SEC update Page 1
Agenda Overview of key SEC initiatives Change in Commission leadership Disclosure effectiveness Revenue recognition standard Non-GAAP financial measures Rulemaking update Enforcement update SEC staff comments and trends update Page 2
Overview of key SEC initiatives Change in Commission leadership Current composition Jay Clayton, Chairman (sworn in on 4 May 2017) Michael Piwowar, Commissioner (term expires August 2018) Kara Stein, Commissioner (term expires August 2017) Two open Commission seats Strategic priorities Capital formation facilitate capital-raising opportunities for all companies, including small- and medium-sized businesses Rulemaking retrospective reviews of rules to assess relevance and effectiveness; consider both incremental and cumulative costs; consider costs of compliance and demonstrating compliance Enforcement focus on individual accountability SEC mission consider long-term interests of Main Street investors Page 3
Overview of key SEC initiatives Disclosure effectiveness history Since 2013, the SEC and its staff have issued a number of concept releases, requests for comment, reports and proposed rules related to the disclosure effectiveness initiative. 2012 2013 2015 2016 2017 April JOBS Act Section 108 Required the SEC to review S-K's registration requirements and determine how they can be modernized and simplified October Chair White speech The Path Forward on Disclosure December Staff Report Public Company Disclosures September Request for Comment Regulation S-X Other entity financial statements December FAST Act Section 72002 requires SEC rulemaking to improve S-K (remove duplicate and outdated requirements) FAST Act Section 72003 requires SEC to study and report on Regulation S-K simplification as well as improvements to disclosure delivery and focus, and then undertake related rulemaking April Concept Release Disclosure Requirements in Regulation S-K July Proposed Rule Disclosure Update and Simplification August Request for Comment Subpart 400 of Regulation S-K Proposed Rule Exhibit Hyperlinks November Staff Report Modernization and Simplification of Regulation S-K March Final Rule Exhibit Hyperlinks Proposed Rule Inline XBRL Request for Comment Guide 3, Statistical Disclosure by Bank Holding Companies Page 4
Overview of key SEC initiatives Disclosure effectiveness Regulation S-K The SEC requested comments on ways to enhance the effectiveness, content and delivery of certain business and financial disclosures, including: The disclosure framework used to determine the materiality of disclosure requirements Line item disclosure requirements (e.g., description of the registrant s business, risk factors, management s discussion and analysis (MD&A)) Presentation and delivery of disclosures Other aspects, including the disclosure regime related to financial reporting, risk management and public policy matters Topics include reducing disclosures for smaller public companies, frequency of interim reporting, sustainability disclosures and auditor involvement in nonfinancial statement disclosures The Fixing America s Surface Transportation (FAST) Act requires the SEC to provide recommendations to Congress, and then propose rules to modernize and simplify the requirements in Regulation S-K. Page 5
Overview of key SEC initiatives Disclosure effectiveness SEC staff report on S-K Key recommendations: MD&A require either of the following: Period-to-period comparison for the two most recent fiscal years and hyperlink to the prior year s annual report for the additional period-to-period comparison Longer-term trend analysis for entire three-year period Table of contractual obligations eliminate table, require narrative Description of property disclose only if property is material to registrant s business Filing of material contracts not in the ordinary course of business limit two-year look-back only to new registrants Legal entity identifiers require them for all legal entities in a registrant s legal structure Page 6
Overview of key SEC initiatives Disclosure effectiveness Regulation S-X SEC requested comments in September 2015 on financial information required for entities other than the registrant, including: Acquired or to-be-acquired businesses (S-X Rule 3-05) Equity method investees (S-X Rule 3-09) Subsidiary guarantors or issuers of guaranteed securities (S-X Rule 3-10) Affiliates that collateralize an issuance (S-X Rule 3-16) Regulation S-X stakeholder recommendations Simplify significance tests and better align them with economics Streamline financial statement requirements of acquired businesses Expand use of pro forma financial information Eliminate complexity and focus disclosures on material information related to equity method investees, subsidiary issuers and guarantors Page 7
