As year-end rapidly approaches, it is time once again to plan for your annual filing. PwC's technology industry publication, Stay informed, 2014 SEC comment letter trends, provides a comprehensive analysis of recent SEC staff comments to assist you in understanding some of the key trends that are relevant to companies in the technology sector.
This year, we have analyzed nearly 2,500 comments issued by the SEC staff from July 1, 2013 to June 30, 2014 to 350 companies in the following subsectors: software & internet, computers & networking, and semiconductors. Even after a 27% increase in SEC staff comments from 2012 to 2013, this year saw another 18% jump in comments received by technology companies. The most notable new trend this year is an increase in comments related to internal control over financial reporting, with the with the number of comments received by technology companies on that topic more than tripling since 2013.
We hope this publication provides you with valuable insights into recent SEC comment letter trends across the technology industry and aids you in your production of high quality annual and quarterly reports.
Click the headings below to explore further analysis on technology SEC comment letter trends.
Internal control over financial reporting has emerged as the newest area of SEC focus. The SEC staff’s comments have challenged registrants’ conclusions regarding the existence or severity of internal control deficiencies, why a revision to the financial statements did not result in a material weakness, and how registrants have evaluated the implications of control deficiencies on all COSO components. The SEC has also stepped up its enforcement activity related to internal control over financial reporting with some of the more well-publicized cases relating to the ineffectiveness of controls in the areas of revenue recognition, expense recognition, inventory valuation, loan loss reserves, and even audit committee oversight.
Comments related to revenue recognition and business combinations each accounted for nearly 10% of all SEC comments received by companies in the technology industry again this year. For revenue recognition comments, multiple-element arrangements and software revenue recognition are still the primary area of focus, but with the continued growth in services deliverables, including software-as-a-service, SEC staff comments on accounting for these types of arrangements have increased.
With mergers and acquisitions activity in the technology industry on the upswing, SEC staff comments have centered on how fair value was determined and the key assumptions used, the allocation of goodwill to reporting units, and pro forma information for acquisitions that are material individually or in the aggregate.
We provide additional analysis of other notable trends in SEC comment letters. Many of the comments relate to areas other than accounting such as the business section, risk factors, and compliance. Included here are also classification and disclosure comments related to cash flows and other comprehensive income. Assessment of materiality as it relates to errors in the financial statements requires significant judgment and the consideration of both quantitative and qualitative factors. Registrants’ materiality assessment should be robust and balanced (reflecting both positive and negative factors) and should be contemporaneously documented, as the SEC staff often asks registrants to provide their materiality analysis when errors are identified.