Tag Archives: Business

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 All those standards are also superseded.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!

A Fall Return to Our Comment of the Week (or So) Blog Posts

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Now that summer vacation is over, and we’ve gotten through a very busy September with lots of SECI programs, we are ready to resume our comment of the week blog posts.

One topic in the news, thanks to all the political campaigning underway, is taxes. As the candidates discuss their plans to reform the tax code, we thought it would make sense to explore in a bit more depth Corp Fin’s comments about tax issues. As you likely know this has been a “frequent comment” hot topic for a while.

Here is a first comment, and a frequent theme in comments, international taxes. As you’ll see, the staff frequently asks for more detail about reconciling items. All of this of course to help readers understand the likelihood of such rates being sustainable.

2. We note from your disclosure in Note 9 that there is a significant reconciling item in the effective income tax reconciliation due to differences between foreign and United States statutory rates, which are primarily attributable to your Luxembourg holding company structure and tax rulings received from Luxembourg tax authorities. Please tell us the nature of the items included in the reconciling line item titled “differences between foreign and U.S. statutory rates.” Also, please provide us with the pre-tax income, statutory rate, and effective tax rate in Luxembourg for all periods presented. Additionally, please tell us the nature of the factors that are driving the changes in this line item from year to year, including the nature of any significant tax rulings.

This second comment in the tax arena is about tax benefits, and even mixes international issues along with the recoverability issue. You can almost hear the next comment asking about “positive and negative” evidence.

  1. Please tell us the facts and circumstances associated with the extraterritorial income tax benefit recognized in each of 2014 and 2013, including the basis for the amount recognized and changes therein. Also, tell us the nature of the reserve applied against such benefits and the amount of the reserve for each year.

Notice how this comment combines domestic versus foreign tax issues along with the theme of disaggregation:

  1. Please revise to disclose the components of income before income taxes as either domestic or foreign. See guidance in Rule 4-08(h) of Regulation S-X. Also, we note that in your reconciliation between the federal statutory rate and the effective income tax rate disclosed in Note L, foreign and state income taxes are combined in one line item. Please note that if either of these items (foreign income taxes or state income taxes) affect the statutory tax rate by more than 5% (either positively or negatively) they should be separately presented on the reconciliation.

And, in this last comment, the significant question of the repatriating the earnings of foreign operations is murky and the staff asks for clarification in disclosure.

  1. You disclose in note 15 that the income tax provision in fiscal 2014 includes $33.7 million of U.S. income and applicable foreign withholding taxes on dividends of $473.7 million due to repatriating foreign subsidiaries earnings to the U.S. parent entity to fund the share repurchase program. You also disclose you have not provided for U.S. and foreign withholding taxes on $471 million of accumulated undistributed earnings of foreign subsidiaries at February 1, 2015 because you intend to reinvest these earnings for the foreseeable future. It is not clear from your present disclosures how management overcame the presumption that all undistributed earnings of subsidiaries will be transferred to the parent and therefore require the accrual of an income tax payable as outlined in ASC 740-30-25-3. Please tell us how you have determined that you have both the ability and intent to indefinitely prevent accumulated undistributed foreign earnings from being repatriated without tax consequences. See ASC 740-30-25-17 and 25-18. In doing so, tell us the following:
    • Explain the specific evidence (e.g. experience of the entity, definite future plans and past remittances, etc.) to substantiate the parent’s assertion of the indefinite postponement of remittances from foreign subsidiaries;
    • Identify the entities and periods where the parent claims permanent reinvestment;
    • Tell us why you have not disclosed that the remittance of undistributed earnings is postponed indefinitely as opposed to the foreseeable future, which is the point used in ASC 740-30-25-19 to describe when it is apparent that a temporary difference reverses and a deferred tax liability is required to be recognized; and
    • Tell us how your decision to repatriate the $473.7 million of funds during 2014 in order to fund your share repurchase program was considered as part of your determination that the $471 million of accumulated undistributed earnings of foreign subsidiaries referenced above continue to be permanently reinvested as of February 1, 2015.

 

Taxes! Well, for now, we will forgo any jokes about how inevitable they are. We do know that tax comments asking for more clarity in disclosure will continue!

 

As always, your thoughts and comments are welcome!

SEC Pay Ratio Final Rule and What to Do?

