In this podcast, we share some of the highlights from recent SEC comment letters and provide perspective on what it may mean for you. We discuss topics such as, Non-GAAP measures, MD&A, Revenue recognition including related SAB 74 disclosures for the new standard, business combinations, impairments, Segments, and income taxes.
- Non-GAAP measures have been a hot item since the SEC issued Compliance and Disclosure Interpretations in May 2016. We have seen a recent uptick in the SEC comment letters to registrants in this area. Key themes addressed in the C&DIs: prominence, exclusion of normal, recurring expenses, inconsistent presentation between periods, exclusion of nonrecurring charges but not non-recurring gains, tax impacts and why the non-GAAP measure is useful to investors.
- MD&A is a key piece of disclosure because it helps to bridge from past results in the financial statements, to management’s vision for the future. Two key areas are discussed: results from operations, and liquidity and capital resources.
- Revenue continues to have areas of complexity that garner comment, such as gross versus net guidance or multiple element arrangements. This year SAB 74 disclosures are a key point to think about with the adoption date of the new revenue standard coming soon. Consider additional qualitative financial statement disclosures to help reader in assessing the significance the impact standard will have upon adoption; including the description of the effect, the process and status of implementation.
- Business combinations continue to be high volume in both the marketplace and in comments received. Comments were seen addressing asset versus business decisions, key assumptions and fair values, the reason for goodwill, allocation of goodwill to reporting units, and others.
- The impairment topic includes both goodwill and asset impairments. Comments continue to highlight the importance of disclosing potential risk of impairment in advance of an actual charge (foreshadowing language). Additional areas of focus include key assumptions, methods used, judgments made, and the use of sensitivity analyses.
- Segments is an annual favorite and continues to be on the list year after year. Focus on the identification and aggregation of segments, who is the CODM (recognizing it may be a group), and what information is being used.
- Income taxes rounds out the list, with a focus on the rate reconciliation and valuation allowances. Rate reconciliation is important as to the underlying tax positions and tax structure of a company. Pay attention to disclosures around when valuation allowances are established or released (timing) and the related foreshadowing. Comments focus on understanding components or factors driving the overall effective rate, for instance, a release of “FIN 48”reserve and the impact on the rate.