Category Archives: Reporting

Watch for Two New Form 10-K Cover Page Check Boxes

10-K Tips, Reporting

Whenever the SEC changes details such as cover page check boxes or the titles of item numbers in its forms, there is invariably a bit of confusion and inconsistent updating.  While these matters are more minutia than material, not being up to date makes a company look a bit careless in the reporting process.

One area to watch as we approach year-end 2022 is the addition of two new check boxes on the Form 10-K cover page.  These new check boxes will be added by the SEC’s “Compensation Recovery Listing Standards and Disclosure Rules” (or “clawback” rules) adopted on October 26, 2022.  You can read the details of the rules in this Press Release and the related Fact Sheet and Final Rule.

The Final Rule will become effective 60 days after publication in the Federal Register.  If this effective date is prior to a company filing its Form 10-K, the new check boxes will be required on the cover page of that Form 10-K.

The two new check boxes will appear immediately before the text “Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)”.  The check boxes will read as follows:

If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. □

Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). □

As always, your thoughts and comments are welcome!

Is Form 12b-25 Ever Required?

10-K/10-Q Tips, Reporting

Many companies have been grateful for the extension provided by Form 12b-25.  While the extension period is not long (five calendar days for a quarterly report and 15 calendar days for an annual report), so long as the delayed report is filed within this grace period a company does not lose its timely filer status.  Perhaps most importantly, it also retains its S-3 eligibility.

But what if a company knows that it will not be able to file its report within the extension period provided by Form 12b-25?  Should it still file a Form 12b-25?  Thanks to some research by Gary Brown, Partner at Nelson Mullins Riley & Scarborough LLP and SEC Institute workshop leader, we know the answer to this question is a resounding yes! 

This answer is found in a Compliance and Disclosure Interpretation:

Question 135.02

Question: Is a company required to file a Form 12b-25 even when it anticipates filing a periodic report after the Rule 12b-25 extension period. 

Answer: Yes. Under Rule 12b-25(a), a company must file a Form 12b-25 for a periodic report that is filed after the due date regardless of whether it anticipates filing the periodic report within the extension period. See Exchange Act Release No. 16718 (Apr. 2, 1980). If the company does not anticipate filing the periodic report within the extension period, it should not check the box in Part II of Form 12b-25. [September 30, 2008]

So, even when a company does not expect to be able to file the delayed report within the extension period, Form 12b-25 should still be filed.

Here a few quick notes about Form 12b-25:

Generally, Form 12b-25 is filed the day after the deadline for the periodic report.

This form appears on the EDGAR system as a form NT, either NT 10-K or NT 10-Q.

Lastly, as an important reminder, remember that Instruction II(a) and Part III of Form 12b-25 require disclosure of the reason the report cannot be filed on time:

PART III — NARRATIVE

State below in reasonable detail why Forms 10-K, 20-F, 11-K, 10-Q, 10-D, N-CEN, N-CSR, or the transition report or portion thereof, could not be filed within the prescribed time period.

(Attach extra Sheets if Needed)

This disclosure should be complete and accurate, as this SEC Enforcement Press Release against eight companies demonstrates.  These companies failed to appropriately disclose that the causes for their late filings were possible or anticipated financial statement restatements.

As always, your thoughts and comments are welcome!

FASB Exposure Draft Addresses Joint Venture Formation 

Hot Topic, Reporting

Accounting for joint venture formation has never been formally addressed in the accounting literature.  As a result, the complexities of accounting for contributed assets and services and related issues have created diversity in practice.  Some joint ventures account for contributed assets at fair value while others have carried over the historical cost of the entities contributing the assets.

