Financial accounting and SEC reporting involve more judgments, estimates and uncertainties every quarter and year-end.\u00a0 Challenges such as making the principles-based judgments for disclosing disaggregated revenues under ASC 606, estimating the appropriate discount rates to use for lease accounting in ASC 842, and determining the necessity of an MD&A know-trend disclosure about an uncertainty, are inescapable.<\/p>\n
One of the scariest \u201coh my\u201d moments we have as SEC reporting professionals is when actual results differ materially from our estimates and judgments.<\/p>\n
Unfortunately, in the realm of SEC reporting we are sometimes \u2013 perhaps all the time \u2013 aware that when we deal with these challenges we are subject to SEC scrutiny.\u00a0 The SEC Enforcement Division\u2019s leadership has emphasized that they are \u201cincredibly focused\u201d on company disclosures.\u00a0 Sometimes we are concerned that we are \u201cdarned if we do and darned if we don\u2019t\u201d when making challenging decisions about judgments, estimates and uncertainties.<\/p>\n
At an October 2020 securities enforcement conference, Enforcement Division Associate Director Melissa Hodgman discussed how the Division approaches situations where companies miss an estimate or judgment.\u00a0 In her remarks, Associate Director Hodgman told the audience that the Division will not assume wrongdoing if a company misses an estimate or judgment in an uncertain situation.\u00a0 She stated that the staff will \u201ctrust good faith estimates\u201d and does not view this as a \u201cgotcha\u201d game when a company misses an estimate or judgment.\u00a0 Instead, the Division will focus on process and documentation.\u00a0 They will try to ascertain that we have made reasoned and good faith judgments using a consistently applied process.\u00a0 The staff has also repeatedly emphasized the importance of robust and clear documentation about why we did what we did.<\/p>\n
NOTE:\u00a0 You may find of interest, PLI\u2019s Insecurities<\/em> Podcast<\/a> episode 23, \u201cA GAAP in Your Financial Reporting<\/a>,\u201d where hosts Chris Ekimoff and Kurt Wolfe further summarize and discuss her remarks.<\/p>\n These remarks are consistent with those of Chief Accountant Sagar Teotia who has said on a number of occasions that well-thought-out applications of principles will not be second guessed.\u00a0 This is an excerpt from a speech by Mr. Teotia on June 23, 2020<\/a>:<\/p>\n Significant Estimates and Judgments; Reasonable Judgments<\/strong><\/p>\n \u00a0<\/strong>As we noted in our April 2020 statement<\/a>, in connection with their financial reporting responsibilities, many companies have been required to make significant judgments and estimates to address a variety of accounting and financial reporting matters.\u00a0 As those who engage with us well know, OCA has consistently not objected to well-reasoned judgments that entities have made, and we will continue to apply this perspective.\u00a0 \u00a0Companies should ensure that significant judgments and estimates are disclosed in a manner that is understandable and useful to investors, and that the resulting financial reporting reflects and is consistent with the company\u2019s specific facts and circumstances.<\/p>\n What both the Enforcement Division and the Chief Accountant are telling us is that when we miss on a challenging estimate or judgment we may be questioned by the staff.\u00a0 To put ourselves in the best position possible to answer the staff\u2019s questions we must be able to show that we consistently followed a well-thought-out process with complete and robust documentation.<\/p>\n As always, your thoughts and comments are welcome.<\/p>\n","protected":false},"excerpt":{"rendered":" Financial accounting and SEC reporting involve more judgments, estimates and uncertainties every quarter and year-end.\u00a0 Challenges such as making the principles-based judgments for disclosing disaggregated revenues under ASC 606, estimating the appropriate discount rates to use for lease accounting in ASC 842, and determining the necessity of an MD&A know-trend disclosure about an uncertainty, are … Continue reading Judgments, Estimates and Uncertainties \u2013 Oh My!<\/span>