Tag Archives: SECI

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!

 

 

 

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!

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!

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.

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.