Up to speed Current developments in the SEC s Division of Corporate Finance

Transcription

1 Up to speed Current developments in the SEC s Division of Corporate Finance

2 Agenda The Inside Scoop SEC leadership, organization Current agenda SEC Hot Topics Enforcement division trends The JOBS Act Dodd-Frank implementation Ahead of the Curve Conflict minerals XBRL Business combination post implementation review On the Horizon - financial instruments Restatement and Revision Trends SEC Comment Letter

3 The inside scoop Securities and Exchange Commission

4 SEC leadership Commissioners In 2013, Mary Jo White was appointed Chair and the remaining open seats on the Commission were filled. Mary Jo White Chair Luis Aguilar (D) Daniel Gallagher (R) Kara Stein (D) Michael Piwowar (R)

5 Organization structure SEC Office of the Chief Accountant James Schnurr Chief Accountant Division of Corporation Finance Keith Higgins Director Division of Enforcement Andrew Ceresney Director Considers company positions on accounting, financial reporting and auditing matters, particularly unusual, complex or innovative transactions Ensures compliance in form and content of filings and considers registrant requests for waivers and interpretations of form and content Investigates possible federal securities law violations including misrepresentation or omission of important information about securities, manipulating the market prices of securities, insider trading and selling unregistered securities

6 On the docket An active environment With a new Chair named in 2013, focus has been on enforcement and completion of rule making. The current agenda Very active regulatory agenda Considerable political and budgetary pressure Division of Enforcement continues to be high profile The JOBS Act Dodd-Frank implementation Disclosure effectiveness

7 Hot topics Enforcement Division Trends Three new task forces formed Fraud Task Force Microcap Fraud Task Force Center for Risk and Quantitative Analytics Increased focus on financial reporting fraud and internal control AQM aka Robocop Increased whistleblower activity Use of neither admit nor deny No broken windows and gatekeeper focus 2013 enforcement activity - $3.4bn in penalties and disgorgements - 96 financial crisis related actions against 161 individuals (66 CFOs) - 44 actions related to insider trading

8 Hot topics The JOBS Act In April 2012, the President signed into law the Jumpstart Our Business Startups (JOBS) Act In 2013, the ban on general solicitation and general advertising in securities has been lifted Introduced a newly designated group of companies known as Emerging Growth Companies or EGCs In October 2013, the SEC proposed Regulation Crowdfunding, allowing start ups and small issuers to raise capital through the offer and sale of securities to a large number of backers often through online platforms

9 Hot topics Dodd-Frank implementation A pay ratio disclosure was proposed by the SEC in September 2013 The final rules implementing the Volcker Rule were implemented in December 2013 that is effective for certain entities beginning June 30, Certain activities are not prohibited, including acting as an agent, broker or custodian In July 2013, two substantial errors required the vacating and remanding of the resource extraction disclosure rules Additional activities: - Bad actors prohibited from participating in certain securities offerings - Broker-dealers now required to conduct searches for holders of securities with whom they have lost contact - Certain entities required to identify and respond to red flags that indicate potential identity theft

10 Hot topics Disclosure Effectiveness Report issued to Congress on its disclosure rules for public companies as required by the JOBS Act SEC is reviewing the disclosure requirements in Regulations S-K and S-X and is considering ways to improve disclosures for both companies and investors. Initial focus is on periodic and current reports, Forms 10-K, 10-Q and 8-K SEC coordinating with the FASB and seeking input from companies to identify ways to improve effectiveness of disclosures and minimize duplication Companies should continuously assess their reporting and the focus of preparers should be on clear, understandable and relevant disclosures

11 Ahead of the curve Conflict minerals

12 Conflict minerals overview Highlights Mandated by Dodd-Frank act First filing was due May 31, 2014 Conflict minerals = Tin, Tungsten, Tantalum, Gold (3TG) In April, US Court of Appeals ruling caused SEC to stay the requirement to declare a conflict status Issued: August 2012 Effective: January 2013 Democratic Republic of Congo (Other covered countries in yellow)

13 Conflict minerals rule requirements

14 Potential updates Legal challenge SEC asked U.S. Court of Appeals to reconsider their ruling in tandem with another First Amendment case. The court has yet to issue a ruling on that case. 4 What may change SEC may issue revisions to rule responsive to court decision, first year of filings More Q&As from the AICPA conflict minerals task force First company filings may influence the level of disclosures of other companies The number of issuers whose conflict minerals filings included an independent private sector audit of their due diligence process. Approx. 1,300 issuers filed.

