the “unreasonable efforts” exception in Item 10(e)(1)(i)(B) without disclosing that fact and identifying the information that is unavailable and its probable significance in a location of equal or greater prominence; and
  • Providing discussion and analysis of a non-GAAP measure without a similar discussion and analysis of the comparable GAAP measure in a location with equal or greater prominence. [May 17, 2016]

The issue behind this comment is that the company presented a full non-GAAP income statement.  The SEC does not permit this kind of presentation.

This is the Company’s response to the comment:

The Company acknowledges the Staff’s comment and advises that it had not previously viewed the non-GAAP reconciliation on page 7 to be a full non-GAAP income statement but will revise its disclosures going forward to ensure that future non-GAAP reconciliations in the Company’s earnings releases and other investor materials do not resemble full non-GAAP income statements. Below please find an example of how the Company intends to present future non-GAAP reconciliations, using the quarter ended March 31, 2020 results for illustrative purposes. We note that this presentation is also included in our Investor Presentation which was included as Exhibit 99.2 to Form 8-K filed on April 22, 2020.

Interpublic Fixed

As always, your thoughts and comments are welcome!

More SEC Disclosure Modernization on the Way?

Hot Topic

If you need a bit of a diversion this week, here is an interesting, and hopefully fun, idea!  On August 8, 2019 at 10:00 AM EDT, the SEC is holding an open meeting and the single item on the agenda is more SEC disclosure modernization!

The Commission will consider whether to propose rule amendments to modernize the description of business, legal proceedings, and risk factor disclosures that registrants are required to make pursuant to Regulation S-K. The proposed amendments are intended to update these rules to account for developments since their adoption or last amendment, to improve these disclosures for investors, and to simplify compliance efforts for registrants.

You can find a link to the meeting webcast, agenda and sunshine notice here.

For the fun part, invite your colleagues and get some donuts and coffee!

Thanks to Bob Laux, our conference organizer and chair, for the heads-up about this meeting!

As always, your thoughts and comments are welcome!

Another Reminder to Watch the Details with Enforcement Emphasis!

Hot Topic

As we blogged back in June, attention to detail is an important part of successful SEC reporting.  Regulation S-X Article 10 is the source of another important SEC reporting detail. This part of S-X contains the interim financial statement requirements for Form 10-Q.

(A quick side note – as we discussed in our previous postthis is where the new requirement for information about changes in shareholders’ equity in Form 10-Qwas added by the Disclosure Update and Simplification rule.)

Article 10, as it has been updated by Disclosure Update and Simplification, includes this fairly simple language concerning the auditor’s review of the financial statements in Form 10-Q:

(d) Interim review by independent public accountant. Prior to filing, interim financial statements included in quarterly reports on Form 10-Q (17 CFR 249.308(a)) must be reviewed by an independent public accountant using applicable professional standards and procedures for conducting such reviews, as may be modified or supplemented by the Commission. If, in any filing, the company states that interim financial statements have been reviewed by an independent public accountant, a report of the accountant on the review must be filed with the interim financial statements.

The language we bolded and underlined in this excerpt was in this paragraph before and after the update. And it is a fairly simple thing to confirm with your auditor, via email or other vehicle, that they are done with the review before you file.

As you will see in this enforcement division press release, paying attention to this detail is important.  In what is apparently a kind of “sweep” action, five companies paid fines averaging $50,000 each for failing to observe this requirement.  It is also interesting to note the SEC and the PCAOB worked together on these actions.

As always, your thoughts and comments are welcome!

Are You Ready to be Simplified?

Hot Topic

On August 17, 2018, the SEC approved a 314-page Final Ruleto implement many parts of their disclosure effectiveness and simplification initiatives.  Included in the many changes made by the rule are updates to:

Regulation S-X

Regulation S-K

The instructions to the Forms

The changes focus on:

Removing redundant and duplicative requirements that are substantially similar to disclosures required by GAAP, International Financial Reporting Standards (IFRS), or other Commission disclosure requirements,

Eliminating overlapping requirements, which are related to, but not the same as GAAP, IFRS, or other Commission disclosure requirements,

Deleting outdated requirements which have become obsolete as a result of the passage of time or changes in the regulatory, business, or technological environment, and

Updating and superseding requirements which are inconsistent with recent legislation, more recently updated Commission disclosure requirements, or more recently updated GAAP.

