SEC comment letter trends for Financial services companies

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.

Non-GAAP measures

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:

  • Presentation with equal or greater prominence of the most directly comparable GAAP financial measure;
  • Reconciliation to the most comparable GAAP financial measure;
  • Appropriateness of adjustments to eliminate or smooth items identified as non-recurring, infrequent or unusual; and
  • Disclosure of why management believes the non-GAAP presentation provides useful information to investors regarding the financial condition or results of operations of the registrant.

  • You disclose non-GAAP measures without presenting the comparable GAAP measures with equal or greater prominence. Please ensure any discussion regarding non-GAAP measures is preceded by an equal or more prominent discussion of the comparable GAAP measure.

  • Please include a reconciliation of core earnings that begins with the most directly comparable GAAP measure. Your revised reconciliation should provide disaggregated disclosure of all the adjustments necessary to arrive at core earnings from the most directly comparable GAAP measure.

  • The disclosure characterizes restructuring charges and impact of foreign currency translation as unusual, though these items appear to be recurring. Please revise your disclosures as appropriate as Item 10(e) prohibits adjusting a non-GAAP financial performance measure to eliminate or smooth items identified as unusual when the nature of the charge or gain is such that it is reasonably likely to recur within two years or there was a similar charge or gain within the prior two years.

  • Your current disclosure discusses management’s use, but not how the presentation of the measure is useful to investors. Please revise your disclosure to include a discussion of investor’s use of these measures.

Fair value measurement

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:

  • The valuation techniques and key inputs used to determine the fair value for each significant class of asset or liability, whether determined by management or a third party (e.g., independent pricing service).

  • The quantitative information provided for significant unobservable inputs used in Level 3 fair value measurements, including the sensitivity of the fair value measurement to changes in those significant unobservable inputs.

  • The sufficiency of disclosure related to non-recurring fair value measurements, such as impairments.

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.


  • You indicate the securities included in Level 2 of the fair value hierarchy are valued utilizing inputs obtained from an independent pricing service. Please tell us what consideration was given to disclosing a description of the valuation techniques and inputs used in the fair value measurements. In addition, tell us what consideration you gave to separately disclosing the valuation techniques and inputs for each class of assets. We refer you to ASC 820-10-50-2 and ASC 820-10-50-2(bbb).    

  • Please disclose quantitative information about the significant unobservable inputs used in developing the fair value of your Level 3 assets and liabilities. Also, tell us what consideration was given to providing a narrative description of the sensitivity of the fair value measurement to changes in unobservable inputs. Please refer to ASC 820-10-50-2(bbb) and (g).

  • Please tell us how you complied with the non-recurring fair value measurement disclosures related to the impairment charge, as required by ASC 820-10-50-2(a). Also refer to the example of these disclosures at ASC 820-10-55-100.

Insurance loss reserves

Preparing the disclosures related to insurance loss reserves, specifically short-duration contract disclosures, often requires significant judgment on the part of management. SEC staff comments have continued to focus on these judgments, and have asked registrants to:

  • Explain the appropriateness of the level of aggregation of information disclosed, including the sufficiency of data used to support aggregation, especially when information across reporting segments or products is being combined;  

  • Reconcile information disclosed in the short-duration contract tables to information presented elsewhere by the company (e.g., other tables/disclosures in the filing, company website presentation, earnings call communications, etc.); and

  • Explain how other judgments have been applied to the short-duration contract disclosures, including the presentation of material acquisitions, reinsurance contracts, actuarial methodologies/assumptions, and the sufficiency of the number of periods presented.


  • Please tell us how your method of allocation results in the short-duration tables provides meaningful information and complies with ASC 944-40-50-4B.

  • Please provide us an analysis of the lines of business presented in your loss development table to help us evaluate whether further disaggregation of the table is necessary under ASC 944-40-50-4H.

  • Provide us reconciliations of the amounts per the table showing the reporting and operating segment breakdowns of prior period net reserve strengthening (releases) to the reserve development inherent in the tables for each of your segments.

  • Tell us what new information was obtained during the year and how this information was interpreted differently by management. Tell us why this information was not available in prior periods, and why your adverse development is not the correction of an error, especially considering the description of your past reserving processes during your earnings conference call.

  • Please explain how you plan to present material acquisitions in your claims development tables in the notes to your future financial statements, including whether this information will be on a full retrospective basis or on a prospective basis in separate tables.

