Tag Archives: Accountancy

10-K Tip Number Four for 2016 – COSO and ICFR

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This is the fourth of our deeper dives in the topics we discussed in our Second Annual Form 10-K Tune-up One-hour Briefing on January 7. (This One-Hour Briefing will be available on-demand soon.)

The topics for this post are:

The COSO framework, and

Internal Control Over Financial Reporting.
COSO

The easier of these two topics to discuss, although it presents some very gray issues, is the 2013 revision of the COSO framework. If you have not yet adopted the updated framework, what are the implications in your SEC reporting?

The SEC has not made any bright-line statements or mandates about this transition. And, in fact, many companies have not yet adopted the framework.

In December of 2013, Paul Beswick, The SEC’s Chief Accountant at that time, said in a speech:

“SEC staff plans to monitor the transition for issuers using the 1992 framework to evaluate whether and if any staff or Commission actions become necessary or appropriate at some point in the future. However, at this time, I’ll simply refer users of the COSO framework to the statements COSO has made about their new framework and their thoughts about transition.”

In addition to this cautionary language, the SEC Staff also discussed this issue at a meeting of the Center For Audit Quality’s SEC Regulations Committee. Here is that section of the minutes:

Ms. Shah stated that the staff is currently referring users of the COSO 1992 framework to the following statements made on the COSO web site:

“COSO believes that users should transition their applications and related documentation to the updated Framework as soon as is feasible under their particular circumstances. As previously announced, COSO will continue to make available its original Framework during the transition period extending to December 15, 2014, after which time COSO will consider it as superseded by the 2013 edition. During the transition period (May 14, 2013 to December 15, 2014) the COSO Board believes that organizations reporting externally should clearly disclose whether the original Framework or the updated Framework was utilized.”

Exchange Act Rule 13a-15(c) requires management’s evaluation of the effectiveness of internal control over financial reporting to be based on a framework that is “a suitable, recognized control framework that is established by a body or group that has followed due-process procedures…” In Release 33-8328, the SEC stated that ” [t]he COSO Framework satisfies our criteria and may be used as an evaluation framework for purposes of management’s annual internal control evaluation and disclosure requirements.”

The staff indicated that the longer issuers continue to use the 1992 framework, the more likely they are to receive questions from the staff about whether the issuer’s use of the 1992 framework satisfies the SEC’s requirement to use a suitable, recognized framework (particularly after December 15, 2014 when COSO will consider the 1992 framework to have been superseded by the 2013 framework).

Clearly there is no hard and fast rule about when to transition, but if a company were to use the old framework much longer, questions about the suitability of the old framework increase in importance. Issues such as what kinds of problems that the new framework might identify that the old framework could miss, (where are there gaps in other words) would need to be addressed.

As a last note, this blog post from the WSJ reports that 73% of 10-K filers for 2014 adopted the new framework:

blogs.wsj.com/riskandcompliance/2015/04/29/the-morning-risk-report-companies-adopting-updated-coso-framework-newsletter-draft/
ICFR

Since its inception the SOX 404 processes used to assess the effectiveness of internal control over financial reporting by management and external auditors have been evolving. In the last few years there have been a number of developments and companies, auditors and regulators have all been raising questions about the process. Some observers have even called this period a “perfect storm” of ICFR evaluation issues.

So, what is behind the perfect storm? Here are a few of the underlying sources of this ongoing issue.
The SEC has asked some challenging questions, including “Where are all the material weaknesses?” In this speech, Deputy Chief Accountant Brian Croteau addresses for the second year in a row how most restatements are not preceded by a material weakness disclosure, raising the question about whether managements’ assessments and external audits are appropriately identifying material weaknesses:

www.sec.gov/News/Speech/Detail/Speech/1370543616539

The PCAOB in their inspection reports have found what they believe to be a significant number of issues in ICFR audits. In the Overall Findings section of their first report on ICFR inspections the Board reported:

In 46 of the 309 integrated audit engagements (15 percent) that were inspected in 2010, Inspections staff found that the firm, at the time it issued its audit report, had failed to obtain sufficient audit evidence to support its audit opinion on the effectiveness of internal control due to one or more deficiencies identified by the Inspections staff. In 39 of those 46 engagements (85 percent) where the firm did not have sufficient evidence to support the internal control opinion, representing 13 percent of the 309 integrated audit engagements that were inspected, the firm also failed to obtain sufficient audit evidence to support the financial statement audit opinion.