You can read the final rule and find the related press release here.

We will post more about the details of some of the changes soon.

As usual, your thoughts and comments are always 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!

Plaintiff Lawsuits – A Legal Proceedings Disclosure Tidbit

Hot Topic

By: George M. Wilson, SEC Institute & Gary M. Brown, Partner, Nelson Mullins Riley & Scarborough LLP (Note: Gary Teaches our SEC Reporting and Practice Skills for Lawyers workshop)

In our Workshops, disclosures about legal proceedings are usually a hot topic for both lawyers and accountants. In these discussions we review the differences between the S-K Item 103 disclosures for legal proceedings and the ASC 450 GAAP disclosures for contingencies. The S-K Item 103 disclosures generally are more about the factual situation and include more details than the GAAP disclosures, including details such as the name of the parties, the court or jurisdiction where the action is taking place and the relief sought. The GAAP disclosures are more focused on expected impact.

 

One challenging aspect of these differences is what to disclose about plaintiff lawsuits. Generally, the GAAP disclosures focus on contingent liabilities, not the kind of contingent asset that would arise from a plaintiff lawsuit. The ASC guidance for gain contingencies is short and to the point:

 

450-30-25   Recognition

General

25-1     

A contingency that might result in a gain usually should not be reflected in the financial statements because to do so might be to recognize revenue before its realization.  450-30-50   Disclosure

General

50-1     

Adequate disclosure shall be made of a contingency that might result in a gain, but care shall be exercised to avoid misleading implications as to the likelihood of realization.

 

S-K Item 103 does not have this same focus on contingent liabilities. In fact, it starts with this language:

 

 Item 103 – Legal proceedings.

 

Describe briefly any material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the registrant or any of its subsidiaries is a party or of which any of their property is the subject. Include the name of the court or agency in which the proceedings are pending, the date instituted, the principal parties thereto, a description of the factual basis alleged to underlie the proceeding and the relief sought. Include similar information as to any such proceedings known to be contemplated by governmental authorities.

 

The language “material pending legal proceedings” does not limit the disclosure to just defendant actions. And, to reinforce this conclusion, the SEC has issued the following Compliance and Disclosure Interpretation:

Section 205. Item 103 — Legal Proceedings

205.01 The bank subsidiary of a one bank holding company initiates a lawsuit to collect a debt that exceeds 10% of the current assets of the bank and its holding company parent. Due to the unusual size of the debt, Item 103 requires disclosure of the lawsuit, even though the collection of debts is a normal incident of the bank’s business. [July 3, 2008]

This C&DI also illustrates the application of the 10% disclosure threshold and an interesting interpretation about normal course of business issues. And, it clearly shows that Legal Proceedings disclosure should include material lawsuits in which the company is a plaintiff as well as a defendant.

 

As always, your thoughts and comments are welcome!

 

It’s time to update your SEC Reporting Skills!

Hot Topic

GO-4049_SEC_Reporting_Skills_Wksp_800x469                                              SEC Reporting Skills Workshop

Designed for accounting and financial reporting professionals, this Workshop will help you build the foundational knowledge and practical experience necessary to prepare and review the SEC’s periodic and current reporting forms.

Attend a class being held in a location near you!

