Bill Hinman, Director of the Securities and Exchange Commission’s Division of Corporation Finance delivered the keynote address at the Practising Law Institute’s annual Securities Regulation in Europe program.  During his speech, Mr. Hinman touched on various topics, including the types of measures that may be undertaken in order to make the capital markets and the public company alternative more attractive.  He discussed the accommodations available to foreign private issuers (FPIs), as well as the Division’s policy changes extending the confidential submission process to companies other than emerging growth companies (EGCs).  Mr. Hinman noted that since adoption of the new policy in the summer of 2017, the Commission has received draft submissions for more than 20 IPOs of companies that exceed $1 billion in revenue or otherwise do not qualify to submit as EGCs, and from over 35 companies engaged in follow-on offerings.  Mr. Hinman also reiterated the willingness of the Division staff to review and consider requests made under Regulation S-X Rule 3-13 for accommodations relating to financial statement presentation.

Addressing future areas of focus, Mr. Hinman noted that the Staff is discussing ways in which internal processes, such as filing reviews and the consideration of no-action letter requests, as well as possible updates to the Financial Reporting Manual and the Compliance and Disclosure Interpretations in order to make these more user-friendly.  Turning to disclosure, Mr. Hinman noted that the Staff is considering whether additional guidance would be helpful regarding cybersecurity disclosure.  Mr. Hinman also provided some insight on future rulemaking.  He noted that the Staff is:

  • preparing recommendations for a proposal to implement the resource extraction issuer disclosure provision of the Dodd-Frank Act;
  • considering rulemaking to raise the threshold companies for smaller reporting company eligibility;
  • recommending final rules to update and simplify disclosure requirements that are outdated, or are overlapping or duplicative with other Commission rules or U.S. GAAP;
  • preparing recommendations for proposals to amend the rules for financial information required for acquired entities (Regulation S-X Rule 3-05), as well as Regulation S-X Rule 3-10 for disclosures by guarantors and issuers of guaranteed securities; and
  • developing recommendations for updating Industry Guide 3 to modernize the disclosure requirements for financial institutions.

The full text of Mr. Hinman’s remarks are available here:  https://www.sec.gov/news/speech/speech-hinman-020118.

The Staff of the Office of the Chief Accountant and of the Division of Corporation Finance issued SAB 118 (see: https://www.sec.gov/interps/account/staff-accounting-bulletin-118.htm) in order to provide guidance for issuers as they prepare their financial statements. The staff guidance provides a “measurement period” for issuers to evaluate the impacts of the Tax Cut and Jobs Act on the their financial statements and sets forth staff expectations for disclosure to investors during the measurement period. The Staff also issued a Compliance and Disclosure Interpretation 110.02, which we set out below:

Question 110.02

Question: Does the re-measurement of a deferred tax asset (“DTA”) to incorporate the effects of newly enacted tax rates or other provisions of the Tax Cuts and Jobs Act (“Act”) trigger an obligation to file under Item 2.06 of Form 8-K?

Answer: No, the re-measurement of a DTA to reflect the impact of a change in tax rate or tax laws is not an impairment under ASC Topic 740. However, the enactment of new tax rates or tax laws could have implications for a registrant’s financial statements, including whether it is more likely than not that the DTA will be realized. As discussed in Staff Accounting Bulletin No. 118 (Dec. 22, 2017), a registrant that has not yet completed its accounting for certain income tax effects of the Act by the time the registrant issues its financial statements for the period that includes December 22, 2017 (the date of the Act’s enactment) may apply a “measurement period” approach to complying with ASC Topic 740. Registrants employing the “measurement period” approach as contemplated by SAB 118 that conclude that an impairment has occurred due to changes resulting from the enactment of the Act may rely on the Instruction to Item 2.06 and disclose the impairment, or a provisional amount with respect to that possible impairment, in its next periodic report.

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On December 1, 2017, the SEC’s Division of Corporation Finance updated its Financial Reporting Manual for the following changes:

  • Revising guidance related to the pro forma impact of adopting new accounting standards (Sections 3250.1(m)-(n)), including clarifying that if a registrant:
    • acquires a significant business, and such business adopts a new accounting standard as of a different date and/or under a different transition method than the registrant, than the registrant must conform the date and method of adoption of the acquired business to its own date and method in its pro forma financial information; however, the guidance suggests that the SEC Staff will consider requests for relief from this requirement; and
    • retrospectively adopts a new accounting standard on January 1, 2018, makes a significant acquisition in September 2018, and later files a Form 8-K that includes pro forma financial information for the year ended December 31, 2017 and the six months ending June 30, 2018, than the registrant does not need to apply the new accounting policy to the pro forma information for periods prior to adoption until it has reflected the new standard in the historical financial statements for those periods; however, if the registrant believes the effect of the new standard on 2017 historical information will be material, it should make appropriate disclosure to that effect in the notes to the pro forma financial information.
  • Revising guidance to address the adoption of new or revised financial accounting standards after an EGC loses its EGC status (Section 10230.1), clarifying that:
    • EGCs that take advantage of an extended transition period provision are encouraged to review their plans to adopt accounting standards upon losing EGC status and to discuss with the SEC Staff any issues they foresee in being able to timely comply; and
    • generally, if an EGC loses its status after it would have had to adopt a standard absent the extended transition, the issuer should adopt the standard in its next filing after losing status, but depending on the facts and circumstances the SEC Staff may not object to other alternatives.
  • Clarifying the effective dates for ASU No. 2014-09 “Revenue from Contracts with Customers” and ASU No. 2016-02 “New Leasing Standard” for certain public business entities (Sections 11100 and 11200).

