Tag Archives: Accountant

Keeping Up With FINRA

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FINRA, the Financial Industry Regulatory Authority and how this Self-Regulatory Organization affects us are less well known aspects of being a public company.   Perhaps you have seen a “FINRA list”, the list of people who have bought and sold your stock in the period surrounding a major change in your stock price. This is one of the tools that regulators use to search for insider trading. Or maybe you have read about how FINRA’s fines for broker/dealers are on a pace to set new records.

One way or another, we should all know about FINRA. You can find out a lot about them on their web page. Here is how FINRA describes their mission in the “About” section of their web page:

“FINRA is dedicated to investor protection and market integrity through effective and efficient regulation of the securities industry.

FINRA is not part of the government. We’re an independent, not-for-profit organization authorized by Congress to protect America’s investors by making sure the securities industry operates fairly and honestly.

We do this by:

writing and enforcing rules governing the activities of 3,895 securities firms with 641,761 brokers;

examining firms for compliance with those rules;

fostering market transparency; and

educating investors.”

Our independent regulation plays a critical role in America’s financial system—by enforcing high ethical standards, bringing the necessary resources and expertise to regulation and enhancing investor safeguards and market integrity—all at no cost to taxpayers.

FINRA’s role does go beyond broker/dealers. They also say:

FINRA uses technology powerful enough to look across markets and detect potential abuses. Using a variety of data gathering techniques, we work to detect insider trading and any strategies firms or individuals use to gain an unfair advantage.

In fact, FINRA processes, on average, 50 billion—and up to 75 billion—transactions every day to build a complete, holistic picture of market trading in the United States.

We also work behind the scenes to detect and fight fraud. In addition to our own enforcement actions, in 2015, we referred more than 800 fraud and insider trading cases to the SEC and other agencies. When we share information with other regulators, it leads to important actions that prevent further harm to investors.”

With this level of referrals, they are clearly a proactive watchdog of the markets! We all need to know who they are and what they do.

As always, your thoughts and comments are welcome.

 

Form 10-K Tip Eight – Conflict Minerals and Form SD Disclosure

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In our One-Hour Briefing presenting our thoughts on key issues for 2016 Form 10-K’s we discussed Conflict Mineral Reporting. Companies need to continue to refine their reporting processes as they gain experience with the rule and also watch for developments in the continuing legal challenges to the rule.

 

The short and sweet news here is that not a lot has changed since last year. That said, since this is a calendar year reporting requirement for all companies with a May 31 due date, there is time for change to occur before the due date.

 

One are that is not different is that because of the April 2014 court decision, issuers are still not required to report whether any of their products have “not been found to be DRC conflict free”.  You can review the SEC Order for the Partial Stay of the rule at:

www.sec.gov/rules/other/2014/34-72079.pdf

 

 

Corp Fin issued a Statement about the Court of Appeals decision which is at:

www.sec.gov/News/PublicStmt/Detail/PublicStmt/1370541681994

 

 

And there are SEC FAQ’s available at:

www.sec.gov/divisions/corpfin/guidance/conflictminerals-faq.htm

 

The FAQ’s do provide some process guidance, but the bottom line is that this area is still evolving.

 

As always, your thoughts and comments are welcome!

 

 

 

PS You can review the Form 10-K Tune-up Briefing and obtain CLE and CPE credit at:

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

 

Form 10-K Tune-Up Tip Number Five for 2016

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The next topic from our 2016 Form 10-K Tune-up One-Hour Briefing is SAB 74 disclosures. You can listen to the briefing on-demand with CPE and CLE credit available at:

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

 
To begin, what does SAB 74, which is Topic 11-M in the SAB Codification, actually require? You can read the whole SAB at:

www.sec.gov/interps/account/sabcodet11.htm#M

 
Here are a few highlights.

First, it is clear that this disclosure is not required for all new Accounting Standards Updates:
“The Commission addressed a similar issue and concluded that registrants should discuss the potential effects of adoption of recently issued accounting standards in registration statements and reports filed with the Commission. The staff believes that this disclosure guidance applies to all accounting standards which have been issued but not yet adopted by the registrant unless the impact on its financial position and results of operations is not expected to be material.”
This part of the SAB dovetails very nicely with an important part of the SEC’s Disclosure Effectiveness Initiative, which is to eliminate immaterial disclosures that potentially “clutter up” a report and potentially obscure material information.
Here are two examples to explore this issue.

CocaCola did not mention recently issued accounting standards in their 2014 Form 10-K MD&A. They apparently made the judgment that there was no material impact in the current year from new accounting standards. They did include SAB 74 disclosures in their financial statements in note 1. You can check it out at:
www.coca-colacompany.com/content/dam/journey/us/en/private/fileassets/pdf/2015/02/2014-annual-report-on-form-10-k.pdf

 
Intel treated this disclosure in exactly the same way, and you can find their 2014 10-K at:
www.intc.com/secfiling.cfm?filingID=50863-15-15

 
So, the first theme for SAB 74 is focus on material information.