Overview of key SEC initiatives Disclosure effectiveness DUSTR Disclosure Update and Simplification release (DUSTR) Proposal would modify or eliminate certain SEC disclosure requirements Category I: redundant or outdated in light of requirements in other Commission rules, US GAAP or IFRS Category II: overlapping with US GAAP (i.e., those requirements that convey reasonably similar information, or information that is not materially incremental and may no longer be useful to investors) Options: (1) Eliminate, (2) Modify or (3) Refer to FASB Category III: outdated due to business or technology changes Category IV: superseded by other accounting, auditing and disclosure requirements EY comment letter Generally agreed with substantially all proposed changes Identified additional items to eliminate Recommended that SEC rules and regulations prescribe disclosure requirements only for information located outside the annual and interim financial statements and associated notes Page 8
Overview of key SEC Initiatives Disclosure effectiveness other possible changes Smaller reporting company definition proposed changes: Increase public float threshold to $250 million from $75 million For entities with no public float, increase revenue threshold to $100 million from $50 million Request for comment on Subpart 400 of Regulation S-K Proposal to modernize Industry Guide 7 Mining Operations Align disclosures with current industry and regulatory practices Rescind guide and move its requirements to Regulation S-K Request for comment on Industry Guide 3 Bank Holding Companies Statistical and other disclosure by bank holding companies Modernize requirements in light of current US GAAP, IFRS and lending industry practices Potential to rescind Guide 3 and integrate its requirements into Regulation S-K Page 9
Overview of key SEC initiatives New revenue recognition standard SEC staff is monitoring implementation of new standard Consistent application is an area of focus Staff has stated that similar facts should result in consistent outcomes Staff expects companies to follow conclusions reached by the Transition Resource Group even though they are non-authoritative Staff Accounting Bulletin (SAB) Topic 11.M (SAB 74) disclosures about potential effects of adoption remain applicable and should evolve as adoption nears If quantitative and qualitative effects are unknown: Disclose when the assessment is expected to be completed Disclose status of implementation project Adoption likely is not a fundamental change that would trigger posteffective amendment to registration statements revenue is one of the single most important measures used by investors in assessing a company s performance. Given market expectations of comparability, companies cannot afford to get the accounting for revenue wrong. SEC Chief Accountant Wesley Bricker Page 10
Overview of key SEC initiatives New revenue recognition standard SEC five-year table Prior periods presented SAB Topic 11.M disclosures to evolve Effective 2014 2015 2016 New revenue standard Full retrospective application date 2017 Potential reporting issues for full retrospective adoption: 2018 Modified retrospective application date 2019 Modified retrospective application date (EGCs opting private co. transition) New or initial registration statements filed in 2018 after adoption presented in Q1 2018 Form 10-Q Selected financial data and earnings to fixed charges tables no requirement to recast earliest two years Investee significance for S-X Rules 3-09 and 4-08(g) when filing 2018 Form 10-K SEC staff will not require reassessing significance for prior periods Pro forma financial information prepared in accordance with Article 11 of Regulation S-X registrant must conform the acquired entity s transition date and method to its own Adoption dates for certain public business entities (PBEs): Companies that are PBEs solely because their financial statements or financial information are included in SEC filings of other SEC registrants (e.g., reporting under Rules 3-05, 3-09, 4-08(g)) will be allowed to adopt ASC 606 and ASC 842 on the private company adoption timeline Page 11
Overview of key SEC initiatives New leasing standard SAB Topic 11.M disclosures Effective 2016 2017 2018 2019 2020 2021 Leases standard issued, and early adoption permitted Prior periods presented Modified retrospective application (calendar-year public entities*) Prior periods presented Modified retrospective application (all other calendaryear entities) * Public entities include public business entities and certain not-for-profit entities and employee benefit plans. Modified retrospective adoption approach to all leases as of the beginning of the earliest comparative period (full retrospective adoption is prohibited) New or initial registration statements filed in 2019 after adoption presented in 2019 interims: SEC accelerates the provision of retrospectively revised financial statements for the years 2018 and 2017, but does not change the date of initial application January 1, 2017 for calendar year-end registrants Page 12
