With the financial reporting world in a constant state of change, it’s challenging to keep up with new and evolving accounting standards, as well as regulations and policy shifts from the new administration. Attend SECI’s live program, 33rd Annual SEC Reporting & FASB Forum being held November 13-14 in Dallas, December 11-12 in San Francisco and December 18-19 in New York City with an accompanying webcast. Get the latest information on emerging issues and the regulatory landscape.
Category Archives: Hot Topic
SEC Updates Revenue Recognition Guidance – We Knew It Was Coming!
By: George M. Wilson & Carol A. Stacey
More than a quarter in advance of the effective date of the FASB’s new revenue recognition guidance the SEC has made necessary changes in their own revenue recognition guidance. As you can read here, the Commission and Staff have addressed three areas:
- SAB Topic 13 and other Staff revenue recognition guidance
- Bill-and-hold guidance
- Vaccines for Government Stockpiles
SAB 116 rescinds SAB Topic 13, which contained much of the Staff’s legacy GAAP revenue recognition guidance. In addition, SAB Topic 8, Retail Companies, and Section A, Operating-Differential Subsidies of SAB Topic 11, Miscellaneous Disclosure, have been updated to conform with the new FASB revenue recognition model.
To update bill-and-hold guidance, this Commission Release rescinds existing bill-and-hold guidance, which interestingly was from an Accounting and Auditing Enforcement Release (AAER No. 108, In the Matter of Stewart Parness). Upon adoption of ASC 606 companies will instead use the guidance in ASC 606-10-55 paragraphs 81 to 84.
The third update relates to vaccines sold into government stockpiles under the Vaccines for Children Program or the Strategic National Stockpile. The new guidance replaces a 2005 release and continues the practice of recognizing revenue at the time a vaccine is placed in a stockpile program. In this release the commission states that in such arrangements revenue should be recognized at the time of the transfer of the vaccine to the stockpile because the customer will have obtained control of the vaccine and the criteria for revenue recognition under the new bill-and-hold guidance will be met.
As always, your thoughts and comments are welcome!
Sustainability Disclosures – It’s Time to Explore!
By: George M. Wilson & Carol A. Stacey
Sustainability disclosures are being mentioned more and more in the news, in company reporting and in regulatory discussions. While it may seem like it is “early days” for this information, it may not be as early as we all think. Here are summaries of a few of the things going on now.
Sustainability information has been touched on by the SEC in their disclosures effectiveness project. In the voluminous 2016 Regulation S-K Concept release the SEC included this language:
We are interested in receiving feedback on the importance of sustainability and public policy matters to informed investment and voting decisions. In particular, we seek feedback on which, if any, sustainability and public policy disclosures are important to an understanding of a registrant’s business and financial condition and whether there are other considerations that make these disclosures important to investment and voting decisions. We also seek feedback on the potential challenges and costs associated with compiling and disclosing this information.
Enough companies are already disclosing sustainability information that the AICPA has published a Guide for Attestation Engagements on Sustainability Information. The AICPA also has a very informative web page about sustainability disclosures in general.
Standard setters in other parts of the world have also begun discussion about sustainability information. Here is an excerpt from a speech Hans Hoogervorst, Chair of the IASB, delivered in April 2017 at the IIRC Council Meeting in New York:
In their latest review of structure and effectiveness, from 2015 to 2016, the Trustees of the IFRS Foundation confirmed the current approach of the International Accounting Standards Board (the Board) to wider corporate reporting. Broadly, this approach is to cooperate with organisations like the Corporate Reporting Dialogue (CRD) and the International Integrated Reporting Council (IIRC).
The Board was also asked to study further what its future role should be in the wider corporate reporting landscape. The Board is examining this question now. During the Board meeting of March 2017, we devoted public discussion to this issue for the first time.
As we wind down from second-quarter reporting (or whenever your fiscal-year has a less busy period!), this might be an opportune moment to learn a bit about these disclosures. There are several sources of information you can begin with:
The Sustainability Standards Board (SASB) maintains industry specific sustainability accounting standards that help public corporations disclose material, decision-useful information to investors. The members of the SASB are appointed by the SASB Foundation, a structure similar to that of the FASB and the FAF. The SASB Foundation is chaired by Michael Bloomberg and both the Foundation Board and the SASB itself have members with deep capital markets, business and academic experience.
The International Integrated Reporting Council defines integrated reporting as “a process founded on integrated thinking that results in a periodic integrated report by an organization about value creation over time and related communications regarding aspects of value creation. An integrated report is a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term.”
Both of these organizations are focused on providing information beyond our existing financial reporting and SEC reporting models. And, interestingly, many companies are already responding to demand for such information. In a report from the SASB titled “The State of Disclosure – An Analysis of the Effectiveness of Sustainability Disclosures in SEC Filing – 2016,” the SASB reviewed the reports of up to the top 10 companies in 79 industries. Among their findings were:
Overwhelmingly, companies have recognized the existence of, or the potential for, material impacts related to the sustainability topics included in SASB standards. Indeed, 69 percent of companies in the analysis reported on at least three-quarters of the sustainability topics included in their industry standard, and 38 percent provided disclosure on every SASB topic.
