The Dbriefs Financial Reporting series presents: SEC Hot Topics Bob Uhl, Deloitte & Touche LLP Joe DiLeo, Deloitte & Touche LLP Tim Kolber, Deloitte & Touche LLP Scott Streaser, Deloitte & Touche LLP November 21, 2013
Agenda SEC landscape Dodd-Frank Act JOBS Act Other SEC matters SEC comment trends Question and answer
Keep in mind This webcast does not provide official Deloitte & Touche LLP interpretive accounting guidance Check with a qualified advisor before taking any action See later slides for information on obtaining written summaries of issues discussed today
Learning objective To enhance participants understanding of important accounting issues and developments pertaining to recent actions of the FASB, IASB, EITF, and others.
Poll question # 1 Are you a financial statement preparer, user, auditor, or other interested party? Preparer User Auditor Other
SEC landscape
Key personnel changes at the SEC Chairman of the SEC Commissioner Elyse Walter named SEC Chairman in December 2012 to replace Chairman Shapiro Mary Jo White sworn in as new SEC Chairman in April 2013 White s term was originally set to run through June 2014 extended to June 2019 SEC Commissioners Kara M. Stein replaced Elisse Walter as a Democratic commissioner in August 2013 Michael S. Piwowar succeeded Troy Paredes as a Republican appointee in August 2013 Director of Division of Enforcement Robert Khuzami resigned in December 2012 George Canellos and Andrew Ceresney named co-directors in April 2013 Director of the Division of Corporation Finance Meredith Cross resigned in December 2012 Keith F. Higgins named new director in May 2013 Chief Accountants OCA - Paul Beswick named Chief Accountant in December 2012 Corporation Finance Mark Kronforst named Chief Accountant in October 2013.
SEC agenda Aggressive enforcement activities Initiatives and policies to support enforcement activities Continue to levy enforcement actions Complete rulemaking commitments under Dodd-Frank and JOBS Acts High priority of President Obama Focus of substantial efforts of resources Reviews of SEC Filings Comment letters to registrants on periodic reports and registration statements.
SEC agenda Revisit disclosure framework Disclosure overload Review of Regulation S-K under Section 108 of the JOBS Act Adoption of IFRSs in U.S. financial reporting system Enforcement and rulemaking activities dominating the SEC s agenda Staff studies complete No additional information on timing for a decision Congressional inquiries Cybersecurity Letter from Senator Rockefeller to SEC Chairman Corporation Finance Disclosure Guidance (CFDG) Topic No. 2, Cybersecurity Frequent focus area in SEC comments to registrants XBRL.
XBRL An update Tag You re It! SEC Staff use of XBRL SEC Investment Advisory Commission recommendations Recommendation 1 Adopt a Culture of Smart Disclosure prompting the collection, standardization, and retrieval of data that is filed with the SEC using machine-readable data tagging formats Recommendation 2 Work towards reducing data tagging costs, especially those of smaller issuers and investors Recommendation 3 Assess existing forms and, when appropriate, revise the forms to require data tagging to increase financial reporting transparency Regulation S-T Rule 406T modified liability runoff U.S. GAAP financial reporting taxonomies FPI Considerations
Poll question #2 Foreign Private Issuers issuing financial statements prepared using IFRSs issued by the IASB are required to submit interactive data files to the SEC. True False
Enforcement-related initiatives Policy-related initiatives Admission of wrong-doing Deferred prosecution agreements for individuals Broken windows policy Organizational and structural efforts Center for Risk and Quantitative Analytics. Use quantitative data and analysis to identify high-risk behaviors and misconduct Microcap Fraud Task Force Target abusive trading and fraud in Microcap companies Financial Reporting and Audit Task Force Enforcement accountants and attorneys aimed at identifying violations related to financial statements, reporting and disclosures, and audit failures Will also monitor restatement activities and analyze industry performance trends Use technology to data mine and tools such as Accounting Quality Model for data analysis
