Tag Archives: FASB

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!

Due Care and Good Faith with Accounting Judgments – More Enforcement News!

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On April 19th the SEC Enforcement Division announced two financial fraud enforcement cases in which companies, officers and in one of the cases the company’s auditors were named and barred or paid fines. Financial fraud enforcement cases are on the rise, but the interesting issue in these cases is that both centered on the challenging, grey area judgements that we make in the accounting process.

In the release Enforcement Division Director Andrew Ceresney said:

“We are intensely focused on whether companies and their officers evaluate judgmental accounting issues in good faith and based on GAAP.”

The most unsettling implication of these two cases is that while we make these judgements with uncertain and sometimes incomplete information, the people who pass judgment on them after the fact always operate with 20-20 hindsight.

The areas involved in these two cases are classic accounting estimate areas. One of the named companies/executives used a warranty accrual, failure to appropriately amortize intangibles and failure to appropriately write down inventory to lower of cost or market to be able to meet earnings targets.

In the other case, company executives failed to appropriately value accounts receivable from and impair investments in an electric car manufacturer that was a major customer. In addition, the audit engagement partner was suspended from appearing before the SEC.

You can read the release at:

www.sec.gov/news/pressrelease/2016-74.html

This message is more than unsettling, it’s downright scary. It almost starts to feel that someone is watching over our shoulder as we make difficult judgment calls. And we know that when we make these kinds of accounting judgments and estimates there is usually no “right answer”. In fact, different professionals may arrive at different conclusions when making these kinds of judgements, but there is usually a range of reasonable estimates.

 

That said, the message is clear, be sure to exercise due care and follow GAAP when making subjective accounting judgments, because if things go wrong, enforcement may be asking questions! And, as we said above, when they ask questions, they will have the benefit of 20-20 hindsight.

 

How do we assure that when someone with hindsight evaluates our decisions we have as strong a position as possible? Here are a few reminders about your process for making and documenting these judgments:

  1. Always create your documentation contemporaneously. If you wait to document a decision until you are asked about it by someone like the SEC, you will never remember all the issues and considerations in your decision. And, it will be easy to see that you created the documentation after the fact.

 

  1. In your documentation be sure to thoroughly evaluate all the different alternatives in the decision process. Lay out in clear language each alternative and the pros and cons of each alternative. Include all relevant factors on all sides of the decision. If someone wants to second guess your decisions and you have not addressed all the issues, it will be more likely that you will be second guessed.

 

  1. Support your discussion with appropriate references to the Accounting Standards Codification. Explain what GAAP you think is relevant and how the guidance applies in your situation. Most importantly, document and be faithful to the principles underneath the GAAP you are using.

 

  1. As part of ICFR, have a documented review process. All appropriate levels of involvement in the decision should be documented, and if your company has a policy about reviewing accounting decisions it should be documented that that policy was followed. If you know there is a material intentional error, such as occurred in these cases, use the appropriate channels within your company to rectify it.

 

If you would like some background about writing these kinds of white papers you could check our One-Hour Briefing about drafting accounting white papers at:

www.pli.edu/Content/How_to_Write_an_Accounting_White_Paper/_/N-1z11dsbZ4n?ID=264615

And lastly, if you are thinking about how the issues in this enforcement relate to issues that could be critical accounting estimates, you could also review the requirements for these disclosures in FR 72. You can find them at the end of the FR at:

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

 

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!

A non-GAAP Measure Subtle Trap

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One of the more complex traps when presenting non-GAAP measures is this question:

Which source of SEC non-GAAP measure guidance applies to your earnings release:

Reg G, or

S-K Item 10(e)?

In case you are not familiar with Reg G and S-K Item 10(e) and when each of them applies:

Reg G applies when you use a non-GAAP measure in a non-filed source, and

S-K Item 10(e) applies when you use a non-GAAP measure in a filed document.

You can learn more about these two non-GAAP rules in some of the earlier posts on our blog. Here is a post with the basics:

 

seciblog.pli.edu/?p=401

 

You can also check out our one-hour briefing about non-GAAP measures from March 2016 at:

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

 

The trap here is this: You might believe that since an earnings release is not a filed document Reg G is the applicable guidance, and all you have to do is present the most directly comparable GAAP measure and provide a reconciliation.

