Category Archives: Reporting

Moving Forward After Year-End

Reporting

For all of us with a December 31 fiscal year we are finally past the year-end finish line.  It is always nice to look up after year-end and feel good that we made it through another busy season.  Right after that celebration, however, the next thing we see is the challenge of first quarter-end!

This is an opportune moment to take stock of our just filed Form 10-K and think about ways we may want to update, refine or improve our reporting.  It is also a good idea to identify areas where we may need to adjust our on-going quarterly reporting for changes going on in the world around us.

At PLI’s 18thAnnual Securities Regulation in Europe program on March 15, 2019, CorpFin Division Director William Hinman provided us with discussion of two areasthat we can use as stepping off points for this process, Brexit and sustainability disclosures.

Beyond reminders about these two important areas, Mr. Hinman also included important discussion about how the SEC’s disclosure system works:

  1. The SEC’s disclosure system is fundamentally principles-based, and
  1. Two of the most important principles-based sections of the disclosure requirements are risk factors and MD&A.

While Mr. Hinman’s speech is fairly brief, it provides substantial food for thought.  We will explore this speech in two posts:

  1. A review of the principles behind the SEC’s disclosure system (this post), and
  1. A discussion of how these principles guide our disclosures in the two areas he addressed, Brexit and sustainability matters (next week).

These are two areas we may want to place on our disclosure committee or disclosure process agendas.

The SEC’s Principles-Based Disclosure System

One of the things that make Mr. Hinman’s speechwell worth reading is his discussion of the challenges in applying the principles-based disclosure guidance of the securities law to complex, uncertain and evolving risks.

One trap we sometimes fall into is the belief that if we disclose everything the SEC’s rules address, if we check all the boxes in Regulations S-K and S-X, the SAB’s and the SLB’s, and all the other sources from the SEC, we will be ok.  In our Workshops we emphasize that this is not the case! And losing this “check-the-box” mentality is crucial to get disclosure right in complex, uncertain and evolving areas.

In his remarks Mr. Hinman said:

“The flexibility of our principles-based disclosure requirements should result in disclosure that keeps pace with emerging issues, like Brexit or sustainability matters, without the need to for the Commission to continuously add to or update the underlying disclosure rules as new issues arise.”

While it may seem a bit contradictory, the SEC actually has a rule saying that we need to think beyond the rules!

240.12b-20   Additional information.

In addition to the information expressly required to be included in a statement or report, there shall be added such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made not misleading.

To emphasize this part of the SEC’s disclosure regimen Mr. Hinman articulates the foundation of the disclosure system:

“our disclosure requirements are intended to provide investors with the material information they need about companies and their securities offerings to make informed investment and voting decisions”

In other words, while the SEC’s rules and regulations provide a starting point, we need to consider the whole context of a situation and include all information material to investors. He also provides this reminder about two of the most principles-based parts of periodic reports:

“Management’s Discussion and Analysis (MD&A) and Risk Factors are examples of such disclosure requirements and are well-suited to elicit disclosure about complex and evolving areas”

This is borne out in the very first sentence of Regulation S-K Item 303, the core guidance for MD&A:

229.303   (Item 303) Management’s discussion and analysis of financial condition and results of operations.

(a) Full fiscal years. Discuss registrant’s financial condition, changes in financial condition and results of operations.

It is hard to imagine a broader, more principles-based requirement than this simple sentence!

In our next post we will delve more into how this principles-based framework provides direction for the two specific areas Mr. Hinman addressed, Brexit and sustainability disclosures.

As always, your thoughts and comments are welcome!

Disclosure Modernization and Simplification: Post #2 – Cover Page Changes

Reporting, Uncategorized

As we overviewed in this post the SEC’s Disclosure Modernization and Simplification final rule changes a number of items in Forms 10-K, 10-Q and 8-K.  This post starts at the beginning, with changes to the cover page of each of these reports.