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 As you doubtless have heard, the SEC, in a split vote, approved the Dodd/Frank mandated “Pay Ratio Rule” on August 5. And yes, there is a lot of politics and a lot of discussion going on about the rule.

Companies will, after the discussion is over, have to deal with all the challenges of actually implementing the rule! To help, we have already scheduled a program, “SEC’s Pay Ratio Rule:  What Companies Need to do to Prepare”, which will be webcast on October 15, 2015. You can get the details about the program at:

www.pli.edu/Content/Seminar/SECs_Pay_Ratio_Rule_What_Companies_Need_to/_/N-4kZ1z11asm?fromsearch=false&ID=263557

As always, your thoughts and comments, even the political ones, are welcome!

Cybersecurity – Help Managing the Risk

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Cybersecurity risk continues to be in the news. The nature and severity of cybersecurity breaches seem to grow in severity and complexity. Both preventive and remedial cybersecurity related costs are continually increasing in our business environment. Fortunately, the tools available to manage cybersecurity risk also continue to evolve. The magnitude of this risk is so large that some companies view cybersecurity breaches all but inevitable!

In this changing world we are presenting a cybersecurity focused conference in September. The conference is titled “Cybersecurity 2015: Managing the Risk”. You can learn more about the program, which will be webcast, and review the agenda at:

www.pli.edu/Content/Seminar/Cybersecurity_2015_Managing_the_Risk/_/N-4kZ1z128nw?fromsearch=false&ID=225691

As always, your thoughts and comments are appreciated!

Known Trends in the News

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In this period of earnings releases we always watch for interesting disclosure examples. Microsoft has provided us with a great example of the “forward looking” disclosures about “known trends and uncertainties” that we discuss in our workshops.

As a reminder, this S-K Item 303 MD&A disclosure requirement says:

(3) Results of operations. (i) ………..

(ii) Describe any 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. If the registrant knows of events that will cause a material change in the relationship between costs and revenues (such as known future increases in costs of labor or materials or price increases or inventory adjustments), the change in the relationship shall be disclosed.

In their most recent earnings release Microsoft reported a $7.5 billion goodwill impairment related to its acquisition of Nokia’s “Devices and Services” business, which they refer to as NDS. At issue here of course is that such an impairment rarely would ever come out of the blue in an unexpected way during the current quarter. In fact, the risk of impairment would almost always be known well before actually recording the impairment. And, if the company “reasonably expects” there will be an impairment in a future quarter, the company must disclosure this risk in MD&A.

On April 29, 2014 Microsoft completed the acquisition of substantially all of Nokia Corporation’s (“Nokia”) Devices and Services Business (“NDS”), which they reported in a new Phone Hardware segment.

Microsoft, which has a June 30 fiscal year end, said this in their Critical Accounting Estimates disclosure in their June 30, 2014 Form 10-K, which was of course shortly after the acquisition.

Goodwill

We allocate goodwill to reporting units based on the reporting unit expected to benefit from the business combination. We evaluate our reporting units on an annual basis and, if necessary, reassign goodwill using a relative fair value allocation approach. Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (May 1 for us) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.

(some text omitted)

The valuation of acquired assets and liabilities, including goodwill, resulting from the acquisition of NDS, is reflective of the enterprise value based on the long-term financial forecast for the business. In this highly competitive and volatile market, it is possible that we may not realize our forecasts. Given the value assigned to goodwill in the purchase price allocation, we will closely monitor the performance of the business versus the long-term forecast to determine if any impairments arise.

They also had a robust risk factor disclosure which you can find in the 10-K.

This disclosure was essentially repeated in their first quarter Form 10-Q for the quarter ended September 30, 2014.

For the second quarter ended December 31, 2015, the disclosure was adjusted a bit to focus on the Phone Hardware segment:

The valuation of acquired assets and liabilities, including goodwill, resulting from the acquisition of NDS, is reflective of the enterprise value based on the long-term financial forecast for the business. In this highly competitive and volatile market, it is possible that we may not realize our forecasts. Given the value assigned to goodwill in the purchase price allocation, we will closely monitor the performance of the business versus the long-term forecast to determine if any impairments arise in our Phone Hardware reporting unit. Except as clarified above, we determined that none of our reporting units were at risk of impairment as of our most recent annual goodwill impairment testing date.

