Disclaimer. EY Webcast: SEC comments and trends. Page 1

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1 Disclaimer This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. This presentation is 2014 EYGM Limited. All Rights Reserved. EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. Ernst & Young LLP is an EY member firm serving clients in the US. For more information about our organization, please visit ey.com. Page 1

2 SEC comments and trends An analysis of current reporting issues 24 September 2014 Page 2

3 Today s moderator Josh Forgione Ernst & Young LLP Partner, Professional Practice Join today s Twitter discussion: #EYSEC Follow us on Page 3

4 Today s agenda SEC s disclosure effectiveness initiative A behind-the-scenes look at the SEC s filing review process Frequent areas of SEC staff comment Taking the reins on the comment process Join today s Twitter discussion: #EYSEC Page 4

5 Today s presenters Loretta Cangialosi Pfizer Inc. Senior Vice President and Controller Meredith Cross Wilmer Cutler Pickering Hale and Dorr LLP Partner Steven Jacobs Ernst & Young LLP Partner, Professional Practice The information contained herein is a summary in nature. Viewers should consult their own professional advisors to address their individual circumstances and concerns. Page 5

6 Today s agenda SEC s disclosure effectiveness initiative A behind-the-scenes look at the SEC s filing review process Frequent areas of SEC staff comment Taking the reins on the comment process Join today s Twitter discussion: #EYSEC Page 6

7 Disclosure effectiveness SEC staff initiative Goals: Reduce costs and burdens for companies Provide material information to investors, in a transparent way What the staff is doing: Reviewing Regulation S-K and S-X requirements Focusing on other entity financial statement requirements Identifying redundancies with US GAAP disclosure requirements Considering use of technology to enhance focus and navigability Includes how and when information is disclosed Identifying opportunities to reduce cost and volume Consider new requirements if gaps are identified Submit comments to SEC at: Page 7

8 Disclosure effectiveness What registrants can do now Consider making current disclosures more effective Focus on material information for investors Eliminate repetitive and outdated information Expand use of cross-referencing Challenge redundancies in MD&A Qualitatively discuss changes depicted in tables rather than repeating the period over period change SEC staff comments should not always lead to more disclosure Division of Corporation Finance has invited preparers to discuss plans for significant revisions in advance Page 8

9 Today s agenda SEC s disclosure effectiveness initiative A behind-the-scenes look at the SEC s filing review process Frequent areas of SEC staff comment Taking the reins on the comment process Join today s Twitter discussion: #EYSEC Page 9

10 The SEC s filing review process Corporation Finance review responsibility Review required by Sarbanes-Oxley every three years Registrants could be reviewed more frequently IPOs, Form 8-Ks (Items 4.01 and 4.02), merger proxies Percent of issuers reviewed 60% 50% 40% 30% 20% 10% 0% 40% 44% 48% 48% 52% FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 Source: SEC 2013 Annual Performance Report Page 10

11 The SEC s filing review process Size of registrants receiving comment letters on Form 10-K filings Larger companies are receiving the majority of SEC staff comment letters 51% 29% 20% Public float: < $75 million $75 to $700 million > $700 million Source: Audit Analytics Comment letters issued related to Forms 10-K for the 12-month period ended 30 June 2014 Page 11

12 % of SEC staff reviews The SEC s filing review process Number of comment letters issued to complete review 70% 60% 50% 62% 40% 30% 20% 10% 0% 25% 9% 4% 1 letter 2 letters 3 letters 4 letters or more Number of comment letter rounds Source: Audit Analytics Comment letters related to Forms 10-K posted to EDGAR during the 12-month period ended 30 June 2014 Page 12

13 Today s agenda SEC s disclosure effectiveness initiative A behind-the-scenes look at the SEC s filing review process Frequent areas of SEC staff comment Taking the reins on the comment process Join today s Twitter discussion: #EYSEC Page 13

14 Frequent areas of SEC staff comment Ranking Frequency Comment letter topic and 2014 MD&A % Fair value measurements % Signatures, exhibits and agreements % Income taxes % Revenue recognition % Non-GAAP financial measures % Intangible assets and goodwill % Executive compensation % Segment reporting % Acquisitions and business combinations % Source: Audit Analytics Comment letter taxonomy for SEC staff comment letters issued to registrants related to Forms 10-K from 1 July 2012 to 30 June 2014 Page 14

15 Frequent areas of SEC staff comment Management s discussion and analysis (MD&A) Results of operations Identify and quantify specific business drivers of results Disclose why significant changes occurred Discuss significant components of costs of sales and operating expenses at consolidated and segment levels Critical accounting estimates Liquidity and capital resources Provide transparent analysis of sources and uses of cash Page 15

16 Frequent areas of SEC staff comment Acquisitions and business combinations ASC 805 disclosures Identification and valuation of acquired intangible assets Goodwill Disclose reporting units at risk of impairment (MD&A) Details of any impairment charge and the timing of related events Interim impairment tests Driver and results of interim test (i.e., disclose if test passed Page 16

17 Frequent areas of SEC staff comment Income taxes Foreign earnings Support for indefinite reinvestment assertions Effect of foreign earnings on effective tax rate Realizability of deferred tax assets Weighting of positive and negative evidence Significant estimates and assumptions used in analysis Consistency with assumptions used elsewhere (e.g., goodwill impairment tests) Page 17

18 Frequent areas of SEC staff comment Segments Identification of operating segments Economic similarity as support for aggregation Impact of changes in the business (e.g., acquisitions, economic characteristics) Revenue recognition Evaluation of principal vs. agent criteria (i.e., gross vs. net presentation) Clear disclosure and presentation of material revenue streams Multiple-element arrangements Identifying units of account Determining relative selling price Page 18

19 Frequent areas of SEC staff comment Non-GAAP measures Usefulness to investors Avoid general or boilerplate disclosures Appropriate labeling of reconciling items and measures Description and nature of adjustments Adjustments must qualify as nonrecurring to be labeled as such Undue prominence Order of presentation and degree of emphasis Page 19

20 Frequent areas of SEC staff comment Internal control over financial reporting Recent focus on identifying and evaluating material weaknesses when there are financial statement errors Does not require an actual material misstatement Evaluation when there are immaterial error corrections Evaluating severity of control deficiency includes both quantitative and qualitative factors Identifying the COSO framework used in management s assessment Page 20

21 Today s agenda SEC s disclosure effectiveness initiative A behind-the-scenes look at the SEC s filing review process Frequent areas of SEC staff comment Taking the reins on the comment process Join today s Twitter discussion: #EYSEC Page 21

22 Taking the reins on the comment process Think about it today, don t worry about it tomorrow Answer all of the right questions Let s talk about the accounting literature Here s what my disclosure will look like next time Get the right people involved Page 22

23 AccountingLink What you need to know. When you need to know it. Because change is constant in the financial reporting world, you need the latest information, analysis and insight, first. Page 23 Register free at:

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