Since this report the PCAOB has summarized issues they have found in ICFR audits in other documents, including Staff Audit Practice Alert No. 11: Considerations for Audits of Internal Control Over Financial Reporting. You can find the alert at:
pcaobus.org/Standards/QandA/10-24-2013_SAPA_11.pdf
The issues addressed in the Alert are very similar to those addressed in the summary inspection report and include:

Risk assessment and the audit of internal control

Selecting controls to test

Testing management review controls

Information technology (“IT”) considerations, including system- generated data and reports

Roll-forward of controls tested at an interim date

Using the work of others

Evaluating identified control deficiencies
In particular, testing management review controls and relying on system-generated data have been common and particularly difficult challenges to deal with in the ICFR process. This combination of challenging areas to deal with and questions about identifying and reporting all material weaknesses in ICFR will likely continue to make this a difficult area in future years.

 

As always, your thoughts and comments are welcome.

 

The whole briefing is now available on-demand with CPE and CLE credit at:

www.pli.edu/Content/OnDemand/Second_Annual_Form_10_K_Tune_Up/_/N-4nZ1z116ku?fromsearch=false&ID=278540

 

Audit Committee Evolution – Some Next Steps

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Over the last two months we have done a series of posts about the evolution of the role of the audit committee and related disclosures:

Part One – Overview and Some History seciblog.pli.edu/?p=447
Part Two – Independence Oversight seciblog.pli.edu/?p=450
Part Three – Audit Fee Disclosures –A Few Common Problem Areas in This Independence Disclosure  seciblog.pli.edu/?p=456
Part Four – The SEC’s Concept Release seciblog.pli.edu/?p=462
Part Five – Voluntary Disclosures in the News   seciblog.pli.edu/?p=486

 
In this last post in the series we discuss two resources for audit committees:

  1. The PCAOB’s outreach to audit committees, and
  2. Our PLI programs for audit committee members

 

PCAOB Outreach to Audit Committees

Recognizing the importance of audit committee oversight of the audit process, the PCAOB has included information for audit committees on their webpage to help audit committees in their oversight role. They have also begun a regular newsletter, “Audit Committee Dialogue”. The newsletter is on the same webpage, along with a number of other resources.
pcaobus.org/Information/Pages/AuditCommitteeMembers.aspx

 

PLI Programs for Audit Committee Members

And, lastly, here are some of our PLI programs that will help audit committee members and other directors build and maintain the knowledge and expertise to appropriately fulfill their responsibilities. Most of these programs are available via web archives, webcast and live attendance. You can learn more about all our programs at www.pli.edu.

Audit Committees and Financial Reporting 2016: Recent Developments and Current Issues
www.pli.edu/Content/Seminar/Audit_Committees_and_Financial_Reporting/_/N-4kZ1z11i36?fromsearch=false&ID=259781

Audit Committees and Financial Reporting 2015: Recent Developments and Current Issues www.pli.edu/Content/OnDemand/Audit_Committees_and_Financial_Reporting/_/N-4nZ1z129aq?ID=221250

Corporate Governance — A Master Class 2016

www.pli.edu/Content/Seminar/Corporate_Governance_A_Master_Class_2016/_/N-4kZ1z11ij4?fromsearch=false&ID=259397

 
Directors’ Institute on Corporate Governance (Thirteenth Annual)www.pli.edu/Content/OnDemand/Directors_Institute_on_Corporate_Governance/_/N-4nZ1z129if?fromsearch=false&ID=221435

 

As always, your thoughts and comments are welcome!

Evolution of the Audit Committee – Part Five – Voluntary Disclosures in the News

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Over the last two months we have done a series of blog posts about audit committee oversight and disclosure issues. One of the major topics under discussion within, among and about audit committees is what information should they disclose about their oversight of the audit, financial reporting and ICFR processes. Most observers agree that effective audit committee oversight is critical to success in these areas. And, many also believe that more information about how individual audit committees exercise this oversight will be valuable to investors and other stakeholders.