As a brief reminder, most of the changes in this final rule are effective 30 days after  publication in the Federal Register.  The Final Rule was published in the Federal Register on April 2, 2019, so the effective date for most of the rule is May 2, 2019.  Two of the changes have different effective dates, the changes to confidential treatment and certain other details surrounding exhibits,  which we will discuss in a later post, and the requirement to add iXBRL tags to cover pages, which is discussed in this post.

The three changes to Forms 10-K, 10-Q and 8-K cover pages are:

  1. The cover pages of Forms 10-K, 10-Q and 8-K now include the filer’s ticker symbol, and the cover pages of all the forms will have consistent information about the national exchange or principal U.S. market for the company’s securities and title of each class of securities.
  1. Cover pages for Forms 10-K, 10-Q and 8-K must now be tagged with inline XBRL.
  1. On Form 10-K’s cover page the S-K 405 Section 16 delinquency reporting checkbox is removed, along with a related instruction in Item 10 of form 10-K.

(Note: Parts of this rule also apply to Forms 20-F and 40-F, which are included in the discussion below.)

1. Consistent Disclosure of Ticker Symbol, Exchange and Class of Securities on Cover Pages

This change seems fairly innocuous, and in fact it really is.  The addition of a company’s ticker symbol to the cover pages of Forms 10-K, 10-Q and 8-K (as well as Forms 20-F and 40-F) is not discussed in any detail in the final rule. As a matter of common sense in a world with so many on-line sources for stock price information this is essentially a nice convenience.  This change follows consistently with last August’s final rule that requires disclosure of a company’s ticker symbol in Form 10-K Item 5.

The other part of this disclosure does not change Form 10-K where information about the exchange or principal U.S. market for the company’s securities and the title of each class of securities is already included.  The new rule adds this information to the cover pages of Forms 10-Q and 8-K (as well as Forms 20-F and 40-F).  Adding this information provides for consistency, particularly when all of this information will be tagged with iXBRL tags.  This change should make gathering data electronically simpler and help assure consistency in how data is gathered.

To make both the above changes the final rule adds this box to Forms 10-K, 10-Q, 8-K, 20-F and 40-F:

CoverPageSymbol

As the final rule was published in the Federal Register on April 2, 2019 and this part is effective on May 2, 2019, this provision will technically be effective for Forms 10-Q and 10-K filed after May 2, 2019,  Given the short time frame between the effective date and the due dates for first quarter 10-Q’s it is possible the SEC may grant a bit of a grace period as they did with the 10-Q requirement in last summer’s Disclosure Update and Simplification rule.  (You can review C&DI Question 105.09 as a reminder.)  Best to stay tuned!

2. Inline XBRL Tagging on Cover Pages for Forms 10-K, 10-Q and 8-K.

The SEC’s Inline XBRL (iXBRL) rule adopted on June 28, 2018, requires companies to implement inline XBRL on the following schedule:

IXBRL Transition

If you have not seen a live iXBRL filing, you could check out this example, where you can also try the SEC’s inline XBRL viewer.  You can also check out Dell Technologies and Adobe for more examples.  (As a side note, later in April we will do another post about this change with some hopefully helpful tips.)

Existing requirements in Reg S-T and the EDGAR Filer Manual include tagging of certain information on the cover pages of Form 10-K and 10-Q, known as document and entity identifier elements.  This existing tagging requirement includes form type, company name, filer size, and public float.  This is of course only part of the information on the cover pages of these forms.

The Disclosure Modernization and Simplification final rule expands this requirement to include more information and applies it to more forms. The new rule requires all of the information on the cover pages of Forms 10-K, 10-Q, 8-K, 20-F, and 40-F to be tagged in Inline XBRL.  This will be done following the guidance in the EDGAR Filing Manual.

Tagged information will now include the exchange on which the company’s securities are registered and the state (or jurisdiction) of incorporation.

The tagging will be done following the requirements in the EDGAR Filer Manual and is added via new Regulation S-T Rule 406 and a new exhibit, Item 601(b)(104) to Regulation S-K.  (The rule also adds new section 104 to the “Instructions as to Exhibits” of Form 20-F, and new paragraph B.17 to the “General Instructions” of Form 40-F to add this requirement to those forms also.)

