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; 

  • Use of individually tailored accounting principles; 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.

  • 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. Excluding amortization of acquired intangible assets may result in non-GAAP measures that are based on individually tailored accounting principles. Please tell us how you considered Question 100.04 of the Non-GAAP C&DIs and why you believe these measures are useful to investors.

Revenue recognition

ASC 606, Revenue from contracts with customers, 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.

  • 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.

  • Given the significance of Non-Interest Income to your operations, please revise future filings to include the disclosure requirements in ASC 606-10-50 in the Summary of  Significant Accounting Policies and Notes to the Consolidated Financial Statements.

  • Although you disclose that you recognize revenue pro-rata over the terms of your customer contracts, it appears from your average acquisition cost disclosure and from your deferred revenue policy note that you recognize your sign-up fee revenue immediately at the time of new member enrollment. Please tell us how you account for your sign-up fee revenue. In your response, reference for us the authoritative literature you rely upon to support your accounting and explain why this revenue stream falls either under insurance accounting guidance or general revenue recognition guidance.

  • We are unclear how revenue arising from contracts with customers is immaterial to your consolidated results, cash flows and financial condition. It appears that most, if not all, of your revenue streams are within the scope of ASC 606. Please tell us how you considered the impact of ASC 606 on all of your revenue streams, including breakage income and warranties, as well as the impact that adoption had upon your customer loyalty programs and accounting for the right of return on your products.Please tell us how you have complied with the disclosure requirements of ASC 606-10-50.

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, including the impacts of COVID-19;

  • discussion of known trends or uncertainties, such as those related to COVID-19, that are reasonably expected to impact future results both in the near and long term;

  • metrics used by management in assessing performance, including how they are calculated and period over period comparisons;

  • 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.

  • On your earnings call, you indicated that you currently anticipate the subsequent quarter revenue to be down as much as 50% with a significant portion of your global business having been closed since early April. Revise your future periodic filings to disclose known trends and uncertainties related to COVID-19. For example, disclose how you expect COVID-19 to impact your future operating results and near- and long-term financial condition and how that compares to the current period. See Item 303 of Regulation S-K, SEC Release No. 33-8350, and CF Disclosure Guidance Topic No. 9.

  • If two or more factors contribute to material changes in revenue, please provide disclosure demonstrating the relative magnitude of each factor, such as the percentage or dollar increase in revenue due to onboarding of new customers versus usage from existing customers. In this regard, it appears from your most recent earnings releases that such information is readily available. Refer to Item 303(a)(3)(iii) 303(a)(3)(iii) of Regulation S-K and Section III.D of SEC Release No. 33-6835.

  • Where a material change in a line item is attributed to two or more factors, including any offsetting factors, the contribution of each identified factor should be described in quantified terms, if reasonably practicable. Please revise your disclosures in future filings accordingly. Similar revisions should be considered throughout your results of operations disclosures, such as in your discussion of the change in research and development and selling, general and administrative expenses. Refer to Item 303(a)(3)(ii) of Regulation S-K and Section III.D of SEC Release No. 33-6835.

  • We note your disclosure and quantification of capacity utilization. Please revise to describe how this measure is calculated and expand the discussion to include the underlying reasons for any significant fluctuations in the measure from period-to-period. Refer to Item 303(a)(3) of Regulation S-K.

  • Please provide information for investors to assess the probability of future goodwill impairment charges. For example, please disclose whether your reporting unit is at risk of failing step one of the quantitative impairment test or that the fair value of this reporting unit is substantially in excess of carrying value and is not at risk of failing step one. If the reporting unit is at risk of failing step one, you should disclose:  

    • the percentage by which fair value exceeded carrying value at the date of the most recent step one test;

    • the amount of goodwill allocated to the reporting unit;  

    • a detailed description of the methods and key assumptions used and how the key assumptions were determined; 

    • a discussion of the degree of uncertainty associated with the assumptions; and  

    • a description of potential events and/or changes in circumstances that could reasonably be expected to negatively affect the key assumptions. 

  • Please describe for us the actuarial methods you utilize to estimate your reserve, including significant assumptions and changes therein and why you believe the methods and assumptions provide a reasonable estimate.

