Tag Archives: ACCOUNTING

SEC Non-GAAP Concerns Ratchet Up

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We discuss non-GAAP measures frequently in our blog. We also did a One-Hour Briefing “Non-GAAP Measures and Metrics: Getting it Right” on April 1 which you can find at:

www.pli.edu/Content/Non_GAAP_Measures_and_Metrics_Getting_it/_/N-1z10vnyZ4n?ID=282910

 

While we try to avoid being “preachy” we do see some real problems in how companies are using non-GAAP measures. Our most recent blog post about these non-GAAP measure problems is at:

seciblog.pli.edu/?p=615

 

To reinforce these issues from the SEC’s perspective Deputy Chief Accountant Wesley Bricker and OCA Chief Accountant Mark Kronforst both addressed the use of non-GAAP measures at a recent conference.

 

You can read Mr. Bricker’s speech at:

www.sec.gov/news/speech/speech-bricker-05-05-16.html

 

In his speech he outlines four major areas where the SEC believes that companies may not be using non-GAAP measures appropriately. He even makes the comment that if a company uses a non-GAAP revenue measure they can expect a comment from the staff.

While Mr. Kronforst’s speech is not on the SEC web page, he reportedly used the words “crack down” when talking about how the SEC will be reviewing the use of non-GAAP measures.

The message is clear, be thoughtful and careful with non-GAAP measures!

 

As always, your thoughts and comments are welcome!

Procrastinating about Rev Rec?

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Let’s face it, almost all of us procrastinate! And when there is a good reason to procrastinate, well, that is all the better! One of the big rationales for procrastinating dealing with the new revenue recognition standard was that the FASB was definitely going to make changes to the original ASU (ASU 2014-09). As the Transition Resource Group identified and discussed issues in the new standard it became clear that the FASB would clarify certain issues and improve the standard in other areas. In fact the FASB started four discrete projects to make changes.

Yesterday that rationale came to an end.   The FASB released the fourth of the four ASU’s. They are:

 

  1. ASU 2015-14 – Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date – Issued August 2015

 

  1. ASU 2016-8 – Revenue Recognition — Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net) – Issued March 2016

 

  1. ASU 2016-10 – Revenue Recognition — Identifying Performance Obligations and Licenses – Final Standard Issued in April 2016

 

  1. ASU 2016-12 – Revenue Recognition — Narrow-Scope Improvements and Practical Expedients – Issued May 2016

 

All the core issues are now in the standard as amended! And yes, the TRG and the AICPA’s Industry Task Forces will continue to work on specific issues. You can read about the TRG’s issues at:

www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176164066683

 

And you can follow-up on the AICPA’s task forces at:

www.aicpa.org/InterestAreas/FRC/AccountingFinancialReporting/RevenueRecognition/Pages/RevenueRecognition.aspx

 

And, even with the TRG and AICPA still at work, the core is there. It is time to get busy!

 

As always, your thoughts and comments are welcome!

Ever Been to an SEC Event? Mark out April 13 for a webcast!

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In our workshops we sometimes joke (a bit) about how fun it is to listen to a webcast of an SEC meeting. And yes, we do say the same thing about FASB meetings. (Total Geek-Out For Sure!)

These meetings are interesting in that you can observe the process the SEC Commissioners and the FASB follow. The depth of the discussions and their careful consideration of the issues is always fascinating to observe.

These meetings generally do not tell you what might happen in the short-term, but do provide a longer-term glimpse into the directions of policy-making and standard setting.

Disclosure effectiveness is a major longer-term initiative at the SEC right now. On April 13, 2016 the SEC is going to discuss “whether to issue a concept release seeking comment on modernizing certain business and financial disclosure requirements in Regulation S-K.”

As you know, this kind of change is something the SEC staff has wanted to do for years. In addition, provisions of both the JOBS Act and the FAST Act focused on disclosure effectiveness. And here is the logical next step – this meeting will likely help illuminate the future direction of disclosure effectiveness.

 

In addition, this meeting may offer ideas that you can implement now to help make your disclosure more direct and useful to investors.

 

So, perhaps this is the time to listen to one of the meetings? You could play it on your computer, have the sound coming out of your speakers, and think how many of your colleagues would join you and listen! SEC Party time perhaps? If you can’t make the live webcast, you can find all of the archived meetings at http://www.sec.gov/news/openmeetings.shtml

 

You can learn more at:

sec.gov/news/openmeetings/2016/ssamtg033016.htm

 

where the original meeting was announced and at:

www.sec.gov/news/openmeetings/2016/ssamtg041316.htm

where the date was changed from March 30 to April 13, 2016.