New S-T Item 406 now provides this requirement:

232.406 Cover Page XBRL Data Tagging.

Electronic filers submitting Forms 10-K (§ 249.310 of this chapter), 10-Q (§ 249.308a of this chapter), 8-K (§ 249.308 of this chapter), 20-F (§ 249.220f of this chapter) or 40-F
(§ 249.240f of this chapter) who are required to submit Interactive Data Files (§ 232.11) in Inline XBRL format in accordance with this Regulation S-T must tag in Inline XBRL electronic format, in the manner provided by the EDGAR Filer Manual, all of the information provided by the electronic filer that is required on the cover page of these forms.

In the final rule as a rational for this change the SEC says:

By increasing the capacity for automation of the data gathering process, we believe these amendments will further enhance investors’ use of interactive data to identify, count, sort, compare, and analyze registrants and their disclosures.   For example, an investor will be able to more readily and accurately identify registrants that are listed on a specific exchange and that identified themselves as well known seasoned issuers in their last annual report. Similarly, the Inline XBRL tagging of the new ticker symbol disclosure requirement will make it easier to relate/link a specific security to the underlying registrant. In addition, the amendments will allow the Commission to make enhancements to the EDGAR system to enable investors to search for filings with these specific criteria.

And, these changes will also benefit the Commission staff:

The new filing requirements will also be of benefit to the Commission, as the Commission and its staff will be able to more readily sort and analyze filings to, among other things, improve data and analysis for rulemaking initiatives.

As a last note, this change will be effective for a company at the same time the Inline XBRL requirement becomes effective for that company, as outlined in the table at the beginning of this section.

3. Elimination of the Form 10-K S-K Item 405 Checkbox

This last cover page change applies only to Form 10-K.  In our workshops we have always cautioned participants to be very careful with the complexly worded S-K Item 405 checkbox related to disclosure of delinquent Section 16 filers.  While there was a separate instruction about this checkbox in the Item 10 instructions, it was not clear that the box should be checked if all reports were filed on time, and the box was frequently incorrect.

Given all the other reporting surrounding delinquent Section 16 filings and the disclosure of this information in proxy statements and Form 10-K, page 219 of the rule contains the change to Form 10-K for this checkbox:

Removing the second sentence of Instruction (G)(4) under “General Instructions”, the checkbox that relates to disclosure under Item 405, and the instruction to Item 10; and

The first part of this change referring to Instruction (G)(4) is a “clean-up” change related to incorporation by reference and will be discussed in a later post.  The second section – “the checkbox that relates to disclosure under Item 405, and the instruction to Item 10” – is the regulatory guidance that removes the troublesome checkbox.  This language is now gone from the cover page:

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [ ]

And, this instruction has also been removed from Item 10:

Instruction

Checking the box provided on the cover page of this Form to indicate that Item 405 disclosure of delinquent Form 3, 4, or 5 filers is not contained herein is intended to facilitate Form processing and review. Failure to provide such indication will not create liability for violation of the federal securities laws. The space should be checked only if there is no disclosure in this Form of reporting person delinquencies in response to Item 405 and the registrant, at the time of filing the Form 10-K, has reviewed the information necessary to ascertain, and has determined that, Item 405 disclosure is not expected to be contained in Part III of the Form 10-K or incorporated by reference.

While the final rule does not include a lot of discussion about this change, this is a welcome simplification!

As a final note, we will dive into details about changes to the required disclosures about delinquent Section 16 filers in a later post.

This starts the details of implementing the Disclosure Modification and Simplification final rule. Our next post will explore the changes to the guidance for risk factor disclosure.

As always, your thoughts and comments are welcome!

The Details and Implementation Steps for Disclosure Modernization and Simplification

Reporting, Uncategorized

Here is a brief video overview of this post, hope you find it interesting!