  • As it relates to your analysis of cash provided by operating activities, please quantify all variance factors cited pursuant to section 501.04 of staff's Codification of Financial Reporting so that investors may readily understand the magnitude of each. Also, please note citing factors such as operating results and changes in balance sheet items may not provide a sufficient basis to understand how operating cash between comparative periods was affected and varied. In this regard, supplement your analysis with the material drivers underlying the factors cited, as appropriate. Refer to section IV.B.1 of Release No. 33-8350 for guidance.

Business combinations

The accounting for business combinations and the related disclosures 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; 

  • Why the registrant omitted the pro forma financial information or other disclosures 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.

  • Please provide more detail regarding the royalty rate for the subject trade name and respective required rates of return used in the relief from royalty calculation. In addition to quantifying the inputs, please tell us how these inputs were determined, if a range of inputs were considered, and the magnitude of the impact on the trade name value if other inputs within the range, if any, had been used.

  • Please disclose a qualitative description of the factors that make up the goodwill recognized in the transaction in accordance with ASC 805-30-50-1(a).

  • We note your business combinations during the year were material in the aggregate to total assets for the current and prior year. Please disclose the following pursuant to ASC 805-10-50- 3 or tell us why you believe you are not required to disclose this information: 

    • the amount of acquisition-related costs, the amount recognized as an expense, and the line item or items in the income statement in which those expenses are recognized;  

    • the amounts of revenue and earnings of the acquiree since the acquisition date included in the consolidated income statement for the reporting period; and

    • the revenue and earnings of the combined entity as though the business combinations that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period (supplemental pro forma information).

  • Please tell us how you considered the requirements for pro forma financial information pursuant to Article 11 of Regulation S-X for the sale of your Facilities described in Item 2.01 of Form 8-K.

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; and 

  • 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).

  • We note that the objective of the short-duration disclosures as outlined in paragraph BC 2 of ASU 2015-09 is to provide financial statement users with information to facilitate analysis of the amount, timing, and uncertainty of cash flows arising from insurance contracts and the development of loss reserve estimates. Please address the following:

    • Explain to us, and revise your disclosures in future filings to provide a more granular discussion of the differences relating the favorable assessments and claims paid. It might be useful to provide a reconciliation to support your discussion.

    • Explain to us the lines of business not included in your disclosure and quantify the prior year development for those lines.

    • Explain why you do not include the lines of business identified in the preceding bullet in your tables, and provide your consideration for disclosing such information.

  • The descriptions of the various insurance business lines within each of your segments makes it seem likely that some of these business lines are likely to experience different loss trends. Further, your disclosure of the trend information includes significant offsetting trends of favorable versus unfavorable development. Please address the following:

    • Tell us how you considered the guidance of ASC 944-40-50-4H when determining to  aggregate your short duration loss tables at the reportable segment level, including the  prohibition of aggregating items that have significantly different characteristics.  Specifically address how you considered the respective characteristics of the business units that are aggregated within a segment and determined that they did not have significantly different characteristics. Further, within your operating units, you have aggregated various product lines. Tell us how you determined that these lines do not have significantly different characteristics.

    • Provide us with a breakdown quantifying the net premiums, losses incurred, loss development  and ending reserve liabilities for the last two years by each of these business units and product line categories. Also, provide us with the average annual percentage payout of incurred claims of incurred loss and allocated loss adjustment expenses, that is the history of claims duration by age, for each of these business units and product line categories.

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.

  • 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.

Segment reporting

SEC staff frequently question how registrants have identified operating segments and aggregated them into reportable segments, often due to events reported by companies in press releases or Form 8-K disclosures. SEC staff may expect to see changes in segments when the company has disclosed significant acquisitions or dispositions, changes in organizational structure, or changes in key personnel. To resolve segment questions, the SEC staff may request a copy of the reporting package utilized by the chief operating decision maker, or other documents, to evaluate its consistency with management’s reporting conclusions.

The lack of entity-wide information required to be disclosed under ASC 280 has also been highlighted by the SEC staff, Specifically, the SEC staff has focused on the required disclosures of:

  • Revenues from external customers for each group of similar products and services; and

  • Geographic disclosures of revenues from external customers and long-lived assets attributable to the public entity’s country of domicile and individual foreign countries that are material.

  • Given the disclosures about your core products as well as the impact on your gross margin driven by shifts in product mix, please expand your disclosure to include revenue for each group of similar products to comply with FASB ASC 280-10-50-40.

  • Please tell us in detail how you determined all of your operating segments or brands are properly aggregated into one reportable segment. Please be sure to address each of the aggregation criteria in ASC 280-10-50-11.

