Tag Archives: lease standard

ICFR Changes and the New Revenue Recognition, Leases, and Financial Instrument Impairment Transitions

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By: George M. Wilson & Carol A. Stacey

 

In his recent, much publicized speech, Chief Accountant Wesley Bricker discussed the transition to the new revenue recognition standard. A bit later in the speech he addressed a not so frequently discussed issue, the requirement to disclose material changes in ICFR as it relates to implementation of the new revenue recognition, leases, credit losses and other standards. Here is an excerpt:

 

Over the next several years, updating and maintaining internal controls will be particularly important as companies work through the implementation of the significant new accounting standards. Companies’ implementation activities will require careful planning and execution, as well as sound judgment from management, as I have mentioned earlier in illustrating areas of judgment in the new GAAP standards.

 

In his remarks, well worth the read, he also comments on two crucial ICFR concerns in these new standards:

Having the requisite skills in the accounting and financial reporting area to make the many new, complex judgements required by these standards, and

Setting an appropriate tone at the top to assure these judgments are made in a reasonable, consistent and appropriate manner.

 

We did a post about reporting changes in ICFR in November 2016. To refresh your memory, or if you are not familiar with this area, here is a summary of the disclosures required for material changes in ICFR. This applies to material changes made to implement new accounting standards as well as any other material changes.

 

These requirements begin with Item 9A in Form 10-K and Part I Item 4 in Form 10-Q. They both refer to S-K Item 308(c):

 

(c) Changes in internal control over financial reporting. Disclose any change in the registrant’s internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of §240.13a-15 or 240.15d-15 of this chapter that occurred during the registrant’s last fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

With changes to ICFR for revenue recognition for information about contracts and estimates, like stand-alone selling price and when control transfers, and changes to ICFR for capitalization of all leases, these new standards could require material changes to ICFR. Are these the types of changes included in the S-K 308(c) disclosure requirement?

 

This is an excerpt from the ICFR C&DI’s, number 7, about SOX reporting which you can find here:

 

After the registrant’s first management report on internal control over financial reporting, pursuant to Item 308 of Regulations S-K or S-B, the registrant is required to identify and disclose any material changes in the registrant’s internal control over financial reporting in each quarterly and annual report. This would encompass disclosing a change (including an improvement) to internal control over financial reporting that was not necessarily in response to an identified material weakness (i.e. the implementation of a new information system) if it materially affected the registrant’s internal control over financial reporting. Materiality, as with all materiality judgments in this area, would be determined upon the basis of the impact on internal control over financial reporting and the materiality standard articulated in TSC Industries, Inc. v. Northway, Inc. 426 U.S. 438 (1976) and Basic Inc. v. Levinson, 485 U.S. 224 (1988). This would also include disclosing a change to internal control over financial reporting related to a business combination for which the acquired entity that has been or will be excluded from an annual management report on internal control over financial reporting as contemplated in Question 3 above. As an alternative to ongoing disclosure for such changes in internal control over financial reporting, a registrant may choose to disclose all such changes to internal control over financial reporting in the annual report in which its assessment that encompasses the acquired business is included.

 

 

The SEC Regulations Committee of the CAQ has also discussed a particularly intricate issue in this transition. What if you change your ICFR this year, but the change is for future reporting when you begin to report under the new standard next year? This issue is still in play, as this excerpt from the minutes discusses:

 

Changes in ICFR in preparation for the adoption of a new accounting standard

Item 308(c) of Regulation S-K requires disclosure of changes in internal control over financial reporting (“ICFR”) during the most recent quarter that have materially affected or are reasonably likely to materially affect the registrant’s ICFR. The Committee and the staff discussed how this requirement applies to changes in ICFR that are made in preparation for the adoption of a new accounting standard when those changes are in periods that precede the date of adoption and do not impact the preparation of the financial statements until the new standard is adopted.

 

The staff indicated that they are evaluating whether additional guidance is necessary for applying the requirements of Item 308(c) in connection with the transition to the new revenue standard.

 

So, as you begin implementing systems and processes for these new standards, don’t forget this part of the reporting!

 

As always, your thoughts and comments are welcome!