Overview of key SEC initiatives Non-GAAP financial measures Non-GAAP financial measures may provide an alternative source of information to help investors better understand operating performance, cash flow or financial position Such measures include EBITDA, adjusted EBITDA, funds from operations (FFO), adjusted FFO, adjusted net income, free cash flow SEC adopted rules (Regulation G, Item 10(e) of Regulation S-K) in 2003 governing the disclosure of non-gaap measures Apply to earnings release, SEC filings, as well as other public disclosures SEC staff guidance has evolved since then, and such measures have been a frequent area of focus in SEC staff reviews of public filings and related comment letters SEC recently raised concerns about the growing use and prominence of non- GAAP measures in earnings releases, SEC filings and other public disclosures This area deserves close attention, both to make sure that our current rules are being followed and to ask whether they are sufficiently robust in light of current market practices. Former SEC Chair Mary Jo White Page 13
Overview of key SEC initiatives Non-GAAP financial measures SEC staff updated and clarified its interpretations in May 2016 through a series of Compliance and Disclosure Interpretations SEC staff views on: Non-GAAP measures that are misleading Tailoring recognition and measurement principles Examples Excluding normal, recurring cash operating expenses Presenting measures inconsistently between periods Excluding nonrecurring charges but not gains Accelerating the recognition of deferred revenue that must be recognized ratably under GAAP Modification of consolidation principles (i.e., use of proportionate consolidation) Prominence of non-gaap measures Omitting comparable GAAP measure Using bold or larger font for non-gaap Volume and order of discussion Excluding a quantitative reconciliation with respect to forward-looking non-gaap measure Full non-gaap income statements Presenting measures per share that appear to be liquidity measures in substance Determining the income tax effects of adjustments to non-gaap measures EBIT and EBTIDA per share Adjusted EBITDA or adjusted FFO per share that appear to function as liquidity measures Non-GAAP income tax effects are not determined appropriately based on non-gaap profit level Inappropriate use of cash tax for a performance measure Page 14
SEC priorities Non-GAAP financial measures next steps Revisit use of non-gaap measures in filings and earnings releases Consider alternative ways of presenting similar information Challenge usefulness and appropriateness of non-gaap measures Present GAAP measure with equal or greater prominence Place GAAP measure first; avoid discussion of non-gaap measures without corresponding GAAP ones Consider revising disclosure describing how management uses the non-gaap measure and how investors could use it Consider disclosure controls over: Non-GAAP measures Key operating metrics Other non-gaap measures in proxy Audit committees are well positioned to exercise healthy oversight by understanding management s controls to calculate non-gaap and other key operational measures. (April 2017) SEC Chief Accountant Wesley Bricker Page 15
SEC rulemaking update Final rules Regulation A+ and Regulation Crowdfunding Expand exempt public offerings that are generally available only to private domestic companies Annual offering limitations Subject to state securities laws? Financial statements Accounting basis Ongoing reporting Securities holder counts Regulation A+ Tier 1 Tier 2 Regulation Crowdfunding Up to $20 million Up to $50 million Up to $1.07 million Yes No No Unaudited Audited (US GAAS or PCAOB standards) Offering size: > $535k audited (reviewed for firsttime issuers) > $107k $535k reviewed $107k certified by CEO US GAAP public business entity basis (domestic issuers) None Included in 12(g) holder counts Annual, semiannual and current reporting Annual reporting; certified by CEO Excluded from 12(g) holder counts Page 16
SEC rulemaking update Regulation D amendments Final rule amended Rule 504 and repealed Rule 505 of Regulation D Exempt offerings limit under Rule 504 was raised to $5 million from $1 million Key requirements of the three registration exemption rules of Regulation D: Regulation D Rule 504 Rule 506(a) Rule 506(b) Dollar limit Limit on number of purchasers Qualifications for purchasers Disclosure requirements $5 million in any 12-month period None None Bad actor events before 20 January 2017 to all purchasers None 35 non-accredited, unlimited accredited Non-accredited must be sophisticated Only if one or more nonaccredited purchasers None Unlimited accredited All must be accredited Not specified Financial statements Not specified Varies Not specified Resale restrictions Yes for non-accredited investors only Yes Yes Page 17
