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.
(7/1/2018 – 6/30/2019)*
|Relative change in number of letters compared to the Prior Period*|
|2||Fair value measurement
|3||Insurance loss reserves||Flat|
|5||Loans receivable and valuation allowances
|6||Accounting changes and error corrections||Flat|
|7||Debt, quasi-debt, warrants and equity||Up|
|9||Disclosure controls and ICFR
|10||Management's discussion and analysis||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 June 30, 2019 ("Current Period") and the 12 months ended June 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 190 and 380, 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.
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:
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 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.
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.
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:
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.
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:
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:
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).
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.
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.
US Financial Services Assurance Leader, PwC US
Banking and Capital Markets Assurance Leader, PwC US
Asset and Wealth Management Assurance Leader, PwC US
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Partner, National Professional Service Group, PwC US
Partner, National Professional Service Group, PwC US