Tag Archives: lease standard

Why, Oh Why, Is It Always Segments?

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By: George M. Wilson & Carol A. Stacey

If you have been involved with SEC reporting for more than say, five minutes, you have heard about or discussed with someone the SEC’s focus on operating segments. Segment related disclosures are included in several Form 10-K Items, including:

Item 1 – Description of the business,

Item 2 – Properties,

Item 7 – MD&A, and of course

Item 8 – Financial Statements.

Almost every SEC conference or workshop addresses the importance of segment disclosures.

The latest segment “message” from the SEC is in the November 7, 2016 Accounting and Auditing Enforcement Release dealing with PowerSecure.

It is the same familiar message we heard in the Sony case in 1998 and the PACCAR case in 2013. When companies avoid making proper GAAP disclosures for operating segments to try and bury problems in one part of a business with profits from another part of their business, trouble will result.

In the “classic” Sony case the company used profits from its music business to mask problems in its movie business. This case also has a great known trend disclosure problem and becomes an almost scary “double trouble” example. To escalate this case to “triple trouble” the SEC also made it clear that Sony’s assignment of MD&A to the IR manager was not appropriate by naming that person in the case and forcing Sony to reassign this responsibility to the CFO. With all that was going on with Sony the SEC went so far as to require the company to engage its auditors to “examine” MD&A. Surprisingly, under the attest standards, auditors can issue a full opinion report on MD&A!

In the PACCAR case problems in new truck sales were hidden with profits from truck parts sales. This SEC Complaint includes a very detailed summary of the operating segment disclosure requirements, discussing in detail how PACCAR’s management viewed the business and how, in the SEC’s judgement, PACCAR was not following the GAAP requirements. It includes this language:

“However, in reporting its truck and parts results as a single segment, PACCAR did not provide investors with the same insight into the Company as PACCAR’s executives.”

This story line repeats in PowerSecure. For the periods in question PowerSecure reported one segment when that was not how management actually viewed the business:

“PowerSecure also misapplied ASC 280 by concluding that its CODM – who was determined to be the Chief Executive Officer (“CEO”) – did not regularly review operating results below the consolidated level to make decisions about resource allocations and to assess performance. This was inconsistent with the way in which the CEO regularly received, reviewed, and reported on the results of the business and how the company was structured. On a monthly basis, the CEO received financial results that reflected a measure of profitability on a more disaggregated level than the consolidated entity. Further, on a quarterly basis, the CEO met with each business unit some of the business unit leaders had business unit level budgets and forecasts and received incentive compensation based, at least in part, upon the results of their business unit.“

The message is clear, don’t use segments to try and hide problems! As a last reminder, don’t forget that these disclosure requirements may go to an even lower level than operating segments in MD&A. Regulation S-K Item 303 makes this clear:

“Where in the registrant’s judgment a discussion of segment information or of other subdivisions of the registrant’s business would be appropriate to an understanding of such business, the discussion shall focus on each relevant, reportable segment or other subdivision of the business and on the registrant as a whole.”

As always, your thoughts and comments are welcome!

 

Disclosure Effectiveness – The Saga Continues

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By: George M. Wilson & Carol A. Stacey

A not so long, long time ago (OK, sorry Arlo Guthrie), and over a very reasonable period, the SEC began its Disclosure Effectiveness initiative. As you have likely heard (and can read about here), the Staff has sought comment and feedback about a variety of issues, including a lengthy release dealing with Regulation S-K and another dealing with various “financial statements of others” requirements in Regulation S-X.

The latest disclosure simplification development is a 26-page Staff report required by the FAST Act titled “Report on Modernization and Simplification of Regulation S-K”. It addresses a variety of areas ranging from properties to risk factors. Included are several interesting ideas such as requiring year-to-year comparisons in MD&A for only the current year and prior year and including hyperlinks to prior filings for prior comparisons.

The report is a thoughtful and interesting step in this challenging process.

As always, your thoughts and comments are welcome!

Year-End Planning – More or Less Concluded – Keeping Up with SEC Focus Areas

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By George M. Wilson & Carol A. Stacey

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

Recently Issued Accounting Standards and a Few Example Comments

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

Disclosure Effectiveness

Should You Consider Any Issues for OCA Consultation?

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

Three Years of Fun – Planning the “Big Three” New FASB Statement Transitions

 

As we are getting ever closer to year-end this is also a good time to proactively review areas where financial reporting problems frequently occur and take steps to assure we have all the “i’s” dotted and “t’s” crossed in these areas.

Unusually complex accounting issues, difficult estimates and sensitive disclosures all become the focus of SEC comments. This is not because the Staff thinks they are important in and of themselves, but rather because these are areas where the Staff frequently uncovers problems in the comment process. Clearly if we do not deal with them appropriately, they involve risk of restatement and amendment.

There are a variety of ways you can keep up with the CorpFin Staff’s frequent comment areas. Every year at our Annual Reporting Forums in November and December, our Conference for Mid-Size and Smaller Companies in September and our Mid-Year Programs in May and June current and former Staffers discuss the areas where they have concerns.

Here is the list from our most recent programs:

  • Segments
  • Statement of Cash Flows
  • Income Taxes
  • Consolidation
  • Business Combinations
  • Fair Value
  • Goodwill
  • Revenue Recognition
  • Non-GAAP Measures & Metrics
  • Internal Control over Financial Reporting

Beyond hearing from the Staff and those in the know, many organizations research comment letters and summarize the areas and frequency of comments within these areas.   You can find these summaries on the web pages for most of the national CPA firms. Here are links to some of them:

EY SEC Comments and Trends

Deloitte’s SEC Comment Letter Series

PWC’s SEC Comment Letter Trends

Other companies build databases of comments which can be researched by comment area, CorpFin Office and even by reviewer. Two companies who sell these kinds of tools are Audit Analytics and Intelligize. However, remember the Staff’s caution that their comments are fact-specific to each registrant and you should never cut and paste from another letter.