SEC rulemaking update FAST Act The FAST Act made changes to the Jumpstart Our Business Startups (JOBS) Act provisions and SEC requirements to facilitate capital formation by smaller companies Reduces minimum public filing period for an emerging growth company (EGC) registration statement to 15 days from 21 days before start of IPO road show Protects EGC status during IPO until earlier of (1) IPO date or (2) one year after issuer would have otherwise lost EGC status Allows an EGC to omit certain financial statements it reasonably expects will not be required at IPO Example: If an EGC expects to go public in 2018, it could include audited financial statements for only 2016 in initial filing or submission (exclude 2015 and add 2017 later) Allows certain smaller reporting companies to forward incorporate by reference subsequent Exchange Act reports in an effective Form S-1 Page 18
Pay ratio disclosure SEC final rule Pay ratio Annual total compensation of principal executive officer (PEO) Median annual total compensation of all other employees except PEO Allows some flexibility in determining median employee Use entire population of employees or a statistical sample Determine using any consistently applied compensation measure (e.g., W-2 information), not necessarily total compensation Annualize compensation for permanent full-time and part-time employees but not for temporary ones Do not convert part-time to full-time equivalent employees Generally calculate median employee every three years and make the determination at any point during the last three months of the fiscal year Calendar year-end entities provide 2017 ratio in 2018 proxy. Page 19
Pay ratio disclosure SEC final rule (continued) Must include May exclude Employees of parent and consolidated subsidiaries Independent contractors if paid by a third party Part-time, seasonal and temporary employees De minimis populations of non-us employees in individual foreign jurisdictions (<5% of total employees in the aggregate) Employees in foreign jurisdictions with data privacy laws (count toward de minimis exemption) Disclose the methods and material assumptions used in determining components of the pay ratio Commissioner Michael Piwowar requested SEC staff to reconsider rule implementation guidance US House CHOICE Act seeks to repeal the pay ratio disclosure rule Page 20
SEC rulemaking update Other proposed rules under Dodd-Frank Act Clawback of excess incentive-based compensation after restatement Would direct national securities exchanges to require companies to implement plans to claw back excess incentive-based compensation received by current and former executive officers upon an accounting restatement Relates to incentive-based compensation tied to accounting related measures, stock price or total shareholder return (TSR) Applies to most recent three years of restated financial statements Includes all SEC registrants (except certain registered investment companies) Pay versus performance disclosures Company to describe the relationship between actual executive compensation paid and TSR, and its TSR compared to peer group TSR Proxy disclosure of hedging policies Disclose whether a company allows employees, officers or directors to engage in transactions to avoid or reduce losses in market value of their equity interests in the company Does not apply to foreign private issuers (FPIs) and certain investment companies Page 21
Dodd-Frank Act update Conflict minerals rule US Court of Appeals found parts of the rule violated the First Amendment but upheld several key aspects April 2014 revised reporting guidance still applies, pending additional actions Disregards requirement to describe products as DRC conflict undeterminable or not found to be DRC conflict free Allows a conflict minerals report (CMR) to be unaudited, unless the issuer voluntarily describes any products as DRC conflict free SEC staff will not recommend enforcement if Form SD omits the CMR starting May 2017 Form SD filings observations (registrants >$1B market capitalization) Independent private sector audits (IPSAs) Year Forms SD IPSAs CMRs 2017 692 14 558 2016 673 15 558 2015 649 5 532 Monitor for additional CHOICE Act developments and SEC rulemaking Page 22
XBRL update Inline XBRL, IFRS Taxonomy, Hyperlinks Today, companies submit XBRL tagged financial statements as an exhibit to their SEC filings or use Inline XBRL under a voluntary program Proposed rules would require Inline XBRL Embeds tags directly in the HTML filing Would not change Scope of XBRL tagging Officer certification scoped out Auditor involvement not required Four-year phase-in after rule is effective for operating companies SEC published IFRS Taxonomy for FPIs using IFRS as issued by IASB FPIs reporting using IFRS as issued by the IASB must file XBRL tagged financial statements for periods ending after 15 December 2017 FPIs not using IFRS or US GAAP are exempt from tagging requirement SEC adopted final rule that most filings must include hyperlinks to filing exhibits Effective for filings after 1 September 2017 Page 23