To address these issues, on October 27, 2022, the FASB issued a Proposed Accounting Standards Update titled “Business Combinations—Joint Venture Formations (Subtopic 805-60).”  The proposed ASU would require joint ventures as defined in the codification to apply the principles of business combination accounting to the formation process.  This would result in most assets and liabilities being measured at fair value, with certain exceptions that are consistent with existing exceptions in the business combination accounting guidance.  One important note, while the term “joint venture” is used to describe many types of entities, the definition of joint venture in the codification is narrow and would not include many entities colloquially referred to as joint ventures:

Corporate Joint Venture

A corporation owned and operated by a small group of entities (the joint venturers) as a separate and specific business or project for the mutual benefit of the members of the group. A government may also be a member of the group. The purpose of a corporate joint venture frequently is to share risks and rewards in developing a new market, product or technology; to combine complementary technological knowledge; or to pool resources in developing production or other facilities. A corporate joint venture also usually provides an arrangement under which each joint venturer may participate, directly or indirectly, in the overall management of the joint venture. Joint venturers thus have an interest or relationship other than as passive investors. An entity that is a subsidiary of one of the joint venturers is not a corporate joint venture. The ownership of a corporate joint venture seldom changes, and its stock is usually not traded publicly. A noncontrolling interest held by public ownership, however, does not preclude a corporation from being a corporate joint venture.

While the proposed ASU would not apply to all entities referred to as joint ventures, for entities that meet this definition the proposed ASU would hopefully reduce diversity in practice.

The FASB asks that comments be submitted by December 27, 2022.

As always, your thoughts and comments are welcome!

SEC Extends Several Rulemaking Comment Periods

Reporting, SEC Hot Topic

On October 7, 2022, the SEC announced that it was extending the comment periods for eleven rulemaking releases and one request for comment.  The affected rulemakings include the SEC’s proposed rules for disclosures related to climate matters, stock repurchases and cybersecurity.  It also applies to the SEC’s SPAC proposal.

The extensions were made because of a technical problem in the Commission’s internet comment form.  The affected comment periods will be open until 14 days after the publication of the related release in the Federal Register.

As you can read in the related Press Release and Reopening Release, anyone who submitted a public comment related to the proposed rulemakings between June 2021 and August 2022 should check to see that their comment is included in the comment file at sec.gov.  If it is not included, it should be resubmitted.

As always, your thoughts and comments are welcome.

SEC Releases Draft Strategic Plan for Fiscal Years 2022-2026

Reporting

On August 24, 2022, the SEC released its Draft Strategic Plan for Fiscal Years 2022-2026.  The plan is based on the three-part mission of the SEC:

The mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation.

The draft plan begins with three goals to work towards accomplishing this mission:

  1. Protect working families against fraud, manipulation, and misconduct; 
  2. Develop and implement a robust regulatory framework that keeps pace with evolving markets, business models, and technologies; and 
  3. Support a skilled workforce that is diverse, equitable, and inclusive and is fully equipped to advance agency objectives. 

The plan describes the SEC’s vision and values along with the steps the organization will take to accomplish each goal.  Included in the planned steps are:

For Goal 1:

Pursue enforcement and examination initiatives focused on identifying and addressing risks and misconduct that affects individual investors.

For Goal 2:

Update existing SEC rules and approaches to reflect evolving technologies, business models, and capital markets

A review of all the steps included in the plan provides many insights into the future direction of the SEC.

The related request for comments on the draft strategic plan can be found here.

As always, your thoughts and comments are welcome!

The PCAOB in Motion

Reporting

Since the SEC’s appointment of an essentially entirely new board on November 8, 2021, the Public Company Accounting Oversight Board (PCAOB) has taken several steps that help auditors and companies begin to understand the future directions of audit oversight and standard setting.

In early 2022, the Board established two new advisory groups, the Investor Advisory Group and the Standards and Emerging Issues Advisory Group.  It approved charters for the groups on March 29, 2022, and on May 9, 2022, announced the members of each group and set dates for their first meetings.   The meeting summaries for the advisory groups can provide insight into areas the PCAOB may address in the future.

On June 7, 2022, the Board hired its first ever Investor Advocate.  This new role is expected to enhance engagement with investors and “amplify investor voices” in the activities of the PCAOB.

The Board also established new Standard-Setting and Research Agendas on May 4, 2022.  Included are several projects to update and modernize the “interim standards” adopted shortly after the PCAOB’s formation.

On June 21, 2022, the Board adopted amendments to its auditing standards designed to “strengthen requirements that apply to audits involving multiple audit firms.”  The amendments were developed after three comment solicitations and were formally approved by the SEC on August 12, 2022.  They will be effective for audits of financial statements for fiscal years ending on or after December 15, 2024.