If you have any other good sources of information about these issues, please leave them in a comment to this post, and, as usual, 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 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

Happy Thanksgiving!

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All of us here at the SEC Institute wish you a Happy Thanksgiving! We hope that you have a wonderful time with loved ones and enjoy this time of year.

And, to add a smile, we have been building a list of things we are thankful for!

  1. All of you and your support of our programs!
  2. Disclosure Effectiveness

OK, we tried to add some humorous SEC and accounting related items to this list, but when we started to think about all the change in our profession and we got to revenue recognition and leases, we weren’t sure if we were thankful for them or not!

So, even with all the change in the world around us, Happy Thanksgiving, and thanks for your participation and support!

 

The SEC Institute Team

A Very Picky Reminder – ICFR and Accounting Standard Implementation Reporting

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By: George M. Wilson & Carol A. Stacey

SAB 74 (SAB Codification 11-M) disclosures surrounding the new revenue recognition, leasing and financial instrument impairment standards have been receiving a lot of attention lately, especially with the SEC Staff announcement about them at the September EITF meeting.

This is not the only reporting that a new accounting standard might involve. Since these new standards could have an impact on ICFR, this is a good time to remember the requirements to report material changes in ICFR. These requirements apply to both Item 9A in Form 10-K and Part I Item 4 in Form 10-Q. They begin with 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. Is this the type of change 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:

  1. 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!

Three Years of Fun – Planning the “Big Three” New FASB Statement Transitions

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by: George M. Wilson & Carol A. Stacey, SEC Institute

We have all heard about the major projects the FASB has completed in recent years. Together with their implementation dates for public companies and allowed transition methods they are:

Revenue recognition: January 1, 2018. (F/Y’s beginning after December 15, 2017)

Early adoption is allowed to the original effective date, F/Y’s beginning after 12/15/16). Either a retrospective or modified retrospective with a cumulative effect adjustment transition may be used.
Leases: January 1, 2019. (F/Y’s beginning after December 15, 2018)

Early adoption is allowed. A retrospective transition must be used. The retrospective approach includes several practical accommodations.

Financial Instrument Impairment: January 1, 2020 (F/Y’s beginning after December 15, 2019)

Early adoption to years beginning after December 15, 2018 is allowed. The transition method is essentially a “modified retrospective approach with a cumulative effect adjustment” with adjustments for certain types of financial instruments.
The revenue recognition and lease changes have been widely discussed, but the financial instruments impairment change has not been as “hot” a topic. It could be problematic for some companies as it will apply to all financial instruments, including accounts receivable. Many companies could face significant challenges gathering the information to move from the current incurred loss model to the new expected loss model.
While the impact of each new standard will vary from company to company, every company needs to think about how to manage these three transitions. Will it be best for your company to adopt all three at once, or will it be best to adopt them sequentially? Or perhaps mix and match a bit?
There are several considerations in these implementation date decisions. How they will affect investor relations is a major issue. The time and other resources required, systems issues and ICFR impact are among the other inputs to this decision. Each company has to evaluate these considerations based on their own circumstances.
Given the potential magnitude of these changes and their widespread discussion in the reporting environment, disclosures about these changes have become more and more important to users. With the recent SEC Staff Announcement at the September EITF meeting about SAB 74 (SAB Codification Topic 11-M) disclosures, disclosing where you are in this process has become almost required. The more or less simple “standard” disclosures about “we have not selected a transition method” and “we do not yet know the impact” may not be enough. Qualitative information about where you are in the process may be a required disclosure.

There are strong incentives to move diligently on these transitions and to tell investors where you are in the process. And, anyway, who really wants to look unprepared?
Three years of sequential fun or big change? Spread it out or rip off the Band-Aid? Slow burn or big bang? We all get to decide what will be best for our company and our investors, the key issue is to make this decision on a timely basis!

 

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

More Whistleblower News and a Warning from the SEC

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In a recent post we discussed the “transformative effect” the SEC’s Whistleblower Program has had on SEC enforcement and reviewed the news that the SEC has now paid out more than $100 million to whistleblowers. We also, in an earlier post, walked-through both the Dodd-Frank and the SOX whistleblower programs and discussed some of their differences and similarities.

The most important thread running through all of this is the importance of whistleblowers in the detection and prevention of financial reporting fraud. The SEC’s Whistleblower Program affords “gatekeepers” a robust process for speaking out when they see something that isn’t right. The program is important in the detection of financial reporting fraud and is becoming an ever more important aspect of the SEC’s Enforcement program.

An important part of this program is sending messages to companies that they cannot act to harm whistleblowers. On two occasions thus far the SEC has acted strongly to punish companies who have sought to impede or retaliate against whistleblowers. The most recent case, in the words of the SEC, involved “firing an employee with several years of positive performance reviews because he reported to senior management and the SEC that the company’s financial statements might be distorted.”

The company paid a fine of half a million dollars.

Whistleblower situations are never simple. The issues involved are always grey. Whistleblowers can sometimes challenge areas where management has tried to make good decisions in complex situations. Loyalty is always an issue when someone blows the whistle. But even with these challenges the message from the SEC is clear; don’t retaliate when someone blows the whistle. Instead take steps to appropriately investigate and resolve the issues!

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