Tag Archives: Finance

Watch Out – Instructions to Form 10-K Typo’s?

In all our workshops we always advise everyone to check the SEC’s webpage for the latest version of the instructions whenever it is 10-K or 10-Q time. And, recently, the SEC put updated instructions for Form 10-K on their webpage.

But this update has an interesting twist!

The updated instructions do not have any major changes. The only really new instructions relate to asset-backed issuers.

That said, there is something really strange about the new instructions. Check them out at:

www.sec.gov/about/forms/form10-k.pdf

Now, as you read them check out the cover page and as you look at the second line it says:

“For the fiscal yar ended”

While this looks like it might be a typo, we know the SEC is always VERY CAREFUL when they make these changes, and we think in all likelihood there has been some sort of a technical problem in the process of converting the instructions to PDF form and uploading them to the webpage.

So, how should we react? Should we literally follow these instructions? Include the likely technical issue errors?

Obviously NOT!

In fact, don’t forget what General Instruction C(1) says:

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.

So, do it right!

As a last note, the 10-Q instructions have not been changed, but as we approach the First Quarter Form 10-Q, watch for updates!

As always, your thoughts and comments are welcome!

Foreign Corrupt Practices Act – Yikes?

FCPA enforcement has become more and more of a priority for the SEC and a bigger and bigger issue for public companies in recent years. The SEC actually has a special section of its webpage devoted to FCPA Enforcement Actions!

www.sec.gov/spotlight/fcpa/fcpa-cases.shtml

Any business with foreign operations, or thinking of establishing one, even if they are modest, needs to pay attention to the challenges of FCPA compliance. Lawyers, accountants and professionals working in almost any aspect of a company with foreign operations need to understand this complex law.

To manage FCPA risks it is crucial to understand issues such as:

What are the Act’s anti-bribery provisions?

What are the Act’s “accounting and recordkeeping” (internal control) provisions?

What are the traps and major issues in the “accounting and recordkeeping” provisions?

How payments that may be immaterial for financial reporting still matter for FCPA compliance.

How internal audits and FCPA compliance audits differ.

What is the difference between a bribe and a “facilitating payment”, and does it matter for FCPA compliance?

What are the civil and criminal consequences of violating the Act?

What are the major parts of a compliance program?

How does a company build an effective compliance program?

If you need a good place to start understanding what is required to deal with FCPA issues, PLI’s One-Hour Briefing, Basics of the U.S. Foreign Corrupt Practices Act (FCPA) 2015, on April 17, 2015, is a great resource for understanding the issues and complying with the Act.

SEC Focus Area – Critical Accounting Estimate Disclosures

In recent speeches SEC Staff members have emphasized the importance of appropriate disclosure of Critical Accounting Estimates. In this blog entry we will go a bit further. We will:

  1. Review some typical comments the staff has been including in comment letters, and
  1. Show you how to find and use the actual guidance for disclosure of Critical Accounting Estimates.

In our workshops we unfortunately find a fair amount of confusion about the SEC’s requirements in this area.

Just what is the SEC Staff saying to registrants about this disclosure? Here are some representative comments. (Fortunately most of these comments are “fix in future filings” comments!)

First, a comment that simply tells a registrant what they are, and where to find the guidance. Note the language that makes it clear this is very different from the Summary of Significant Accounting Policies!

  1. We note your response to our prior comment 3. The proposed disclosure for your Critical Accounting Policies within Management’s Discussion and Analysis appears to be a duplication of the accounting policies already disclosed in the footnotes to your financial statements. Please note that the objective of the Critical Accounting Policies within Management’s Discussion and Analysis is different from that of the Summary of Significant Accounting policies included in the footnotes to your financial statements; the objective of the Critical Accounting Policy disclosure is to address material implications of uncertainties associated with the methods, assumptions and estimates underlying the (application of) your critical accounting measurements. Refer to FR-72, which can be found on our website at: http://www.sec.gov/rules/interp/33-8350.htm. Please modify your proposed disclosure within Management’s Discussion and Analysis to eliminate repetition of the accounting policies disclosed elsewhere in your filing and, to the extent not disclosed elsewhere, include disclosure that addresses the specific methods, assumptions and estimates underlying the your critical accounting measurements

Next, here are three comments to illustrate the level of analysis that the SEC Staff expects in your discussion of the historical and potential future variability in financial results related to Critical Accounting Estimates.

  1. We refer to the following disclosures from your Critical Accounting Policies found on page 53, “In establishing our credit practices, we seek to strike an appropriate balance between prudent learner credit policies and learner retention. Accordingly, we periodically review and alter learner credit policies to achieve that objective by restricting or expanding the availability of credit we extend.” Please tell us in detail about the facts and circumstances that have caused you to review and alter learner credit policies in the past.