On August 17, 2022 the Board released its latest Audit Committee Resource.  This PCAOB Spotlight document is designed to offer “questions that audit committees of public companies might want to consider as part of their ongoing engagement and discussion with their auditors, including how the auditors are responding to the financial reporting and audit risks posed by the current economic environment.”

In June 2022, the Inspections Division published its “Staff Overview for Planned 2022 Inspections.”  This document, which is relevant not just for auditors but for audit committees and investors, “highlights selected areas of planned 2022 inspection focus.”

On August 26, 2022, the PCAOB announced the signing of a “Statement of Protocol” with the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China.  This document is a significant step in providing a process for the PCAOB to conduct inspections of Chinese audit firms and, if necessary, pursue investigations. 

Lastly, in a process that builds on these steps and provides insight into the overall direction of the PCAOB, on August 16, 2022, the Board published for comment a draft “Five-Year Strategic Plan for Protecting Investors.”  The plan sets out four goals which are consistent with its actions in recent months:

  • Goal 1:  Modernize Standards
  • Goal 2:  Enhance Inspections
  • Goal 3:  Strengthen Enforcement
  • Goal 4:  Improve Organizational Effectiveness

The momentum and direction of the PCAOB is becoming clear with its actions and Spotlight statements.  Each of these developments clearly fits with the elements of the draft Five-Year Strategic Plan.  This information can help auditors and companies as they plan and execute audits.

As always, your thoughts and comments are welcome.

SEC Adjusts JOBS Act Revenue Threshold for Inflation

Reporting

The 2012 JOBS Act requires the SEC to adjust the Emerging Growth Company (EGC) revenue threshold for inflation every five years.  (If you would like a quick refresher about the “IPO On-Ramp” created by the JOBS Act, check out this summary at SEC.gov.)  In 2017, the first inflation adjustment increased the revenue threshold from $1,000,000,000 to $1,070,000,000.  On September 9, 2022, the SEC announced the second inflation adjustment, increasing the threshold to $1,235,000,000.  You can read more in this Press Release, which includes links to the Final Rule and Fact Sheet.

As always, your thoughts and comments are welcome!

SEC Charges VMware in “Reverse” Channel Stuffing Case

Hot Topic, Reporting

We have blogged about many SEC “pull forward” enforcement cases.  They all involve companies that “pull forward” orders scheduled for future periods to the current period to meet sales forecasts and expectations. (Check out this post for several example cases).  As the volume of these cases shows, “pull forwards” are a common way companies can try to mask revenue shortfalls.  Interestingly, in almost all these cases, there is no financial statement revenue recognition misstatement.  Goods are shipped and revenue is recognized in the proper period.  Most of these cases focus on companies not disclosing the impact of related management practices, including price reductions, extended payment terms and the potential impact on future period revenues.

In an interesting twist on this practice, on September 12, 2022, the SEC charged VMware with “managing” its backlog to move orders from current quarters to future quarters, the mirror image of a “pull forward.”  According to the SEC’s Accounting and Auditing Enforcement Release, this allowed VMware to meet revenue forecasts and related analysts’ expectations during a period where its business slowed relative to projections and its sales mix was shifting from a point in time license model to a revenue recognition over time subscription model.

The basis for this case is failing to disclose to investors how VMware “managed” its backlog.  Revenue was not misstated.  The case includes disclosures in Exchange Act reports, earnings calls and earnings releases. According to the AAER:

“Beginning with its Form 10-Q filed for Q1 FY19, VMware began disclosing in its filings that ‘[t]he amount and composition of [VMware’s] backlog will fluctuate period to period, and backlog is managed based upon multiple considerations, including product and geography,’ but the disclosure omitted material information regarding the discretionary nature of VMware’s backlog, the extent to which VMware controlled the amount of its backlog, and how backlog was used to manage the timing of the company’s recognition of total and license revenue. In actuality, VMware’s backlog practices during the relevant period were controlled for the purpose of determining in which quarters revenue would be recognized and had the effect of obscuring the company’s financial results and avoiding revenue shortfalls versus company financial guidance and analysts’ estimates in at least three quarters during FY20, as well as full-year FY20.”