As you have likely heard on March 20, 2019, the SEC adopted a final rule for “Disclosure Modernization and Simplification” as part of its responsibilities under the FAST Act.  This new rule makes a number of detailed changes to reports on Form 10-K, 10-Q and, to a lesser extent, Form 8-K.  The rule also makes several broad changes in areas such as incorporation by reference, obtaining confidential treatment and iXBRL tagging.

As we did with the August 2018 Disclosure Update and Simplification rule, we are going to do a series of posts to help manage these details and implement this new rule.

To begin, in this post, to help see the big picture of the changes, we have a list of what is “modernized and simplified” item-by-item in Forms 10-K and 10-Q.

Next will be a series of posts that delve into the changes for each item.

Last, after the final rule with any corrections or updates is published in the Federal Register, we will post a comprehensive “cookbook” to provide step-by-step guidance to implement the changes.

To help organize our thoughts for implementation of this new rule, here is the item-by-item “big picture” summary of all the periodic reporting changers in the Disclosure Modernization and Simplification rule:

  1. Cover page changes

Both 10-Q and 10-K now include ticker symbol on the cover page.

Elimination of the S-K 405 Section 16 delinquency reporting check box.

Both 10-Q and 10-K cover pages must now be tagged for iXBRL (effective with the iXBRL rule).

  1. Item 1A – Risk Factors

Risk factor guidance has been moved from S-K Item 503(c) to new Item 105. The wording has been changed to remove examples.

  1. Item 2 – Properties

           S-K Item 102 has been changed to focus on material information about
properties.

  1. Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Regulation S-K Item 303 has been changed to allow companies that present three years of financial statements to omit the earliest year in MD&A discussion.

  1. Item 10. Directors, Executive Officers and Corporate Governance.

One minor change in S-K Item 401 to fix the instruction that permits omitting executive officer information from the proxy or other information statement if it is included in Part One of Form 10-K.

Another minor change to S-K Item 405 to change the title of the section for delinquent Section 16 filers to “Delinquent Section 16(a) Reports” and encourage omitting this title if there are no delinquencies to report.

  1. Item 11. Executive Compensation.

No changes (although there is one minor change to S-K Item 407(d) that may affect proxy disclosures, including some EGC disclosures).

  1. Item 15. Exhibits, Financial Statement Schedules.

Changes for incorporation by reference, redacting of information with potential competitive harm, potential exclusion of schedules for exhibits, omission of information that would violate personal privacy considerations and other changes such as moving disclosures such as a description of the registrant’s securities to an exhibit.

With the changes listed above, our detailed posts will also include discussion of other changes, such as:

The elimination of the 5-year time horizon for incorporation by reference from 34 Act reports that used to be in S-K Item 10(d).

Changes to Rule 12b-23 dealing with incorporation by reference to clarify that incorporation by reference into the financial statements is generally not allowed.

Several changes to S-K Item 501 and other prospectus related changes.

As a final note, most significant SEC rule changes end up with an acronym or nickname as we discuss them. Hence, last August’s Disclosure Update and Simplification rule became known as “Duster”.  So far, no consensus nickname for this new rule has emerged. If you have a suggestion put it in a response to this post!

As always, your thoughts, comments and nickname suggestions are welcome!

Singing the Same Song Everywhere and a Revenue Recognition Disclosure Bonus

Reporting

One of the points we make in our workshops is that companies should exercise care to be consistent across all communication vehicles including SEC filings, earnings releases, webpage information and investor presentations.  Someone in every organization should be charged with reviewing all communications to assure they are all singing the same song.

The SEC looks at all the channels a company uses to communicate when they review filings.   Inconsistencies in the disclosure across these channels are “low-hanging fruit” in the comment process.

The FASB’s new revenue recognition standard, Accounting Standards Codification Topic 606 creates a new reason to be even more careful about this consistency.  The focal point for this concern is the requirement to disclose disaggregated revenues (606-10-50-05):

An entity shall disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.