Goodwill impairment uncertainty is a frequent comment area:

  1. We note your response to prior comment 4 indicating that you will include additional related disclosures if any of your reporting units are at risk of failing step one of the impairment test. If none of your reporting units are at risk of failing step one, please tell us what consideration you gave to disclosing that conclusion. In addition, tell us whether the estimated fair values of any of your reporting units substantially exceed the carrying values, and consider disclosing any such determination. Tell us your threshold for determining that the excess is substantial.

And this last comment is just good, sound analysis:

  1. We note the reduction in your allowance for doubtful accounts as a percentage of total accounts receivable from July 31, 2013 (18.1%) to July 31, 2014 (14.7%). Please describe to us the factor(s) that resulted in the reduction (e.g. changes in the category of outstanding receivables, the composition of the aging or the Company’s accounting policy or methodology with respect to the allowance from the prior period). Also confirm to us that you will clearly describe any significant factor(s) that influenced management’s judgment with respect to the estimate of allowance for doubtful accounts in future filings.

So, just where is the current guidance for Critical Accounting Estimate disclosure? There is a bit of confusion here! This all started in the post-Enron period with FR 60 (the FRs are Financial Reporting Releases, interpretations that are approved by the SEC Commissioners). This release addressed the aggressive use of accounting principles and required disclosure of “Critical Accounting Policies”. It also required that this disclosure be made in plain English. It was issued very quickly in order to apply to year-end 2001 financial statements, and was called a “Cautionary Advice”. As this disclosure was a very new concept, it did not describe in great detail exactly what a critical accounting policy was or what disclosures should be made. You can find this brief FR, for perhaps historical purposes, at:

www.sec.gov/rules/other/33-8040.htm

The key reason the FR was short was that the SEC planned to make a formal rule concerning this disclosure. The rule was proposed, but was never actually finalized.

The reason the rule was never finalized is that the SEC instead addressed this disclosure in FR 72. You can find the current guidance in FR 72 way towards the end in Section V. Here is the release, just scroll way down:

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

(Note the evolution in terminology from Critical Accounting Policy to Critical Accounting Estimate.)

If you read this brief Commission interpretation and keep in mind the comments above, you will create meaningful disclosure in this area. A few points to consider:

  1. Critical accounting estimate disclosure is NOT the same as accounting policy disclosures.
  2. You could start with the idea that you have far fewer Critical Accounting Estimates than accounting policies, perhaps three to five as a starting point.
  3. Be sure to address what makes the estimate critical and uncertain, and why the impact could be material.
  4. Include quantified sensitivity analysis that will help investors understand the potential impact if the estimate were to change.

We hope this helps, and as always, your thoughts and comments are appreciated!

Planning on an IPO?

One of the great things going on in the economy right now is the increase in IPO activity. Working with a company through the IPO process is one of the most challenging and rewarding experiences SEC reporting professionals can have. It is always a huge learning process, and since no two deals are ever exactly the same, also very exciting!

Companies have to do significant preparation to be ready for an IPO, and the IPO process itself can be all consuming. Both these phases of the project are only prelude to all the additional work as a public company. With so much change involved, training and preparation are crucial.

To help with all the phases of the IPO process we offer a variety of courses through PLI’s Corporate and Securities practice area. You can check this area out on our webpage, www.pli.edu .

For near-term IPO training we are offering our “How to Prepare an Initial Public Offering” program on April 10. You can attend live in New York City at our conference center or participate via webcast. You can learn more at:

www.pli.edu/Content/Seminar/How_to_Prepare_an_Initial_Public_Offering/_/N-4kZ1z129o6?fromsearch=false&ID=224973

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

XBRL Starting to Bubble-Up to the Comment Letter Surface?

One of the questions that SEC reporting companies have asked about XBRL (among the many questions we ask about XBRL!) is when will the SEC start to write comments about XBRL submissions?

Very few companies have ever seen a comment letter include any mention of their XBRL submissions.

It appears that comments may be starting to be issued about XBRL.  One of the ways the SEC sends messages in in a kind of generic comment letter that they call a “Sample Letter Sent to Public Companies”, which we refer to as a “Dear CFO Letter”.

While this seems to lack the impact of a comment letter sent directly to a company, the Dear CFO Letter is actually just as important as a directly received comment letter.  It is a message to a broad group of companies about an issue that the SEC thinks is pervasive, and is, in essence, a broadly transmitted comment letter.

The most recent Dear CFO Letter actually deals with XBRL!  You can find it at:

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

The letter reminds registrants to be sure to include all calculation relationships.

It also includes this language:

“Acceptance of your filing by EDGAR does not mean that your filing is complete or in compliance with the Commission’s requirements.”

This Dear CFO letter coupled with the XBRL report we blogged about last week could be the start of a greater emphasis on XBRL matters in filings.

We would love to hear your comments!  Leave them here or email Carol or George.