In our post on October 30 we reviewed the SEC’s Concept Release discussing possible incremental disclosures about this oversight. You can review it here:

seciblog.pli.edu/?p=462

Out in the real world it turns out that many companies are voluntarily making disclosures beyond those currently required by the SEC. On November 3, 2015 the Center for Audit Quality and Audit Analytics released their second “Audit Committee Transparency Barometer”. This “Barometer” is a survey of actual audit committee disclosures. Interestingly, this report shows that many companies are voluntarily going beyond required audit committee disclosures.

If you are not familiar with the CAQ you can read about it in our June 16, 2015 post at:

seciblog.pli.edu/?p=405

The press release about this second “Barometer” report and a link to the full report are at:

www.thecaq.org/newsroom/2015/11/03/second-annual-audit-committee-transparency-barometer-reveals-encouraging-disclosure-trends-for-public-companies-of-all-sizes

It makes for very interesting reading and provides valuable information in the search for “best practices” for audit committee disclosures. The report focuses on audit committee disclosures about external auditor oversight for companies in the S&P Composite 1500. As you read it you will see many companies voluntarily disclose information about topics ranging from issues considered in recommending the audit firm for appointment/reappointment to the audit committees role in selecting the engagement partner.

 

As always, your thoughts and comments are welcome!

Debt Versus Equity – More on Ratchets

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On November 3 we blogged about debt versus equity issues and how in late stage financings investors were demanding price adjustment and conversion rate adjustment features such as ratchet provisions. In essence this was to protect late round investors if the valuations they used for their investment was substantially higher than the IPO valuation.

As you may have been following, Square has just completed their IPO. Here is an excerpt from Square’s stockholder’s equity note in their financial statements:

The initial conversion price for the convertible preferred stock is $0.21627 for the Series A preferred stock, $0.71977 for the Series B-1 preferred stock, $0.95369 for the Series B-2 preferred stock, $5.79817 for the Series C preferred stock, $11.014 for the Series D preferred stock, and $15.46345 for the Series E preferred stock. In the event the Company issues shares of additional stock, subject to customary exceptions, after the preferred stock original issue date without consideration or for a consideration per share less than the initial conversion price in effect immediately prior to such issuance, then and in each such event the conversion price shall be reduced to a price equal to such conversion price multiplied by the following fraction:

the numerator of which is equal to the deemed number of shares of common stock outstanding plus the number of shares of common stock, that the aggregate consideration received by the Company for the total number of additional shares of common stock so issued would purchase at the conversion price immediately prior to such issuance; and

the denominator of which is equal to the deemed number of shares of common stock outstanding immediately prior to such issuance plus the deemed number of additional shares of common stock so issued.

Series E preferred stock contains a provision for the adjustment of conversion price upon a public offering. In the event of such offering, in which the price per share of the Company’s common stock is less than $18.55614 (adjusted for stock splits, stock dividends, etc.), then the then-existing conversion price for the Series E preferred stock shall be adjusted so that, as of immediately prior to the completion of such public offering, each share of Series E preferred stock shall convert into (A) the number of shares of common stock issuable on conversion of such share of Series E preferred stock; and (B) an additional number of shares of common stock equal to (x) the difference between $18.55614 and the public offering price, (y) divided by the public offering share price.

The language above is not very easy to understand, but there are various price adjustment features and the instruments that have them were entered into at various points in time, including some later stage investments. So, the debt versus equity issues is present.

Square’s IPO priced at $9, (actually below the expected price range, but the company did get a nice day one price rise on the exchange) so Square will have to make up shares to these later stage investors. This is a simple example where late stage financing valuations were higher than the IPO price.

Here are two links to information about the transaction. Buzzfeed has a nice summary of the deal at:

www.buzzfeed.com/williamalden/square-valued-at-29-billion-in-ipo-short-of-expectations?utm_medium=email&utm_campaign=News+-+1119+Thursday&utm_content=News+-+1119+Thursday+CID_8ba44ca9bcced29cacc07f7e086f01c4&utm_source=BuzzFeed%20Newsletters&utm_term=.uxrLvq8pj#.amezg5KWJ
Here is a WSJ article where the WSJ somehow wanted to call this ratchet a “penalty”:

blogs.wsj.com/digits/2015/11/18/square-pays-93-million-penalty-to-some-investors-in-ipo/

As always, your thoughts and comments are welcome!