That is NOT the case. The reason that S-K Item 10(e) applies to your earnings release is actually very subtle. It is in the instructions to Form 8-K. Tucked away in the earnings release 8-K, Item 2.02, is this instruction:

 

  1. The requirements of paragraph (e)(1)(i) of Item 10 of Regulation S-K (17 CFR 229.10(e)(1)(i)) shall apply to disclosures under this Item 2.02.

 

Thus, the first part of S-K Item 10(e) DOES apply to your earnings release, even though it is not “filed” and even though the Item 2.02 8-K is not a filed document!

 

So, to be very detailed, this part of S-K Item 10(e) applies to year earnings release (there are other requirements in S-K Item 10(e) that do not apply, we won’t list them here):

 

(e) Use of non-GAAP financial measures in Commission filings. (1) Whenever one or more non-GAAP financial measures are included in a filing with the Commission:

 

(i) The registrant must include the following in the filing:

(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; and

 

One area the staff will comment on is the “equal or greater prominence” requirement in paragraph (A) above. Here is an example comment:

 

  1. We note that in the Financial Highlights section of your press release furnished on Form 8-K, you disclose Total Segment EBITDA, a non-GAAP financial measure, without the disclosure of the most comparable GAAP measure. Please note that under Item 10(e)(1)(i)(A) when a non-GAAP financial measure is presented, the most directly comparable financial measure calculated in accordance with GAAP must be disclosed with equal or greater prominence. Please revise accordingly. See also Instruction 2 to Item 2.02 of Form 8-K.

 

As always, your thoughts and comments are welcome!

 

 

Non-GAAP Measures in the News

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How companies use non-GAAP measures is one of the “hot topics” that we post about frequently. This is not just because we think it is interesting. (Although we do!). More to the point, it is a subject of frequent SEC comment, and in the last several weeks both SEC Chair Mary Jo White and Chief Accountant James Schnurr have expressed their concern about more aggressive use of non-GAAP measures. And a recent report from FACTSET (mentioned in more detail below) bears out this concern.

Carol and George, your blog authors, recently did a One-Hour Briefing about Non-GAAP measures.

You can find the archived One-Hour Briefing at:

www.pli.edu/Content/OnDemand/Non_GAAP_Measures_and_Metrics_Getting_it/_/N-4nZ1z10vny?fromsearch=false&ID=283312

 

In the Briefing we included this quote from Mr. Schnurr’s March 22, 2016 speech to the 12’th Annual Life Sciences Accounting and Reporting Congress in Philadelphia, PA:

 

Non-GAAP measures

Before I conclude today’s remarks, I’d like to provide my perspectives on non-GAAP measures, which is a topic that continues to receive attention from investors, those at the SEC, as well as the general news media.

The Commission adopted rules in 2003 addressing the disclosure of non-GAAP financial measures, both generally and with respect to inclusion in SEC filings. While the Commission’s rules allow companies to provide non-GAAP measures to investors as alternative measures that supplement information in the financial statements, the rules are clear that the non-GAAP measures must not be misleading. The SEC staff has observed a significant and, in some respects, troubling increase over the past few years in the use of, and nature of adjustments within, non-GAAP measures by companies as well prominence that the analysts and media have accorded such measures when reporting on the results of the companies they cover.

 

Non-GAAP measures are intended to supplement the information in the financial statements and not supplant the information in the financial statements. However, when the financial news networks report quarterly earnings, they very frequently report the non-GAAP measure of earnings with no reference to the actual GAAP earnings, often not even identifying it as having been adjusted. In addition, I am particularly troubled by the extent and nature of the adjustments to arrive at alternative financial measures of profitability, as compared to net income, and alternative measures of cash generation, as compared to the measures of liquidity or cash generation. In my view, preparers should carefully consider whether significant adjustments to profitability outside of customary measures such as EBITDA or non-recurring items or other charges to the business, such as the sale of portions of the business in order to provide the user with an understanding of how these events impact trends and future performance, are appropriate. As it relates to cash measures, I believe those measures should be reconciled to cash flow from operations.

 

Staff in the Division of Corporation Finance continues to monitor non-GAAP disclosures as part of its selective review process and regularly issues comments on this issue. The staff also provides guidance on the application of Commission rules through speeches and other mechanisms — and of course, staff comment letters are publicly available. You can expect that the staff will continue to be vigilant in their review of the use of these measures for compliance with the rules.