With this background, our next few posts will help you build an understanding of the state of these disclosures in current reporting, the nature of investor demand for these disclosures, and the standards that the SASB is developing to help investors get the information that they believe they need.
As always, your thoughts and comments are welcome!
FASB, SEC and PCAOB Update for SEC Reporting Professionals Workshop
FASB, SEC and PCAOB Update for SEC Reporting Professionals Workshop
Taking place August 23rd in Grapevine, TX.
What You Will Learn:
- The latest FASB developments, including:
- The new lease accounting model in-depth and related implementation steps
- Implementation issues for the new revenue recognition standard and the latest Transition Resource Group developments
- Statement of cash flow classification issues
- Other recently issued standards, including the simplification project standards
- Practical tips on applying existing financial reporting requirements
- Current SEC developments, including Disclosure Effectiveness and status of Dodd-Frank disclosures
- SEC review comment letter priorities via case studies and detailed discussion
- Current PCAOB proposals and rulemaking projects, including the auditor’s report
- Common findings from PCAOB reviews and the potential impact on both the Independent Public Accountant and their public clients
- Emerging issues and challenges in merger and acquisition accounting
What You Should Bring
Customize your Workshop experience by bringing your company’s or a client’s most recent SEC filings, including Forms 10-K, 10-Q, and a recent 8-K. If you are in the process of an IPO, bring a copy of your latest filing and the SEC’s most recent comment letter. If you work with a company that is not yet public, filings from a company in your industry are a reasonable alternative.
How You Can Register:
http://www.pli.edu/Content/FASB_SEC_and_PCAOB_Update_for_SEC_Reporting/_/N-1z10odqZ4k?ID=290526
Projects, Pronouncements and Developments Affecting Your SEC Reporting
How do the latest SEC, EITF, PCAOB and FASB updates affect your reporting? Attend FASB, SEC and PCAOB Update for SEC Reporting Professionals Workshop being held August 23rd in Grapevine, TX. Get up to date in-depth information on all the latest developments and practical tips on applying existing financial reporting requirements, including pushdown accounting, debt issuance costs and commitment fees, discontinued operations and dispositions, segment reporting and goodwill impairment.
http://www.pli.edu/Content/FASB_SEC_and_PCAOB_Update_for_SEC_Reporting/_/N-1z10odqZ4k?ID=290526
Demystifying Alternative Financing Solutions for Emerging and Growing Companies
Auditors and Financial Officers of companies who raise capital with complex financial instruments often find themselves drowning in convoluted accounting issues and restatements. Avoid the confusion by attending the live workshop, Debt vs. Equity Accounting for Complex Financial Instruments being held September 13th in Las Vegas. Through a detailed review of the accounting literature and numerous examples and case studies this Workshop will help you build the knowledge and experience to appropriately recognize, initially record and subsequently account for these complex financing tools
http://www.pli.edu/Content/Debt_vs_Equity_Accounting_for_Complex_Financial/_/N-1z10odmZ4k?ID=290522
The MD&A Know Trend Test – Staying Out of Trouble!
By: George M. Wilson & Carol A. Stacey
In our last post we reviewed a recent MD&A enforcement case focused on failure to disclose bad news. This forward looking “known-trend” disclosure requirement arises when management is aware of some “trend, demand, commitment, event or uncertainty” that could cause a material problem and fails to disclose this information to shareholders. The S-K Item 303(a)(3)(ii) language creating this requirement is:
Describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.
One of the challenging parts of this requirement is the “reasonably expects” probability threshold. What exactly does this mean? The Staff addressed this requirement in FR 36 with this language:
Where a trend, demand, commitment, event or uncertainty is known, management must make two assessments:
(1) Is the known trend, demand, commitment, event or uncertainty likely to come to fruition? If management determines that it is not reasonably likely to occur, no disclosure is required.
(2) If management cannot make that determination, it must evaluate objectively the consequences of the known trend, demand, commitment, event or uncertainty, on the assumption that it will come to fruition. Disclosure is then required unless management determines that a material effect on the registrant’s financial condition or results of operations is not reasonably likely to occur.
Each final determination resulting from the assessments made by management must be objectively reasonable, viewed as of the time the determination is made.
The language that makes this test challenging is the first part of paragraph (2). In essence, if management cannot make the assumption that a known trend is “not reasonably likely to come to fruition” in step one it must assume that it will come to fruition.