Revenue recognition

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:

  • Performance obligations – the nature of performance obligations, why goods or services are distinct, and disclosure of remaining performance obligations. Also, comments related to information provided in other parts of the filing that appear inconsistent with the number of performance obligations in a contract.
  • Variable consideration – the determination of the transaction price and how a company estimates variable consideration.
  • Recognizing revenue – the timing of when control transfers, the method of recognizing revenue over time, and accounting for licensing arrangements.
  • Costs to obtain a contract – the determination of the appropriate costs to capitalize, the amortization period, and related disclosures (including election of practical expedients).
  • Gross versus net presentation – judgments related to gross versus net presentation of revenue, including an assessment of whether the company controls the good or service being provided to the end customer.
  • Disaggregated revenue – disaggregation disclosures that appear inconsistent with information provided in other parts of the filing or in other forums, such as investor presentations.

  • Please provide us with your analysis regarding how you determined you had one performance obligation in your revenue arrangements.
  • Please tell us how you considered the disclosure requirements outlined in ASC 606-10-50-12 through 50-15 and 606-10-50-17 through 50-20 as it relates to your allocation of your transaction price between residents fees and services revenues performance obligations.
  • It appears from your description of the contract that you perform a variety of activities under a customer contract. Please tell us your consideration of ASC 606-10-50-17 related to the disclosure of significant judgments involved in determining that all of the contracts have a single performance obligation.
  • Please explain to us, in detail, how you account for variable consideration when determining the transaction price. In your response please address each specific circumstance that causes variability in the consideration; how you estimate variable consideration; and your basis for concluding that it is probable a significant revenue reversal will not occur. Refer to ASC 606-10-32-11.
  • We note that you offer consulting and trainings as part of your services offerings. Please tell us over what period of time you typically provide these services and how you determined that point in time revenue recognition was appropriate. Refer to ASC 606-10-25-23 through 25-30.
  • We note that you utilized the practical expedient to avoid capitalizing incremental costs of obtaining the contract. Given your disclosure that you sell product to your largest customer under a long term contract and other customers under contracts that could be one to two years in duration, please further tell us how you considered the guidance under ASC 340-40-25-4.
  • Please explain to us your consideration of the guidance in ASC 606-10-55-36 through 55-40 when determining whether you are acting as a principal or as an agent when providing your products / services.
  • We note your disclosure of sales disaggregated by each reportable segment. How did you consider your discussions of sales by end market within your investor presentation and earnings call.  

Loans receivable and valuation allowances 

The SEC staff’s comments have focused on disclosures relating to the significant qualitative factors that affect the collectability of the lending portfolio and in particular how those qualitative trends influence the amount of the allowance for loan losses.

The SEC staff also frequently asks registrants to provide additional disclosures when changes in the allowance for loan losses appear inconsistent with changes in key credit metrics and changes in the lending portfolios.


  • Please revise future filings to discuss the underlying factors contributing to changes in credit quality (e.g., charge-offs, delinquency rates) during each period presented. Also, ensure that you comprehensively explain how changes in credit quality trends impacted your allowance for loan losses.
  • Tell us and clarify in future filings why despite the increase in net charge-offs in the consumer and indirect loan portfolio the related provision is lower in the current year relative to any other prior period.
  • Tell us and expand your disclosure to describe directionally the trends in your qualitative factors and how these trends affected the overall level of the qualitative component of your general allowance for each period presented. Additionally, describe whether certain product classes result in higher or lower qualitative adjustments and the factors driving those trends. Lastly, please provide an indication of the level of the qualitative component of the general allowance relative to the component based on historical loss rates.

 

Accounting changes and error corrections

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:

  • Additional information regarding management’s evaluation of materiality in accordance with SAB Topics 1.M and 1.N;
  • Clarification regarding whether adjustments relate to a change in estimate or correction of an error; and
  • For corrections of errors, additional information regarding management’s evaluation of the related impact on the design and operating effectiveness of internal control over financial reporting.

  • 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.

Debt, quasi-debt, warrants and equity

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 registrant's consideration of conversion and redemption options in determining debt or equity classification;
  • Support for the classification of financing transactions as extinguishments or modifications of debt; and
  • Expanded disclosures of the material terms of debt agreements, including an indication of compliance with financial covenants and the sensitivity associated with such measures.