 

 

The second point to think about with this disclosure is what do we need to say about new standards that we believe will be material.

The SAB contains four disclosure requirements:

 
1. “A brief description of the new standard, the date that adoption is required and the date that the registrant plans to adopt, if earlier.

 
2. A discussion of the methods of adoption allowed by the standard and the method expected to be utilized by the registrant, if determined.

 
3. A discussion of the impact that adoption of the standard is expected to have on the financial statements of the registrant, unless not known or reasonably estimable. In that case, a statement to that effect may be made.

 
4. Disclosure of the potential impact of other significant matters that the registrant believes might result from the adoption of the standard (such as technical violations of debt covenant agreements, planned or intended changes in business practices, etc.) is encouraged.”

 

 

As you consider these disclosures, the first thing that arises is that over time there will be a progression in the detail of the disclosure.

For example, most companies at this point in time will not know which method they will use to implement the new revenue recognition standard. But, as we go through next year, we will get closer to that decision. When the decision is made, the disclosure should be updated to inform investors about which method will be used. The same issue applies to quantifying the impact of a change.

 
The fourth disclosure, the potential impact on other significant matters, points out that when such a situation exists, this information may not be appropriate to disclose in the financial statements, but would be disclosed in MD&A.

This means that this disclosure should not always be exactly the same in the financial statements and MD&A.
As a brief PS, we have blogged about this topic before and suggested some wording for SAB 74 disclosures about the new revenue recognition standard. You can read that post at:
seciblog.pli.edu/?p=171

 

As always, your thoughts and comments are welcome!

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

 

10-K Tip Number One for 2016

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Happy New Year from all of us at the SEC Institute Division at PLI! We hope your new year is beginning well and if you are working on closing year-end December 31, 2015 that all is proceeding smoothly.

Last week, on January 7, 2016, Carol and George (that being us of course, the bloggers you are reading now!) presented a One-Hour Briefing, “PLI’s Second Annual Form 10-K Tune-up”. In the briefing we discussed three broad groups of issues to think about this year-end. These were New and Emerging Issues, Recurring Issues, and SEC Staff Focus Areas. Here is the complete list of the topics we discussed in the One-Hour Briefing:

  • New and Emerging Issues
    • Customer accounting for fees paid for cloud computing arrangements
    • PCAOB AS 18 Related Parties – impacts both auditors & registrants
    • PCAOB AS 17 Auditing Supplemental Info Accompanying Audited F/S
    • Audit Committee disclosure
    • ICFR and COSO
  • Recurring Issues
    • SAB 74 disclosures for Revenue Recognition and others
    • Disclosure effectiveness
    • Cybersecurity
    • Conflict minerals & Form SD disclosure
  • SEC Staff Focus Areas
    • Segments – focus on ASU 280
    • Statement of Cash Flows
    • Income taxes
    • Fair value
    • Foreign Exchange Rates, Commodity Prices, and Interest Rates

 

You can hear everything we discussed in an On-Demand version of the Briefing that will be available soon.

To augment the Briefing we are writing a series of blog posts to dive more deeply into each of the areas we discussed than the one-hour time limit allowed.

The first issue, customer accounting for fees paid for cloud computing arrangements, relates to ASU 2015-5. This ASU is effective for public business entities for periods beginning after December 15, 2015. For other entities the effective date is one year later.

One of the major issues in this new standard is that costs associated with a contract may be accounted for differently depending on whether the contract involves a software license or is only a service contract.

To get to that issue we need to review the major provisions of the ASU.

This project arose with the increase in the use of “cloud” based computing systems. These generally include “software as a service agreements” (SaaS) and other types of “software hosting” arrangements. There was no clear guidance about how customers should account for such arrangements. As a consequence, it was unclear whether these were software contracts subject to software accounting guidance or simply service contracts or perhaps a hybrid of the two accounting areas.

The ASU puts paragraph 350-40-15-4A into the ASC section dealing with internal use software:

“The guidance in this Subtopic applies only to internal-use software that a customer obtains access to in a hosting arrangement if both of the following criteria are met:

  1. The customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty.
  2. It is feasible for the customer to either run the software on its own hardware or contract with another party unrelated to the vendor to host the software.”

If the above criteria are not met then the contract does not involve a software license and is a service contact.

The key issue here is that if the two criteria are met, then the agreement is treated as a multiple element arrangement and the costs are allocated between the software license and a service element associated with the hosting contract. The costs associated with the software license fall into the guidance for costs related to internal use software, or if appropriate, another software model such as software to be used in research and development.

On the other hand, if there is no software license element, then the contract is treated as any other service contract.

The financial reporting implications of this distinction can affect issues such as balance sheet classification, since a software license would be accounted for as an asset in appropriate circumstances, i.e. if it was paid for in advance. Income statement geography can also be affected as software amortization versus service contract expense could be in different income statement line items. And, it is possible that the amount of costs recognized in each period could be different.