Accounting Quality Model (AQM) AQM also referred to as Robocop Developed by Division of Risk, Strategy and Financial Innovation May be used across the SEC Designed to identify possible earnings management Compares companies to peers Identify outlier discretionary accruals Looks at risk indicators and risk inducers May be enhanced to analyze MD&A
Enforcement-related initiatives Whistleblower awards under the Dodd-Frank Act Became effective on August 12, 2011 Original information Penalty more than $1 million 10% - 30% award FY 2011 FY 2012 FY 2013 Whistleblower tips received 334 3,001 3,238 Disclosures & F/S 2013 17.2% Offering Fraud 2013 17.1% Manipulation 2013 16.2% Six individuals have received payments to date Last payment to an individual in October 2013 for approximately $14 million Whistleblower Program Annual Report Issued November 15, 2013. http://www.sec.gov/about/offices/owb/annual-report-2013.pdf
Division of enforcement statistics Cases result from Market surveillance activities Investor tips/complaints (e.g., whistleblower information) Other SEC Divisions/Offices Self-regulatory organizations and other security industry sources Media reports Foreign Corrupt Practices Act FY 2012 FY 2011 Number of enforcement actions 734 735* Number of National Priority Cases** 150 105 Orders for penalties and disgorgements $3.1billion $2.8 billion *Highest amount filed in a fiscal year **These represent the Division of Enforcement s most complex and significant matters. Enacted in 1977 but remains a priority and a leading area of enforcement activity Division restructured in 2010 to include a dedicated office for FCPA violations November 2012, DOE released a guide in conjunction with the Department of Justice.
Dodd-Frank Act
Dodd-Frank Act Rulemaking activity Proposed rules Pay Ratio Disclosure [September 18, 2013] Implements Section 953(b) of the Act Applicable to registrants subject to Regulation S-K, Item 402 EGCs, SRCs, and FRIs are exempted from requirement What does a registrant need to disclose? Median annual compensation of its employees Ratio of this median income to its CEO s annual pay Who is included in the population of employees? All full-time, part-time, seasonal, domestic, and foreign employees Includes those employed on last day of fiscal year Respondents expressed concerns about the complexity and costs of applying proposal In response - a certain level of flexibility in calculating median compensation was incorporated into proposal.
Dodd-Frank Act Rulemaking activity Proposed rules (cont d) Credit Risk Retention [August 18, 2013] Implements Section 941of the Act Who would be impacted by this rule? Applicable to sponsors of securitization transactions or their majorityowned affiliates Excludes securitization transactions of asset-backed securities collateralized by qualified residential mortgages Requirements Must retain no less than 5% of credit risk of assets collateralizing asset-backed securities Can utilize various risk retention options Vertical risk retention approach Horizontal risk retention approach Combination approach
Dodd-Frank Act Rule-related activity Conflict minerals Conflict minerals rule upheld [July 24, 2013] Plaintiffs argued that the final rule is too costly to implement and violates a registrant s First Amendment Rights Registrants meeting final rule s reporting requirements must still file Form SD with SEC by May 31, 2014 SEC and AICPA issue guidance on conflict minerals [May 2013] Disclosure of payments by resource extraction issuers Final SEC rule vacated [July 2, 2013] Judge cited that SEC misread the statute to require public disclosure of reports and decision to deny any exemption was arbitrary SEC has decided not to appeal this ruling but reserves the right to revise and reissue a rule in the future Issuers subject to the rule are not required to submit a Form SD in the current reporting period
Poll question #3 All of the following statements are true about the SEC s final rule on conflict minerals except which one of the following: The conflict minerals rule covers any mineral that originated from the Democratic Republic of Congo or adjoining countries. In July of this year, the final rule on conflict minerals was upheld by the U.S. District Court of the District of Columbia. Impacted issuers will need to file their first Form SD for calendar year ending December 31, 2013 by May 31, 2014. The AICPA and SEC have issued interpretive guidance on implementing the conflict minerals rule.