15 Year 2 - What companies should focus on Moving from project to program Refine information-gathering process to enhance completeness, accuracy, and efficiency Expand process to a broader population of products, business units, or suppliers (if applicable) Fully implement due diligence framework and enhance enforcement of conflict minerals policy in decisionmaking Assess public reaction to initial filings and revisit decisions about risk and transparency Refine process Draft SEC filing Gather info Assess results

16 Ahead of the curve XBRL

17 XBRL overview Highlights Limited liability provision sun-setting SEC comment letters on XBRL data quality SEC use of powerful data analytics Risk modeling via Accounting Quality Model (a.k.a., Robocop) XBRL has broad impacts: 9,800 companies 94,000 filings Interactive Data reports now have the same legal exposure as traditionally formatted reports

18 Interactive data programs The SEC strategic plan Interactive data filings that provide highly structured and reusable disclosures to stakeholders. Hot topics 1) Programs around the world 2) Assurance considerations 3) Consumer demand and applications 4) Common reporting errors 5) Reporting trends and implications

19 Hot topic #1 Interactive data programs around the world Securities, statutory, financial services (Basel II, Solvency II), tax, statistical, corporate responsibility, GRI, CSR and others Over 50 countries with programs Standardized business reporting is reducing compliance burden in NL, AU, CN, SG, FI, IE UK, etc. through reporting process convergence

20 Hot topic #2 Assurance considerations There is currently no required auditor involvement or association with the U.S. SEC XBRL exhibit, however auditors can assist in various capacities at request of management and/or the audit committee. On the home front Attestation under AT-101 AICPA published Principles and Criteria and SOP 13-2 Emergence of Inline XBRL raises question of auditor association when HTML and XBRL are in a single document Looking abroad Mandatory assurance on XBRL emerging in IN, NL, ZA, DK and others

21 Hot topic #3 Consumer demand and applications Investors Collaborative analytical apps Increasing demand for high quality XBRL reports Automated press stories Analysts

22 Hot topic #4 Common reporting errors and implications Management is typically unaware of reporting error magnitude and root cause assessments find that errors often result from ineffective review processes. Common reporting errors Negative values (amounts are backwards ) Inappropriate company specific extensions Incomplete reports Inappropriate contexts and units, and others Implications Liability for material reporting errors under Section 302 Unanticipated outcomes by analysts, SEC and others Embarrassing questions posed in public forums History of errors is audit trail for potential plaintiffs

23 Hot topic #5 Reporting trends and implications Initial outsourcing to printers is now migrating to disclosure management insourcing Disclosure management application implementations vary Standardization of ledgers via AICPA Audit Data Standards Leading practices for Disclosure Management application implementations have resulted in approximately 30% reductions in cost and time (source: PwC s At a Glance: Disclosure management: Streamlining the Last Mile)

24 What are the next steps Looking forward In the U.S. SEC Rule Changes (e.g., ixbrl, IFRS XBRL for FPI s) More AICPA Audit Data Standards DATA Act Enhancements in analyst applications and capabilities Around the World Accelerating migration to XBRL Demand for standard audit information, especially in taxation Financial Services (Basel II, Solvency II, etc.) Assurance on XBRL reports Where to find additional information XBRL reporting and the risks At a Glance - Disclosure management: Streamlining the Last Mile

25 Ahead of the curve Business combination post implementation review

26 Business combination post implementation review overview Summary In May 2013, the Financial Accounting Foundation (FAF) completed the post-implementation review of ASC 805, Business Combinations Overall observations Principles and requirements of the standard are generally understandable Challenges Fair value requirements Business combination versus asset purchase

27 What they saw Preparer feedback Increased costs and complexities when measuring the fair value of assets and liabilities assumed, and contingent consideration Difficulty determining a business combination versus an asset purchase User feedback Generally find information useful Questioned usefulness of information related to Fair value of difficult to measure assets and liabilities Bargain purchases Asset purchases Next steps FASB is awaiting the completion of the IASB s postimplementation review on IFRS 3 and will coordinate with IASB before deciding to take on a project

