Tag Archives: Financial Reporting

Year-End Planning Topic Number 5 – Disclosure Effectiveness

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Our year-end conferences have begun with the presentation of our 12th Annual SEC Reporting & FASB Forum for Mid-sized & Smaller Companies in Las Vegas last week and will continue with our 32nd Annual SEC Reporting & FASB Forums in November and December.

Disclosure effectiveness is a theme that is already emerging from CorpFin at these conferences.

As we think about how we communicate with shareholders this is another year-end planning consideration. We have done a number of posts about disclosure effectiveness and how the SEC (and FASB) are working on projects to make disclosure more effective. This project has roots that go back a good way, and both the JOBS Act and the FAST Act have helped it build momentum.

You can find a nice review of the SEC’s Concept Releases and related proposals about disclosure effectiveness here. All this rule making will, of course, require time as the SEC requests comments and revises its proposals based on constituent feedback.

In the meantime, the Staff is sending a clear message to make disclosures more effective right now. At our recent conference, CorpFin reminded everyone that SEC reports are intended to be communication documents as well as compliance documents and suggested actions we can all take in the context of current rules to make communication more effective:

 

Streamline disclosures,

Eliminate outdated information,

Tailor disclosures, focusing on factors unique to the company,

Don’t use comment letters in a generic sense.

 

These ideas fit nicely with the Staff’s previously discussed ideas we have been discussing for quite a while:

 

Reduce repetition,

Focus disclosure,

Eliminate outdated and immaterial information.

 

All of this dovetails together with a speech by Keith Higgins that started the initiative in 2014. And, with this much mention by the Staff, clearly change is in the wind, and we all have an opportunity to get ahead of the change and make communication better.

 

Making changes to annual and quarterly report disclosure is never a simple process, as the number of stakeholders and reviewers make change very challenging. And, thinking about how best to meet the information needs of investors is never easy.

 

However, many companies are already making changes to disclosure. If you want to find examples, check out American Express and GE. Both have been very proactive in this arena.

 

Now is a good time to consider and search for opportunities to make current disclosure more effective!

 

As always, your thoughts and comments are welcome!

How Prepared are you for SEC Annual Reporting Season or your next 10-Q?

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Have you stayed on top of recent developments at the SEC, FASB and PCAOB? Register for our live seminar and webcast, 32nd Annual SEC Reporting & FASB Forum being held November 14-15 in Dallas, December 12-13 in New York City and December 19-20 in San Francisco. Prepare for year-end reporting season and hear a discussion of current events, including disclosure effectiveness, juggling Rev. Rec., Leases and more.

http://www.pli.edu/Content/32nd_Annual_SEC_Reporting_FASB_Forum/_/N-1z11c8sZ4k?ID=262904

SAB 74/Topic 11-M – News from the SEC at the September EITF Meeting

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At the September 22, 2016 EITF meeting the SEC Staff made an important announcement about SAB Topic 11-M/SAB 74 disclosures about recently issued accounting standards.

We have done a number of posts about this disclosure, and you can review the basics here.

Because companies will be implementing three major new standards over the next few years the Staff:

Emphasized the importance of these disclosures because investors need to be aware of how much the new revenue recognition, leases and financial instrument impairment standards may or may not affect future results, and

Discussed what companies should do if they cannot yet quantify the impact of these changes.

In the Staff Announcement SEC Assistant Deputy Chief Accountant Jenifer Minke-Girard stated that if a company cannot yet estimate the impact of adopting these new standards then it should consider making incremental qualitative disclosures about the potential significance of adopting the new standards that would include:

 

The status of the company’s implementation process,

A description of any significant implementation matters that have not yet been addressed,

The effect of any accounting policies that the registrant expects to select upon adoption, and

How such policies may differ from current accounting policies.

While not saying that a specific time table was appropriate, Ms. Minke-Girard said it would be appropriate to include these disclosures in interim filings before the end of the calendar year and the timing of this announcement at the September EITF meeting was to provide time to make these disclosures in year-end filings.

 

As always, your thoughts and comments are appreciated!

 

Disclosures About Risks and Uncertainties

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All the news about Apple’s international tax situation, a significant uncertainty that they and many other companies face, presents a great opportunity to review how uncertainties and the big questions they pose should be disclosed.