Theimplementation guidance related to this disclosure requirementincludes this language, one of the few places US GAAP refers to information outside the financial statements:

When selecting the type of category (or categories) to use to disaggregate revenue, an entity should consider how information about the entity’s revenue has been presented for other purposes, including all of the following:

  1. Disclosures presented outside the financial statements (for example, in earnings releases, annual reports, or investor presentations)
  2. Information regularly reviewed by the chief operating decision maker for evaluating the financial performance of operating segments
  3. Other information that is similar to the types of information identified in (a) and (b) and that is used by the entity or users of the entity’s financial statements to evaluate the entity’s financial performance or make resource allocation decisions.

This is the genesis of the following comment exchange on revenue recognition disclosures:

  1. Original Comment:

We note your disaggregated revenue disclosures of revenue by product and by geographic region in Note 16. Tell us your consideration for disclosing further disaggregation of revenue for other fresh produce similar to the table disclosed on page 4 of your 10-K for the Fiscal Year Ended December 29, 2017 and in your earnings releases furnished on Form 8-K.

  1. Company response to initial comment:

We call to the Staff’s attention that, in Note 16 to the consolidated financial statements contained in our Form 10-Q for the quarter ended June 29, 2018 (the “Q2 2018 Form 10-Q”), we continued to show disaggregated revenue from contracts on the basis of our aggregated reportable segments consistent with Accounting Standards Codification (“ASC”) 280, Segment Reporting, as we did in our Form 10-K for the fiscal year ended December 29, 2017 and our Form 10-Q for the fiscal quarter ended March 30, 2018. We also call to the Staff’s attention that Note 3 to our consolidated financial statements included in the Q2 2018 Form 10-Q contains a cross reference to Note 16, with that cross reference expressly referring to the additional description of our reportable business segments and disaggregated revenue disclosures in Note 16. Under the circumstances, we believe that the approach taken in the Q2 2018 Form 10-Q meets the disclosure requirements ASC 606, Revenues from Customers. The objective of ASC 606 is to show how the nature, amount, timing of revenue and cash flows affected by economic factors and mirror our contracts with customers. It is important to note that our contracts with customers do not differ significantly across the various fresh fruit products, shown on page 4 of our Form 10-K and, as such, we believe that the disclosure included in the Q2 2018 Form 10-Q based on aggregated reportable segments as included in Note 16 is sufficient to meet the requirements of the standard.

  1. SEC follow-up comment:

We note from your response to our prior comment 1 that you believe
your disclosure based on aggregated reportable segments as included in Note 16 is sufficient to meet the requirements of ASC 606 in terms of disaggregated revenue disclosures because your contracts with your customers do not differ across fruit products. However, the guidance in ASC 606-10-55-90 indicates that when selecting the type of category to use to disaggregate revenue, you should also consider how information about your revenue has been presented for other purposes including among other factors, disclosures presented outside your financial statements such as in earnings releases, annual reports or investor presentations. In this regard, we note that you have provided revenue amounts on a further disaggregated basis than your reportable segments in earnings releases and in the front section of your Form 10K.The guidance also gives examples of categories that might be appropriate which includes type of contract, but does not limit the categories based on customer contracts. Please provide us further analysis for why you believe product types such as pineapples, fresh-cut product, avocados, melons, and non-tropical produce have similar economic factors in the nature, amount, timing and uncertainty of revenue and cash flows and therefore do not need to be disaggregated under the guidance in ASC 606. Alternatively, please further disaggregate your revenue in the notes to the financial statements under ASC 606-10-50-5. Refer also to the guidance in ASC 606-10-55-89 through 91.

As you can read in the company’s second response letter, they did agree to provide incremental disclosures.

As always, your thoughts and comments are welcome!

A Quick Quarter-End Reminder and an Example Statement of Changes in Stockholders’ Equity

Reporting

As a quick reminder for first quarter-end, the SEC’s Disclosure Update and Simplification Rule last fall added a requirement to the Form 10-Q to include a statement of changes in stockholders’ equity.  This requirement was added via this addition to Article 10-01(a)  of Regulation S-X:

(7) Provide the information required by §210.3-04 for the current and comparative year-to-date periods, with subtotals for each interim period.

