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.

2. 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.

3. 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!

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.

As always, your thoughts and comments are welcome!

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!

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,

2. Revise rules to update and streamline and improve the SEC’s disclosure framework,
   and

3. 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!

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!

You can read details in this statement from Chair Clayton.

Details of CorpFin getting back to business are in this Announcement.

As always, your thoughts and comments are welcome!

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!

In November and December 2018, SEC Chair Clayton, Chief Accountant Bricker and several other staff members discussed the use of S-X Rule 3-13 waivers.  These waivers may be appropriate when a mechanical application of rules like the significant subsidiary test yield results that may require costly disclosures that might not be material to investors.  All of the SEC speakers emphasized that such waivers require thorough analysis and are not automatic.  The SEC staff has processes in place to respond to these requests in a timely manner.

If you want to review the details of this process you can check out this post from December 2017, and this update in April 2018.

As always, your thoughts and comments are welcome!

As companies worked through the implementation of the new revenue recognition standard they dealt with two issues surrounding ICFR:

What changes were required to ICFR for this new standard, and

Whether or not these changes to ICFR required reporting a material change in ICFR.

Reporting material changes in ICFR is a requirement in both Form 10-K and Form 10-Q and involves substantial amounts of judgment.  This postreviews the details of this requirement.

As we grapple with the new Lease and Credit Losses standards, to help us with the ICFR change process, FEI published two research studies in November 2018:

A Lessee’s Guide to Implementing Internal Control over Financial Reporting for contracts accounted for under Accounting Standards Codification (ASC) 842, Leases

and

A Guide to Implementing Internal Control over Financial Reporting for the Current Expected Credit Loss (CECL) Standard.

The reports were issued by FEI’s Committee on Corporate Reporting (CCR).  (Our workshop leader Reed Wilson is a member of CCR, and thanks to him for the heads-up about these reports).  Both are designed to help companies anticipate ICFR issues they may encounter as they implement these new standards and also provide examples for documentation and processes.

As always, your thoughts and comments are welcome!

The staff in the SEC’s Office of the Chief Accountant recently provided their insights on a number of issues based on recent consultations with companies, their auditors and other groups within the SEC.  They shared these observations in speeches which you can find on this section of the SEC’s webpage.

The issued discussed by the OCA staff included:

Internal control over financial reporting (“ICFR”) – evaluation of control deficiencies.

Internal control over financial reporting (“ICFR”) – preparation of material weakness disclosures.

Internal control over financial reporting (“ICFR”) – evaluation of operating effectiveness of controls

New revenue standard (Topic 606) – observations on the identification of performance obligations

New revenue standard (Topic 606) – evaluating the existence of a significant financing component.

New revenue standard (Topic 606) – application of the principal versus agent guidance

New revenue standard (Topic 606) – identification of performance obligations

New leases standard (“Topic 842”) – Lessee transition – minimum rental payment composition policies

New leases standard (“Topic 842”) – Lessee transition – minimum rental payment measurement policies

New leases standard (“Topic 842”) – Certain lessee and lessor costs

New credit losses standard (“Topic 326”) – Accounting policy for loan charge-offs upon the adoption of the new credit losses standard

New credit losses standard (“Topic 326”) – Application of subsequent events guidance following adoption of the new credit losses standard

The shift from the London Interbank Offered Rate (LIBOR)

If you are currently dealing with any of these issues you will find examples and the staff’s positions on these issues in the related speeches.

As always, your thoughts and comments are welcome!