 

As always, your thoughts and comments are welcome!

Known Trends and Self-Fulfilling Prophecies

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Forewarning disclosures, the “known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations” are one of the topics we discuss occasionally in our blog posts. This MD&A disclosure can be very problematic because the information disclosed may alarm investors or make management nervous about creating a “self-fulfilling prophecy”.

We are always watching how companies deal with these issues, and here are two examples from both ends of the potential disclosure spectrum.

The first example, dealing with goodwill impairment, is from a company that has been in the news a lot lately, Yahoo. Along with all the issues they have dealt with involving their investment in Alibaba, Yahoo continues to work on building their core business. As part of this process in June of 2013 they acquired Tumblr, the blog-hosting website. The purchase price was $990 million and in connection with the acquisition Yahoo recorded $749 million in goodwill. (See note 4 about acquisitions in the consolidated F/S in the 2015 10-K)

Fast forward the acquisition to December 31, 2015 and in note 5 to the consolidated F/S dealing with impairments Yahoo says:

As identified above, in step one, in 2015, the carrying value of the U.S. & Canada, Europe, Tumblr and Latin America reporting units exceeded the estimated fair value. The Company completed an assessment of the implied fair value of these reporting units, which resulted in an impairment of all goodwill for the U.S. & Canada, Europe, and Latin America reporting units and a partial impairment for the Tumblr reporting unit. The Company recorded goodwill impairment charges of $3,692 million, $531 million, $230 million and $8 million, associated with the U.S. & Canada, Europe, Tumblr, and Latin America reporting units, respectively, for the year ended December 31, 2015. The impairments were a result of a combination of factors, including a sustained decrease in our market capitalization in fourth quarter of 2015 and lower estimated projected revenue and profitability in the near term.

 

So, from June 2013 to December 31, 2015 the $749 million in Tumblr related goodwill was reduced by $230 million. In the tech world, these things happen.

But what about the future? In an interesting spot, Critical Accounting Estimates in their 2015 10-K MD&A Yahoo included this statement:

Given the partial impairment recorded in our Tumblr reporting unit in 2015, it is reasonably possible that changes in judgments, assumptions and estimates we made in assessing the fair value of goodwill could cause us to consider some portion or all of the remaining goodwill of the Tumblr reporting unit to become impaired, which comprised $519 million of our remaining $808 million goodwill balance as of December 31, 2015. In addition, a future decline in market conditions and/or changes in our market share could negatively impact the estimated future cash flows and discount rates used in the income approach to determine the fair value of the reporting unit and could result in an impairment charge in the foreseeable future.

 

This is a direct warning, using the S-K words “reasonably possible”.

 

Here is the second example. These comments are from a letter to a retailing company, and you can see the SEC is asking whether the company effectively dealt with an uncertainty in their future:

  1. Please expand this section to discuss any known material trends, events or uncertainties that have had or are reasonably expected to have a material impact on your liquidity or revenues or income from continuing operations. In this regard, we note (i) persistent comparable store sales decreases in fiscal year 2014 and through the first three quarterly periods of 2015 and (ii) that the company has scaled back its previously planned strategic retail expansion for fiscal year 2016 and beyond.

We also note management’s concern, as expressed in recent earnings calls, regarding the cannibalization effect from new retail stores, coupled with softer than expected new store performances. Please discuss whether you expect comparable store sales to continue to decrease, due to continued cannibalization or otherwise, and the short and long-term actions that you are taking to address any perceived trends. In this regard, your discussion should address your past and future financial condition and results of operation, with particular emphasis on the prospects for the future. See Item 303(a) of Regulation S-K and SEC Release No. 33- 8350.

 

One really interesting part of this comment is how the staff went well beyond the company’s filings to information disclosed in earnings calls.

 

 

As always, your thoughts and comments are appreciated!

Comment of the Week – Market Risk Reminder

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We have been discussing the topic of Market Risk Disclosures a lot in this environment of volatile exchange rates, bumpy commodity prices and uncertain interest rates. This disclosure is one of the most confusing parts of Regulation S-K. Without going into a whole lot of details about S-K Item 305 (which we covered in an earlier blog at seciblog.pli.edu/?p=489), as we move towards the end of the first quarter it will continue to be important to focus on getting this disclosure right.

 

So, with this post as a reminder, here is a quick example in a recent comment:

Item7A. Quantitative and Qualitative Disclosures About Market Risk, page 63

  1. Please provide an analysis on whether your “cash flow hedges,” discussed in the second- to-last paragraph of page 63, are material, such that you would need to provide the disclosure in Item 305(a) of Regulation S-K. Please see General Instruction 5.B to Item 305(a) and (b).