Developing disclosures about uncertainties is never simple. One reason for this complexity is how many areas they can affect in a 10-K or 10-Q. The key places to focus are:

Risk Factors

Financial statements – GAAP contingency disclosures

MD&A – possible known trend disclosures

The key disclosures will be in the three above items, and that is where we will focus for now. It is important to remember though that other areas could be involved. Disclosure might be included for example in legal proceedings in Item 3 (which would generally be similar to the financial statement disclosures but would likely include more details) and perhaps even the business description in Item 1 if the uncertainty was a significant general development.

Risk Factor Disclosure

S-K Item 503(c) contains this requirement:

(c) Risk factors. Where appropriate, provide under the caption “Risk Factors” a discussion of the most significant factors that make the offering speculative or risky. This discussion must be concise and organized logically.

Clearly a material uncertainty could fall into this disclosure requirement. Apple talked about tax issues in their most recent Form 10-Q Part II Item 1A disclosure (emphasis added):

The Company could be subject to changes in its tax rates, the adoption of new U.S. or international tax legislation or exposure to additional tax liabilities.

The Company is subject to taxes in the U.S. and numerous foreign jurisdictions, including Ireland, where a number of the Company’s subsidiaries are organized. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. The Company’s effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation, including in the U.S. and Ireland. For example, in June 2014, the European Commission opened a formal investigation of Ireland to examine whether decisions by the tax authorities with regard to the corporate income tax to be paid by two of the Company’s Irish subsidiaries comply with European Union rules on state aid. If the European Commission were to conclude against Ireland, it could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid, and such amount could be material.

The Company is also subject to the examination of its tax returns and other tax matters by the Internal Revenue Service and other tax authorities and governmental bodies. The Company regularly assesses the likelihood of an adverse outcome resulting from these examinations to determine the adequacy of its provision for taxes. There can be no assurance as to the outcome of these examinations. If the Company’s effective tax rates were to increase, particularly in the U.S. or Ireland, or if the ultimate determination of the Company’s taxes owed is for an amount in excess of amounts previously accrued, the Company’s financial condition, operating results and cash flows could be adversely affected.

 

Financial Statement Disclosures

After the risk factor, where perhaps we use an “everything including the kitchen sink” approach, Apple goes further. In the notes to the financial statements they included this disclosure. Note here that ASC 450 dealing with contingencies and the three levels of probability — probable, reasonably possible and remote — would apply, along with guidance about uncertain tax positions. Here, along with disclosure about other tax issues, Apple discloses the issue again (check out the last paragraph in particular).

Note 5 – Income Taxes

As of June 25, 2016, the Company recorded gross unrecognized tax benefits of $7.6 billion, of which $2.8 billion, if recognized, would affect the Company’s effective tax rate. As of September 26, 2015, the total amount of gross unrecognized tax benefits was $6.9 billion, of which $2.5 billion, if recognized, would have affected the Company’s effective tax rate. The Company’s total gross unrecognized tax benefits are classified as other non-current liabilities in the Condensed Consolidated Balance Sheets. The Company had $1.5 billion and $1.3 billion of gross interest and penalties accrued as of June 25, 2016 and September 26, 2015, respectively, which are classified as other non-current liabilities in the Condensed Consolidated Balance Sheets.

Management believes that an adequate provision has been made for any adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issues addressed in the Company’s tax audits are resolved in a manner not consistent with management’s expectations, the Company could be required to adjust its provision for income taxes in the period such resolution occurs. Although timing of the resolution and/or closure of audits is not certain, the Company believes it is reasonably possible that its gross unrecognized tax benefits could decrease (whether by payment, release or a combination of both) in the next 12 months by as much as $800 million.

On June 11, 2014, the European Commission issued an opening decision initiating a formal investigation against Ireland for alleged state aid to the Company. The opening decision concerns the allocation of profits for taxation purposes of the Irish branches of two subsidiaries of the Company. The Company believes the European Commission’s assertions are without merit. If the European Commission were to conclude against Ireland, the European Commission could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid. While such amount could be material, as of June 25, 2016 the Company is unable to estimate the impact.

One of the areas the SEC focuses on in reviewing contingency disclosures is the “reasonably possible” probability level. In this situation disclosure is required and an amount must be disclosed if it can be estimated. If it can’t be estimated disclosure is still required.

 

MD&A

 

And, lastly MD&A requires disclosure of known trends and uncertainties. The language in S-K Item 303 includes this requirement:

 

 

(a)(3)(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.