28 On the horizon Financial instruments (classification and measurement)

29 Classification and measurement - executive summary What you need to know Significant complexity concerns raised over February 2013 ED Recent decisions move proposed guidance towards current GAAP - Bifurcation retained - Loans and debt securities: models that exist today retained Project now focused on targeted amendments to U.S. GAAP - Equity securities - Financial liabilities if FVO elected Not converged with IFRS Talking theory Getting feedback Coming soon Impacts Equity securities: FVNI with practicability exception New impairment model for equity investments not at FVNI Debt investments and financial liabilities largely unchanged Looking forward Redeliberations continue Final standard expected Q Unlikely to be effective earlier than 2016

30 On the horizon Financial instruments (Impairment)

31 Impairment - executive summary What you need to know Broad scope impacts most financial instruments New expected loss model replaces the existing incurred loss model Convergence will not be achieved FASB - Single measurement lifetime losses at inception except for available for sale debt securities IASB - Dual measurement lifetime losses upon trigger Impacts More timely recognition of losses Effect on regulatory capital requirements Eliminates multiple impairment models Looking forward IASB issued final standard FASB redeliberations continue Final standard expected mid 2015 Talking theory Getting feedback Coming soon

32 Restatement and revision trends Top five causes of restatements and revisions 1. Debt, quasi-debt, warrants & equity (BCF) 2. Cash flow statement 3. Revenue recognition 4. Tax expense, benefit, deferral and other issues 5. Foreign, related party, affiliated or subsidiary issues Source: Audit Analytics; restatements & revisions from 10-K Filers Yellow = restatements Brown = revisions

33 SEC comment letter Sources of comments: Filed documents Analyst calls Financial press, website Whistleblower PCAOB inspection Responses to SEC comment letters Public and part of disclosure record Inaccurate information creates exposure for company Interest by the press Do s and Don ts We don t agree with the staff what should we do?

34 SEC comment letter Current Themes MD&A General Observations MD&A - Liquidity MD&A Results of Operations Current themes The following section includes comment letter themes seen over the past year. Overall, these themes have remained somewhat unchanged in recent years and are consistent with themes seen in restatements and revisions. Risk Factors Goodwill and Impairments Loss Contingencies

35 SEC comment letter themes MD&A General Observations MD&A - Liquidity MD&A Results of Operations Risk Factors Goodwill and Impairments Loss Contingencies MD&A General Observations Enable users to see the company through the eyes of management. Provide an executive overview Discuss trends which may have a material impact on future operating results and liquidity Should not simply repeat information provided elsewhere; rather, explain the whys and implications Discussion of critical accounting estimates should include changes in assumptions, judgments, estimates, and other variables that impact operating results

36 SEC comment letter themes MD&A General Observations MD&A - Liquidity MD&A Results of Operations Risk Factors Goodwill and Impairments MD&A - Liquidity Address sources and uses of cash and uncertainty to satisfy future obligations. Discuss trends in cash flow, particularly when cash flow does not correlate to income from operations (e.g., positive cash flow, but operating losses, or vice versa) Expand discussion of the underlying reasons for the sources and changes in cash flows Disclose items that impact the availability of credit, including reasonably likely future debt covenant violations, limitations to draw on existing lines of credit, and other borrowing limitations Loss Contingencies

37 SEC comment letter themes MD&A General Observations MD&A - Liquidity MD&A Results of Operations Risk Factors Goodwill and Impairments Loss Contingencies MD&A Results of Operations Highlight and explain activities driving material changes period-over-period. Provide readers with an understanding of the significant components of revenues and expenses that, in management s judgment, facilitate an understanding of the results of operations Expand discussion of changes, including the underlying reasons, in the results of operations at the segment or geographic location level Expand discussion of the impact of current economic conditions Describe other known trends or uncertainties that have had or may have a material impact on operations

38 SEC comment letter themes MD&A General Observations MD&A - Liquidity MD&A Results of Operations Risk Factors Goodwill and Impairments Risk Factors Describe the risk and specify how it impacts the registrant. Completeness of material risk factors Describe any new or revised legislation or regulations, or changes in existing laws and regulations, which have had, or may have a material adverse effect on the company Discuss cyber attacks that have affected, or could materially affect, products, services, customer or supplier relationships, or competitive conditions Loss Contingencies

