The SEC Division of Corporation Finance's filing review process is a key function utilized by the SEC staff to monitor the critical accounting and disclosure decisions applied by registrants. Our analysis of SEC comment letters identifies the frequency of topical areas addressed by the SEC staff and how their focus areas changed over time. In addition to providing our insights on the nature of the SEC staff comments, we provide sample text from the SEC staff’s comments and links to where you can learn more about the accounting and disclosure requirements addressed in each topical area.
Click on the trends to learn more.
(10/1/2018 – 9/30/2019)*
|Relative change in number of letters compared to the Prior Period*|
|3||Fair value measurement||Flat|
|4||Management's discussion and analysis||Flat|
|6||Goodwill and other intangibles||Flat|
|7||Debt, quasi-debt, warrants and equity||Flat|
|8||Disclosure controls and ICFR||Flat|
|9||Inventory and cost of sales||Flat|
|10||Accounting changes and error corrections||Flat|
*This analysis was performed based on topical areas assigned by research firm Audit Analytics for comment letters publicly issued in the 12 months ended September 30, 2019 ("Current Period") and the 12 months ended September 30, 2018 ("Prior Period") in relation to Form 10-K and Form 10-Q filings. Total comment letters evaluated during the Current Period and Prior Period were approximately 180 and 250, respectively.
The relative number of comment letters has increased.
The relative number of comment letters has decreased.
The relative number of comment letters has not changed significantly.
The new revenue standard (ASC 606) requires more quantitative and qualitative disclosure than prior guidance. The following areas have been addressed in the SEC staff's comments:
Non-GAAP financial measures result in frequent comments regarding compliance with Item 10(e) of Regulation S-K and the related compliance and disclosure interpretations, sometimes resulting in requests to remove or substantially modify non-GAAP metrics. Focus areas have included:
Fair value measurements often require the application of significant judgment. The SEC staff has focused on the quality of disclosure around those significant judgments and estimates, frequently commenting on:
Certain of the fair value disclosure requirements, and consequently the nature of the SEC staff’s comments may be impacted by ASU 2018-13, Changes to the Disclosure Requirements for Fair Value Measurements, which can be early adopted.
The SEC staff's comments on management’s discussion and analysis have emphasized the requirements in Item 303 of Regulation S-K and the related disclosure objectives, including a focus on:
Business combinations are a consistent area of focus for the SEC staff, with frequent comments related to:
The SEC staff has focused on the quality of the disclosure around significant judgments and estimates associated with goodwill and intangible assets, including impairment assessments, frequently commenting on:
Debt, quasi-debt, warrants and equity securities continue to be a source of restatements and revisions due to errors in the application of the relevant guidance. The accounting for such items often include critical accounting estimates that require significant judgment. The SEC staff has focused on the transparency and quality of the disclosures around these judgments and estimates, frequently requesting:
The focus of the SEC staff’s comments on Internal Control over Financial Reporting (ICFR) has not changed significantly from prior years. They continue to focus on:
The SEC staff comments for inventory focused on inventory reserves, including subsequent recoveries. To a lesser extent, the SEC staff inquired regarding management’s estimates for inventory reserves.
For cost of sales, the SEC staff focused on the components of cost of sales, ensuring non-cash items, like depreciation, were allocated to cost of sales, and questioning the calculation of gross margin when it was not.
Please tell us how your inventory recoveries are consistent with the guidance in SAB Topic 5.BB and ASC 330-10-35-14 which states when goods have been written down below cost at the close of a fiscal year such reduced amount is viewed as creating a new cost basis for the item.
Please disclose, if true, that you allocate a portion of your payroll costs and depreciation and amortization to cost of sales. If such an allocation is not made, please tell us why not. Refer to ASC 330-10-30-1 through 30-8.
Please tell us your basis for presenting gross margin on the face of the statement of operations. In this regard, we note you exclude depreciation and amortization from gross margin. To avoid placing undue emphasis on cash flow, depreciation and amortization should not be positioned in the income statement in a manner which results in reporting a figure for income before depreciation. Refer to ASC 225-10-S99-8. See also Item 302(a) of Regulation S-K.
Disclosures relating to a change in accounting principle, a change in estimate, and a correction of an error often receive attention in SEC staff comment letters. Comments request further quantitative and qualitative analysis on the accounting and disclosure judgments applied by management in these areas.
The SEC staff comments relating to accounting changes and errors asked registrants to provide:
Your disclosure indicates that you have concluded the effects of the correction of errors were not material individually or in the aggregate to your previously reported annual periods; however, it appears that the corrections had a material impact. Please provide a comprehensive analysis explaining how you determined these corrections were not material.
We note that your discussion references an "accounting adjustment." Please tell us the nature of these accounting adjustments including whether you changed accounting policies or corrected errors in accordance with ASC 250.
Regarding the accounting error you disclose in the notes to your consolidated financial statements, please provide us with a detailed explanation of how you considered the identification and correction of this error in your evaluation of internal control over financial reporting and disclosure controls and procedures. In doing so, please tell us how you evaluated the control deficiency(s) that led to this error, whether this control deficiency(s) posed a substantial risk of a material restatement, and the reason(s) for your conclusion.
Consumer Markets Assurance Leader, PwC US
Partner, National Professional Services Group, PwC US