 

Here is an excerpt from Apple’s MD&A.

 

 

On June 11, 2014, the European Commission issued an opening decision initiating a formal investigation against Ireland for alleged state aid to the Company. The opening decision concerns the allocation of profits for taxation purposes of the Irish branches of two subsidiaries of the Company. The Company believes the European Commission’s assertions are without merit. If the European Commission were to conclude against Ireland, the European Commission could require Ireland to recover from the Company past taxes covering a period of up to 10 years reflective of the disallowed state aid. While such amount could be material, as of June 25, 2016 the Company is unable to estimate the impact.

 

 

Uncertainty disclosures are never easy, and with all the areas that can potentially be involved, a place to be very careful!

 

As always, your thoughts and comments are welcome!

Get the Skills Necessary to Succeed in the Current SEC Reporting Environment

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Financial Reporting professionals are constantly challenged to keep on top of changing SEC Reporting requirements. Accountants and Auditors need to know how to prepare and review SEC periodic and current reporting forms, including the 10-K Annual Report, the 10-Q Quarterly Report, and the 8-K Current Report, as well as an understanding of how to comply with the annual proxy requirements and how insider trading rules work. Register today for one of our upcoming live in-depth workshops, SEC Reporting Skills Workshop 2016 being offered October 13-14 in New York City, October 24-25 in Chicago and November 10-11 in San Diego. December dates and locations are also available and posted on our website. Attendees will learn to master Forms 10-K, 10-Q, and 8-K and the proxy statement, use all the important sources of SEC reporting rules and guidance, write an effective MD&A and deal with the SEC staff and understand their “hot buttons,” including frequent comment areas such as revenue recognition, the statement of cash flows, segments, non-GAAP measures, and contingencies.

http://www.pli.edu/Content/Seminar/SEC_Reporting_Skills_Workshop_2016/_/N-4kZ1z11c95?Ns=sort_date%7c0&ID=262877

Year-End Planning – Number Four – Recently Issued Accounting Standards and a Few Example Comments

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In recent weeks we have been posting about areas to deal with in advance of year-end. So far we have addressed:

Issues in the Statement of Cash Flows

Evaluating and Auditing ICFR

The New Item 16 Form 10-K Summary

 

The spirit and rationale behind these posts is that it is always a good idea to proactively anticipate problems that may arise and act to keep issues from becoming problems.

As we continue this series our next post is about SAB 74 (Topic 11-M in the SAB Codification), the requirement for disclosures about recently issued accounting standards.

 

With the major changes coming from the new revenue recognition standard, the new lease standard, and for financial companies the new financial instrument impairment standard, these disclosures become increasingly important. Users need to be forewarned about the expected impact of these new standards. This is essentially a known trend disclosure in your MD&A.

 

Here is an excerpt from Topic 11-M. You can read the entire SAB here.

 

Interpretive Response: The staff believes that the registrant should evaluate each new accounting standard to determine the appropriate disclosure and recognizes that the level of information available to the registrant will differ with respect to various standards and from one registrant to another. The objectives of the disclosure should be to (1) notify the reader of the disclosure documents that a standard has been issued which the registrant will be required to adopt in the future and (2) assist the reader in assessing the significance of the impact that the standard will have on the financial statements of the registrant when adopted. The staff understands that the registrant will only be able to disclose information that is known.

 

The following disclosures should generally be considered by the registrant:

 

A brief description of the new standard, the date that adoption is required and the date that the registrant plans to adopt, if earlier.

 

A discussion of the methods of adoption allowed by the standard and the method expected to be utilized by the registrant, if determined.

 

A discussion of the impact that adoption of the standard is expected to have on the financial statements of the registrant, unless not known or reasonably estimable. In that case, a statement to that effect may be made.

 

Disclosure of the potential impact of other significant matters that the registrant believes might result from the adoption of the standard (such as technical violations of debt covenant agreements, planned or intended changes in business practices, etc.) is encouraged.

 

 

As a company gets closer to the adoption date for a new standard these disclosures should evolve. And although “[t]he staff understands that the registrant will only be able to disclose information that is known”, the other side of this disclosure is that when you know something, you should disclose it!

 

One last heads up – when you file your 10-K for the year before adoption, in other words you will adopt the day after that year-end, the staff will likely expect robust disclosure, including quantification of the impact of adoption.