 

The proliferation of non-GAAP reporting measures among registrants, and reliance and reporting by analysts, should warrant increased focus by management and the audit committee. I believe the focus should go beyond determinations that the measures comply with the Commission’s rules and include probing questions on why, in contrast to the GAAP measure, the non-GAAP measure is an appropriate way to measure the company’s performance and is useful to investors. In addition, companies should ensure that the measure is prepared in a manner that includes appropriate controls and oversight procedures.

 

You can find the whole speech at:

www.sec.gov/news/speech/schnurr-remarks-12th-life-sciences-accounting-congress.html

 

Chair White’s Speech at an AICPA conference in December included these remarks:

  • Another financial reporting topic of shared interest and current conversation is the use of non-GAAP measures.  This area deserves close attention, both to make sure that our current rules are being followed and to ask whether they are sufficiently robust in light of current market practices.  Non-GAAP measures are allowed in order to convey information to investors that the issuer believes is relevant and useful in understanding its performance.  By some indications, such as analyst coverage and press commentary, non-GAAP measures are used extensively and, in some instances, may be a source of confusion.
  • Like every other issue of financial reporting, good practices in the use of non-GAAP measures begin with preparers.  While your chief financial officer and investor relations team may be quite enamored of non-GAAP measures as useful market communication devices, your finance and legal teams, along with your audit committees, should carefully attend to the use of these measures and consider questions such as:
    • Why are you using the non-GAAP measure, and how does it provide investors with useful information?
    • Are you giving non-GAAP measures no greater prominence than the GAAP measures, as required under the rules?
    • Are your explanations of how you are using the non-GAAP measures – and why they are useful for your investors – accurate and complete, drafted without boilerplate?
    • Are there appropriate controls over the calculation of non-GAAP measures?

 

So, the message has clearly been sent, be thoughtful about the use of non-GAAP measures and be careful to not be misleading.

 

How are companies responding to these messages?

For now, it does not look like they are listening. FACTSET has done a very detailed study that includes all the earnings releases for the Dow Jones Industrial Average companies for their most recent year-end. Their results are available at:

 

www.factset.com/insight/2016/03/earningsinsight_03.11.16#.Vw5yo2OPAQK

 

Their findings are very dramatic. For companies that released a non-GAAP earnings measure the difference between GAAP EPS and non-GAAP EPS from 2014 to 2015 widened from 11.8% to 30.7%. And that is just one of may statistics that highlight growing differences between GAAP and non-GAAP measures. Of course, the non-GAAP measures all seem to look better…

 

So, we suggest careful review by your audit committee and management of the use of non-GAAP measures. And, be sure to look back to the comments above and ask the questions Chair White asked:

 

  • Why are you using the non-GAAP measure, and how does it provide investors with useful information?
  • Are you giving non-GAAP measures no greater prominence than the GAAP measures, as required under the rules?
  • Are your explanations of how you are using the non-GAAP measures – and why they are useful for your investors – accurate and complete, drafted without boilerplate?
  • Are there appropriate controls over the calculation of non-GAAP measures?”

As always, your comments and thoughts are welcome!

Carol and George

 

Disclosure Effectiveness – Looking for A Deeper Dive?

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Last week we lightheartedly posted about the fun of listening to a live webcast of an SEC meeting and being “cool” and “in the know”. The meeting we mentioned is on April 13th and includes this agenda item:

 

The Commission will consider whether to issue a concept release seeking comment on modernizing certain business and financial disclosure requirements in Regulation S-K.

 

Concept releases explore issues and very frequently provide insight into the direction that future policy making will take. As an example you could check out the SEC’s recent concept release about audit committee disclosures in this post:

 

seciblog.pli.edu/?p=462

 

Also, in some words that may be familiar to folks who have attended our SEC Workshops, here is a quote about MD&A from FR 36:

 

The MD&A requirements are intended to provide, in one section of a filing, material historical and prospective textual disclosure enabling investors and other users to assess the financial condition and results of operations of the registrant, with particular emphasis on the registrant’s prospects for the future. As the Concept Release states:

 

The Commission has long recognized the need for a narrative explanation of the financial statements, because a numerical presentation and brief accompanying footnotes alone may be insufficient for an investor to judge the quality of earnings and the likelihood that past performance is indicative of future performance. MD&A is intended to give the investor an opportunity to look at the company through the eyes of management by providing both a short and long-term analysis of the business of the company. The Item asks management to discuss the dynamics of the business and to analyze the financials.

 

Most importantly, the SEC listens and very often thoughtfully takes into account the issues discussed in comment letters in their subsequent rulemaking.   All this leads us to the conclusion, especially since the Disclosure Effectiveness process has been underway for quite a while, that this could be an important meeting!

