Hey, if you haven’t been there in a while, go check out the SEC’s home page!
As always, your thoughts and comments are welcome!
By: George M. Wilson & Carol A. Stacey
Sustainability disclosures are being mentioned more and more in the news, in company reporting and in regulatory discussions. While it may seem like it is “early days” for this information, it may not be as early as we all think. Here are summaries of a few of the things going on now.
Sustainability information has been touched on by the SEC in their disclosures effectiveness project. In the voluminous 2016 Regulation S-K Concept release the SEC included this language:
We are interested in receiving feedback on the importance of sustainability and public policy matters to informed investment and voting decisions. In particular, we seek feedback on which, if any, sustainability and public policy disclosures are important to an understanding of a registrant’s business and financial condition and whether there are other considerations that make these disclosures important to investment and voting decisions. We also seek feedback on the potential challenges and costs associated with compiling and disclosing this information.
Enough companies are already disclosing sustainability information that the AICPA has published a Guide for Attestation Engagements on Sustainability Information. The AICPA also has a very informative web page about sustainability disclosures in general.
Standard setters in other parts of the world have also begun discussion about sustainability information. Here is an excerpt from a speech Hans Hoogervorst, Chair of the IASB, delivered in April 2017 at the IIRC Council Meeting in New York:
In their latest review of structure and effectiveness, from 2015 to 2016, the Trustees of the IFRS Foundation confirmed the current approach of the International Accounting Standards Board (the Board) to wider corporate reporting. Broadly, this approach is to cooperate with organisations like the Corporate Reporting Dialogue (CRD) and the International Integrated Reporting Council (IIRC).
The Board was also asked to study further what its future role should be in the wider corporate reporting landscape. The Board is examining this question now. During the Board meeting of March 2017, we devoted public discussion to this issue for the first time.
As we wind down from second-quarter reporting (or whenever your fiscal-year has a less busy period!), this might be an opportune moment to learn a bit about these disclosures. There are several sources of information you can begin with:
The Sustainability Standards Board (SASB) maintains industry specific sustainability accounting standards that help public corporations disclose material, decision-useful information to investors. The members of the SASB are appointed by the SASB Foundation, a structure similar to that of the FASB and the FAF. The SASB Foundation is chaired by Michael Bloomberg and both the Foundation Board and the SASB itself have members with deep capital markets, business and academic experience.
The International Integrated Reporting Council defines integrated reporting as “a process founded on integrated thinking that results in a periodic integrated report by an organization about value creation over time and related communications regarding aspects of value creation. An integrated report is a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value in the short, medium and long term.”
Both of these organizations are focused on providing information beyond our existing financial reporting and SEC reporting models. And, interestingly, many companies are already responding to demand for such information. In a report from the SASB titled “The State of Disclosure – An Analysis of the Effectiveness of Sustainability Disclosures in SEC Filing – 2016,” the SASB reviewed the reports of up to the top 10 companies in 79 industries. Among their findings were:
Overwhelmingly, companies have recognized the existence of, or the potential for, material impacts related to the sustainability topics included in SASB standards. Indeed, 69 percent of companies in the analysis reported on at least three-quarters of the sustainability topics included in their industry standard, and 38 percent provided disclosure on every SASB topic.
With this background, our next few posts will help you build an understanding of the state of these disclosures in current reporting, the nature of investor demand for these disclosures, and the standards that the SASB is developing to help investors get the information that they believe they need.
As always, your thoughts and comments are welcome!
By: George M. Wilson & Carol A. Stacey
As we discussed in this post enumerating Rev Rec early adopters, Microsoft disclosed in their SAB 74 disclosures plans to early adopt both the new Rev Rec and Lease Accounting standards as of July 1, 2017, the beginning of their fiscal year 2018. As you will see in their Form 10-K for the year-ended June 30, 2017, they have executed their plan. (New Microsoft financial reporting motto: “Sleep is for the Weak”?)
As you review their disclosures you will see that Microsoft adopted the Rev Rec standard with a full retrospective approach, making this disclosure:
The standard will be effective for us beginning July 1, 2018, with early adoption permitted. We elected to early adopt the standard effective July 1, 2017. In preparation for adoption of the standard, we have implemented internal controls and key system functionality to enable the preparation of financial information and have reached conclusions on key accounting assessments related to the standard, including our assessment that the impact of accounting for costs incurred to obtain a contract is immaterial.