Article 3.04 referred to in the paragraph above is the requirement to provide a statement of changes in stockholders’ equity:

  • 210.3-04   Changes in stockholders’ equity and noncontrolling interests.

An analysis of the changes in each caption of stockholders’ equity and noncontrolling interests presented in the balance sheets shall be given in a note or separate statement. This analysis shall be presented in the form of a reconciliation of the beginning balance to the ending balance for each period for which a statement of comprehensive income is required to be filed with all significant reconciling items described by appropriate captions with contributions from and distributions to owners shown separately. Also, state separately the adjustments to the balance at the beginning of the earliest period presented for items which were retroactively applied to periods prior to that period. With respect to any dividends, state the amount per share and in the aggregate for each class of shares. Provide a separate schedule in the notes to the financial statements that shows the effects of any changes in the registrant’s ownership interest in a subsidiary on the equity attributable to the registrant.

Given the timing of the effectiveness of the Disclosure Update and Simplification Rule, the staff stated in a C&DIthat they would not require companies to provide this disclosure for the third quarter last year, but it would be required after that.  For calendar year-end companies, first quarter 2019 is when it is required.

Question 105.09

Question: On August 17, 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. The amendments will become effective on November 5, 2018. Among the amendments is the requirement to present the changes in shareholders’ equity in the interim financial statements (either in a separate statement or footnote) in quarterly reports on Form 10-Q. Refer to Rules 8-03(a)(5) and 10-01(a)(7) of Regulation S-X. When are filers expected to comply with this new requirement?

Answer: The amendments are effective for all filings made on or after November 5, 2018. In light of the timing of effectiveness of the amendments and proximity of effectiveness to the filing date for most filers’ quarterly reports, the staff would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments. For example, a December 31 fiscal year-end filer could omit this disclosure from its September 30, 2018 Form 10-Q. Likewise, a June 30 fiscal year-end filer could omit this disclosure from its September 30, 2018 and December 31, 2018 Forms 10-Q; however, the staff would object if it did not provide the disclosures in its March 31, 2019 Form 10-Q. (Sept. 25, 2018 and updated October 4, 2018)

With that reminder, if you would like to review an example of the statement, check out this presentation from P&G’s Form 10-Q.  It provides separate presentations for the quarter and year-to-date information.

 

PandG Stmt of SE

As always, your thoughts and comments are welcome!

Get More Details on the SEC’s New Disclosure Modernization and Simplification Rule

Reporting

With the new Disclosure Modernization and Simplification Rule we blogged about yesterday going effective 30 days after publication in the Federal Register, we will all likely be scrambling a bit to get up-to-speed with these changes.  To help us along the path PLI will present a One-Hour Briefing on April 12, 2019 titled “Disclosure Effectiveness and Fast Act Amendments”. You can read about the briefing here.

As always, your thoughts and comments are welcome!

More Disclosure Modernization and Simplification!

Reporting

On March 20, 2019, the SEC continued modernizing and simplifying their disclosure rules as they adopted a final rule that will:

  1. Simplify disclosure and disclosure processes,
  1. Revise rules to update and streamline and improve the SEC’s disclosure framework,
    and
  1. Update other rules to account for developments since their adoption or amendment.

The changes in the final rule include:

Companies will generally be able to exclude discussion of the earliest of three years in MD&A if they have already included the discussion in a prior filing.

Companies will need to provide disclosure about a physical property only to the extent that it is material to the registrant.

Registrants will be required to tag all cover page data in Inline XBRL on Forms 10-K, 10-Q, 8-K, 20-F and 40-F.

Companies will be able to omit confidential information in material contracts and certain other exhibits without submitting a confidential treatment request, so long as the information is (i) not material and (ii) would likely cause competitive harm to the registrant if publicly disclosed.

Companies will not be required to file attachments to their material agreements if such attachments do not contain material information or were not otherwise disclosed.

Companies will no longer be required to file as an exhibit any document or part thereof that is incorporated by reference in a filing, but instead will be required to provide hyperlinks to documents incorporated by reference.

