Top 5 comment letter trends

Video Jan 23, 2017

PwC monitors the comment letters issued by the SEC staff and annually publishes the Comment Letter trends publication series. Hear PwC’s Brian Ness share his Top 5 items to keep in mind as you prepare your filings.

Top 5 comment letter trends

Hear the Top 5 trends in comment letters based on our 2016 Comment Letter Trends publication series


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This video is part of The quarter close publication and video perspectives series.


Hello I’m Brian Ness.

PwC monitors the comment letters issued by the SEC staff and annually, we publish our Comment Letter trends publication series. Today, I want to give you a glimpse of that content by sharing five items that stand out to me. Perhaps, keep these in mind as you prepare your filings.

The first item on my list, Management Discussion and Analysis (MD&A), is the most significant area of staff comment across all industries. The discussion of a company’s results of operations should provide insight into the underlying drivers of significant changes, even when those factors may offset and result in an overall insignificant change. There have also been comments related to the impact of current economic conditions, whether that be foreign currency movements, or other macroeconomic factors. In liquidity and capital resources, there is a staff focus on discussing the underlying reasons for the sources and uses in cash flows; rather than simply repeating figures on the cash flow statement. We have seen comments related to disclosing events impacting liquidity, such as material debt agreements, covenants or restrictions, and the impact of permanently reinvested foreign earnings.

Moving into my second item, in May 2016, the staff issued compliance and disclosure interpretations on non-GAAP measures. The C&DIs don’t change the rules around non-GAAP presentation, rather, they provide interpretive guidance, examples and insights into the staff’s thinking. The first thing to note is the concept of prominence. The rule states that GAAP measures should have equal or greater prominence to non-GAAP measures. In practice, however, this has not always been the case. The C&DIs provide a variety of examples of items that might be more prominent, such as placement on the page, larger font or bolding, but the key take away here is that GAAP measures come first.

Next, is non-GAAP information that excludes normal or recurring cash operating expenses. This is a facts and circumstances assessment, where you need to exercise judgment. For example, in determining if an item is normal or recurring, a retailer that closes down stores on a regular basis is different from a manufacturer that closes a single plant in 20 years.

Last is what may be referred to as creating your own-GAAP, when a company presents an individually tailored recognition and measurement method. The example the staff used was a company that recognized revenue ratably over time in accordance with GAAP, and then presented a non-GAAP performance measure as though it earned revenue when customers were billed. Use of individually tailored methods will likely garner comment. It’s important to note that this concept applies to all disclosures, not just revenue, like the staff’s example.

My third item is Segment reporting. The Chief Operating Decision Maker, the CODM, is responsible for allocating resources and assessing the performance of the entity. While often an individual, like the CEO or COO, sometimes the CODM function is performed by a group. Recently we have seen the staff request organization charts, listings of key meetings and the roles of who attended to assess the identification of segments.

Another area of focus by the SEC staff is the identification and aggregation of operating segments. The segment guidance only allows companies to aggregate multiple operating segments into a reportable segment if they have similar economic characteristics and certain other qualitative factors are met. Two more items to go.

The SEC staff continues to show interest in companies’ internal control over financial reporting. This focus is based on the concept that disclosure of a material weakness should be a leading indicator of potential issues. However, in practice, material weaknesses are typically not disclosed until after a material error has been identified which results in a restatement of the financial statements. We have seen questions from the staff on the existence or severity of internal control deficiencies when an immaterial error in prior periods is disclosed. In this situation, we have seen the staff ask for a timeline of when and how the deficiencies were identified and what the potential amount of the error could have been.

Lastly, the staff’s comments on SAB 74, which requires disclosure about how a new accounting standard will impact the company, include: description of the standard, adoption date, method of adoption and impact on the financial statements if known. For significant new standards like revenue and leases, assessing the impact can be a long process. As you progress, consider adding qualitative disclosures to help readers understand the status of the implementation and the potential impact the standard will have upon adoption.

For more information on these, and other comment letter trends, including sector by sector analysis, please refer to our Comment Letter Trend publication series, available on

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