 

If you would like to learn a bit more after the meeting, PLI will be presenting a One-Hour Briefing titled “SEC’s New Concept Release on Modernizing Regulation S-K” on April 25, 2016. Four speakers, including former CorpFin staffers, will present the briefing to help build a deeper understanding of the process. You can learn more at:

 

www.pli.edu/Content/Seminar/SEC_s_New_Concept_Release_on_Modernizing/_/N-4kZ1z10szo?Ns=sort_date%7c0&ID=283018

 

As always, your thoughts and comments are welcome!

 

 

The SEC Comment Process – What if?

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In all our workshops and seminars, when we discuss the SEC review process we always emphasize that when you get a comment from the staff you do NOT immediately change disclosure in response to the comment. As the staff says in their on-line “Filing Review Process” document, they view the process of issuing comments as a “dialogue with a company about its disclosure”.

You can find the filing review process document, which is updated on a regular basis at:

www.sec.gov/corpfin/Article/filing-review-process—corp-fin.html

 

To illustrate, here is a real life comment example.

 

STEP ONE – COMMENT RECEIVED

What would you do if you received this comment?

 

Reportable Segments, page 39

  1. Your segment discussion and analysis only refers to non-GAAP amounts. Pursuant to Item 10(e) of Regulation S-K, we remind you that more prominence should not be given to non-GAAP financial measures compared to GAAP financial measures. In this regard, please revise your discussion and analysis to first provide a discussion of the corresponding GAAP amounts for each segment ensuring equal prominence to that of your non-GAAP amounts.

The comment uses the language “please revise”, which is a bit scary, and in the back of our minds we hope we can push the comment to an “in future filings” comment if we decide the staff is on-point. The comment is focused on the use of non-GAAP measures in MD&A as discussed in operating segment disclosures. Of course, the use of non-GAAP measures in segment disclosures is appropriate if in fact your chief operating decision maker uses non-GAAP information. So, your first step in the research process for this comment might be to go review that part of ASC 280.

 

 

STEP TWO – REVIEW GAAP LITERATURE

Here is the relevant section:

Measurement

50-27     The amount of each segment item reported shall be the measure reported to the chief operating decision maker for purposes of making decisions about allocating resources to the segment and assessing its performance. Adjustments and eliminations made in preparing a public entity’s general-purpose financial statements and allocations of revenues, expenses, and gains or losses shall be included in determining reported segment profit or loss only if they are included in the measure of the segment’s profit or loss that is used by the chief operating decision maker. Similarly, only those assets that are included in the measure of the segment’s assets that is used by the chief operating decision maker shall be reported for that segment. If amounts are allocated to reported segment profit or loss or assets, those amounts shall be allocated on a reasonable basis.

ASC 280 then goes on to require disclosure about the measurement basis used for segment disclosures:

50-29     A public entity shall provide an explanation of the measurements of segment profit or loss and segment assets for each reportable segment. At a minimum, a public entity shall disclose all of the following (see Example 3, Cases A through C [paragraphs 280-10-55-47 through 55-49]):

  1. The basis of accounting for any transactions between reportable segments.
  2. The nature of any differences between the measurements of the reportable segments’ profits or losses and the public entity’s consolidated income before income taxes, extraordinary items, and discontinued operations (if not apparent from the reconciliations described in paragraphs 280-10-50-30 through 50-31). Those differences could include accounting policies and policies for allocation of centrally incurred costs that are necessary for an understanding of the reported segment information.
  3. The nature of any differences between the measurements of the reportable segments’ assets and the public entity’s consolidated assets (if not apparent from the reconciliations described in paragraphs 280-10-50-30 through 50-31). Those differences could include accounting policies and policies for allocation of jointly used assets that are necessary for an understanding of the reported segment information.
  4. The nature of any changes from prior periods in the measurement methods used to determine reported segment profit or loss and the effect, if any, of those changes on the measure of segment profit or loss.
  5. The nature and effect of any asymmetrical allocations to segments. For example, a public entity might allocate depreciation expense to a segment without allocating the related depreciable assets to that segment.