The updates to the Financial Reporting Manual are available here.

On December 4, 2017, the SEC’s Chief Accountant, Wesley Bricker spoke at the 2017 AICPA Conference on Current SEC and PCAOB Developments.  Highlights of Mr. Bricker’s comments include the following:

  • Ongoing Priorities. Bricker identified the following priorities: (1) supporting the successful implementation of the new GAAP standards (i.e., revenue recognition, leases, and current expected credit losses); (2) conducting oversight of the FASB; (3) conducting oversight of the PCAOB; (4) consulting on accounting issues and auditor independence rules; (5) monitoring internal control over financial reporting (“ICFR”); (6) advancing the effectiveness of audit committees in financial reporting; (7) contributing to international accounting, audit, and disclosure work; and (8) identifying innovations and emerging issues and evaluating their implications for financial reporting.

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At the PLI Securities Regulation Institute, Mark Kronforst, the SEC’s Division of Corporation Finance (“Corp Fin”) Chief Accountant, reminded registrants that the SEC is willing to consider and process Rule 3-13 waiver requests.  Rule 3-13 of Regulation S-X (“Rule 3-13”) allows the SEC, upon the informal request of a registrant and where consistent with investor protection, to permit the omission of financial statements otherwise required by the SEC rules or their substitution by financial statements of a comparable character.

In July this year, SEC Chair Jay Clayton stated that under Rule 3-13, issuers can request modifications to their financial reporting requirements in certain circumstances where disclosures are burdensome to generate, but may not be material to the total mix of information available to investors. Chair Clayton encouraged companies to consider whether such modifications may be helpful in connection with their capital raising activities and assured them that SEC staff is placing a high priority on responding with timely guidance.

Echoing Mr. Clayton’s earlier remarks in July, Mr. Kronforst stated that Rule 3-13 is about facilitating capital information, and allows companies to be granted relief where consistent with investor protection.  Mr. Kronforst said the SEC staff is encouraging companies with reporting problems to come to them and that, under a pilot program, the SEC staff usually responds within five days from the date of request.  He also noted that the Corp Fin Financial Reporting Manual (the “Manual”) has been updated to include the names of particular SEC staff members who are experts within particular fields pertinent to Rule 3-13 waivers.  He said requests for relief need not be sent by certified mail or via Fedex, instead they should be submitted by email to the email address link provided in the Manual.  Finally, Mr. Kronforst reminded everyone that Rule 3-13 has two parts; just as the SEC can grant waivers, it can also ask for additional financial information that has not been provided, where necessary or appropriate and consistent with investor protection.

On November 14, 2017, SEC Chief Accountant Wesley R. Bricker gave remarks before the Financial Executives International 36th Annual Current Financial Reporting Issues Conference: Effective Financial Reporting in a Period of Change. Mr. Bricker began his speech by discussing the SEC’s focus on maintaining fair capital markets and the far reaching impact of the SEC’s reporting requirements. Highlights of the speech include the following:

  • New GAAP Standards: Mr. Bricker highlighted new GAAP standards in the area of revenue, leases and financial instruments, and he indicated that the SEC Staff is available for consultation on the new standards.
    • The new revenue standard was first released in 2014 but is now in the final stage of implementation. Mr. Bricker stressed the importance of effective internal controls during this transition period. He also suggested that applications of the new standard should be supported by proper documentation.
    • The new lease standard will be effective in 2019 for calendar-year companies and will result in assets and liabilities being recorded for most leases. Both the revenue and lease standards require reasonable judgment in certain areas and Mr. Bricker noted that while not required, a best practice is for companies to commence efforts to implement the new leases standard concurrently (or partially concurrently) with the new revenue standard.
    • Finally, with respect to the credit loss standard, FASB’s goal was to improve the usefulness of financial instrument reporting for users of financial statements. To do this, FASB developed a credit loss model that results in timelier reporting of credit losses. Bricker expressed his support for the review by U.S. prudential regulators, called upon by the U.S. Treasury, with a view towards harmonizing the application of the credit loss standard with regulators’ supervisory efforts.
  • The Auditor’s Reporting Model: Mr. Bricker next discussed the SEC’s recent approval of a new PCAOB standard which will result in substantial changes to the independent auditor’s report. He explained that these changes stem from input received over the last seven years and that the changes were unanimously approved by the SEC. One such change is that beginning with auditors of fiscal years ending on or after June 30, 2019, reports on large accelerated filers will include communication about critical audit matters. This requirement will cause the auditor to provide his or her perspective on matters that were communicated with the audit committee and involve subjective or challenging cases of judgment. Mr. Bricker encouraged auditors to update their methodologies, provide training, and, at the engagement team level, use the transition period for the implementation of the new standard to engage in dialogue with audit committees so that audit committees have time to understand the types of matters that may be communicated as critical audit matters in the audit reports. Bricker also indicated that during the phased effective dates (audit reports with communication of critical audit matters will be required for large accelerated filers 18 months before being required for all others) the SEC Staff will review carefully the results of the post-implementation procedures and work with the PCAOB as it considers whether additional changes to the requirements are needed, including to the implementation date for non-large accelerated filers.

A copy of the speech is available at: https://www.sec.gov/news/speech/speech-bricker-2017-11-14.