SEC nonpublic review program Expansion of scope beyond EGCs Scope (regardless of filer category or status) All IPO registration statements All registration statements within one year as a new SEC reporting company All initial registration statements under Section 12(b) of the Exchange Act Effective 10 July 2017 Registrant may omit from the draft registration statement financial information that is expected not to be required at the time such registration statement is publicly filed Different from rule for EGCs, which is based upon expected effective date Public filing must be at least 15 days before road show (or if none, effective date) This is an important step in our efforts to foster capital formation, provide investment opportunities, and protect investors. Bill Hinman, Director of the Division of Corporation Finance Page 24
Enforcement activities Record number of cases in 2016 led to over $4 billion in recoveries SEC filed a total of 868 cases in 2016 103 financial reporting cases in 2016 versus 135 in 2015 1000 800 600 400 200 639 630 656 671 664 684 735 734 676 755 807 868 574 219 179 185 138 157 143 126 89 79 68 96 135 103 Issuer reporting and disclosure actions Total enforcement actions 0 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 16 Source: Select SEC and Market Data reports by fiscal year The Enforcement Division s leveraging of data, quantitative analytics significantly to this year s very strong results. contributed Former SEC Chair Mary Jo White Page 25
Enforcement activities (continued) Financial Reporting and Auditing (FRAud) Group Revenue recognition Inadequate controls over the accounting for rebates Earnings management and misleading non-gaap measures Non-GAAP measures that contain misleading adjustments Non-GAAP measures that are developed inconsistently from period to period Loss contingencies Undisclosed exposure from known defects in a sold product Failure to accrue and disclose a liability related to an ongoing government investigation Income tax accounting Overstating net income by posting top-side entries in the tax provision Emphasis on holding gatekeepers accountable Accountants, lawyers, audit committee chairs, broker dealers Whistleblower program protects and rewards whistleblowers More than 4,200 tips in SEC fiscal 2016 Page 26
SEC staff comments and trends update Page 27
SEC filing review process Division of Corporation Finance review responsibility Review required by Sarbanes-Oxley Act every three years Registrants could be reviewed more frequently IPOs, Form 8-Ks (Items 4.01 and 4.02), merger proxies Percentage of issuers reviewed 60% 50% 44% 48% 48% 52% 52% 51% 56% 40% 30% FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 Source: SEC 2016 Annual Performance Report Page 28
SEC filing review process (continued) Companies receiving comment letters by size Public float: Number of SEC comment letters by year 7,610 < $75 million, 24% 5,916 5,352 4,683 3,735 2,905 > $700 million, 57% $75 million to $700 million, 17% 2011 2012 2013 2014 2015 2016 Forms 10-K and 10-Q Source: Audit Analytics SEC UPLOAD comment letters issued related to Forms 10-K and 10-Q for the 12-month periods ended 30 June 2011 through 2016 Page 29
SEC filing review process (continued) Number of comment letters issued to complete review % of SEC staff reviews 80% 70% 60% 50% 40% 30% 20% 10% 0% 75% 19% 5% 1% 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 2016 Page 30
Frequent areas of SEC staff comment Ranking Comment letter topic for SEC FYE 30 June 2016 2015 MD&A 1 1 Non-GAAP financial measures 2 4 Fair value measurements 3 2 Revenue recognition 4 3 Segment reporting 5 7 Income taxes 6 6 Intangible assets and goodwill 7 8 Acquisitions and business combinations 8 9 Signatures, exhibits and agreements 9 5 Commitments and contingencies 10 13 Source: Audit Analytics Comment letter taxonomy for SEC staff comment letters issued to registrants related to Forms 10-K from 1 July 2014 to 30 June 2016 Page 31
SEC staff focus areas Areas of frequent comment non-gaap measures Clearly explain usefulness to investors Meaningful insights about performance, profitability or cash flows Consider management use, if material Should not be more prominent than GAAP measures Includes order of presentation and degree of emphasis in earnings releases and SEC filings Accurate explanation Clearly describing the measure and appropriate labeling of reconciling items Avoid general or boilerplate discussions Preparers should consider how their disclosure controls and procedures apply to the disclosure of non-gaap measures. SEC Chief Accountant Wesley Bricker Page 32