JOBS Act
Jumpstart Our Business Startups Act Rulemaking activity Proposed rule Crowdfunding [October 23, 2013] Implements Title III of the Act What is crowdfunding? Raising capital by offering and selling securities through the internet Small amounts of individual contributions from a large number of people What are basic requirements of the proposal? Individual investors subject to annual income or net worth requirements Eligible companies limited to raising $1 million in a 12-month period Certain companies are ineligible SEC requires certain disclosures and audited or reviewed financial statements Proposed rule introduces regulatory framework for intermediaries that process transactions Comments on proposal due February 14, 2014
Jumpstart Our Business Startups Act Rulemaking activity Final rule Eliminating Prohibition against General Solicitation and Advertising of Certain Offerings [Issued July 10, 2013] Implements requirements of Section 201(a) of the Act Amends Regulation D to allow certain entities to use general solicitation and advertisements to market securities Amends Rule 144A allowing securities to be offered to investors that are other than qualified institutional buyers Requirements are legally driven and registrants should consult with their legal counsel SEC Interpretations on JOBS Act SEC issued responses to Frequently Asked Questions Emerging Growth Companies (Title I) Access to Capital for Job Creators (Title II) Crowdfunding (Title III) Exchange Act Registration and Deregistration (Title V VI) SEC Division of Corporation Finance updated Financial Reporting Manual to reflect impact of JOBS Act
Poll question #4 The proposed SEC rule on crowdfunding includes the following provisions EXCEPT: Limits capital that can be raised to $1 million in a 12-month period Requires the transaction to be completed through an SECregistered intermediary All companies are eligible to raise capital through crowdfunding Requires companies participating to file certain information with SEC, including reviewed or audited financial statements
Other SEC matters
Other SEC matters Other activities SEC clarifies views on use of social media Analogizes to SEC interpretive release on use of web sites Personal social media sites not presumed to be a distribution channel for material corporate information Must let investors know where company has/will disclose such information (i.e., information distribution channels and disclosure practices) Compliance with Regulation FD applicable whenever non-public information is disclosed to persons described in Regulation FD Companies need to assess policies and controls Additional assessment needed if company elects not to file a Form 8-K Iran Threat Reduction and Syria Human Rights Act Disclosures effective for filings due after February 6, 2013 Requires issuers to disclose information about "sanctionable activities" with Iran or Syria Introduces new IRANNOTICE submission type on EDGAR In December 2012, the SEC issued compliance and disclosure interpretations in response to the disclosure requirements of the Iran-Syria Act.
Other SEC matters Staff interpretive guidance Financial Reporting Manual (FRM) Updated quarterly (i.e., January, April, July, and October) More notable updates relate to real estate acquisitions, significance test considerations for equity method investees (Reg. S-X, Rule 3-09), and updated examples of Non-GAAP measures Recent update incorporates JOBS Act guidance http://www.sec.gov/divisions/corpfin/cffinancialreportingmanual.shtml Compliance & Disclosure Interpretations (C&DIs) Updated periodically (most recently May and November of this year) Provide interpretations on Securities Act sections, Securities Act forms, Exchange Act forms, Regulation S-K, Exchange Act rules, Exchange Act Form 8-K, and oil and gas rules http://www.sec.gov/divisions/corpfin/cfnew/cfnew0513.shtml
Poll question #5 SEC rules prohibit registrants from using personal social media sites to comply with the Regulation FD requirements. True False
SEC comment trends
SEC comment trends SEC review process About 9,000 domestic and 1,000 foreign registrants All issuers reviewed at least 1 out of every 3 years Percentage of issuers reviewed FY08 FY09 FY10 FY11 FY12 39% 40% 44% 48% 48% Office for financial services registrants (continuous reviews of certain registrants) Staff is listening to analyst/earnings calls, reviewing press releases and websites and issuing comments Emailing comment letters and new closing letters Continue to post comment letters to EDGAR after 20 days (was 45 days)
SEC comment trends Management s discussion and analysis (MD&A) Comments addressed most areas of MD&A but have focused on: Material trends and uncertainties that affect results of operations Enhanced liquidity discussions Estimates in critical accounting policies Obligations subject to uncertainties