The descriptions above are, of course, only a summary.  There are many details about which forms are affected and other matters in the final rule. We will go into more detail in subsequent posts.

The rule will generally be effective 30 days after publication in the Federal Register.

The provisions of the new rule are also applied for the most part to investments companies.

The foundations for these changes go back to the congressional mandates in the JOBs Act and the FAST Act requiring the SEC to review its disclosure regimen and this next step continues the process of last August’s Disclosure Update and Simplification Final Rule.  Whether you call it disclosure update or disclosure modernization, it is clear the Commission will continue this process.  And with this kind of regulatory activity shortly after year-end, it will be interesting to see what the rest of the year brings!

As always, your thoughts and comments are welcome!

One Last Year-End Check – Frequent Problem and Restatement Areas

Reporting

At this point in the year-end process most of us have numbers in place and are working on the final steps in reporting.  As you move toward final reviews, we share with you Audit Analytics’ list of high-risk financial reporting areas that can hopefully help you avoid reporting problems.

For the last 17 years Audit Analyticshas done an exhaustive review of public company restatements.  Their report “2017 Financial Restatements – A Seventeen Year Comparison” has an amazing wealth of information about numbers of restatements, types of restatements and trends over time.

For purposes of this post, the most meaningful information is the list of underlying areas that were involved in the 553 restatements made in 2017.  These are the areas that clearly present the highest risks of misstatement in financial reporting, and warrant a bit of extra review before issuance of financial statements.

Here are the top ten items on Audit Analytics’ list for 2017:

Number and Percentage of
Area                                                                                                                          Restatements

Debt, Quasi debt, Warrants & Equity (BCF) Security Issues               87        15.7%
Revenue Recognition Issues                                                                           77        13.9%
Tax Expense/Benefit/Deferral/Other Issues                                             77        13.9%
Cash Flow Statement Classification Errors                                               72        13.0%
Liabilities, Payables, Reserves and Accrual Estimate Failures         63        11.4%
Expense (payroll, SGA, other) Recording Issues                                     59        10.7%
Foreign, Related Party, Affiliated or Subsidiary Issues                        53          9.6%
Accounts/loans Receivable, Investments & Cash Issues                    47          8.5%
Acquisitions, Mergers, Disposals, re-org Acct Issues                           45         8.1%
Deferred, Stock-based and/or Executive Comp Issues                       40          7.2%

 

Note, the list goes on to include 14 other causes of restatements, but we are focusing on the top 10 here as the highest risk areas.

If you made tough calls in any of these areas, here is a reminder to be sure all the i’s are dotted, and t’s are crossed.  Hope this helps!

As always, your thoughts and comments are welcome!

A Year-End Reporting Question: Does a Material Weakness Mean the Financial Statements Are Misstated?

Reporting

On December 11, 2018, the SEC announced settled chargesagainst a natural and organic food company, Hain Celestial Group.  The company’s problems began when members of the company’s finance group discovered that its sales organization had been offering unauthorized incentives to two major customers.  These incentives induced the customers to accept shipments near quarter-end that helped the sales department meet internal sales goals.

When the finance department discovered these unauthorized practices they began an investigation and appropriately involved the company’s audit committee.  In August 2016, when the company determined that the amount involved was likely material, they self-reported the problem to the SEC.  On the same day they announced the problem to the public and indicated they would not be able to file their SEC reports until an appropriate investigation could be completed.

The company did not file periodic reports until June 2017, at which time they filed their 10-K and also caught up their 10-Qs.  One very interesting aspect of the reports is that the company determined that there were no material misstatements in any prior periods.  The 10-K they filed had no restated financial statements.  That said, the company concluded that there was in fact a material weakness in internal control over financial reporting.

This clearly makes sense. The existence of a material weakness does not mean that a material error has occurred.  It means, as the definition of a material weakness states, that there “is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.”  The risk a misstatement will not be detected is different from the risk that a misstatement will occur.

You can read the Form 10-K with the related disclosures here.

As always, your thoughts and comments are welcome!