This perhaps more complex issue depends on whether the arrangement includes a software license. If it does include a software license the internal use software guidance applies. The expense recognition part of this guidance is articulated in ASC 350-40-30:

30-1     Costs of computer software developed or obtained for internal use that shall be capitalized include only the following:

  1. External direct costs of materials and services consumed in developing or obtaining internal-use computer software. Examples of those costs include but are not limited to the following:
  2. Fees paid to third parties for services provided to develop the software during the application development stage
  3. Costs incurred to obtain computer software from third parties
  4. Travel expenses incurred by employees in their duties directly associated with developing software.
  5. Payroll and payroll-related costs (for example, costs of employee benefits) for employees who are directly associated with and who devote time to the internal-use computer software project, to the extent of the time spent directly on the project. Examples of employee activities include but are not limited to coding and testing during the application development stage.
  6. Interest costs incurred while developing internal-use computer software. Interest shall be capitalized in accordance with the provisions of Subtopic 835-20.

These costs can even include the costs of data conversion.

For service contracts, there is no such guidance. And here in fact lies the more problematic issue. If a cloud based computing arrangement includes a software license the internal use software guidance for costs may require capitalization of costs that would not be capitalized if the contract is only a service contract. Thus the amount of expense recognized for an arrangement could be different if it has a software license or does not have a software license. If you have this situation, careful analysis is crucial!

As always, your thoughts and comments are welcome!

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!

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.

A Bit of SEC Trivia – Form 10

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During our Workshops we discuss a lot of detailed information, some of which does not come up often in practice. With this in mind, we thought we would start a series of blog posts about some of these “trivia” topics.

The first trivia question is “What is Form 10 all about?”

Turns out Form 10 is a behind the scenes issue in a current news story. On November 1, 2015, HP officially completed the process of splitting itself up into two separate companies:

HP, Inc. (ticker HPQ) which has the legacy HP PC and printer businesses. This company describes itself with these words:

“Our vision is to create technology that makes life better for everyone, everywhere — every person, every organization, and every community around the globe. This motivates us — inspires us — to do what we do. To make what we make. To invent, and to reinvent. To engineer experiences that amaze. We won’t stop pushing ahead, because you won’t stop pushing ahead. You’re reinventing how you work. How you play. How you live. With our technology, you’ll reinvent your world.” (From www.hp.com)

 Hewlett Packard Enterprise (ticker HPE) which has the HP services and corporate hardware businesses uses these words:

Hewlett Packard Enterprise is an industry leading technology company that enables customers to go further, faster. With the industry’s most comprehensive portfolio, spanning the cloud to the data center to workplace applications, Hewlett Packard Enterprise’s technology and services help customers around the world make IT more efficient, more productive and more secure. (From www.hpe.com)

Behind this split is a myriad of fascinating business reasons, which will doubtless become business school cases in the future. What is fun about the transaction for SEC geeks is how it was accomplished in the public company reporting world. HPE was separated out from HP, essentially a “spin-off” transaction. There were a lot of legal steps in the process, but in essence there was no public offering of HPE stock, it was distributed to the existing HP shareholders.

After the spin-off both companies wanted to trade on the NYSE. For HP Inc. this was easy; this is the corporate entity that was already listed, so no big deal. But what about the newly created HPE?

There is no transaction here to register under the 1933 Act, as stock is not being offered or sold to the public; it is being directly distributed to the existing HP shareholders. So there is no S-1 or S-3 or S-4 to file.

This is where the Form 10 comes in. It is a company’s first, and probably only, 1934 Act registration statement, and is the way a company “registers” under the 1934 Act when it trips over the size tests in the 1934 Act, which HPE did when it distributed stock to more than 2,000 persons. As a result, HPE will start the corresponding periodic and current reporting requirements. So the only SEC filing that HPE had to make in connection with the distribution of its stock to the existing HP shareholders was a Form 10.

To simplify a bit, 1934 Act registration is required if a company has a class of equity security held by 2,000 or more persons or 500 persons who are not accredited investors and over $10 million in assets or if the company wants to list on a national security exchange. Of course HPE met the requirements, and so HPE filed a Form 10. (There is of course more complexity to the registration issue, so if you have to deal with it careful research is required!)

Form 10 is a lot like a Form 10-K and you can see HPE’s Form 10 at:

www.sec.gov/Archives/edgar/data/1645590/000119312515338732/0001193125-15-338732-index.htm

In this filing, the Form 10 itself is a shell, and you will find all the relevant information in Exhibit 99.1.

If you have any SEC trivia you would like us to explore, please let Carol or George know, and as always, your thoughts and comments are welcome and appreciated.

One last little trivia note – if you do a ticker search for HP, guess what company has this ticker? Helmerick and Payne, a contract oil and gas drilling company. Who would have guessed?