SEC staff focus areas Example comments on non-gaap measures The justification for the use of the non-gaap financial measure must be substantive. Merely indicating that you provide such non-gaap financial measures to give investors additional data to evaluate your operations is not sufficient support for disclosure of the non-gaap financial measures. Please move the non-gaap information to follow your discussion of your results of operations. Your current presentation and discussion of non-gaap measures does not comply with Item 10(e)(1)(i)(A) of Regulation S-K as it appears to give undue prominence to non-gaap measures. The adjustment change in deferred revenue in arriving at your non-gaap measure adjusted EBITDA appears to accelerate the recognition of revenue associated with the deferred revenue liability that otherwise would not be recognized in any of the periods for which adjusted EBITDA is presented. Accordingly, adjusted EBITDA substitutes a tailored revenue recognition method for that prescribed by GAAP and does not comply with Question 100.04 of the staff s Compliance & Discussion Interpretations on Non-GAAP Financial Measures. Please remove this adjustment from your computation of adjusted EBITDA. Page 33
SEC staff focus areas Areas of frequent comment segment reporting Identification of chief operating decision maker (CODM) Registrants shouldn t default to CEO CODM does not need to have ultimate decision-making authority Identification of operating segments Neither organizational structure nor reports provided to CODM are determinative Emphasis on how the business is managed Aggregation of operating segments to reporting segments Consider both qualitative and quantitative factors Similar economic characteristics and all qualitative criteria No bright lines on similar economic characteristics; future doesn t overcome past Similarity viewed from the perspective of a reasonable investor Internal control over financial reporting (IFCR) must include effective controls over the determination of operating and reportable segments Page 34
SEC staff focus areas Example comments on segment reporting We note that your five operating segments are aggregated into one reportable segment. Please address the following: Compare and contrast your operating segments relative to the areas listed in ASC 280-10-50-11(a) through (e). With respect to any differences among your operating segments, tell us why you determined that disaggregation was not warranted. Provide us with each operating segment s historical and projected revenues, gross margin, operating margin and measure of segment profitability. Tell us the basis of organization (i.e., why the company is organized in the manner that it is). Tell us the consideration given by management in determining your single reportable segment in light of the acquisition of XYZ Company (XYZ), which continues to operate in a different region of the country post acquisition. Page 35
SEC staff focus areas Areas of frequent comment ICFR and disclosure controls Recent remarks from SEC officials: Reliable financial reporting depends on effective ICFR SEC s guidance to management requires more evidence and documentation in high-risk areas PCAOB findings may reflect deficiencies in management s controls and assessments Disclosure controls Non-GAAP measures Key operating metrics Page 36
SEC staff focus areas Areas of frequent comment ICFR Focus on whether all material weaknesses are being identified and evaluated appropriately Is there a reasonable possibility that a material misstatement will not be prevented or detected? Does not require an actual material misstatement the could factor Recent focus on immaterial error corrections Little r restatements and out-of-period error adjustments Evaluate the severity of a control deficiency considering both quantitative and qualitative factors Properly describe material weakness design or operational failure? A material weakness is a deficiency, or combination of deficiencies, in ICFR such that there is a reasonable possibility that a material misstatement will not be prevented or detected on a timely basis. Page 37
SEC staff focus areas Example SEC staff comments on ICFR Immaterial error correction and ICFR We note that during the quarter you have corrected multiple financial statement errors which you concluded are immaterial to your previously reported amounts contained in your annual report. Please provide an explanation of how you considered the identification and correction of these errors in your evaluation of internal control over financial reporting and disclosure controls and procedures. Page 38