The AAER focuses on disclosure:

“In making public statements regarding its backlog, VMware omitted material information regarding the extent to which the company controlled its quarter-end total and license backlog numbers through its use of discretionary holds, and the extent to which it used backlog to control the timing of revenue recognition generally. The managed backlog disclosure did not convey to investors the material information that backlog was used by VMware to manage the timing of revenue recognition based upon factors such as the company’s financial guidance and  analysts’ estimates. This information was necessary in order to make VMware’s statements regarding its backlog, in light of the circumstances under which they were made, not misleading.”

In key parts of the AAER, the SEC addresses materiality:

“VMware’s statements and omissions regarding its quarterly revenue and revenue growth, without disclosing the impact that the company’s discretionary backlog practices and revenue management had on reported revenue, materially concealed a substantial FY20 slowing in the company’s recognized revenue growth versus expectations. Reasonable investors would have considered the foregoing information to have been important in deciding whether to purchase VMware securities during the relevant period.”

“In addition, this was important information to analysts, who began questioning VMware’s backlog ‘drawdown’ following the company’s Q1 earnings call and continued to question the continual reductions in quarter-end backlog numbers throughout the remainder of the fiscal year. VMware recognized the materiality of the issue when preparing its Q&A scripts.”

VMware paid an $8,000,000 fine.  The company did not admit or deny the SEC’s findings.

As always, your thoughts and comments are welcome.

A Frequent SEC Comment – “Can You Prove it?”

Comment of the Week, Reporting

In both offering documents and periodic reports companies frequently make assertions like the following, which appears in a Form S-1 Registration Statement for Doximity:

Overview

We are the leading digital platform for medical professionals, with over____ million members as of March 31, 2021, including more than ____% of physicians across all 50 states and every medical specialty.

(Note:  The numbers were left blank in the first draft registration statement submitted to the SEC.)

When companies make these sorts of assertions, the SEC will invariably ask for support, as the staff did in this comment:

Draft Registration Statement on Form S-1 submitted March 5, 2021

Prospectus Summary Overview, page 1

  1. You describe yourself as the “leading digital platform for U.S. medical professionals.” Please provide the basis for your characterization that you have a leading software platform and describe how this leadership is defined and/or determined. For example, it is not clear whether you are basing this on objective criteria such as market share based on revenues for competing software platforms in your industry.

As long as the company can support their assertion, these types of statements are acceptable disclosures.  In this case Doximity supported their assertion with this response and clarified disclosure:

Prospectus Summary

Overview, page 1

1.You describe yourself as the “leading digital platform for U.S. medical professionals.” Please provide the basis for your characterization that you have a leading software platform and describe how this leadership is defined and/or determined. For example, it is not clear whether you are basing this on objective criteria such as market share based on revenues for competing software platforms in your industry.

RESPONSE: The Company respectfully acknowledges the Staff’s comment, and advises the Staff that it has revised the disclosure on pages 1, 63, and 91 of the Amended Draft Registration Statement to address the Staff’s comment. The Company also advises the Staff that the Company is basing this on the number of U.S. physicians utilizing its platform compared to competing software platforms in its industry.

The clarified disclosure, which was included in an amended Form S-1, appropriately describes the measure the company uses to support its “leading” status:

Overview

We are the leading digital platform for U.S. medical professionals, as measured by the number of U.S. physician members, with over 1.8 million medical professional members as of March 31, 2021. Our members include more than 80% of physicians across all 50 states and every medical specialty.

As always, your thoughts and comments are welcome!

Check Out PLI’s inSecurities Podcast and our SEC Institute Newsletter

Reporting, SECI News

If you have not yet listened to PLI’s inSecurities Podcast, it is a wonderful way to keep up with current developments in securities regulation and company reporting.  You can find all episodes here.

The latest inSecurities episode features a discussion of our most recent SEC Institute Quarterly Newsletter, including a special Sarbanes-Oxley Act trivia quiz featuring Chris Ekimoff and Kurt Wolf, the podcast hosts, along with SEC Institute Workshop Leader George Wilson.  If you would like to subscribe to the SECI Newsletter, visit us at SEC Institute and scroll to the middle of the page to sign up!

As always, your thoughts and comments are welcome!