Conflict Minerals Reporting Developments

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By: George M. Wilson & Carol A. Stacey

 

As you may have heard, on April 3, 2017, the U.S. District Court for the District of Columbia entered final judgment in the on-going litigation over the Conflict Minerals Reporting Rule and remanded the case to the SEC.

 
This follows the action of the U.S. Court of Appeals for the District of Columbia Circuit, which in August of 2015 reaffirmed its prior holding that Section 13(p)(1) of the Securities Exchange Act and Rule 13p-1 “violate the First Amendment to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have ‘not been found to be “DRC conflict free”’. (Nat’l Ass’n of Mfrs., et al. v. SEC, No. 13-CF-000635 (D.D.C. Apr. 3, 2017))

 
Now that the decision has been remanded to the Commission, how this part of the statute and the related rule will be dealt with is uncertain. Since the requirement is part of the Dodd-Frank Act, the Commission is in a complex position. Even more uncertain is how companies should approach this part of the reporting process as they prepare to File Form SD by May 31 of this year.
To help companies deal with this situation the SEC has issued two Public Statements.

 
The first, a Public Statement by the Division of Corporation Finance, discusses how the SEC will approach the issue until further rule-making or other developments take place. CorpFin’s position is summarized in the following quote:

 
The court’s remand has now presented significant issues for the Commission to address. At the direction of the Acting Chairman, we have considered those issues. In light of the uncertainty regarding how the Commission will resolve those issues and related issues raised by commenters, the Division of Corporation Finance has determined that it will not recommend enforcement action to the Commission if companies, including those that are subject to paragraph (c) of Item 1.01 of Form SD, only file disclosure under the provisions of paragraphs (a) and (b) of Item 1.01 of Form SD. This statement is subject to any further action that may be taken by the Commission, expresses the Division’s position on enforcement action only, and does not express any legal conclusion on the rule.

 
In the Instructions to Form SD it is instruction (c) which requires “due diligence” if the “reasonable country of origin inquiry” determines that a company’s conflict minerals did or could have originated in the Democratic Republic of the Congo or one of the adjoining countries.

 
The second, a Public Statement by Acting Chairman Piwowar, discusses plans for future Commission action and expresses various thoughts about the cost and related enforcement aspects of the rule. In the Public Statement he says:

 
The Court of Appeals left open the question of whether this description is required by statute or, rather, is solely a product of the Commission’s rulemaking. The Commission will now be called upon to determine how to address the Court of Appeals decision – including whether Congress’s intent in Section 13(p)(1) can be achieved through a descriptor that avoids the constitutional defect identified by the court – and how that determination affects overall implementation of the Conflict Minerals rule.

 

I have accordingly instructed our staff to begin work on a recommendation for future Commission action. In preparing its recommendation, the staff will consider, among other things, the public comments received in response to the January 31, 2017 request for comment.

 

As always, your thoughts and comments are welcome!

The Move to The New Revenue Recognition Standard – Is the Pressure On?

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By: George M. Wilson & Carol A. Stacey

 

Now that year-end is over for most calendar-year companies the transition to the new revenue recognition standard is a major focus area. In recent weeks there have been two interesting sources of comment and information about this transition.

 

First, on March 21, 2017 Chief Accountant Wesley Bricker spoke before the Annual Life Sciences Accounting & Reporting Congress in Philadelphia. (If you are thinking “that sounds familiar”, it was at this same conference a year ago that former Chief Accountant Jim Schnurr made some serious comments about the use of non-GAAP measures that previewed the May C&DI’s!).

 

In his remarks, Mr. Bricker focused on the transition to the new revenue recognition standard, saying:

 

“Let me now turn to implementation of the new revenue standard.  This area deserves close attention, both to make sure that the standard is implemented appropriately and timely and to ask whether the appropriate transition disclosures are being made so that investors and other market participants have sufficient time to absorb the anticipated effects of the new standard.

 

…………………………..

 

In the worrisome column, however, some companies need to make significant progress this year in their implementations.  In a survey of public companies released in October 2016, eight percent of respondents at that time had not started an initial assessment of the new revenue recognition standard, while an overwhelming majority of the others were still assessing the impact.

Particularly for companies where implementation is lagging, preparers, their audit committees and auditors should discuss the reasons why and provide informative disclosures to investors about the status so that investors can assess the implications of the information. Successful implementation requires companies to allocate sufficient resources and develop or engage appropriate financial reporting competencies.”

