Tag Archives: PLI

More Transitions at the SEC

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By: George M. Wilson & Carol A. Stacey

As you have most likely heard, Chair White recently announced that she will leave the Commission at the end of the Obama administration. As usual, whenever there is a change in administration the senior leadership at the commission leaves and their successors are appointed by the new President. Yesterday Chief Accountant Jim Schnurr announced that he will be retiring from the Commission. You can read the details here. Wes Bricker has been named the new Chief Accountant.

 

If you want to follow along and see SEC news as it happens, you can find all the SEC’s current press releases here.

 

As always, your thoughts and comments are welcome!

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!

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!

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.

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!

 

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!

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!