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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On November 15, the House Financial Services Committee approved 23 bills, which included various bills that facilitate capital formation and reduce certain regulatory requirements.‎  Chairman of the Committee, Jeb Hensarling, stated that these bills “…will provide smaller businesses with greater access to the capital markets so those businesses can grow and create jobs.”  The following were included among the approved bills:

  • H.R. 4263‎, the Regulation A+ Improvement Act, which proposes to increase ‎the amount that companies can offer and sell under SEC Regulation A, Tier II, from $50 million to $75 million. The bill passed 37-23.
  • H.R. 4015, the Corporate Governance Reform and Transparency Act of 2017, which provides for the registration of proxy advisory firms with the SEC, disclosure of proxy firms’ potential conflicts of interest and codes of ethics, and the disclosure of proxy firms’ methodologies for formulating proxy recommendations and analyses.  The bill passed 40-20.
  • H.R. 4248, which proposes to repeal Section 1502 of the Dodd-Frank Act, and would require public companies to disclose in annual reports filed with the SEC whether the company sources “conflict minerals” from the Democratic Republic of Congo and its nine neighboring countries. The bill passed 32-27.
  • H.R. 4267, the Small Business Credit Availability Act, which proposes to amend the Investment Company Act of 1940 in order to require the SEC to streamline the offering, filing, and registration processes for BDCs.  The bill also increases a BDCs’ ability to deploy capital to businesses by reducing its asset coverage ratio—or required ratio of assets to debt—from 200% to 150% if certain requirements are met. The bill passed 58-2.
  • H.R. 4279, the ‎Expanding Investment Opportunities Act, which directs the SEC to amend its rules to enable closed-end funds that meet certain requirements to be considered “well-known seasoned issuers” (WKSIs) and to conform the filing and offering regulations for closed-end funds to those of traditional operating companies. The bill passed 58-2.
  • H.R. 4281, the Expanding Access to Capital for Rural Job Creators Act, which proposes to amend the Securities Exchange Act of 1934 to have the SEC’s Advocate for Small Business Capital Formation identify any unique challenges to rural area small businesses when identifying problems that small businesses have with securing access to capital. H.R. 4281 also requires that the annual report made by the SEC’s Small Business Advocate include a summary of any unique issues encountered by rural area small businesses. The bill passed 60-0.

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.

This month, Deloitte & Touche LLP released its annual study on the Securities and Exchange’s (“SEC”) recent comment letters.  The 2017 study notes a decline in the overall number of SEC reviews with comment letters and in the number of SEC comments issued over the past several years.  In 2017, 1,491 comment letters were issued by the SEC, a 13% decline from 2016 and 54% decline over the prior five-year period.  The SEC has attributed this trend to the effectiveness and transparency of the review process and improved financial reporting by issuers.  The number of comments per review has also declined steadily over the five-year period, with 1.33 comments received on average by registrants, and only 20% of issuers receiving two or more comments in a review.

In the report, Deloitte identified the most frequently addressed areas in SEC comment letters:

  • Non-GAAP financial measures overtook MD&A as the top topic addressed in reviews with comment letters and overall comment letters issued by the SEC. 474 reviews with comment letters relating to non-GAAP measures accounted for 43% all reviews in 2017.  The number of comment letters on this topic represented a decline from the prior year, however, as registrants have revised annual disclosures to address prior SEC comments.
  • MD&A disclosures have continued to be a leading source of SEC comments (18% of all reviews in the past year), with a particular focus on uncertainties affecting results of operations, estimates in critical accounting policies, liquidity and capital resources, disclosure of contractual obligations, early-warning disclosures and income tax disclosure.
  • Additional topics heavily represented in SEC comment letters issued in 2017 include disclosures relating to fair value, segment reporting and revenue recognition.

Last, the report offered an analysis of the specific filing status and revenues of issuers who received SEC comment letters in recent years:

  • While large accelerated filers have consistently been subject to the most reviews with comment letters since 2013 (56%), large accelerated filers have only accounted for 29% of the filed 10-Ks over the same five year period.

Companies that have generated more revenue have received a disproportionately higher number of reviews with comment letters than companies generating less revenue.  Since 2013, on average, issuers generating $1 billion or more revenue accounted for 44% of the reviews with comment letters, although they only represented 21% of the filed Form 10-Ks eligible for review.

Now offered as a webinar

Tuesday, November 14, 2017
8:30 a.m. – 9:30 a.m. Eastern

Our speakers will review and discuss SEC and FASB developments that registrants and directors should consider as they prepare their Forms 10-K, including the following:

  • Use of Non-GAAP financial measures;
  • Comment letter trends;
  • Updating your MD&A;
  • New revenue recognition standard;
  • Developments in derivatives/hedge accounting;
  • New lease accounting rules; and
  • New credit impairment rules.


NY and CA CLE credit is pending.

To register, please click here.

The SEC’s Investor Advisory Committee announced its next meeting on December 7, 2017, beginning at 9.30 am.  The agenda for the meeting includes a discussion of a recommendation of the Investor as Purchaser Subcommittee regarding electronic delivery of information to retail investors;  a discussion regarding retail investor protections and transparency in municipal and corporate bond markets; a discussion regarding cybersecurity risk disclosures; a discussion regarding dual-class share structures; and a discussion regarding retail investor disclosure.  The meeting is open to the public and will also be webcast on the SEC’s website.

Today, to mark the opening of the Practising Law Institute’s 49th Annual Institute, SEC Chair Clayton gave a keynote address focused on governance and  transparency, which was a surprising direction since the program focuses heavily on capital formation.  In his remarks, Chair Clayton discussed the SEC’s rulemaking agenda.  He noted that the SEC’s near-term agenda will be more limited than in prior years.  In outlining key areas of attention, Chair Clayton discussed the proxy process and shareholder engagement.  He discussed the need to ensure that the voice of retail investors is heard.  This is unusual in that so many academic studies and popular press articles have discussed the extent to which there has been a significant decline in the percentage of public company stocks in pure retail hands.  To the extent that there is retail ownership it is disintermediated since ownership is indirect through ETFs or other managed investments.  In any event, Chair Clayton questioned whether the voting decisions made by funds are maximizing value for shareholders.  Chair Clayton also discussed enforcement initiatives and again focused on risks to retail investors–highlighting particular areas of concern such as fee disclosures, penny stock related fraud, and transaction processing issues (such as those that might facilitate microcap fraud).  Chair Clayton also touched briefly on ICOs offerings.  Here is a link to the full text of the remarks:

On October 16, 2017, Clermont Partners released a survey on the reliance of active investors on non-GAAP versus GAAP reporting, intangible assets and non-financial metrics.  Unlike passive investors who invest in index funds, active investors select securities to buy and sell.  Fifty-six active investors, focused on a variety of industries and investment strategies, participated in the 14-question survey.  Highlights of the survey include the following:

  • 74% of the respondents rely on non-GAAP more than GAAP reporting when evaluating a company’s performance.
  • 44% of the respondents believe that non-GAAP measures have become more important over time.
  • 90% of the respondents will frequently make their own adjustments to a company’s GAAP results based on what they believe is relevant in evaluating performance.
  • 64% of the respondents believe that intangible assets are important factors in evaluating performance.

The results of the survey suggest that non-GAAP metrics are viewed more favorably by active investors as they buy and sell securities and that the SEC rules emphasizing GAAP metrics are largely ignored by active investors.  A copy of the survey is available here.