What would this mean if there were a 50/50 chance of something bad happening? As an example, suppose that your goodwill is not impaired this year-end, but the numbers in step one of the impairment test have been deteriorating with this trend:
2014 2015 2016
Fair value of reporting unit $3,000 $2,500 $1,900
Carrying value of reporting unit $1,800 $1,800 $1,800
Excess of FV over CV $1,200 $ 700 $ 100
There is clearly a trend here, and while management is likely doing all they can to make the business work, what if their assessment is that there is a 50/50 chance that the goodwill may be impaired next year? While there is no accounting recognition, the MD&A known trend disclosure requirement would say that this potential impairment, if it is material, should be disclosed.
This is not an easy determination, but the enforcement case in the last post makes it clear that it is crucial to get this disclosure right!
As always, your thoughts and comments are welcome!
MD&A: A New Known-Trend Enforcement Case
By: George M. Wilson & Carol A. Stacey
One of the “golden rules” of MD&A we discuss in our workshops is “no surprise stock drops”. (Thanks to Brink Dickerson of Troutman Sanders for the rules!) Actually, it is OK if management is surprised with a stock drop. However, it can be problematic if management previously knew of some issue that, when disclosed, causes a surprise stock drop for investors.
The classic start to a known trend enforcement case is a company announcement that results in a stock price drop. On February 26, 2014, UTi, a logistics company, filed an 8-K with news of a severe liquidity problem. UTi’s shares fell to $10.74, a decline of nearly 30% from the prior day’s close of $15.26.
The reason this is an SEC reporting issue is this paragraph from the MD&A guidance in Regulation S-K Item 303 paragraph (a)(3)(ii):
Describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations. If the registrant knows of events that will cause a material change in the relationship between costs and revenues (such as known future increases in costs of labor or materials or price increases or inventory adjustments), the change in the relationship shall be disclosed. (emphasis added)
If management knows of some sort of uncertainty that could result in a material impact if it comes to fruition, they must evaluate whether they “reasonably expect” this to happen. If they do “reasonably expect” this to happen then it should be disclosed in MD&A.
When there is a surprise stock drop like the one experienced by UTi, the questions the SEC Enforcement Division will ask, to borrow from another context, are “what did management know about the problem” and “when did they know it?”
Enforcement Release, AAER 3877 revealed that the genesis of UTi’s liquidity problem was an issue in the implementation of a new IT system that created billing problems. And, it was clear from the facts, including an internal PowerPoint presentation, that management knew they had a problem well before they filed the 8-K.
However, in their 10-Q for their third quarter ended October 31, 2013, which was filed in December of 2013, UTi did not disclose the liquidity problem. In fact, they said:
Our primary sources of liquidity include cash generated from operating activities, which is subject to seasonal fluctuations, particularly in our Freight Forwarding segment, and available funds under our various credit facilities. We typically experience increased activity associated with our peak season, generally during the second and third fiscal quarters, requiring significant disbursements on behalf of clients. During the second quarter and the first half of the third quarter, this seasonal growth in client receivables tends to consume available cash. Historically, the latter portion of the third quarter and the fourth quarter tend to generate cash recovery as cash collections usually exceed client cash disbursements.
They also made no mention of the implementation problems with their new IT system. They actually said:
Freight Forward Operating System. On September 1, 2013, we deployed our global freight forwarding operating system in the United States. As of that date, based on a variety of factors, including but not limited to operational acceptance testing and other operational milestones having been achieved, we considered it ready for its intended use. Amortization expense with respect to the system began effective September 2013, and accordingly, we recorded amortization expense related to the new application of approximately $3.3 million during the third quarter ended October 31, 2013.
Hence the surprise when the 8-K disclosed the problems. Both the CEO and CFO are also named in the Enforcement Release and paid penalties.
As mentioned above, the probability standard for disclosure is “reasonably expects”. More about this complex probability assessment in our next post!
As always, your thoughts and comments are welcome!
Business Combinations Accounting Guidance Now Delivered in a Pragmatic, Practical Way
Gain an in-depth understanding of how to apply the FASB standard (codified in ASC 805) on business combinations, including recent related ASUs, how to make journal entries in specific situations, the areas where estimation and judgment is required, the SEC requirements for financial statements and pro forma information for significant business combinations, and the appropriate financial statement disclosure. Attend SECI’s live interactive workshop, Accounting for Business Combinations being held August 16th in New York City. http://www.pli.edu/Content/Accounting_for_Business_Combinations_Workshop/_/N-1z10od5Z4k?ID=290625&t=WLH7_ADDP
Master SEC Reporting and Prepare to Tackle New Challenges
The complicated world of SEC reporting has now gotten even more complicated! Be sure you are prepared to comply with the recently enacted changes and have a plan in place to deal with the SEC staff “hot buttons”. Attend SECI’s live workshop SEC Reporting Skills Workshop 2017 being held July 20-21 in Las Vegas, August 17-18 in New York City and August 21-22 in Grapevine with additional dates and locations listed on the SECI website.
http://www.pli.edu/Content/SEC_Reporting_Skills_Workshop_2017/_/N-1z10oe8Z4k?ID=290534