Tag Archives: INTERNAL AUDITING

A Year End Planning Detail – No More Mailing the ARS to the SEC!

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One frequently asked question in our Workshops concerns the “10-K Wrap” or the annual report that companies prepare: Is this a required report or is it an optional investor relations “marketing” document?

Turns out it actually is required for the proxy process. When a company solicits proxies for its annual meeting, and the annual meeting includes, the election of directors, the proxy statement must be accompanied or preceded by an Annual Report to Shareholders or “ARS”.   You can find all the details about this requirement in Rule 14a-3. The Form 10-K and the ARS, however, are significantly different. The Form 10-K is a filed document while the ARS is furnished to shareholders pursuant to the proxy rules.

In this earlier post we reviewed the details of the proxy requirement for the ARS.

If you would like a refresher on the filed vs. furnished issues, check out this post.

One of the seeming anachronisms in this process is that the SEC has, even in these days of EDGAR, still required that paper copies of the ARS be sent to the SEC. This requirement is in the proxy rules. (Check out rules 14a-3(c) and Rule 14c-3(b)). Every time we talk about this requirement in our Workshops there are visions of the last scene from “Raiders of the Lost Ark” with a huge warehouse full of boxes no one will ever open again!

 

On November 2 the SEC modernized this requirement with the following Compliance and Disclosure Interpretation:

Proxy Rules and Schedule 14A (Regarding Submission of Annual Reports to SEC under Rules 14a-3(c) and 14c-3(b))

 

Question: Exchange Act Rule 14a-3(c) and Rule 14c-3(b) require registrants to mail seven copies of the annual report sent to security holders to the Commission “solely for its information.” A similar provision in Form 10-K requires certain Section 15(d) registrants to furnish to the Commission “for its information” four copies of any annual report to security holders. Can a registrant satisfy these requirements by means other than physical delivery or electronic delivery pursuant to Rule 101(b)(1) of Regulation S-T?

Answer: Yes. The Division will not object if a company posts an electronic version of its annual report to its corporate web site by the dates specified in Rule 14a-3(c), Rule 14c-3(b) and Form 10-K respectively, in lieu of mailing paper copies or submitting it on EDGAR. If the report remains accessible for at least one year after posting, the staff will consider it available for its information. [November 2, 2016]

So, as we approach this year end we can change this process and even save some postage!

As always, your thoughts and comments are welcome!

 

George M.  Wilson, Director, The SEC Institute & Carol A. Stacey, Director, The SEC Institute

SECI Annual Forum Returns to Dallas, New York City & San Francisco!

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Annual reporting season is here and the Division of Corporate Finance has been busy! Revisions to non-GAAP guidance is being finalized as well as the pay ratio rule and thousands of 10-Ks are being reviewed.

Revenue Recognition and Leasing Standards have been finalized and companies are faced with implementing compliance.

Register today for our 32nd Annual SEC Reporting & FASB Forum being offered November 14-15 in Dallas, December 12-13 in New York City and December 19-20 in San Francisco.

  • Get the latest updates on What’s Happening NOW in World of SEC Reporting
  • Earn CPE credit
  • Network with other Practitioners

Our Reporting Roundtable will lead a lively discussion of current events including simplification overload, disclosure effectiveness, juggling Rev. Rec., Leases, CECL adoptions and more.

Follow this link to Register today and reserve your spot!

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

 

 

 

 

 

 

 

Revenue Recognition – How Much Time Will You Really Need?

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By: George M. Wilson & Carol A. Stacey, SECI Institute

Much has been written and said about the resources and time that will be required to implement the new revenue recognition standard. All public companies must implement the new standard for fiscal periods beginning after December 15, 2017, roughly 15 months from now. For calendar year-end companies, the first report on Form 10-Q using the new model will be filed in about 18 months. Time is, well, short.

Even the SEC has expressed their concerns about this transition. If you have not seen their comments, check out their expansion of SAB 74 disclosures announced at the September EITF meeting in this post.

Now, we are not writing this post to nag people. Our goal is to help you assess your particular situation with a deeper understanding of the areas you will need to address and the time and resources you will need. Armed with appropriate information you can build a plan and obtain the requisite resources.

Amidst all the commentary there isn’t much detail about the specific challenges in transitioning to the new revenue recognition model. Obviously a single blog post can’t do that either! But what we can do is help you with some starting points that your situation analysis will have to address to determine the resources your company will need. So, here are highlights of three of the more involved areas.

 

  1. As you likely know the new standard is contract based. Step one in the five step revenue recognition model is to identify contracts with customers. This means you need processes and controls to assure all contracts with customers are identified and tracked. And, perhaps more complex, modifications to contracts will need to be tracked and recorded. How much work and time will be required to build the systems to capture and control this information flow?