39 SEC comment letter themes MD&A General Observations MD&A - Liquidity MD&A Results of Operations Risk Factors Goodwill and Impairments Provide thorough disclosure even when an impairment is not charged. Provide foreshadowing disclosures Discuss methodology and key assumptions used for the impairment assessment Disclose specific facts, circumstances and events giving rise to impairment charges Discuss at risk reporting units Goodwill and Impairments Loss Contingencies

40 SEC comment letter themes MD&A General Observations MD&A - Liquidity MD&A Results of Operations Risk Factors Goodwill and Impairments Loss Contingencies Loss Contingencies Continued focus on the disclosure of potential losses and financial impact. Quantitative disclosure of a reasonably possible range of loss exceeding what has already been recorded or disclosure that it is immaterial to all financial statements Disclosure as to why a company cannot determine a reasonably possible range including a description of procedures in place to develop such conclusion Disclosure of the company s consideration of what the potential impact of settlement may be on cash flows

41 SEC comment letter themes Revenue Recognition Segment Reporting Income Taxes Non-GAAP measures Revenue Recognition The Staff compares the revenue/distribution channels discussed in the Business section with revenue policy disclosures in footnotes and comments on inconsistencies - Disclose whether the company has one or multiple units of accounting Provide clarification on the determination of selling price Explain how the multiple element guidance was considered in relation to a material modification to an agreement disclosed elsewhere in the document - Gross vs. net presentation considerations Separate presentation required for revenue and cost of revenue line items for bundled arrangements (products versus services) Disclosure regarding critical estimates, including those used in multiple element arrangements

42 SEC comment letter themes Revenue Recognition Segment Reporting Income Taxes Non-GAAP measures Segment Reporting The SEC assumes that if information is provided to the CODM, it is being used. Staff compares other public information to segment disclosures for consistency Operating segments must have similar economic characteristics to be aggregated Changes in operating segments may impact goodwill impairment test Assertions of only one segment often solicit a comment Staff often request a copy of the CODM package

43 SEC comment letter themes Revenue Recognition Segment Reporting Income Taxes Non-GAAP measures Income Taxes Disclosures regarding pre-tax income from U.S. and foreign jurisdictions Discussion of underlying factors included in the effective tax rate reconciliation Provide support for the recognition or release of a valuation allowance Uncertain tax positions - Disclose reasonably possible significant changes within the next 12 months - Evaluation of impact of uncertain tax positions on contractual obligations Indefinite reinvestment of foreign earnings and liquidity constraints

44 SEC comment letter themes Revenue Recognition Segment Reporting Income Taxes Non-GAAP measures Non-GAAP measures Common pitfalls include inappropriate items excluded and Non-GAAP measures given greater prominence than GAAP measures. The relevance of the measure How management uses the measure (if it does) and how investors should use the measure Limitations on the measure Appropriate reconciliation to a GAAP measure Reference to the lack of comparability to measures used by other companies

45 SEC comment letter themes Fair value pricing sources Fair value disclosures VIE / Consolidation Fair value measurement - pricing Validation of prices obtained from third party pricing sources. Disclose the number of quotes the issuer obtains per instrument, and how the issuer determines the ultimate value used Disclose whether prices obtained from pricing services or brokers are adjusted Disclose how controls over pricing service providers are monitored to support the completeness and accuracy of the prices received

46 SEC comment letter themes Fair value pricing sources Fair value disclosures VIE / Consolidation Fair value measurement - disclosure Expanded disclosure around fair value measurement. Disclose the interrelationship between unobservable inputs and how they might magnify or mitigate the effect of changes on fair value Disclose the weighted average of the range of unobservable inputs provided as a supplement when the range is large Quantify the amount evaluated under each valuation approach when multiple approaches are used for the same class of instruments

47 SEC comment letter themes Fair value pricing sources Fair value disclosures VIE / Consolidation VIE / Consolidation Additional disclosure around consolidation determination. Provide discussion as to why or why not the Company has decided to consolidate a VIE Disclose why the Company is or is not considered the primary beneficiary Provide separate disclosure of balance sheet items for consolidated VIEs Provide further detail as to how the company evaluated each acquisition to determine whether asset or business

48 In closing... This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty o f care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers LLP. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers LLP which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.