The role of the audit committee is constantly changing. Recent regulations from the SEC and guidance from the PCAOB impact how audit committees, their advisors and those who prepare public company disclosures function. If you are a member of an audit committee, advise audit committees, or are responsible for corporate reporting on financial reporting and controls, you need to have the latest information and stay on top of current updates that occurred over the past year including SEC and PCAOB developments. Register today for PLI’s June 12th live program and webcast, Audit Committees and Financial Reporting being held in New York City.
Tag Archives: FASB/IASB
The New Going Concern Disclosures – An Example
By: George M. Wilson & Carol A. Stacey
Sears, a storied retailer with a rich history, provides a perhaps not unexpected example of the new going concern disclosures in their recently filed 10-K. In their financial statements on page 66 of the 10-K you will find these disclosures:
Our historical operating results indicate substantial doubt exists related to the Company’s ability to continue as a going concern. We believe that the actions discussed above are probable of occurring and mitigating the substantial doubt raised by our historical operating results and satisfying our estimated liquidity needs 12 months from the issuance of the financial statements. However, we cannot predict, with certainty, the outcome of our actions to generate liquidity, including the availability of additional debt financing, or whether such actions would generate the expected liquidity as currently planned. In addition, the PPPFA contains certain limitations on our ability to sell assets, which could impact our ability to complete asset sale transactions or our ability to use proceeds from those transactions to fund our operations. Therefore, the planned actions take into account the applicable restrictions under the PPPFA.
If we continue to experience operating losses, and we are not able to generate additional liquidity through the mechanisms described above or through some combination of other actions, while not expected, we may not be able to access additional funds under our amended Domestic Credit Agreement and we might need to secure additional sources of funds, which may or may not be available to us. Additionally, a failure to generate additional liquidity could negatively impact our access to inventory or services that are important to the operation of our business. Moreover, if the borrowing base (as calculated pursuant to the indenture) falls below the principal amount of the notes plus the principal amount of any other indebtedness for borrowed money that is secured by liens on the collateral for the notes on the last day of any two consecutive quarters, it could trigger an obligation to repurchase notes in an amount equal to such deficiency.
This, as the bolded sentence above illustrates, is an example of the situation where there is substantial doubt about the ability of Sears to continue as a going concern, but the substantial doubt is mitigated by the company’s plans. The new reporting requirement for going concern disclosures has a two path approach. The first is:
If, after considering management’s plans, substantial doubt about an entity’s ability to continue as a going concern is alleviated as a result of consideration of management’s plans, an entity shall disclose in the notes to financial statements information that enables users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the notes):
- Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans)
- Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
- Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.
The second disclosure path is:
If, after considering management’s plans, substantial doubt about an entity’s ability to continue as a going concern is not alleviated, the entity shall include a statement in the notes to financial statements indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued. Additionally, the entity shall disclose information that enables users of the financial statements to understand all of the following:
- Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern
- Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
- Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.
Sears provides us an interesting example and the delicate dance of the wording in their disclosure sheds light on how challenging this new requirement can be for companies.
And, to close the loop, here is the opinion paragraph from the auditor of Sear’s financial statements:
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sears Holdings Corporation and subsidiaries as of January 28, 2017 and January 30, 2016, and the results of their operations and their cash flows for each of the three fiscal years in the period ended January 28, 2017, in conformity with accounting principles generally accepted in the United States of America.
Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 28, 2017, based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
As always, your thoughts and comments are welcome!
Revenue Recognition – The Clock is ticking!
Are you ready to implement the FASB/IASB New Revenue Recognition Standard? With approximately nine months to go – The countdown is on! SECI is conducting training workshops throughout the U.S. to prepare filers for the changes and arm them with the tools for implementation. Workshop leaders use interactive lecture, examples and case studies to impart solid knowledge of the provisions of the FASB’s and IASB’s new revenue recognition standard and build an understanding of how the new standard changes revenue recognition accounting and also how it affects the related estimates and judgements. Upcoming workshops include May 2-3 in New York City, May 22-23 in Chicago and June 21-22 in San Francisco with additional dates listed on the SECI site.
Confirmation Hearings!
Everyone in the SEC Reporting community has been waiting for the new leadership at the Commission to be confirmed. As a bit of a preview, here is a link to C-Span video of Chair nominee Jay Clayton’s confirmation hearing. Enjoy!
The Enforcement Division Found Evidence How?????
By: George M. Wilson & Carol A. Stacey
Earlier in March the Enforcement Division announced a settled case against homebuilder Desarrolladora Homex S.A.B. de C.V. This company fraudulently inflated revenues by reporting the sale of over 100,000 homes that had never been built or sold! This was a huge fraud, over $3 billion!
All of that is interesting, but what is really fascinating is how the SEC found that the homes had never been built. They used satellite imagery! You can see one of the pictures here.
We are tempted to say “watch the skies”, but that sounds too much like a 50’s sci-fi movie trailer…..
As always, your thoughts and comments are welcome!