 

When a company has decided which method it will use to adopt, it should disclose that information!

 

As a company researches and builds an understanding of how much a new standard will affect the financial statements, this impact should be disclosed.

 

Frequently we are concerned that there is uncertainty in this process, and that is never comfortable to discuss in an SEC report. Here are two excerpts that are examples of this disclosure from a June 30, 2016 Form 10-K. They deal with this uncertainty (emphasis added):

 

Leases

 

In February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet. Most prominent among the amendments is the recognition of assets and liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. Under the new standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach.

 

The new standard will be effective for us beginning July 1, 2019, with early adoption permitted. We currently anticipate early adoption of the new standard effective July 1, 2017 in conjunction with our adoption of the new revenue standard. Our ability to early adopt is dependent on system readiness, including software procured from third-party providers, and the completion of our analysis of information necessary to restate prior period financial statements.

 

We anticipate this standard will have a material impact on our consolidated financial statements. While we are continuing to assess all potential impacts of the standard, we currently believe the most significant impact relates to our accounting for office, retail, and datacenter operating leases.

 

Revenue from Contracts with Customers

 

In May 2014, the FASB issued a new standard related to revenue recognition. Under the new standard, revenue is recognized when a customer obtains control of promised goods or services and is recognized in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has recently issued several amendments to the standard, including clarification on accounting for licenses of intellectual property and identifying performance obligations.

 

The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (the cumulative catch-up transition method). We currently anticipate adopting the standard using the full retrospective method to restate each prior reporting period presented.

 

The new standard will be effective for us beginning July 1, 2018, and adoption as of the original effective date of July 1, 2017 is permitted. We currently anticipate early adoption of the new standard effective July 1, 2017. Our ability to early adopt using the full retrospective method is dependent on system readiness, including software procured from third-party providers, and the completion of our analysis of information necessary to restate prior period financial statements.

 

We anticipate this standard will have a material impact on our consolidated financial statements. While we are continuing to assess all potential impacts of the standard, we currently believe the most significant impact relates to our accounting for software license revenue. We expect revenue related to hardware, cloud offerings, and professional services to remain substantially unchanged. Specifically, under the new standard we expect to recognize (Product A) revenue predominantly at the time of billing rather than ratably over the life of the related device. We also expect to recognize license revenue at the time of billing rather than over the subscription period from certain multi-year commercial software subscriptions that include both software licenses and Software Assurance. Due to the complexity of certain of our commercial license subscription contracts, the actual revenue recognition treatment required under the standard will be dependent on contract-specific terms, and may vary in some instances from recognition at the time of billing.

 

We currently believe that the net change in (Product A) revenue from period to period is indicative of the net change in revenue we expect from the adoption of the new standard.

 

Lastly, as we always like to do, here are two example comments to reinforce the issues in this disclosure:

 

Please revise your disclosures to fully comply with Question 2 of SAB Topic 11:M for each standard listed. Specifically, if early adoption is permitted, you should state the date that you plan to adopt the standard. You should also discuss the impact that adoption of each standard is expected to have on your financial statements or, if applicable, make a statement to the effect that you are still assessing the impact that adoption of each standard will have on your financial statements and the impact is not known or reasonably estimable at this time.

 

Please revise to include a discussion of the potential effects that recently issued accounting standards will have on your financial statements when adopted in a future period. Refer to SAB Topic 11.M. For example, please revise to disclose the potential effect of ASU No. 2014-09, Revenue from Contracts with Customers.

How Prepared are you for SEC Annual Reporting Season or your next 10-Q?

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It has been a very active time at the SEC, FASB and PCAOB. Have you stayed on top of recent developments, activities and proposals? For example, the Leases Standard is final and the FASB is awash in simplification and other projects. Register now for our upcoming live seminar and webcast, 32nd Annual SEC Reporting & FASB Forum being held November 14-15 in Dallas, December 12-13 in New York City and December 19-20 in San Francisco. Prepare for year-end and reporting season by attending this highly anticipated and popular annual seminar and hear a roundtable discussion of current events, including simplification overload, disclosure effectiveness, juggling Rev. Rec., Leases, CECL adoptions and more. Our expert faculty will also discuss the new CDIs on non-GAAP measures, the Regulation S-K Concept Release, frequent accounting and disclosure comments, Revenue Recognition and guidance on lease accounting, MD&A disclosure and much more.