And, in their Form 10-Q for the third quarter ended March 31, 2015, this “known trend or uncertainty” became a bigger risk and was addressed directly:

“Goodwill

(Some text omitted)

We determined that none of our reporting units were at risk of impairment as of our most recent annual goodwill impairment testing date. The valuation of acquired assets and liabilities, including goodwill, resulting from the acquisition of NDS, is reflective of the enterprise value based on the long-term financial forecast for the Phone Hardware business. In this highly competitive and volatile market, it is possible that we may not realize our forecast. Considering the magnitude of the goodwill and intangible assets in the Phone Hardware reporting unit (see Note 8 – Business Combinations of the Notes to Financial Statements), we closely monitor the performance of the business versus the long-term forecast to determine if any impairments exist in our Phone Hardware reporting unit. In the third quarter of fiscal year 2015, Phone Hardware did not meet its sales volume and revenue goals, and the mix of units sold had lower margins than planned. We are currently beginning our annual budgeting and planning process. We use the targets, resource allocations, and strategic decisions made in this process as the inputs for the associated cash flows and valuations in our annual impairment test. Given its recent performance, the Phone Hardware reporting unit is at an elevated risk of impairment. Declines in expected future cash flows, reduction in future unit volume growth rates, or an increase in the risk-adjusted discount rate used to estimate the fair value of the Phone Hardware reporting unit may result in a determination that an impairment adjustment is required, resulting in a potentially material charge to earnings.”

(Emphasis added)

Blunt words to forewarn investors of the risk of impairment!

As always, your thoughts and comments are welcome!

 

Non-GAAP Measures – The Next Chapter – Is it a Good Day to Non-GAAP?

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In several of our previous posts we have been exploring the guidance for the use of non-GAAP measures along with some areas where the SEC finds problems and hence writes non-GAAP measure comments.

This next chapter is about removing items considered unusual or infrequent. Many companies use such measures in order to present what they believe is a more “normal” or “recurring” earnings number and trend.

This is not a simple issue in any way shape or form. It is clear investors place significant value on this information. It is also clear that some companies push this presentation too far.

As an example, suppose a company has recorded a restructuring charge in the current quarter and in their earnings release and MD&A in Form 10-Q management wants to present a picture of earnings without this restructuring charge.

What are the SEC’s rules about such measures? Reg G of course applies to the earnings release, and does not prohibit such an adjustment. As we reviewed in our earlier posts, Regulation S-K Item 10(e) is the source of the SEC’s guidance about the use of non-GAAP measures in filed documents:

(e)(ii) A registrant must not:

(A) ———Omitted————-

(B) Adjust a non-GAAP performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual, when the nature of the charge or gain is such that it is reasonably likely to recur within two years or there was a similar charge or gain within the prior two years;

You can read the complete Item in our post of June 5, 2015 or at:

www.ecfr.gov/cgi-bin/text-idx?SID=8e0ed509ccc65e983f9eca72ceb26753&node=17:3.0.1.1.11&rgn=div5#se17.3.229_110

When S-K Item 10(e) was originally created as part of the SOX regulatory revisions the language in this paragraph was interpreted as essentially prohibiting performance measures with adjustments for unusual or infrequent items in filed documents. While many companies would include such adjustments in non-GAAP measures in earnings releases, because the SEC was very active with comments in this area, rarely would they appear in MD&A in filed documents.

(Note: You can check our post of May 7, 2015 to review the difference between filed and furnished.)

To clarify their position about this issue the SEC has issued several Compliance and Disclosure Interpretations about the use of non-GAAP measures:

www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm

Here is the relevant C&DI:

Question 102.03

Question: Item 10(e) of Regulation S-K prohibits adjusting a non-GAAP financial performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual, when the nature of the charge or gain is such that it is reasonably likely to recur within two years or there was a similar charge or gain within the prior two years. Is this prohibition based on the description of the charge or gain, or is it based on the nature of the charge or gain?

