By: George M. Wilson & Carol A. Stacey<\/p>\n
If you have been involved with SEC reporting for more than say, five minutes, you have heard about or discussed with someone the SEC\u2019s focus on operating segments. Segment related disclosures are included in several Form 10-K Items, including:<\/p>\n
Item 1 – Description of the business,<\/p>\n
Item 2 – Properties,<\/p>\n
Item 7 – MD&A, and of course<\/p>\n
Item 8 – Financial Statements.<\/p>\n
Almost every SEC conference or workshop addresses the importance of segment disclosures.<\/p>\n
The latest segment \u201cmessage\u201d from the SEC is in the November 7, 2016 Accounting and Auditing Enforcement Release dealing with PowerSecure<\/u><\/a>.<\/p>\n It is the same familiar message we heard in the Sony case in 1998 and the PACCAR\u00a0case 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.<\/p>\n In the \u201cclassic\u201d Sony case<\/u><\/a>\u00a0the 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 \u201cdouble trouble\u201d example. To escalate this case to \u201ctriple trouble\u201d the SEC also made it clear that Sony\u2019s 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 \u201cexamine\u201d MD&A. Surprisingly, under the attest standards, auditors can issue a full opinion report on MD&A!<\/p>\n In the PACCAR case problems in new truck sales were hidden with profits from truck parts sales. This SEC Complaint<\/u><\/a>\u00a0includes a very detailed summary of the operating segment disclosure requirements, discussing in detail how PACCAR\u2019s management viewed the business and how, in the SEC\u2019s judgement, PACCAR was not following the GAAP requirements. It includes this language:<\/p>\n \u201cHowever, 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\u2019s executives.\u201d<\/p>\n This story line repeats in PowerSecure<\/u><\/a>. For the periods in question PowerSecure reported one segment when that was not how management actually viewed the business:<\/p>\n \u201cPowerSecure also misapplied ASC 280 by concluding that its CODM \u2013 who was determined to be the Chief Executive Officer (\u201cCEO\u201d) – 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.\u201c<\/p>\n The message is clear, don\u2019t use segments to try and hide problems! As a last reminder, don\u2019t 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:<\/p>\n \u201cWhere in the registrant’s\u00a0judgment a discussion of segment information or of other subdivisions of the registrant’s\u00a0business would be appropriate to an understanding of such business, the discussion shall focus on each relevant, reportable segment or other subdivision of the business<\/strong>\u00a0and on the registrant as a whole.\u201d<\/p>\n As always, your thoughts and comments are welcome!<\/p>\n <\/p>\n","protected":false},"excerpt":{"rendered":" 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\u2019s focus on operating segments. Segment related disclosures are included in several Form 10-K Items, including: Item 1 – Description of the business, Item … Continue reading Why, Oh Why, Is It Always Segments?<\/span>