 

  1. The new standard requires many judgments, including, what are your performance obligations, how you will estimate variable consideration and how you will estimate stand-alone selling price to allocate consideration. How much time will you need to build these processes and the controls surrounding these processes?

 

  1. Even if the timing of your revenue recognition will not change, you will need to make substantially more disclosures including what are your performance obligations, how and when they are satisfied, how you estimate variable consideration and how you estimate stand-alone selling price. Perhaps the most subjective of all the new disclosures is the requirement to disaggregate revenue based on how different revenue streams are affected by “economic factors”. How much time will you need to assess “economic factors” and make these kinds of judgments about disclosures?

 

This process will be different for every company. For a retailer the process will likely need less time than for a custom manufacturer. But all companies will need some time. The time to analyze the new standard, build the policies for how the new standard will apply to your business, do the proper documentation, build processes and establish controls is what this is all about. And while it may not change how or when some companies recognize revenue, it will affect how and when you make disclosures.

This discussion does not even begin to address a raft of other issues companies face such as the decision about which transition method to use or how you will assess when customers “obtain control” of a product or service to determine the time revenue is recognized under the new standard.

So, again, not to nag, we do urge you to begin your planning process and if you have not yet done so, begin to learn how the new standard works and assess how it will apply to your business.

If you would like to let us know where are you in the process, we will share aggregate status reports in future posts.

Here are some example status updates.

Aware of the new standard.

Studying the new standards to learn how it works.

Reviewing how the new standard will apply to your business.

Drafting the policy white paper for the new standard.

Modifying accounting systems and processes for the new standard.

Updating IT systems or acquiring IT systems for the new standard.

Implementing new IT systems.

Currently running parallel between the old and new standard.

 

As always, your thoughts and comments are welcome!

Year-End Topic 6 – Should You Consider Any Issues for OCA Consultation?

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As we approach year-end another issue to plan well in advance is whether or not you should ask OCA to pre-clear any extremely complex or subjective accounting decisions. This is a well-established process and when you are faced with a complex transaction, extremely subjective accounting determinations or an area where GAAP is not clearly established it makes sense to pre-clear the issue and avoid the possibility of restatement, amendment, or getting hung up in the CorpFin comment process. This is especially true when we know we will all be reviewed at least once every three years.

 

OCA’s process for consultation is outlined here. The process does need a significant amount of preparation and usually requires a few weeks to complete, sometimes more, so advance planning is important.   The document link above has a very detailed list of what needs to be included in your correspondence with OCA and what to expect from the process.

 

Since this is a consultation with the Office of the Chief Accountant, the answer you get will be definitive and cannot be over-ridden in the review process.

 

There is also a telephone consultation service you can use to consult with the CorpFin Chief Accountants office, a different process of course, but sometimes a good starting point. You can find out about this less formal process here.

 

Lastly, here is a recent list of frequent OCA consultation areas you can use to access whether your issues would benefit from this process:

 

Revenue Recognition, gross vs net etc.

Business combinations, who is the acquirer, business vs assets, contingent consideration

Financial assets, impairments valuation

Segments and aggregation

Consolidation VIE

Long lived assets, e.g. goodwill impairment

Taxes,

Leases

Pension

Debt vs equity

 

As always, your thoughts and comments are welcome!

Keeping Up With FINRA

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FINRA, the Financial Industry Regulatory Authority and how this Self-Regulatory Organization affects us are less well known aspects of being a public company.   Perhaps you have seen a “FINRA list”, the list of people who have bought and sold your stock in the period surrounding a major change in your stock price. This is one of the tools that regulators use to search for insider trading. Or maybe you have read about how FINRA’s fines for broker/dealers are on a pace to set new records.

One way or another, we should all know about FINRA. You can find out a lot about them on their web page. Here is how FINRA describes their mission in the “About” section of their web page:

“FINRA is dedicated to investor protection and market integrity through effective and efficient regulation of the securities industry.

FINRA is not part of the government. We’re an independent, not-for-profit organization authorized by Congress to protect America’s investors by making sure the securities industry operates fairly and honestly.

We do this by:

writing and enforcing rules governing the activities of 3,895 securities firms with 641,761 brokers;

examining firms for compliance with those rules;

fostering market transparency; and

educating investors.”

Our independent regulation plays a critical role in America’s financial system—by enforcing high ethical standards, bringing the necessary resources and expertise to regulation and enhancing investor safeguards and market integrity—all at no cost to taxpayers.

FINRA’s role does go beyond broker/dealers. They also say:

FINRA uses technology powerful enough to look across markets and detect potential abuses. Using a variety of data gathering techniques, we work to detect insider trading and any strategies firms or individuals use to gain an unfair advantage.