SEC staff focus areas Areas of frequent comment MD&A Results of operations Disclose not only what but why significant changes occurred Identify and quantify specific business drivers of results Discuss key metrics clearly and completely Discuss significant components of costs of sales and operating expenses at consolidated and segment levels Liquidity and capital resources forward-looking information Consideration of economic factors Known trends that affect revenues and income in future periods Type of exposure: Describe effect of: Foreign exchange fluctuations Strength of US dollar Economic conditions Changes in interest rates Decline in commodity prices Sustained slow GDP growth Federal Reserve monetary policy Sustained low oil and gas prices Page 39
SEC staff focus areas Areas of frequent comment revenue recognition Clear disclosure of revenue recognition policies Evaluating principal versus agent criteria (i.e., gross vs. net presentation) Identify deliverable and the party responsible for fulfilling it Primary obligor starting point for evaluating criteria General inventory risk criterion should be considered broadly (i.e., includes intangible goods or services) Latitude to establish pricing consider any economic constraints Multiple-element arrangements Identifying units of account Determining relative selling price Disclosure of expected effect of new revenue guidance in ASC 606 SAB Topic 11.M. Disclosure should not be boilerplate Page 40
SEC staff focus area Example SEC staff comment on effect of new revenue standard (SAB Topic 11.M) You state that you are in the process of evaluating the impact that the amended revenue recognition guidance in Topic 606 will have on your consolidated financial statements. Please revise to provide a qualitative discussion of the potential impact that this standard will have on your financial statements when adopted. In this regard, include a description of the effects of the standard that you expect to apply and a comparison to your current revenue recognition policies. Describe the status of your process to implement the new standard and the significant implementation matters yet to be addressed. In addition, to the extent that you determine the quantitative impact that adoption of Topic 606 will have on your results, please also disclose such amounts. Page 41
SEC staff focus areas Areas of frequent comment income taxes Foreign earnings Support for indefinite reinvestment assertions Effect of foreign earnings on effective tax rate Disproportionate income generated in low-tax jurisdictions Realizability of deferred tax assets Weighting of positive and negative evidence Consideration of how objectively verifiable the evidence is Significant estimates and assumptions used in analysis Consistency with assumptions used elsewhere (e.g., goodwill impairment) Income tax-related disclosures in MD&A Insight into the extent to which the past is indicative of the future and reasons for changes in the effective tax rate (ETR) Explain changes in line items in the reconciliation of the statutory tax rate to the ETR Differences in trends between tax expense and cash taxes paid Uncertain tax positions: disclose thoroughly any trends and uncertainties Page 42
SEC staff focus areas Areas of frequent comment commitments and contingencies Measurement and disclosure of loss contingencies Undertake sufficient procedures before concluding that a range of loss cannot be estimated Do not fail to disclose losses that are reasonably possible of being in excess of the amount accrued Evaluate and update disclosures each reporting period Balance sheet presentation Offset loss contingencies and receivables from insurance only if the criteria in ASC 210 are met (gross vs. net presentation) Page 43
SEC staff focus areas Areas of frequent comment fair value measurements Disaggregate classes of assets and liabilities Disclose valuation techniques and inputs used Do not simply disclose source used to determine fair value (e.g., fair value was determined using a commercial pricing service) Do not simply list the valuation techniques and inputs used for all assets and liabilities Do not use boilerplate language to describe valuation techniques Page 44
SEC staff focus areas Common restatement areas Top three topics 2016 % Top three topics 2015 % Income taxes 16 Income taxes 17 Revenue recognition 9 Revenue recognition 13 Reclassifications* (balance sheet or income statement) 6 for each topic Liabilities, depreciable assets, expense recognition 6 for each topic To avoid financial reporting errors and restatements, entities should: Identify and account for key contractual terms Focus on changes in business and effects on estimates on a timely basis Entities should correct identified errors as soon as practicable to avoid restatement due to an accumulation of individually immaterial errors * These presentation matters were generally part of a restatement and were only the primary cause of one restatement in 2016. Page 45
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