The most significant impact of the standard relates to our accounting for software license revenue. Specifically, for Windows 10, we will recognize revenue predominantly at the time of billing and delivery rather than ratably over the life of the related device. For certain multi-year commercial software subscriptions that include both distinct software licenses and Software Assurance, we will recognize license revenue at the time of contract execution rather than over the subscription period. Due to the complexity of certain of our commercial license subscription contracts, the actual revenue recognition treatment required under the standard will depend on contract-specific terms and in some instances may vary from recognition at the time of billing. Revenue recognition related to our hardware, cloud offerings such as Office 365, LinkedIn, and professional services will remain substantially unchanged.
Adoption of the standard will result in the recognition of additional revenue of $6.6 billion and $5.8 billion for fiscal year 2017 and 2016, respectively, and an increase in the provision for income taxes of $2.5 billion and $2.1 billion, respectively, primarily due to the net change in Windows 10 revenue recognition. In addition, adoption of the standard will result in an increase in accounts receivable and other current and long-term assets of $2.7 billion and $4.2 billion, as of June 30, 2017 and 2016, respectively, driven by unbilled receivables from upfront recognition of revenue for certain multi-year commercial software subscriptions that include both distinct software licenses and Software Assurance; a reduction of unearned revenue of $17.8 billion and $11.7 billion as of June 30, 2017 and 2016, respectively, driven by the upfront recognition of license revenue from Windows 10 and certain multi-year commercial software subscriptions; and an increase in deferred income taxes of $5.2 billion and $4.8 billion as of June 30, 2017 and 2016, respectively, driven by the upfront recognition of revenue.
One of the interesting aspects of this disclosure is the conclusion that contract acquisition costs are not material, making commissions accounting much simpler! And it is worth noting that the new revenue recognition guidance will require Microsoft to recognize some revenue earlier than the old guidance.
For the new lease standard Microsoft included this disclosure:
The standard will be effective for us beginning July 1, 2019, with early adoption permitted. We elected to early adopt the standard effective July 1, 2017 concurrent with our adoption of the new standard related to revenue recognition. We elected the available practical expedients on adoption. In preparation for adoption of the standard, we have implemented internal controls and key system functionality to enable the preparation of financial information.
The standard will have a material impact on our consolidated balance sheets, but will not have a material impact on our consolidated income statements. The most significant impact will be the recognition of ROU assets and lease liabilities for operating leases, while our accounting for capital leases remains substantially unchanged.
Adoption of the standard will result in the recognition of additional ROU assets and lease liabilities for operating leases of $6.6 billion and $5.2 billion as of June 30, 2017 and 2016, respectively.
Microsoft’s discussion of new internal controls and system functionality are key issues in implementing the new lease accounting model.
Microsoft also included a tabular disclosure entitled “Expected Impacts to Reported Results” detailing the impact on selected statement of operations and balance sheet amounts from adopting both standards. You can find it on pages 61 and 62 of the Form 10-K.
When Microsoft files their Form 10-Q for their first Quarter Ended September 30, 2017, the full impact along with all required disclosures will be interesting to see!
As always, your thoughts and comments are welcome!
How do the latest SEC, EITF, PCAOB and FASB updates affect your reporting? Attend FASB, SEC and PCAOB Update for SEC Reporting Professionals Workshop being held August 23rd in Grapevine, TX. Get up to date in-depth information on all the latest developments and practical tips on applying existing financial reporting requirements, including pushdown accounting, debt issuance costs and commitment fees, discontinued operations and dispositions, segment reporting and goodwill impairment.
http://www.pli.edu/Content/FASB_SEC_and_PCAOB_Update_for_SEC_Reporting/_/N-1z10odqZ4k?ID=290526
Auditors and Financial Officers of companies who raise capital with complex financial instruments often find themselves drowning in convoluted accounting issues and restatements. Avoid the confusion by attending the live workshop, Debt vs. Equity Accounting for Complex Financial Instruments being held September 13th in Las Vegas. Through a detailed review of the accounting literature and numerous examples and case studies this Workshop will help you build the knowledge and experience to appropriately recognize, initially record and subsequently account for these complex financing tools
http://www.pli.edu/Content/Debt_vs_Equity_Accounting_for_Complex_Financial/_/N-1z10odmZ4k?ID=290522
Are you ready to implement the FASB/IASB New Revenue Recognition Standard? With just a handful of months to go – The countdown is on! SECI is conducting training workshops throughout the U.S. to prepare filers for the changes and arm them with the tools for implementation. Workshop leaders use interactive lecture, examples and case studies to impart solid knowledge of the provisions of the FASB’s and IASB’s new revenue recognition standard and build an understanding of how the new standard changes revenue recognition accounting and also how it affects the related estimates and judgements. Upcoming workshops include August 24-25 in Grapevine, September 11-12 in Las Vegas and December 13-14 in New York City.