 

ASC 280 also includes this reconciliation requirement:

 

50-30     A public entity shall provide reconciliations of all of the following (see Example 3, Case C [paragraphs 280-10-55-49 through 55-50]):

  1. The total of the reportable segments’ revenues to the public entity’s consolidated revenues.
  2. The total of the reportable segments’ measures of profit or loss to the public entity’s consolidated income before income taxes, extraordinary items, and discontinued operations. However, if a public entity allocates items such as income taxes and extraordinary items to segments, the public entity may choose to reconcile the total of the segments’ measures of profit or loss to consolidated income after those items.
  3. The total of the reportable segments’ assets to the public entity’s consolidated assets.
  4. The total of the reportable segments’ amounts for every other significant item of information disclosed to the corresponding consolidated amount. For example, a public entity may choose to disclose liabilities for its reportable segments, in which case the public entity would reconcile the total of reportable segments’ liabilities for each segment to the public entity’s consolidated liabilities if the segment liabilities are significant.

 

With this, our review of the relevant GAAP literature is well underway, and substantially complete.

 

STEP THREE – REVIEW THE RELEVANT SEC NON-GAAP GUIDANCE

As you research the SEC’s requirements surrounding the use of non-GAAP measures, most of us are familiar with Reg G, which applies to non-GAAP measures in documents that are not filed, such as earnings releases. But this comment is about S-K Item 10(e) which applies to non-GAAP measures included in MD&A. As you read Item 10(e) you would find:

(5) For purposes of this paragraph (e), non-GAAP financial measures exclude financial measures required to be disclosed by GAAP, Commission rules, or a system of regulation of a government or governmental authority or self-regulatory organization that is applicable to the registrant. However, the financial measure should be presented outside of the financial statements unless the financial measure is required or expressly permitted by the standard-setter that is responsible for establishing the GAAP used in such financial statements.

Where to go from here? Lets get into the specific facts in the company’s Form 10-K.

 

 

STEP FOUR – APPLY THE RESEARCH TO THE COMPANY’S DISCLOSURES

Here is an excerpt from the company’s segment note:

 

“We prepared the financial results for our reportable segments on a basis that is consistent with the manner in which we internally disaggregate financial information to assist in making internal operating decisions. We included the earnings of equity affiliates that are closely associated with our reportable segments in the respective segment’s net income. We have allocated certain common expenses among reportable segments differently than we would for stand-alone financial information. Segment net income may not be consistent with measures used by other companies. The accounting policies of our reportable segments are the same as those applied in the consolidated financial statements.”

Here is an excerpt from the MD&A disclosure that the SEC comment is focused on:

When compared to the same period last year, core earnings increased in the twelve months ended December 31, 2013 by $202 million, or 13%, driven by the following items:

 

· Higher core earnings in the Optical Communications, Life Sciences,

Environmental Technologies and Display Technologies segments in the

amounts of $59 million, $44 million, $11 million and $7 million, respectively; and
·  

Lower operating expenses in the amount of $49 million, driven by a decrease in

variable compensation and cost control measures implemented by our segments.

 

You can find the company’s Form 10-K at:

files.shareholder.com/downloads/glw/1822865217x0xS24741%2D15%2D15/24741/filing.pdf

 

You can read the issues the SEC is commenting about in MD&A on page 39, and the segment note starts on page 137.

At this point we are ready to make an informed judgment about the comment. And this one follows a really twisty path! First, the MD&A clearly includes non-GAAP measures for “core” operations. And, interestingly, these are not the measures that are disclosed in the segment note in the financial statements. Since the measures used in the MD&A are not in the segment note the provision in S-K Item 10(e) excluding disclosures required under GAAP does not apply, and so the company must comply with the provisions. The next step is to, as we said above, make a case with the staff that it will be appropriate to fix this comment in future filings and not amend the current Form 10-K.

 

STEP FIVE – RESPOND TO THE COMMENT

Here is the company’s response to the comment, and the staff did allow this to become a future filings comment:

We acknowledge the Staff’s comments and, beginning with our Form 10-Q filed for the second quarter of 2014, will revise our future disclosure to ensure that more prominence is not given to non-GAAP financial measures when compared to GAAP financial measures.  With respect to the request to revise our discussion and analysis to first provide a discussion of the corresponding GAAP amounts for each segment, we provide the following updated disclosure, which we propose to use in future filings.

You can read the response letter and the complete version of the response to comment 8 including the proposed disclosure at:

 

www.sec.gov/Archives/edgar/data/24741/000002474114000025/filename1.htm

 

 

As always, your thoughts and comments are welcome!