Answer: The prohibition is based on the description of the charge or gain that is being adjusted. It would not be appropriate to state that a charge or gain is non-recurring, infrequent or unusual unless it meets the specified criteria. The fact that a registrant cannot describe a charge or gain as non-recurring, infrequent or unusual, however, does not mean that the registrant cannot adjust for that charge or gain. Registrants can make adjustments they believe are appropriate, subject to Regulation G and the other requirements of Item 10(e) of Regulation S-K. [Jan. 11, 2010]

So, lets go back to our example company where management wants to add this charge back to show operations on a more “recurring” basis. Management could add the restructuring charge back to net income in the company’s earnings release and the MD&A of the related 10-Q. In the 10-Q Regulation S-K Item 10 would apply, and the company would have to consider how to describe the restructuring change. If the company had such a charge in the last two years or reasonably expected such a charge in the next two years then they could still adjust for it in the non-GAAP measure, but they could not describe it as non-recurring, infrequent or unusual.

Do companies always follow this guidance? Unfortunately NOT! Here is an example:

In the fourth bullet point of the second paragraph of this section you present a non-GAAP measure of the increase in SG&A adjusted for “one-time unusual items” as a percentage of net sales. You indicate that the one-time unusual items are acquisition, integration, spin-off and restructuring related costs, but we note that you have recorded similar costs in the last three fiscal years. Item 10(e)(1)(ii) of Regulation S-K prohibits adjusting a non-GAAP performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual when the nature of the charge or gain is such that it is reasonably likely to recur within two years or there was a similar charge or gain within the prior two years. Please explain why you believe these adjustments are non-recurring in nature or revise similar presentations in future filings to refrain from characterizing these adjustments as “non-recurring.” Please refer to question 102.03 of our Non-GAAP Financial Measures Compliance and Disclosure Interpretation, available at http://www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm.

Disclosure Simplification? That was too easy for GE, they went so much further!

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In one of our June workshops a participant brought the most recent GE Form 10-K into the group’s discussions. GE has dramatically redesigned their Form 10-K to be a communication focused document.

If it weren’t for the cover page, most SEC reporting professionals would not even recognize this filing as a 10-K. Right after the cover page is a picture of a GE worker and this is followed by an executive summary. It looks like an annual report to shareholders at first, but no, it is the ACTUAL FORM 10-K! It even has colors!

The document is organized differently to tell GE’s story in a meaningful and engaging way. When you think Form 10-K you usually think of a lock-step structure of Parts and Items, and this structure does not appear at all in this narrative document. GE has used General Instruction C.1. in a very innovative way. This instruction says:

  1. Preparation of Report.
    1. (1)  This form is not to be used as a blank form to be filled in, but only as a guide in the preparation of the report on paper meeting the requirements of Rule 12b-12. Except as provided in General Instruction G, the answers to the items shall be prepared in the manner specified in Rule 12b-13.

GE completely redesigned the structure and the flow. GE did not follow the lock-step format of the Form 10-K Parts and Items. Instead they reorganized the content into a logical structure and flow. In addition, you will see a variety of font sizes and headings, pictures, graphics and other tools to make information easier to follow and understand. (All of course looking back to the concepts of Plain English.)

When we here at the blog first read the document we wondered how it could even be grounded in the Form 10-K instructions, but check out page 231. Here is the linkage to the instructions. In the order of the Parts and Items in the Form 10-K instructions GE cross references to where the required disclosures are in their new 10-K.

The investment in improvement and change in this document is, well, WOW!

You can find the 10-K at:

www.ge.com/ar2014/assets/pdf/GE_2014_Form_10K.pdf

As always, your thoughts and comments are welcome and appreciated!

Non-GAAP Measures – The SAGA continues – Full non-GAAP Financial Statements?

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In our last two posts we reviewed the two sources of SEC guidance for the use of non-GAAP measures:

Reg G for non-filed documents such as earnings releases, and

Reg S-K Item 10(e) for non-GAAP measures included in filed documents such as in the MD&A of Form 10-K.

We also explored issues in the definition of a non-GAAP measure, which can be complex for some operational measures such as revenue per employee and same store sales.

In our next few posts we will discuss areas where companies sometimes push the use of non-GAAP measures a bit too far. When this happens, as you would expect, the SEC frequently writes comments about these issues.

The first is something that has happened frequently when companies want to show what their F/S would look like without certain non-cash charges. A very common example is share based payment expense. Since share based payments can affect a number of lines in the F/S companies will sometimes present an entire F/S, for example an Income Statement, on a non-GAAP basis.