 

 

P.S. And, just in case this is relevant to you, here is a link to our new workshop “Debt vs. Equity Accounting for Complex Financial Instruments”. This new case-driven workshop will be presented five times next year.

www.pli.edu/Content/Debt_vs_Equity_Accounting_for_Complex_Financial/_/N-1z11c8lZ4k?ID=262917

Revenue Recognition Help From FinREC

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As you know the new FASB and IASB revenue recognition standards supersede all our existing revenue recognition guidance. Here in the US the new standard was such a major change that it was placed in a brand new codification section (ASC 606). One of the major changes with the new model is how it treats “specialized industries”. Many industries, such as software and construction, had specialized industry revenue recognition guidance. All those standards are also superseded. These industries now face many questions and uncertainties about how to apply the new revenue recognition model to unique and different transactions.

The new model, designed to make revenue recognition principles consistent across all industries, is much more general and does not include the detailed kind of guidance that old GAAP frequently provided. This potentially increases the risk that there could be diversity within industries in the application of the new standard.

FinREC, the Financial Reporting Executive Committee of the AICPA, and the AICPA’s Revenue Recognition Task Force have been working to help deal with these issues. They have established 16 industry groups and are developing a new “Accounting Guide for Revenue Recognition”. These resources will be developed with participation and review of standard setters, but will not be authoritative. The groups describe them as eventually providing “helpful hints and illustrative examples for how to apply the new Revenue Recognition Standard.”

They have published a list of potential implementation issues identified to date which you can find at:

www.aicpa.org/InterestAreas/FRC/AccountingFinancialReporting/RevenueRecognition/DownloadableDocuments/RRTF_Issue_Status.pdf

As always, your thoughts and comments are appreciated!

Leases – News on the International Front

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As we all wait with baited breath for news from Norwalk as the FASB staff completes drafting the final version of the new standard on Lease Accounting, the IASB has announced that they have formally finished their project. In their project summary the IASB now states:

“The IASB has completed its decision making for the Leases project. The new Leases Standard will be effective from 1 January 2019. The IASB plans to issue the new Leases Standard before the end of 2015.”

You can find the project summary at:

www.ifrs.org/Current-Projects/IASB-Projects/Leases/Documents/Definition-of-a-Lease-Oct-2015-FINAL.pdf

  1. If the link above does not work for you, paste it into your browser.

Comment of the Week – Debt Versus Equity Issues on the Rise?

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The genesis of this post is actually a panel discussion from PLI’s 47th Annual Institute on Securities Regulation. This program is one of our major events in the CLE world. The roster of speakers is amazing, starting with a keynote address from Chair White and featuring so many SEC alums, current staffers and industry professionals that an SEC geek simply can’t resist the program.

Anyway, on the first day of the conference the first panel discussed capital market “health” in the current environment. One of the market developments they discussed was financing rounds companies complete shortly before an IPO. In the current environment more and more late round investors are demanding “price protection”. This “price protection” includes instruments like warrants with adjustable prices (ratchets or down-rounds) and preferred stock with adjustable conversions options.

(The staff does write comments about these kinds of instruments, and we have a few examples below.)

It turns out that sometimes the valuations used for these private placements shortly before an IPO don’t follow through to the valuations in the IPO. So the late round investors ask for price protection so they won’t seem to have overpaid shortly before an IPO. (This dovetails very nicely with the recent discussion in the financial press about how valuations for “unicorn” companies may be overstated in the current tech world.)

This is exactly the kind of price protection that has been common in emerging companies that have been far from the IPO process, and it is these kinds of instruments that have been the cause of so many restatements.

If you have ever attended any of our Midyear, Annual or Mid-Sized and Smaller Company SEC Reporting & FASB Forums you are familiar with the continuously updated list of restatement issues we discuss at those conferences. For the last seven years, the number one cause of restatements by public companies has been debt versus equity accounting. Instruments such as warrants with repricing provisions combined with the convoluted, complex accounting guidance in this area have caused more restatements than any other issue.