 

The second recent development is the release by Deloitte in a “Heads Up” newsletter in April 2017 of their most recent updated survey “Adopting the New Revenue Standard — Where Do Companies Stand?”

 

In the survey, Deloitte found that many companies that had originally contemplated using a full retrospective have moved more towards the modified retrospective method. And, along with the worries of the Chief Accountant above, they also found:

 

“Slightly more than half of respondents had started to implement the new standard, but most were in the very early phases of adoption.”

 

As always, your thoughts and comments are welcome!

 

Overcome the Challenges Resulting from the FASB’s New Lease Accounting Standard!

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The FASB’s new lease accounting standard presents complex accounting, internal control, systems and implementation challenges. Attend SECI’s live interactive workshop, Implementing the FASB’s New Leases Accounting Standard Workshop being held May 17th in Dallas with additional dates and locations this fall. Attendees will learn the conceptual underpinnings, overall structure and details of this new standard as it applies to both lessees and lessors. Implementation considerations, system issues and related topics will be discussed in detail and concepts will be reinforced by use of examples and case studies.

http://www.pli.edu/Content/Seminar/Implementing_the_FASB_s_New_Lease_Accounting/_/N-4kZ1z10dmc?fromsearch=false&ID=309311&t=WLH7_DPAD

Jeepers – More Whistleblower Enforcement Cases? – Do We Have the Message Yet?

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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

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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!

Solid Knowledge and Tips Needed to Successfully Navigate SEC Reporting

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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

Non-GAAP Measures – The Saga Continues

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By: George M. Wilson & Carol A. Stacey

The sometimes fuzzy distinction between non-GAAP liquidity measures and non-GAAP performance measures is a major concern of the SEC’s Non-GAAP Compliance and Disclosure Interpretations (C&DI’s) and the comment letters the Staff issues focused on this topic. In the middle of this grey question are EBITDA and “adjusted EBITDA”. Whether these measures are liquidity measures or performance measures can be a very complex, subjective question. To take some of the grey away the SEC included this C&DI in their May 2016 changes:

Question 103.02

Question: If EBIT or EBITDA is presented as a performance measure, to which GAAP financial measure should it be reconciled?

Answer: If a company presents EBIT or EBITDA as a performance measure, such measures should be reconciled to net income as presented in the statement of operations under GAAP. Operating income would not be considered the most directly comparable GAAP financial measure because EBIT and EBITDA make adjustments for items that are not included in operating income. In addition, these measures must not be presented on a per share basis. See Question 102.05.  (emphasis added) [May 17, 2016]

 

The last sentence in this answer is all about the potential confusion between EBITDA and cash flow from operations. GAAP and the SEC guidance specifically prohibit presenting cash flow per share because of the potential confusion between earnings per share and cash flow per share. (This goes all the way back to ASR 142 and old SFAS 95!) EBITDA, even when intended by management as an operations measure, is so close to this line that it cannot be presented on a per share basis.

 

In an interesting sequence of comment letters and responses the SEC has pushed its concerns about these kinds of non-GAAP measures to a new level. After a number of back and forth letters with a registrant focusing on whether a “non-GAAP adjusted net income” was a performance or liquidity measure the staff included this language in a late round comment:

 

Finally, in light of our discussions about this matter, we will evaluate the industry practices you described to us and consider whether additional comprehensive non-GAAP staff guidance is appropriate.

 

It is extremely unusual, as was even reported in The Wall Street Journal on February 13, 2017, to see a statement like this in a comment letter.

 

Even more eyebrow-raising is this comment in the SEC’s closing letter:

 

Although we do not agree with your view, in light of the circumstances, we have completed our review of your filing. 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. (emphasis added)

 

If you are presenting an EBITDA or similar measure it would be smart to review these letters.

 

You can find the first of the comment letter series here. The company’s responses (CORRESP documents) and the follow-up comment letters (UPLOAD documents) appear in this EDGAR list.

 

As always, your thoughts and comments are welcome.