In the view of the SEC their non-GAAP measure guidance allows the presentation of individual measures, but it does not permit this kind of full financial statement presentation. In essence, the risk that this could cause investor confusion is too great.

This position is formally stated in a Compliance and Disclosure Interpretation (C&DI). Here is the text:

Question 102.10

Question: Is it appropriate to present a full non-GAAP income statement for purposes of reconciling non-GAAP measures to the most directly comparable GAAP measures?

Answer: Generally, no. Presenting a full non-GAAP income statement may attach undue prominence to the non-GAAP information. [Jan. 11, 2010]

You can find all the C&DI’s for non-GAAP measures at:

www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm

Given this position, when the staff sees this kind of presentation, they do write comments! Here is an example:

  1. We see on page 5 of your earnings release that you present non-GAAP financial measures and related reconciliations required by Item 10(e) of Regulation S-K in the form of non-GAAP income statements. Please tell us how your presentation considers the guidance set forth in Compliance and Disclosure Interpretation 102.10. Under the cited guidance, it is generally not appropriate to present a non-GAAP income statement for purposes of reconciling non-GAAP financial measures to the most directly comparable GAAP financial measures.

And, here is another that has a bit more complexity, but the same theme, and makes the point that gross sales is in fact a non-GAAP measure that should be reconciled to net sales.

  1. We note that you present gross sales less promotional and other allowance figures at the top of your full GAAP income statements on page 48. In addition, you present and discuss gross sales, a non-GAAP measure, prior to the presentation and discussion of net sales, the most comparable GAAP measure, in your selected financial data on page 40 and in your discussion on page 49. Furthermore, it appears that you reconcile gross sales, the non-GAAP measure, to net sales, the most directly comparable GAAP measure, by presenting this reconciliation in a full non-GAAP income statement which is generally not considered appropriate as it may attach undue prominence to the non-GAAP measure, gross sales. Please revise future filings to present and discuss the GAAP measure net sales, more prominently than the non-GAAP measure, gross sales. In addition, any reconciliation of the two measures should not be included on your full income statement as this may result in presentation of a full non-GAAP income statement. Refer to the guidance outlined in Item 10(e) of Regulation S-K and Question 102.10 of Staff’s Compliance & Disclosure Interpretation on Non-GAAP Financial Measures at http://www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm

As always, your thoughts and comments are appreciated!

 

SEC Comment of the Week: To GAAP or non-GAAP, aye, that is the question….

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Or – There is more than Reg G!

The use of Non-GAAP financial measures has a long and storied history. Non-GAAP disclosures always seem to engender controversy and questions. While there is no doubt that they are widely used and important to many investors, unfortunately they are sometimes misused, and can even result in enforcement action. Check out this enforcement release against Trump Hotels and casinos as a great example of what not to do:

www.sec.gov/news/headlines/trumphotels.htm

During our workshops we frequently find that there is more than a bit of confusion over the SEC’s guidance for the use of non-GAAP measures. Most SEC Reporting professionals know about “Reg G” and it’s guidance, but that is not the only place the SEC has non-GAAP measure rules. (Note: It was in 2002 that the Title IV of the SOX Act gave the SEC the power and responsibility to regulate the use of “pro forma figures”, later renamed non-GAAP measures.)

Regulation G is the SEC rule that applies when a non-GAAP measure is included in a document that is not filed with the SEC such as an earnings release.

Regulation S-K Item 10(e), which is not as well understood, is additional guidance that must be followed if a non-GAAP measure is included in a filed document, such as in MD&A in Form 10-K and 10-Q or in CD&A in a proxy statement.

This difference is not always well understood and does result in SEC Comments. (There is an example comment to a company that did not follow S-K Item 10’s guidance below)

What is the Difference?