  • We are unable to agree with your conclusion that the amounts under the agreement were appropriately classified as equity. We believe that since the agreement is not legal form equity, is titled as a loan agreement and contains some debt-like features, liability classification of the instrument is required. Further, we note that the instrument has no features that would indicate that it is indexed to the Company’s equity. As a result, please advise how you evaluated the identification and correction of the apparent error in the previously-issued financial statements in accordance with ASC 250-10-05.
  • You note that you may be required to repurchase your convertible notes for cash if you undergo a fundamental change, and that the convertible notes may become due and payable under certain events of bankruptcy, insolvency or reorganization. Please provide us with your analysis of the applicable accounting guidance supporting your classification of the equity component of the notes as equity. Explain your consideration of ASC 815 and ASC 480 in this analysis.
  • Please explain to us why a portion of the refinancing transaction was accounted for as an extinguishment and a portion accounted for as a modification. In your response, please discuss the guidance in ASC 470-50-40.
  • We note that you are subject to negative and project-specific covenants. Summarize for us the nature and computation of the covenants you are subject to. Please tell whether any of such covenants could impact your ability to obtain additional debt financing to a material extent. If so, please discuss the covenants in question and the consequences of any limitations to the company's financial condition and operating performance. See Sections I.D and IV.C of the SEC Interpretive Release No. 33-8350. 

Business combinations

Business combinations are a consistent area of focus for the SEC staff, with frequent comments related to:

  • Purchase price allocations, including questions about how fair value was determined and the key assumptions used;

  • The completeness of disclosures when the purchase price allocation is preliminary;

  • Why the registrant omitted the pro forma financial information required by ASC 805; and

  • Compliance with the Regulation S-X Article 11 pro forma financial information requirements for significant business combinations disclosed on Form 8-K and in certain registration statements.


  • Tell us how you determined the fair value of the significant intangible assets acquired, including the significant assumptions utilized.

  • You disclose that the purchase price allocation for the acquisition is preliminary. Please disclose the information required by ASC 805-20-50-4A.

  • Please tell us why you did not include pro forma financial information reflecting the acquisition, as required by ASC 805-10-50-2(h).

  • It does not appear to us that the pro forma adjustment is directly attributable to the transaction. Please revise your pro forma financial statements to remove this adjustment or tell us how this adjustment complies with Article 11-02(b)(6).

Disclosure controls and ICFR

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 identification and disclosure of material weaknesses. Specifically, the SEC staff continues to question why a restatement or revision did not result in the reporting of a material weakness;

  • Management’s disclosure around the effectiveness of ICFR and disclosure controls and procedures (DC&P). The SEC staff has questioned registrants when there is no explicit conclusion about the effectiveness of DC&P or when management has concluded that ICFR is ineffective while DC&P is effective; and

  • Management’s documentation of the changes in ICFR that have materially affected, or are reasonably likely to materially affect the registrant’s ICFR as required by Item 308 of Regulation S-K. Such changes may include updates to internal controls made in the process of (a) remediating previously identified material weaknesses, (b) as a result of the integration of significant acquisitions, (c) due to the implementation of new information technology systems, or (d) implementation of a new accounting standard.


  • Please provide us with a detailed explanation of how you considered the identification and correction of the 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.
  • Tell us whether you made any changes to your internal control over financial reporting in response to the correction described under this note. If so, explain to us how you considered disclosing this change under Controls and Procedures of your filing. If not, explain to us your basis for concluding no change was necessary.
  • Please tell us how you determined that the material weakness identified did not impact your conclusion regarding the effectiveness of your disclosure controls and procedures, as defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Please refer to SEC Release No. 33-8238, Final Rule: Management’s Report on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports. 
  • Please file an amended Form 10-K to specifically state your assessment of internal control over financial reporting as either effective or not effective. Refer to the guidance in Item 308(a)(3) of Regulation S-K. 
  • Please revise future filings to clarify which version, 1992 or 2013, of the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission's Internal Control -- Integrated Framework you utilized when performing your assessment of internal control over financial reporting.

Management's discussion and analysis

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:

  • The discussion and analysis of results of operations, including the description and quantification of unusual or infrequent events or any significant economic changes;

  • Critical accounting estimates, including the judgments made in the application of significant accounting policies, and the likelihood of materially different reported results if different assumptions or conditions were to prevail; and

  • Liquidity and capital resources, including clear discussion of drivers of cash flows and the trends and uncertainties related to meeting known or reasonably likely future cash requirements.


  • In future filings, please provide additional information about the components of operating expenses, such as quantifying the components and the factors driving the increase and the extent to which you expect this trend to continue.

  • To the extent any of your reporting units have estimated fair values that are not substantially in excess of their carrying values, please provide the following:

    • Amount of goodwill allocated to the reporting unit;

    • Description of the methods and key assumptions used;

    • Discussion of the degree of uncertainty associated with the key assumptions; and

    • Description of events or changes in circumstances that could reasonably be expected to negatively affect the assumptions.

  • Revise future filings to disclose the amount of cash and cash equivalents held by foreign subsidiaries and quantify any amounts that would not be available for use in the United States without incurring US income taxes. Provide a discussion of any known trends, demands or uncertainties relating to your liquidity as a result of your policies of indefinitely reinvesting earnings outside the United States.

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