When Disclosure Obligations Reach Beyond Financial Reporting

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By: George M. Wilson & Carol A. Stacey

Good accounting requires good communication. Many times information that is well-removed from the financial reporting and accounting functions has impacts on the financial statements or other parts of the SEC reporting process, especially MD&A. The Sarbanes Oxley Act built on the internal accounting controls guidance in section 13(b) of the FCPA Act in expanding the evaluation, audit and reporting requirements for internal control over financial reporting, or ICFR, and creating the concept of disclosure controls and procedures, or DCP.

A recent enforcement action brings home, at this important year-end time, the importance of effective disclosure controls throughout the company, with perhaps redundant controls that search beyond traditional financial reporting functions for issues that may impact the financial statements or require disclosure in other parts of a periodic report. It reinforces the idea that responsibility for disclosure is a company-wide obligation, and that companies need to build reliable infrastructures to ensure that investors receive all of the information they are supposed to receive.

ICFR and its related requirements have been part of the reporting process for decades. ICFR is formally defined in Exchange Act Rule 13(a)-15 as:

a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers, or persons performing similar functions, and effected by the issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:

(1) Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;

(2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the issuer are being made only in accordance with authorizations of management and directors of the issuer; and

(3) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements.

ICFR is all about the financial statements and that of course includes all of the relevant disclosures in the footnotes to the financial statements.

Here is how SOX expanded this process and formally defined disclosure controls in Exchange Act Rule 13(a)-15:

For purposes of this section, the term disclosure controls and procedures means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act (15 U.S.C. 78a et seq.) is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

What is clear in this definition is that DCP relates to the entire report, not just the financial statements. And, both ICFR and DCP are relevant to the financial statements.

The terms “accumulate and communicate” are particularly relevant for this case. DCP clearly applies to the concept of a known trend in MD&A, which may not be relevant to the financial statements. It also applies to information that may be relevant to accounting for contingencies, even when that information is in an operational area.

In the enforcement case mentioned above the company paid “a $1 million penalty to settle charges that deficient internal accounting controls prevented the company from properly assessing the potential impact on its financial statements of a defective ignition switch found in some vehicles.” Further,

“[t]he SEC’s order finds that the company’s internal investigation involving the defective ignition switch wasn’t brought to the attention of its accountants until November 2013 even though other (company) personnel understood in the spring of 2012 that there was a safety issue at hand. Therefore, during at least an 18-month period, accountants at the (company) did not properly evaluate the likelihood of a recall occurring or the potential losses resulting from a recall of cars with the defective ignition switch.

This case clearly addressed accounting for contingencies and the related GAAP disclosures. In other situations there may not be a contingency disclosure, but there could be a known trend in MD&A. Both are relevant issues as we work through year-end. What this all builds to is that the disclosure process, including both ICFR and DCP, has to reach beyond the information required for financial statement reporting.

It is all about communication! And this might be a good time to communicate this issue to your disclosure committee and all the parts of your organization.

As always, your thoughts and comments are welcome!

Whistleblower Reminders

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By: George M. Wilson & Carol A. Stacey

 

On December 19 and 20, 2016, as a year-end reminder, the SEC’s Enforcement Division announced two more cases to emphasize that companies MUST NOT do anything to impede employees from blowing the whistle.

You can find a lot more background about this issue in this post.

In the first case NeuStar Inc. paid a fine of $180,000 for putting restrictive language in severance agreements.

The SEC found that NeuStar was “routinely entering into severance agreements that contained a broad non-disparagement clause forbidding former employees from engaging with the SEC and other regulators ‘in any communication that disparages, denigrates, maligns or impugns’ the company.” The agreements were structured harshly. Departed employees would lose all but $100 of their severance pay if they violated the agreement. This language impeded at least one former employee from contacting the SEC.

In the second case Oklahoma City-based SandRidge Energy Inc. agreed to pay a fine of $1.4 million. Even though the company reviewed their severance arrangements several times after new Dodd/Frank rules were put in place, they continued to include language “restricting” former employees from blowing the whistle to regulators.

The SEC found that “SandRidge fired an internal whistleblower who kept raising concerns about the process used by SandRidge to calculate its publicly reported oil-and-gas reserves.”

The message is clear – Don’t try to limit a former employee’s ability to blow the whistle! Instead, take steps to investigate the matter!

As always, your thoughts and comments are welcome!