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 September 8th & November 3rd in New York City and October 16th in San Francisco. 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.
By: George M. Wilson & Carol A. Stacey
One of the “golden rules” of MD&A we discuss in our workshops is “no surprise stock drops”. (Thanks to Brink Dickerson of Troutman Sanders for the rules!) Actually, it is OK if management is surprised with a stock drop. However, it can be problematic if management previously knew of some issue that, when disclosed, causes a surprise stock drop for investors.
The classic start to a known trend enforcement case is a company announcement that results in a stock price drop. On February 26, 2014, UTi, a logistics company, filed an 8-K with news of a severe liquidity problem. UTi’s shares fell to $10.74, a decline of nearly 30% from the prior day’s close of $15.26.
The reason this is an SEC reporting issue is this paragraph from the MD&A guidance in Regulation S-K Item 303 paragraph (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. (emphasis added)
If management knows of some sort of uncertainty that could result in a material impact if it comes to fruition, they must evaluate whether they “reasonably expect” this to happen. If they do “reasonably expect” this to happen then it should be disclosed in MD&A.
When there is a surprise stock drop like the one experienced by UTi, the questions the SEC Enforcement Division will ask, to borrow from another context, are “what did management know about the problem” and “when did they know it?”
Enforcement Release, AAER 3877 revealed that the genesis of UTi’s liquidity problem was an issue in the implementation of a new IT system that created billing problems. And, it was clear from the facts, including an internal PowerPoint presentation, that management knew they had a problem well before they filed the 8-K.
However, in their 10-Q for their third quarter ended October 31, 2013, which was filed in December of 2013, UTi did not disclose the liquidity problem. In fact, they said:
Our primary sources of liquidity include cash generated from operating activities, which is subject to seasonal fluctuations, particularly in our Freight Forwarding segment, and available funds under our various credit facilities. We typically experience increased activity associated with our peak season, generally during the second and third fiscal quarters, requiring significant disbursements on behalf of clients. During the second quarter and the first half of the third quarter, this seasonal growth in client receivables tends to consume available cash. Historically, the latter portion of the third quarter and the fourth quarter tend to generate cash recovery as cash collections usually exceed client cash disbursements.
They also made no mention of the implementation problems with their new IT system. They actually said:
Freight Forward Operating System. On September 1, 2013, we deployed our global freight forwarding operating system in the United States. As of that date, based on a variety of factors, including but not limited to operational acceptance testing and other operational milestones having been achieved, we considered it ready for its intended use. Amortization expense with respect to the system began effective September 2013, and accordingly, we recorded amortization expense related to the new application of approximately $3.3 million during the third quarter ended October 31, 2013.
Hence the surprise when the 8-K disclosed the problems. Both the CEO and CFO are also named in the Enforcement Release and paid penalties.
As mentioned above, the probability standard for disclosure is “reasonably expects”. More about this complex probability assessment in our next post!
As always, your thoughts and comments are welcome!
Gain an in-depth understanding of how to apply the FASB standard (codified in ASC 805) on business combinations, including recent related ASUs, how to make journal entries in specific situations, the areas where estimation and judgment is required, the SEC requirements for financial statements and pro forma information for significant business combinations, and the appropriate financial statement disclosure. Attend SECI’s live interactive workshop, Accounting for Business Combinations being held August 16th in New York City. http://www.pli.edu/Content/Accounting_for_Business_Combinations_Workshop/_/N-1z10od5Z4k?ID=290625&t=WLH7_ADDP
Are you ready to implement the FASB/IASB New Revenue Recognition Standard? With just a handful of months to go – The countdown is on! SECI is conducting training workshops throughout the U.S. to prepare filers for the changes and arm them with the tools for implementation. Workshop leaders use interactive lecture, examples and case studies to impart solid knowledge of the provisions of the FASB’s and IASB’s new revenue recognition standard and build an understanding of how the new standard changes revenue recognition accounting and also how it affects the related estimates and judgements. Upcoming workshops include August 24-25 in Grapevine, September 11-12 in Las Vegas and December 13-14 in New York City.