Tag Archives: AM Law

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 Three for 2016

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This post continues the series of deeper dives into the 10-K reporting issues we highlighted in our January 7, 2016 One-Hour Briefing, “PLI’s Second Annual Form 10-K Tune-Up”. (This One-Hour Briefing will be available on-demand soon.) This is the third topic in the briefing, audit committee disclosures.

In the Fall of 2015 we did a series of posts about audit committee issues, a topic that has been under discussion by the SEC and the reporting community. The SEC’s concept release about audit committee disclosures and a study by The Center for Audit Quality and Audit Analytics that shows that many companies are making audit committee disclosures well beyond those required by the SEC, the Exchanges and the NASDAQ brought this discussion to a new level of importance.

This is, of course, why we included this topic in our One-Hour Briefing. And, rather than repeat all the issues, here are the blog posts which you can peruse and dive into more deeply at your leisure:

 

 

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

Part Six – Some Next Steps  seciblog.pli.edu/?p=496

 

 

 

As always, your thoughts and questions are welcome!

 

Audit Fee Disclosures –A Few Common Problem Areas in This Independence Disclosure

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Over the last few weeks we have been blogging about auditor independence issues, a very “hot topic” in the current SEC reporting and enforcement environments. One disclosure focused on independence, audit fees, has been around for over 15 years. You would think that after 15 years it would be routine and perhaps even “ho hum”. However, like so many detailed disclosures, it has complexities that create questions and problems. Here are three examples:

In the disclosure where should fees related to 33 Act services such as comfort letters be included? Are these Audit Fees or Audit-Related Fees?

The Audit Fee disclosure uses the terminology “fees billed”. What is the appropriate treatment if the auditor has not fully billed for the audit?

Where should benefit plan audit fees be presented? Audit Fees or Audit-Related Fees?

We’ll answer these questions below, but first, lets briefly review how this disclosure sheds light on auditor independence. Investors can use this information to compare the magnitude of audit fees with non-audit fees. The key underlying question is “Could the amount of non-audit fees compared to audit fees in any way call into question or compromise auditor objectivity and independence?”

(In this post we won’t go into all the history of this disclosure. If you want to delve into the controversy and issues behind it google search “Enron audit fees.”)

It was a 2003 update to this disclosure that built the requirement with the four categories and two year format we use today. The current requirement, which is in Item 14 of Form 10-K and Schedule 14A for the proxy is:

(1) Disclose, under the caption Audit Fees, the aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for the audit of the registrant’s annual financial statements and review of financial statements included in the registrant’s Form 10-Q (17 CFR 249.308a) or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years.

(2) Disclose, under the caption Audit-Related Fees, the aggregate fees billed in each of the last two fiscal years for assurance and related services by the principal accountant that are reasonably related to the performance of the audit or review of the registrant’s financial statements and are not reported under Item 9(e)(1) of Schedule 14A. Registrants shall describe the nature of the services comprising the fees disclosed under this category.

(3) Disclose, under the caption Tax Fees, the aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning. Registrants shall describe the nature of the services comprising the fees disclosed under this category.

(4) Disclose, under the caption All Other Fees, the aggregate fees billed in each of the last two fiscal years for products and services provided by the principal accountant, other than the services reported in Items 9(e)(1) through 9(e)(3) of Schedule 14A. Registrants shall describe the nature of the services comprising the fees disclosed under this category.

1933 Act Related Fees

These categories seem fairly self-explanatory, but at times can be confusing. For the question about where should fees related to 1933 Act services, including fees for services like comfort letters, be disclosed, you actually have to dig all the way back into commentary in the Final Rule Release. (While we don’t have to do this very often, it is always good to remember this step in the research process!)

While we might be tempted to think of them as “Audit Related”, these 33 Act fees are “Audit Fees”. The Final Rule states:

While the rules we are adopting continue to require issuers to disclose fees paid to the principal accountant for audit services, we are expanding the types of fees that should be included in this category to include fees for services that normally would be provided by the accountant in connection with statutory and regulatory filings or engagements. In addition to including fees for services necessary to perform an audit or review in accordance with GAAS, this category also may include services that generally only the independent accountant reasonably can provide, such as comfort letters, statutory audits, attest services, consents and assistance with and review of documents filed with the Commission.

To research the Final Rule Release you can find it at:

www.sec.gov/rules/final/33-8183.htm

 

The Terminology “Fees Billed”

In the category audit fees does the word “billed” mean that this should be on an as-billed basis or more accrual basis?

The Office of the Chief Accountant has provided guidance on these and similar questions in an FAQ document. However, that document is not with the Compliance and Disclosure Interpretations. It is at a separate location for information about independence issues. You can find all the independence documents at:

www.sec.gov/info/accountants/independref.shtml

In particular, the FAQ’s that deal with these issues are at:

www.sec.gov/info/accountants/ocafaqaudind080607.htm

These FAQ’s tell us that the amount should be the fee billed or expected to be billed for the audit. The principle of the disclosure is that we want the fees for the audit to compare with other fees, so regardless of when billed, show the cost of the audit:

Question 2 (issued January 16, 2001 revised 2004)

Q: In determining fees that are disclosed pursuant to Items 9(e) (1) – (e) (4) of Schedule 14A, should the disclosure be based on when the service was performed, the period to which the service applies, or when the bill for the service is received?

A: Fees to be disclosed in response to Item 9(e)(1) of Schedule 14A should be those billed or expected to be billed for the audit of the registrant’s financial statements for the two most recently completed fiscal years and the review of financial statements for any interim periods within those years. If the registrant has not received the bill for such audit services prior to filing with the Commission its definitive proxy statement, then the registrant should ask the auditor for the amount that will be billed for such services, and include that amount in the disclosure. Amounts disclosed pursuant to Items 9(e) (2) – (e) (4) should include amounts billed for services that were rendered during the most recent fiscal year, even if the auditor did not bill the registrant for those services until after year-end.

 

Benefit Plan Audits

And last, for benefit plan audits, the FAQ’s mentioned above state that these fees are “Audit Related”:

Question 7 (issued August 13, 2003)

Q: What fee disclosure category is appropriate for professional fees in connection with an audit of the financial statements of a carve-out entity in anticipation of a subsequent divestiture?

A: The release establishes a new category, “Audit-Related Fees,” which enables registrants to present the audit fee relationship with the principal accountant in a more transparent fashion. In general, “Audit-Related Fees” are assurance and related services (e.g., due diligence services) that traditionally are performed by the independent accountant. More specifically, these services would include, among others: employee benefit plan audits, due diligence related to mergers and acquisitions, accounting consultations and audits in connection with acquisitions, internal control reviews, attest services related to financial reporting that are not required by statute or regulation and consultation concerning financial accounting and reporting standards. Fees for the above services would be disclosed under “Audit-Related Fees.”

As usual, your comments and thoughts are welcome!