http://www.pli.edu/Content/32nd_Annual_SEC_Reporting_FASB_Forum/_/N-1z11c8sZ4k?ID=262904

Developments for Foreign Private Issuers

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In the SEC world Foreign Private Issuers (FPI’s) are companies organized outside the United States who have stock that trades on a US exchange. Foreign Private Issuers are permitted to use a special reporting system which includes the Form 20-F Annual Report and Form 6-K for other reporting. This system has a number of accommodations for companies organized outside the United States. For example, FPI’s are actually allowed to report to the SEC using IFRS and the volume of compensation disclosures can be substantially less than for domestic registrants.

 

Like all SEC reporting regimens, the FPI system has its own nuances and subtleties. For example, simply being organized outside the US does not entitle a company to use the FPI system. The more formal definition of a FPI is in an Exchange Act Rule:

 

  • 240.3b-4   Definition of “foreign government,” “foreign issuer” and “foreign private issuer”.

 

(Note: (a) and (b) omitted)

 

(c) The term foreign private issuer means any foreign issuer other than a foreign government except for an issuer meeting the following conditions as of the last business day of its most recently completed second fiscal quarter:

 

(1) More than 50 percent of the issuer’s outstanding voting securities are directly or indirectly held of record by residents of the United States; and

 

(2) Any of the following:

 

(i) The majority of the executive officers or directors are United States citizens or residents;

(ii) More than 50 percent of the assets of the issuer are located in the United States; or

(iii) The business of the issuer is administered principally in the United States.

 

This means that a company that is currently a FPI must monitor its status to see if it continues to meet this definition. If at some point it no longer meets the definition it must switch to the regular Form 10-K, Form 10-Q and Form 8-K reporting regimen. You may also find Topic 6 of the Financial Reporting Manual, Foreign Private Issuers & Foreign Businesses, helpful.

 

To help FPI’s deal with some of the unique aspects of this special system PLI is offering a One-Hour Briefing on October 6 entitled “Accessing the U.S. Capital Markets:  What Foreign Private Issuers Need to Know.” You can learn more about the briefing here.

 

Also, while we have offered our SEC Reporting Skills Workshop for 20-F Filers on an on-site basis over the past few years, we will have a public session of the workshop in New York late next year along with our Annual Forum in New York.

 

As always, your thoughts and comments are welcome!

$100 Million in Whistleblower Awards!

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Way back in April of 2015 we did a post about whistleblowers and the upside financial risk in blowing the whistleblowing to the SEC. The Sarbanes-Oxley whistleblower process requires an anonymous path to the audit committee, but the Dodd-Frank process, which is direct to the SEC, is the whistleblower path that can result in financial rewards.

 

This week the SEC announced that awards under this program have now exceeded $100 million. This happened after the recent payment of the program’s second largest award, $22 million.

 

To add a bit of focus, in the related press release, Enforcement Division Director Andrew Ceresney said:

 

“The SEC whistleblower program has had a transformative impact on the agency, enabling us to bring high quality enforcement cases quicker using fewer resources,” said Andrew Ceresney, Director of the SEC Division of Enforcement. “The ultimate goal of our whistleblower program is to deter securities violations and paying more than $100 million in whistleblower awards demonstrates the value that whistleblowers have added to our enforcement program.”

 

As always, your thoughts and comments are welcome!

Some Cybersecurity Risk-Management Support

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Cybersecurity Risk continues to be a huge and problematic issue. Processes and tools to respond to Cybersecurity incidents are constantly evolving. To help you keep up to date with these issues our “Cybersecurity 2016: Managing Cybersecurity Incidents” program will be offered on September 20 live in NY and via webcast.

 

Topics to be addressed will include:

 

Overview of the cyber insurance market and what to look for when purchasing

Cybersecurity provisions to include in vendor and business partner agreements

Managing a forensic investigation

Threat landscape: how can companies protect themselves?

Cybersecurity Act of 2015 and its ramifications for the private sector, plus SEC activity

EU developments on breach notification in the GDPR and NIS Directive

 

The program will also include these special features:

 

Cyberattack simulation

Hacker’s perspective: what are they seeking?

CISO and Regulators panel: strategies for global companies and guidance on sharing information with the government

 

You can learn more here.

 

As always, your thoughts and comments are welcome!