In fact, FINRA processes, on average, 50 billion—and up to 75 billion—transactions every day to build a complete, holistic picture of market trading in the United States.

We also work behind the scenes to detect and fight fraud. In addition to our own enforcement actions, in 2015, we referred more than 800 fraud and insider trading cases to the SEC and other agencies. When we share information with other regulators, it leads to important actions that prevent further harm to investors.”

With this level of referrals, they are clearly a proactive watchdog of the markets! We all need to know who they are and what they do.

As always, your thoughts and comments are welcome.

 

SEC Review News – No More “Tandy” Language

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Have you ever wondered why the SEC puts this language at the end of every comment letter?

We urge all persons who are responsible for the accuracy and adequacy of the disclosure in the filing to be certain that the filing includes the information the Securities Exchange Act of 1934 and all applicable Exchange Act rules require. Since the company and its management are in possession of all facts relating to a company’s disclosure, they are responsible for the accuracy and adequacy of the disclosures they have made.

In responding to our comments, please provide a written statement from the company acknowledging that:

  • the company is responsible for the adequacy and accuracy of the disclosure in the filing;
  • staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and
  • the company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.

The history of this language goes all the way back to the 70’s. Tandy was the first company to receive this language in a comment letter. The comment process had been asserted as a possible defense and the staff wanted to make it clear that this was not appropriate. It was in 2004, after a flood of FOIA requests to obtain comment letters, that the staff decided to make all comment letters and responses public. With that decision they decided to require “Tandy” language in all comment letter responses. You can read more in this 2004 release.

The Staff has now changed their position. Since this language has been around for so long they will no longer require it in each response. Instead, the staff will simply put this language in comment letters:

We remind you that the company and its management are responsible for the accuracy and adequacy of their disclosures, notwithstanding any review, comments, action or absence of action by the staff.

You can read the details here.

The change is effective immediately, so all comment letter responses after October 5, 2016 do not need the “Tandy” language.

As always, your thoughts and comments are welcome!

 

Hot Topic Update – FASB’s Dramatic New Lease Accounting Standard

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The FASB’s new lease accounting standard presents complex accounting, internal control, system and implementation challenges. Learn the conceptual underpinnings, overall structure and details of the standard as it applies to both lessees and lessors. Register now for our live half-day seminar November 30th in San Francisco or December 15th in New York City, Implementing the FASB’s New Lease Accounting Standard Workshop 2016. Discussion includes implementation steps and system and ICFR issues.

http://www.pli.edu/Content/Seminar/Implementing_the_FASB_s_New_Lease_Accounting/_/N-4kZ1z10l1v?fromsearch=false&ID=300755

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!

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!

 

News From the CAQ – Still no Simple Answer for the RevRec/S-3 Issue!

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Back in June of 2015 we posted about the Center for Audit Quality, or CAQ. This organization, which has its roots with the AICPA, advocates for issues surrounding public company auditing with the goal of building and maintaining the public’s trust in the auditing process. You can learn more about the CAQ at their web page.

One important part of the CAQ is the SEC Regulations Committee. This group meets regularly with the SEC Staff to discuss emerging issues in practice. The summaries of their meetings are generally very useful resources and reviewing them on a periodic basis can help deal with complex and emerging issues.

In their June meeting the Committee and the SEC Staff discussed one of the issues we have blogged about earlier in the summer, the impact of retrospective adoption of a new accounting standard (revenue recognition and leases of course!) on a registration statement filed after you file a 10-Q in the year of adoption but before the end of the year. It is conceivable that the S-3 could require applying the new accounting standard to an additional earlier year. (Check out this post if you need to refresh your memory.)

Here is the summary of discussion about this issue from the SEC Regulations Committee June meeting:

Requirement to provide restated financial statements when a Form S-3 registration statement is filed after the registrant has filed its first Form 10-Q reflecting full retrospective adoption of the new revenue standard

As a follow-up to a topic discussed at the March 2016 Joint Meeting, the Committee and the staff discussed Deputy Chief Accountant Wes Bricker’s remarks at the 2016 Baruch College Financial Reporting Conference on transition activities for the new revenue recognition standard. Specifically, the Committee and the staff discussed the provision in ASC 250-10-45-5 which indicates that “[a]n entity shall report a change in accounting principle through retrospective application of the new accounting principle to all prior periods, unless it is impracticable to do so.” ASC 250-10-45-9 provides guidance on the term “impracticable.”

The staff indicated that they are available for consultation with registrants that have concluded it would be impracticable to revise one or more comparative prior periods, but they also noted that consultation is not required.

So, it is all still a bit grey!

As always, your thoughts and comments are welcome!