Some XBRL News and A Few Tidbits

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XBRL has not really been in the news much lately, but on March 29, 2016 the SEC released a second DERA study about tagging processes. The study, titled “Staff Observations of Custom Axis Tags” is at:

www.sec.gov/structureddata/reportspubs/osd_assessment_custom-axis-tags.html

Here is an excerpt from the introduction of the report:

As part of our ongoing process to monitor registrant compliance with the requirements to report their financial information in their eXtensible Business Reporting Language (XBRL) exhibits, staff in the SEC Division of Economic and Risk Analysis recently assessed certain aspects of the XBRL exhibits that affect the data quality of the disclosures provided. Specifically, the staff examined the use of custom axis tags in XBRL exhibits that reporting companies submitted with their annual reports on Form 10-K. An axis tag in XBRL allows a filer to divide reported elements into different dimensions (e.g., revenue by geographical area, fair value measurement levels, components of total equity (e.g., common, preferred)) while also showing the relationships between separately reported elements.

……………

The staff’s analysis resulted in a few key observations. First, unlike our previous staff observations that revealed a lower average rate of custom line item tags among large filers, staff observed a higher average use of custom axis tags as filer size increased, with the rate of custom axis tags highest for large accelerated filers. Second, for a random sample of filings that staff reviewed, staff observed instances of filers creating custom axis tags unnecessarily when an appropriate standard axis tag existed in the U.S. GAAP taxonomy.

 

This is an interesting development, and clearly demonstrates the SEC’s work to help make XBRL information more reliable and useful.

The earlier information the SEC has issued about XBRL include:

A “Dear CFO” letter about calculation structures that is at:

www.sec.gov/divisions/corpfin/guidance/xbrl-calculation-0714.htm

This earlier DERA study of extension use at:

www.sec.gov/dera/reportspubs/assessment-custom-tag-rates-xbrl.html

 

Getting XBRL Right

Next, here is a good reminder to make sure that your XBRL submissions are prepared properly and tagging is done appropriately. While XBRL is not subject to ICFR and there is no requirement for any sort of auditor review, XBRL submissions are subject to your disclosure controls and procedures. As a result you should have appropriate controls to assure that your XBRL submission:

“is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms.”

The above quote is from the definition of Disclosure Controls and Procedures in Exchange Act Rule 13a-15 which is at:

www.ecfr.gov/cgi-bin/text-idx?SID=8e0ed509ccc65e983f9eca72ceb26753&node=17:4.0.1.1.1&rgn=div5#se17.4.240_113a_615

This requirement is highlighted in a recent Form 10-K/A filed by Goldman Sachs to make some corrections in their XBRL submission. Goldman filed their original 10-K on February 19, 2016 and on March 1, 2016 filed a Form 10-K/A. As is required by the Exchange Act Rules for amendments, Goldman included this explanatory note:

EXPLANATORY NOTE

Due to an error by our external financial printer, our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (Original Form 10-K) was filed with an incorrect version of Exhibit 101, which provides items from our Original Form 10-K formatted in eXtensible Business Reporting Language.

This Amendment No. 1 on Form 10-K/A (Amendment) to our Original Form 10-K, filed on February 19, 2016, is being filed in accordance with Rule 12b-15 under the Securities Exchange Act of 1934 for the sole purpose of including the correct version of Exhibit 101.

This Amendment does not amend or otherwise update any other information in the Original Form 10-K and does not reflect events occurring after the date of the Original Form 10-K.

Goldman was perhaps doing something that is appropriate, which we discuss in our workshops. After the filing someone likely double checked the XBRL submission and found the problem, and they fixed it as soon as possible. This is an example of disclosure controls in action on a detective basis, and again, while the SEC has not really indicated that they will do a lot of review of XBRL submissions, we need to make sure they are done appropriately. And, who knows, it is possible the SEC pointed this out to Goldman.

 

Taxonomy Update

On March 7, 2016 the SEC updated the EDGAR system to accept the 2016 XBRL taxonomies previously released by the FASB. The announcement is at:

www.sec.gov/structureddata/announcement/osd-announcement-030716—xbrl-taxonomy-update.html

 

Using XBRL Information

While we still don’t hear a lot about users taking advantage of all the information in the XBRL database, user tools are continuing to evolve. One tool that provides a nice way to access and use XBRL data comes from a company called Calcbench. If you do peer group analysis or are searching for comparable disclosures, this is a very useful tool. You can learn more at:

www.calcbench.com

 

As usual your thoughts and comments, including any insights you have about people using XBRL or XBRL user tools, is 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!