Reg G, the rule for non-filed documents such as an earnings release or an investor presentation, is in essence very simple. You can find Reg G at:

www.ecfr.gov/cgi-bin/text-idx?SID=8e0ed509ccc65e983f9eca72ceb26753&node=17:4.0.1.1.5&rgn=div5

The nuts and bolts of Reg G are fairly straightforward:

“(a) Whenever a registrant, or person acting on its behalf, publicly discloses material information that includes a non-GAAP financial measure, the registrant must accompany that non-GAAP financial measure with:

(1) A presentation of the most directly comparable financial measure calculated and presented in accordance with Generally Accepted Accounting Principles (GAAP); and

(2) A reconciliation (by schedule or other clearly understandable method), which shall be quantitative for historical non-GAAP measures presented, and quantitative, to the extent available without unreasonable efforts, for forward-looking information, of the differences between the non-GAAP financial measure disclosed or released with the most comparable financial measure or measures calculated and presented in accordance with GAAP identified in paragraph (a)(1) of this section.”

There is also an anti-fraud provision to prevent measures that are misleading. A company cannot knowingly lie or omit a material fact in disclosure of a non-GAAP measure. The definition of a non-GAAP measure is also in the rule. (We will explore this definition in our next post!)

Regulation S-K item 10 (e), the source of guidance for non-GAAP measures used in filed documents, has more required disclosure about “why’s” behind the use of non-GAAP measures and some specific rules about things that can’t be done with non-GAAP measures. It does require essentially the same things as Reg G, but then adds additional requirements. Here is its core:

First, if a company uses a non-GAAP measure in a filed document, S-K Item 10(e) requires four things:

“(A) A presentation, with equal or greater prominence, of the most directly comparable financial measure or measures calculated and presented in accordance with Generally Accepted Accounting Principles (GAAP);

(B) A reconciliation (by schedule or other clearly understandable method), which shall be quantitative for historical non-GAAP measures presented, and quantitative, to the extent available without unreasonable efforts, for forward-looking information, of the differences between the non-GAAP financial measure disclosed or released with the most directly comparable financial measure or measures calculated and presented in accordance with GAAP identified in paragraph (e)(1)(i)(A) of this section;

(C) A statement disclosing the reasons why the registrant’s management believes that presentation of the non-GAAP financial measure provides useful information to investors regarding the registrant’s financial condition and results of operations; and

(D) To the extent material, a statement disclosing the additional purposes, if any, for which the registrant’s management uses the non-GAAP financial measure that are not disclosed pursuant to paragraph (e)(1)(i)(C) of this section”

In addition to these four requirements, the first two of which are almost the same as Reg G, S-K Item 10 has five prohibitions. A company cannot:

(A) Exclude charges or liabilities that required, or will require, cash settlement, or would have required cash settlement absent an ability to settle in another manner, from non-GAAP liquidity measures, other than the measures earnings before interest and taxes (EBIT) and earnings before interest, taxes, depreciation, and amortization (EBITDA);

(B) Adjust a non-GAAP performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual, when the nature of the charge or gain is such that it is reasonably likely to recur within two years or there was a similar charge or gain within the prior two years;

(C) Present non-GAAP financial measures on the face of the registrant’s financial statements prepared in accordance with GAAP or in the accompanying notes;

(D) Present non-GAAP financial measures on the face of any pro forma financial information required to be disclosed by Article 11 of Regulation S-X (17 CFR 210.11-01 through 210.11-03); or

(E) Use titles or descriptions of non-GAAP financial measures that are the same as, or confusingly similar to, titles or descriptions used for GAAP financial measures…

So far we have discussed and recapped a lot of information. All of that leads to this example SEC staff comment about the use of non-GAAP measures.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, page 27

  1. We note that you present certain non-GAAP financial measures, including constant currency revenues, gross profit excluding the impacts of the MDP transaction and the exchange, SG&A expense excluding certain costs as a percentage of revenue, and consolidated adjusted EBITDA. Please revise future filings to include all of the disclosures required by Item 10(e)(1)(i) of Regulation S-K for all non-GAAP measures included in your presentation.

This one is as simple as knowing the difference between Reg G and S-K Item 10!

As always, your thoughts and comments are appreciated!

It’s Conference Time!

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Our four Midyear SEC and FASB Forums are underway! This picture is from our Chicago Conference on May 28 and 29. In June the Forums will take place in New York and San Francisco. Check out the dates, agenda and speakers at:

http://www.pli.edu/Content/30th_Midyear_SEC_Reporting_FASB_Forum/_/N-1z12892Z4k?ID=231682

All the programs are chaired by Carol Stacey and bring you up to date with all important developments and current issues at the SEC, FASB and PCAOB.