Being one of the few accountants in the Institute on Securities Regulation it was fascinating listening to the lawyers discuss these complex instruments. The discussion of disclosures that should surround these complex instruments and their unique features was deep and rich. No one however mentioned the accounting issues that they create, and the risk of restatement that goes along with this accounting complexity.

It was a great reminder that as accounting professionals we need to be on the watch for this issue and when we see it raise the accounting issues and assure they are dealt with effectively. This is one of the times when communication between finance, legal and accounting professionals is crucial.

If you would like to review an example of the accounting these instruments create, one of the participants on the panel was from BOX, a successful IPO which had this exact situation. In their first Form 10-K and their S-1 you can find a derivative liability on their balance sheet and a related fair value adjustment in their income statement related to redeemable preferred stock warrants they issued which were derivatives. You can find their Form 10-K at:

www.boxinvestorrelations.com/sec-filings

And, last, here are a couple of example comments. All of this really emphasizes the need to be aware of this issue and build the skills to recognize the issue and deal with it effectively.

It appears the exchangeable senior notes issued in August 2014 contain redemption features. Provide us your analysis that supports your conclusion that none of the redemption features are required to be bifurcated in accordance with ASC 815-15. Specifically address whether the debt involves a substantial discount in accordance with ASC 815-15-25-40 through [25-43].

We note your disclosure that the 1.25% Notes contain an embedded cash conversion option and that you have determined that this option is a derivative financial instrument that is required to be separated from the notes. Please provide us with the details of your analysis in determining that this conversion option should be accounted for separately as a derivative and refer to the specific accounting literature you relied on.

As always, your thoughts and comments are welcome!

P.S. And, just in case this is relevant to you, here is a link to our new workshop “Debt vs. Equity Accounting for Complex Financial Instruments”. This new case-driven workshop will be presented five times next year.

www.pli.edu/Content/Debt_vs_Equity_Accounting_for_Complex_Financial/_/N-1z11c8lZ4k?ID=262917

 

Evolution of the Audit Committee – Part Four

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In three previous posts about audit committee evolution we explored:

A bit of history about how audit committee responsibilities have changed over time,

Situations where independence issues have resulted in enforcement involving      auditors and companies, and

How some issues, such as auditor independence, are not just matters for the auditor to monitor, but also may require audit committee involvement.

 

As history demonstrates, audit committees play a crucial role in oversight of the financial reporting process. An effective audit committee is a crucial part of assuring the reliability and reasonableness of financial information. Unfortunately, history also shows us that audit committees don’t always successfully fulfill their responsibilities.

Chair White expanded on these issues in a June 2014 speech to the Stanford University Rock Center for Corporate Governance Twentieth Annual Stanford Directors’ College. In that speech, after reviewing two enforcement cases which involved audit committee members she said:

I mention these cases because audit committees, in particular, have an extraordinarily important role in creating a culture of compliance through their oversight of financial reporting. As you know, under the Sarbanes-Oxley Act, audit committees are required to establish procedures for handling complaints regarding accounting, internal controls, and auditing matters, as well as whistleblower tips concerning questionable accounting or auditing practices. Audit committees also play a critical role in the selection and oversight of the company’s auditors. These responsibilities are critical ones and we want to support you. Service as a director is not for the faint of heart, but nor should it be a role where you fear a game of “gotcha” is being played by the SEC.

Clearly Ms. White is emphasizing the responsibility audit committees have as gatekeepers in the financial reporting process.

(You can read the whole speech at: www.sec.gov/News/Speech/Detail/Speech/1370542148863 )

All of this leads us to the SEC’s July 1, 2015 Concept Release “POSSIBLE REVISIONS TO AUDIT COMMITTEE DISCLOSURES”. Attempting to perhaps incentivize audit committees to perform effectively, and even more importantly shed light on audit committee performance to help investors and other stakeholders understand whether audit committees are effectively fulfilling their oversight responsibilities are not simple issues, and this concept release begins a significant discussion.

What sorts of disclosures does the concept release propose to deal with these issues? The principle areas of focus are:

Audit Committee’s Oversight of the Auditor

Audit Committee’s Process for Appointing or Retaining the Auditor

Qualifications of the Audit Firm and Certain Members of the Engagement Team Selected By the Audit

In the summary of the concept release the commission makes their objective clear, stating:

Some have expressed a view that the Commission’s disclosure rules for this area may not result in disclosures about audit committees and their activities that are sufficient to help investors understand and evaluate audit committee performance, which may in turn inform those investors’ investment or voting decisions.