A Bit of SEC News and a Hopefully Enjoyable Video
By: George M. Wilson & Carol A. Stacey
In the first few weeks of the new Administration there was news from the SEC including reconsideration of the Conflict Minerals and Pay Ratio disclosures as well as the legislative repeal of the Resource Extraction Payment disclosure.
While there have not been as many highly publicized developments in recent weeks, the Commission is continuing its normal business. A final rule for Hyperlinks to Exhibits, a proposal to for Inline XBRL, approving an XBRL Taxonomy for IFRS, and a Request for Comment to consider changes to Bank Holding Company Disclosures in Guide 3 are a few of the normal course of business things going on at the SEC. The Enforcement Division continues its normal process with cases ranging from an auditor trading on inside information to a Ponzi scheme involving resale of Hamilton tickets. And, of course, CorpFin continues its review program, and after reviewing over 50% of all companies last year it will be interesting to see the numbers this year.
In a way, especially with so many of our SEC reporting community working on year-end and quarter-end reports, it is nice to have a normal flow of work from the SEC instead of big stories!
So, enjoy the lull! And, to have a bit of fun in this lull, here is a hopefully entertaining diversion. The SEC’s Office of Investor Education and Advocacy has, via its investor.gov website, produced a number of educational videos for investors. This one, titled “Don’t let someone else live the life you’ve been saving for”, is particularly entertaining! Enjoy!
As always, your thoughts and comments are welcome!
Jeepers – More Whistleblower Enforcement Cases? – Do We Have the Message Yet?
By: George M. Wilson & Carol A. Stacey
Just a few weeks ago we did the latest in a series of posts about the SEC’s Whistleblower program. That post focused on two significant enforcement cases where companies attempted to impede whistleblowers. For other posts in our whistleblower series, see:
Our post discussing the background of the SOX and Dodd/Frank whistleblower programs
Our post about the total amount being paid-out to whistleblowers exceeding $100,000,000 (It is even more today!)
Our post discussing a company having to pay a $500,000 fine for firing a whistleblower
SEEMS LIKE THE MESSAGE SHOULD BE CLEAR BY NOW! Don’t try to limit how employees can blow the whistle.
But, the Enforcement Division is not done!
In a case announced on January 17 a company paid a $650,000 fine for including language trying to restrict whistleblower rights in over 1,000 severance arrangements. After removing the language the company also voluntarily agreed to conduct annual training for employees about their whistleblowing rights.
In a case announced on January 21 the SEC found a company that actively searched for a whistleblower, to the point of essentially threatening employees. The reason for the hunt was clear, the treasurer and the company had manipulated information related to hedge accounting and was actively trying to hide the fact that certain hedging relationships were not effective. When the SEC began to ask questions about the issue, the company suspected someone had blown the whistle. The company tried to ferret out the whistleblower, compounding their offenses. The company and the treasurer both paid fines.
There is a very important reason for these cases. In many situations a fraud would go undetected if it were not for the conscience and courage of whistleblowers.
It would seem that the SEC is actively searching for more enforcement cases to make the point that it is illegal for a company to try and prevent or impede employees from blowing the whistle.
Not to be too preachy, and hopefully to be a bit practical, here are two thoughts:
For all of us who may see a need to blow the whistle, know that this is never easy, and know that you have rights and protections.
For companies, don’t try to hide problems and make sure any agreements surrounding employee departures don’t have these kinds of restrictions!
As always, your thoughts and comments are welcome!
XBRL for Foreign Private Issuers Using IFRS
By George M. Wilson & Carol A. Stacey
Foreign Private Issuers (FPI’s) who file using IFRS have been in a conundrum about XBRL because there was no usable IFRS taxonomy. The SEC excepted these FPI’s from XBRL until an appropriate taxonomy was developed.
A usable IFRS XBRL taxonomy was formally announced by the SEC on March 1, 2017. The announcement includes a link to the IFRS XBRL Taxonomy that FPI’s must use.
The SEC indicated that FPI’s who use IFRS may begin to submit XBRL financial statements immediately, and that they MUST submit XBRL financial statements for periods ending on or after December 15, 2017.
As always, your thoughts and comments are welcome!
First Quarter 2017 Form 10-Q Hot Topics – SAB 74 and Beyond!
Are you prepared to effectively deal with current and evolving SEC reporting issues, particularly SAB 74 disclosures and recently issued accounting standards in your first quarterly report on Form 10-Q this year? Attend our April 28th One Hour Video Briefing, First Quarter 2017 Form 10-Q Hot Topics as our expert faculty review the key issues to address in your Form 10-Q quarterly reporting.
Solid Knowledge and Tips Needed to Successfully Navigate SEC Reporting
Financial reporting professionals that are armed with the foundational knowledge and practical experience are better prepared to complete and review the SEC’s periodic and current reporting forms, including the 10-K Annual Report, the 10-Q Quarterly Report and the 8-K Current Report. Attend an upcoming SECI live workshop, SEC Reporting Skills, being held in March in San Francisco, New York and San Diego with additional dates and locations.
http://www.pli.edu/Content/SEC_Reporting_Skills_Workshop_2017/_/N-1z10od0Z4k?ID=290554