 

As usual, your thoughts and comments are welcome!

Conflict Minerals – More Help!

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In our Form 10-K Tune-Up this year we addressed conflict mineral reporting developments. We did a deeper discussion with links to several supporting documents in this post:

seciblog.pli.edu/?p=565

 

If you are searching for more help and information as you prepare Form SD, PLI is presenting a One-Hour Briefing focused on this evolving reporting requirement. Topics to be addressed include:

The latest on the legal challenge to SEC rule

Updates on pending legislation in the EU and the U.S.

Tips for drafting your conflict minerals report for 2015

Best practices for 2016 due diligence planning and compliance trends

Guidance for preparing audit documentation

Overview of risks associated with supply chain disclosure

 

All of this is even more important as NGO’s focus more and more on these reports.

You can read more about the One-Hour Briefing and sign-up at:

www.pli.edu/Content/Seminar/Conflict_Minerals_Preparing_for_Your_Filing/_/N-4kZ1z10u15?fromsearch=false&ID=281215

 

 

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 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

 

Climate Change – An MD&A Heads-Up

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In our One-Hour Briefing discussing MD&A Hot Topics on February 8, 2016 we included climate change disclosures as one of the SEC’s current focus areas. We reviewed the SEC’s climate change disclosure guidance in FR 82 along with current developments in this area, including example SEC comments. This is clearly a very challenging uncertainty to deal with for many companies.  You can find FR 82 at:

www.sec.gov/rules/interp/2010/33-9106.pdf

 

If you are in an industry that is faced with this disclosure issue, WilmarHale’s Energy, Environment and Natural Resources Practice is in the process of presenting an eight-week series into this and other challenges facing the energy sector. You can read their thoughts about climate change disclosures and find the other posts in their blog at:

www.wilmerhale.com/pages/publicationsandnewsdetail.aspx?NewsPubId=17179880687

 

First Annual Dealing with MD&A Hot Topics.  Link to our one hour briefing by using the link below:

http://www.pli.edu/Content/First_Annual_Dealing_with_MDA_Hot_Topics/_/N-1z10wp5Z4n?ID=280193

 

Hope this helps, and as always your thoughts and comments are welcome!

10-K Tip Number Six for 2016 – The SEC’s Disclosure Effectiveness Initiative

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As a starting point in this post, we want to be clear, the SEC continuously focuses on making disclosure effective. This is an important part of their mission, to provide information to investors. Over the years projects like Plain English and the MD&A guidance in FR 72 have clearly helped improve disclosure.
And, in large part thanks to the JOBS Act, disclosure effectiveness is a formal initiative at the SEC right now. This, of course, is why we included it as a hot topic on our 2016 Form 10-K Tune-Up, which is now available on-demand with CLE and CPE credit at:

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

 

The JOBS Act formalized this process with its requirement to study various S-K disclosures. Going beyond the JOBS Act, the SEC has sought comment on other matters including certain parts of Regulation S-X. Late last year the FAST Act created required next steps in this process. All of these projects, and the others that will come, will hopefully result in a modernization and refocusing of the whole disclosure process. You can read about all the different parts of this initiative at the Disclosure Effectiveness section of the SEC’s web page:

www.sec.gov/spotlight/disclosure-effectiveness.shtml

 

 

(If you would like to read more about the FAST Act check out this post:

seciblog.pli.edu/?p=515 )

 

 

These elements of the SEC’s process are clearly longer-term, and the regulatory steps involved need time for constituent input and careful consideration of the impact of possible change. This does not mean that there are not steps you can take right now to help make information better for investors. In fact, in numerous public forums the SEC Staff has consistently focused on three themes you can use right now to improve disclosure. They are:

Reduce repetition

 

Focus disclosure

 

Eliminate outdated and immaterial information

 

You can get the SEC’s perspective on these issues in this speech by Corp Fin Director Keith Higgins:

www.sec.gov/News/Speech/Detail/Speech/1370541479332

 

And this speech from December 2015 by Chief Accountant James Schnurr touches on things to do now, particularly using judgment:

www.sec.gov/news/speech/schnurr-remarks-aicpa-2015-conference-sec-pcaob-developments.html

 

 

One last issue – if you have questions about something such as a whether to continue a disclosure related to an SEC comment from prior years that is immaterial today, the staff actually encourages that you call them to discuss the issue!

 

As always, your thoughts and comments are welcome!