The reporting of additional information by the audit committee with respect to its oversight of the auditor may provide useful information to investors as they evaluate the audit committee’s performance in connection with, among other things, their vote for or against directors who are members of the audit committee, the ratification of the auditor, or their investment decisions.

Here is a quick outline of the areas addressed in the Concept Release:

  1. Auditor Committee’s Oversight of the Auditor
  2. Additional Information Regarding the Communications Between the Audit Committee and the Auditor
  3. The Frequency with which the Audit Committee Met with the Auditor
  4. Review of and Discussion About the Auditor’s Internal Quality Review and Most Recent PCAOB Inspection Report
  5. Whether and How the Audit Committee Assesses, Promotes and Reinforces the Auditor’s Objectivity and Professional Skepticism
  6. Audit Committee’s Process for Appointing or Retaining the Auditor
  7. How the Audit Committee Assessed the Auditor, Including the Auditor’s Independence, Objectivity and Audit Quality, and the Audit Committee’s Rationale for Selecting or Retaining the Auditor
  8. If the Audit Committee Sought Requests for Proposal for the Independent Audit, the Process the Committee Undertook to Seek Such Proposals and the Factors They Considered in Selecting the Auditor
  9. The Board of Directors’ Policy, if any, for an Annual Shareholder Vote on the Selection of the Auditor, and the Audit Committee’s Consideration of the Voting Results in its Evaluation and Selection of the Audit Firm
  10. Qualifications of the Audit Firm and Certain Members of the Engagement Team Selected By the Audit Committee
  11. Disclosures of Certain Individuals on the Engagement Team
  12. Audit Committee Input in Selecting the Engagement Partner
  13. The Number of Years the Auditor has Audited the Company
  14. Other Firms Involved in the Audit

As you can see, the areas the SEC is considering for disclosure are significant and would represent a major change in how much of the audit committee’s work is in the sunshine of disclosure. Along this evolutionary path it is important to remember that a Concept Release is essentially a discussion document. If the SEC does pursue rulemaking, the content of a proposed rule will be based on input received in response to the concept release. The SEC is always responsive to substantive comments, so if a rule is eventually proposed, it will differ from the proposed rule based on comments from constituents. This means we are early on in this process, and we can provide input to the process.

As a concluding thought, if you do want to comment on the Concept Release, here is where to do that:

www.sec.gov/cgi-bin/ruling-comments#

As always, your thoughts and comments are welcome!

 

SEC Comment of the Week – A Favorite Topic

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It is hard to believe we are already in mid-October, and the fourth quarter of the calendar year is well underway. Many companies will soon start planning for year-end reporting and being aware of “hot button issues” is a key part of this process. To help in this planning process we are going to highlight key planning issues through our blog posts. Here is the first of these issues we think all companies should be thinking about as year-end approaches.

As we have watched comments in recent weeks, one of the areas that continues to be emphasized is the quantification of analysis in MD&A. The roots of this issue are deep. Way back in 1989 one of the examples in FR 36 laid out the framework:

Revenue from sales of single-family homes for 1987 increased 6% from 1986. The increase resulted from a 14% increase in the average sales price per home, partially offset by a 6% decrease in the number of homes delivered. Revenues from sales of single-family homes for 1986 increased 2% from 1985. The average sales price per home in 1986 increased 6%, which was offset by a 4% decrease in the number of homes delivered.

The increase in the average sales prices in 1987 and 1986 is primarily the result of the Company’s increased emphasis on higher priced single-family homes. The decrease in homes delivered in 1987 and 1986 was attributable to a decline in sales in Texas. The significant decline in oil prices and its resulting effect on energy-related business has further impacted the already depressed Texas area housing market and is expected to do so for the foreseeable future. The Company curtailed housing operations during 1987 in certain areas in Texas in response to this change in the housing market. Although the number of homes sold is expected to continue to decline during the current year as a result of this action, this decline is expected to be offset by increases in average sales prices.