SEC comment trends Management s discussion and analysis (MD&A) Disclosures about key metrics in MD&A Registrants are encouraged to use metrics to tell a registrant s story, but should include sufficient information to not mislead investors Example: Disclosure of significant increase of number of registered users of a website when only a small subset of users are actually paying customers
SEC comment trends Financial statement accounting and disclosure topics Income Taxes Repatriation of undistributed earnings of foreign subsidiaries Disclosure of amount of unrecognized DTL or why not practicable to disclose Liquidity disclosures Disclosures about the registrant s rate reconciliation Impact of foreign jurisdictions with very low tax rates Valuation allowances No or insufficient valuation allowance Reversals of valuation allowance
SEC comment trends Financial statement accounting and disclosure topics Segment Reporting Operating segments Identification of operating segments Aggregation into reportable segments Disclosure requirements Product and service revenue by segment & geographic area Goodwill Impairment Testing Reporting unit considerations Aggregation of reporting units Assessment of indicators of impairment
SEC comment trends Financial statement accounting and disclosure topics Fair Value Focus on disclosures related to Level 3 fair value measurements Unobservable inputs used Valuation technique used Disclosure of control procedures to validate security pricing Validation of independent prices received from third parties Disclosure of whether prices are adjusted Disclosure of valuation methodology when comparable pricing (Level 2) is used
SEC comment trends Financial statement accounting and disclosure topics Revenue Recognition Disclosure of revenue recognition policy for significant revenue streams Are the four criteria met to recognize revenue? (SAB Topic 13) Expanded disclosures for specific transactions or groups of transactions Multi-element arrangements Identification of and allocation of consideration to each unit of accounting Selling Price for each deliverable (i.e., VSOE, third-party evidence, or estimated selling price) Period over which revenue is recognized
Poll question #6 The SEC staff discourages registrants from using metrics in their MD&A. True False
SEC comment trends Other disclosure topics Non-GAAP financial measures Support why the non-gaap measure is useful to investors Avoid undue prominence of a non-gaap financial measure Consistency in registrant s use of key metrics in SEC filings and information disclosed outside of filings (e.g. website, press releases, earnings calls) Compliance and disclosure interpretations (C&DIs)
SEC comment trends Other disclosure topics Consolidations Primary beneficiary assessment Disclosure of economics flowing to registrant from investment in VIEs Statutory Restrictions / Dividends Disclosure of minimum capital and surplus requirements and restrictions on payments of dividends Disclosure Controls & Procedures (DC&P) and Internal Control over Financial Reporting (ICFR) Assessment after remediation of Material Weakness Disclosure of Framework (COSO 2013 vs. COSO 1992)
SEC comment trends Industry specific accounting and disclosure topics Banking and securities Asset quality disclosures Technology Revenue recognition Online Games and the Sale of Virtual Goods Life sciences Collaborative arrangements
SEC comment trends Recent SEC OCA accounting consultations General topics most commonly consulted on: 17% business combinations or new basis 17% financial assets 16% revenue recognition 14% consolidations 14% long-lived assets 10% debt or equity determinations
Poll question #7 What is your level of familiarity with our annual SEC comment letter publication? I read each year s publication from cover to cover I occasionally use it when preparing filings I am aware that it exists, but have used it infrequently Never heard of it until today Copyright 2013 2012 Deloitte Development LLC. All rights reserved.
Question and answer
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Contact info Bob Uhl Joe DiLeo Tim Kolber Scott Streaser ruhl@deloitte.com jodileo@deloitte.com tkolber@deloitte.com sstreaser@deloitte.com
Acronyms used in presentation ASC: FASB Accounting Standards Codification ASU: Accounting Standards Update EITF: Emerging Issues Task Force FASB: Financial Accounting Standards Board FPI: Foreign Private Issuer GAAP: Generally Accepted Accounting Principles OCA: Office of the Chief Accountant PCAOB: Public Company Auditor Oversight Board PCC: Private Company Council SAG: PCAOB Standing Advisory Group SAB: Staff Accounting Bulletin SEC: Securities and Exchange Commission VSOE: Vendor-specific Objective Evidence
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