Upcoming workshops include:

https://www.pli.edu/Content/SEC_Reporting_Skills_Workshop_2018/_/N-1z10128Z4k?ID=320803&t=TBY8_LNKIN

https://www.pli.edu/Content/SEC_Reporting_Skills_Workshop_2018/_/N-1z10128Z4k?ID=320803&t=TBY8_LNKIN

https://www.pli.edu/Content/SEC_Reporting_Skills_Workshop_2018/_/N-1z10128Z4k?ID=320803&t=TBY8_LNKIN

 

 

 

Helping Audit Committees Grapple with Change

Hot Topic

By: George M. Wilson, SEC Institute

Few corporate governance roles are more complex than that of the audit committee member. To help audit committee members and their advisors keep pace with

  • new GAAP standards for major areas, such as revenue recognition, lease accounting and financial instrument impairment;
  • new and evolving PCAOB regulations, such as the new auditors report and discussion of critical audit matters; and
  • an increased focus on risk management practices, particularly cybersecurity risk

PLI is offering its “Audit Committees and Financial Reporting 2018: Recent Developments and Current Issues” program on June 11, 2018. The program will be held at PLI’s New York Center and will also available via webcast and groupcast.

 

As always, your thoughts and comments are welcome!

Rule 3-13 Requests for Waivers – Yes, the SEC Really Means It!

Hot Topic

http://https://player.vimeo.com/video/264522844

By: George M. Wilson, SEC Institute

Last December we blogged about the SEC actively encouraging companies to consider requesting waivers of certain financial reporting requirements using an historically little mentioned provision of Regulation S-X. Rule 3-13 says:

 

  • 210.3-13   Filing of other financial statements in certain cases.

The Commission may, upon the informal written request of the registrant, and where consistent with the protection of investors, permit the omission of one or more of the financial statements herein required or the filing in substitution therefor of appropriate statements of comparable character. The Commission may also by informal written notice require the filing of other financial statements in addition to, or in substitution for, the statements herein required in any case where such statements are necessary or appropriate for an adequate presentation of the financial condition of any person whose financial statements are required, or whose statements are otherwise necessary for the protection of investors.

The SEC Chairman and the Director of the Division of Corporation Finance have mentioned this “waiver process” in several public forums, and there is a substantial amount of “buzz” about this change in approach by the staff in the community of registrants.

 

This report from Orrick is one example. Another is this “To the Point” update from EY.

 

The staff has described what they consider a preferred process for requesting these waivers, and they are responding to these requests in a very timely fashion, frequently within a week or ten days. To facilitate this process the staff put the following language at the very beginning of the introductory material in the CorpFin Financial Reporting Manual:

  • (The Division of Corporation Finance) Acts on behalf of the Commission to grant relief under Rule 3-13 of Regulation S-X. The staff has authority, where consistent with investor protection, to permit registrants to omit, or substitute for, required financial statements. Requests for this relief should be submitted by email. Call (202) 551-3111 and ask for the appropriate person listed below to discuss questions about potential relief:

Rule 3-05 – Patrick Gilmore

Article 11 – Todd Hardiman

Rules 3-09 and 4-08(g) – Christy Adams

Rules 3-10 and 3-16 – Tricia Armelin

Rule 3-14 – Jessica Barberich

 

To the above guidance we would add the advice to involve your auditors in this process as they may have helpful advice along the way and their opinion may be relevant to the SEC.

 

So, what are some typical situations where we should stop and consider whether or not to approach the staff about such a waiver request? Here are a few examples.

 

Significance tests – When applying the three significant subsidiary tests, in particular the income test, if an acquirer has very small income this part of the test could be met for an acquisition that may not really be “significant”. If one of the three parts of this test seems out of the norm then there may be other, more appropriate, considerations in making a determination whether separate financial statements are useful. This would be a great time to consider a Rule 3-13 request.

Pre-and post-acquisition periods for S-X rule 3.05 – When appropriate it may be best to use an analysis that is less mechanical and focuses on trend issues that are meaningful and which help assess how an acquisition may impact on post-acquisition results.

Predecessor/Successor issues – In some cases stub periods may not be as relevant or reliable carve out F/S may not be possible to build. For example, it may be that abbreviated financial statements may provide the information that investors need in this type of situation.

IFRS financial statements may be acceptable for some acquisitions and equity method investees – if a company could be a foreign private issuer the staff may accept IFRS financial statements.

Mechanical compliance with a rule sometimes is not the best way to provide investors with the information they need. It is a good thing to know that there are alternatives. So, when you think you are in this situation, go talk to the staff!