You can find the release at:

www.sec.gov/rules/interp/33-6835.htm

 

In 2003 FR 72 emphasized the importance of understanding the causal factors underlying changes:

  1. Focus on Analysis

MD&A requires not only a “discussion” but also an “analysis” of known material trends, events, demands, commitments and uncertainties. MD&A should not be merely a restatement of financial statement information in a narrative form. When a description of known material trends, events, demands, commitments and uncertainties is set forth, companies should consider including, and may be required to include, an analysis explaining the underlying reasons or implications, interrelationships between constituent elements, or the relative significance of those matters.

You can find the release at:

www.sec.gov/rules/interp/33-8350.htm

 

And, here are a few very recent comments where the staff focuses on these requirements in MD&A. (We have added emphasis to highlight key issues.)

As previously requested, please disclose more detail about the underlying material factors contributing to the increases in comparable store sales in both your year-end and interim results discussions, such as any changes in selling prices, volumes or the introduction or discontinuance of popular products that had a significant impact on your revenue. Refer to Item 303(a)(3)(iii) of Regulation S-K. In this regard, your current disclosures such as stating that comparable store sales increase primarily due to “strong deals in electronics, pets and clothing” do not provide enough insight into the underlying factors that drove the increase in comparable store sales that investors can access the likelihood that past results are indicative of future results. To the extent that multiple offsetting factors influenced your comparable store sales, you should discuss the impact of each significant factor. For example, if “strong deals” indicates that you lowered average prices through increased promotional activity, this would appear to decrease revenue; however, these lower prices may have been more than offset by higher volumes of products being sold. In this case, both the decrease in pricing and the increase in volume should be described.

Throughout your discussion of the results of operations, you refer to various factors that have impacted your results without quantifying the impact of each factor. Where a material change is attributed to two or more factors, including any offsetting factors, the contribution of each identified factor should be described in quantified terms. For example, you attribute the decrease in net sales and unit sales for the (Product A) in 2014 as a result of growth in the Greater China and Japan segments offset by declines in all other segments with no quantification. As another example, you attribute the growth in the Americas segment in 2014 as a result of increased net sales of (Products B, C and D), Software and Services offset by a decline in net sales of (Product E and A) and weakness in foreign currencies but you do not quantify the effects of these individual factors. Please explain to us how you considered quantifying the sources of material changes and offsetting factors throughout your discussion. Refer to Item 303(a)(3)(iii) of Regulation S-K and Section III.D of SEC Release No. 33-6835.

(Bloggers note: The release mentioned here is FR 36 quoted above)

We note you attribute the changes in headcount to explain certain changes in your results of operations but the headcount does not appear to be quantified. Please tell us your consideration of quantifying the headcount at the end of each period as a factor to explain the changes for the line items that are impacted. We refer you to Item 303(a)(3)(iii) of Regulation S-K and Section III.D of SEC Release No. 33-6835.

 

As always, your thoughts and comments are welcome!

Audit Committee Challenges and Changes on the Horizon

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The role of the Audit Committee in corporate governance is continuously developing, expanding and becoming more complex. Even before the dramatic events at Enron and Worldcom (without going too much into history!) regulators and governance experts focused on clarifying and enhancing audit committee functions. After Enron, Worldcom and the rest of the wave of governance breakdowns in the early 2000’s the SEC began to require even more significant disclosures about audit committee function.

This process has continued. At the 2014 PLI SEC Speaks conference the Chief Accountant of the SEC delivered a speech entitled “Audit Committee – Back to Basics”. You can find the presentation materials at:

www.sec.gov/News/Files/1371146714240

Even matters as foundational as auditor independence have been issues for the SEC. Deputy Chief Accountant Brian Croteau focused on such areas in this December 2014 speech:

www.sec.gov/News/Speech/Detail/Speech/1370543616539

As Audit Committees deal with these challenges, PLI will have a great program on June 23, 2015 titled “Audit Committees and Financial Reporting 2015 – Recent Developments and Current issues”. Included will be the latest news on potential expanded audit committee reporting. You can learn more about the program at:

www.pli.edu/Content/Seminar/Audit_Committees_and_Financial_Reporting/_/N-4kZ1z129aq?fromsearch=false&ID=221246

As always your comments, thoughts and ideas are welcome!