  • Please revise future filings to present separately revenues from external customers attributed to your country of domicile. Also, when material, separately disclose the revenues from external customers attributed to an individual foreign country. Refer to ASC 280-10-50-41(a).

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.

  • We note management concluded that your disclosure controls and procedures and internal control over financial reporting were effective as of the end of the period covered by your annual report. Given the fact that you have restated your previously issued financial statements due to errors, please tell us why you did not disclose that these restatements were indicative of a material weakness in your internal control over financial reporting to comply with Item 308(a)(3) of Regulation S-K, and tell us how your officers determined that your disclosure controls and procedures were effective despite such material weakness in your internal controls over financial reporting.

  • Your report states that during your assessment, “management identified no significant deficiencies;” however, your report does not include a statement as to whether or not your internal controls over financial reporting were effective as required by Item 308(a)(3) of Regulation S-K. Please revise management’s report accordingly.

  • Please revise your report 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. 

  • Please revise to disclose any change in your internal control over financial reporting that occurred during the last fiscal quarter that has materially affected, or reasonably likely to materially affect, your internal control over financial reporting. Refer to Item 308 (c) of Regulation S-K.

  • We note that management concluded that disclosure controls and procedures were effective as of the end of the fiscal year. We also note management's conclusion that disclosure controls and procedures were not effective as of your fiscal third quarter. The narrative in your Form 10-K, however, states that "during the fourth quarter, there have been no changes in our internal control over financial reporting that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting." Please explain to us how you determined there was a change in the effectiveness of your disclosure controls and procedures, from period-to-period, given that there were no changes in internal controls during your fiscal fourth quarter.

Loans receivable and valuation allowances

The SEC staff’s comments regarding loans receivable and valuation allowances have focused on the following:

  • 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.

  • Requests for revisions to quantitative and qualitative disclosures to adequately address the characteristics and risks of particular portfolios, which are assessed to determine the allowance for loan losses.

  • Requests for registrants to provide additional disclosures when there are significant quantitative changes in the allowance for loan losses or changes that appear inconsistent with changes in key credit metrics or 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.

  • We note your disclosure for loan portfolio by loan type as well as the description of credit risk associated with each loan type. However, it does not appear your disclosure adequately addresses the risks and characteristics of certain portfolios which make up the vast majority of your allowance balance. Please revise your MD&A to address the following related to these portfolios: (1) allocation between prime and non-prime loans; (2) typical terms of your retail installment contracts and auto loans and the percentage of fixed loans versus variable loans; and (3) default rates and other risks associated with non-prime loans, the procedures you follow to mitigate those risks, and how the level of non-prime loans in your portfolio affects your allowance levels.

  • We note that your unallocated allowance for loan losses increased during the quarter. Please tell us the factors driving the increase in this portion of the allowance during the quarter.

  • Tell us and revise future filings to disclose the quantitative assumptions used in estimating the prepayment estimate for each loan class in accordance with ASC 310-20-50-2.


The SEC staff continues to ask registrants to:

  • Clarify how they determined whether they were or were not the primary beneficiary of a variable interest entity (VIE); and

  • Provide disclosures required by ASC 810 for consolidated entities that were determined to be a VIE.

  • It appears that you have investments in affiliates that are 100% owned and accounted for under the equity method of accounting. Please tell us how you determined you are not required to consolidate these affiliates in accordance with ASC Topic 810. To the extent you have determined you are not the primary beneficiary, please tell us how you arrived at that conclusion.

  • We note that you consolidate your joint venture, which is a variable interest entity in which you are the primary beneficiary. Please provide us with your detailed analysis discussing your basis in consolidating the joint venture, and cite the accounting literature relied upon.

  • We note that substantially all of your consolidated affiliates are considered variable interest entities; however, we do not see where you have provided the disclosures required by ASC 810-10-45-25 and ASC 810-10-50-3. Please advise, or tell us why this information is not required.

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Bob Sands

Bob Sands

US Financial Services Assurance Leader, PwC US

Sam Kennedy

Sam Kennedy

Banking and Capital Markets Assurance Leader, PwC US

Rachael Bradley

Rachael Bradley

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John Fosbenner

John Fosbenner

Insurance Assurance Leader, PwC US

Felix Perez

Felix Perez

Partner, National Professional Service Group, PwC US

Jonathan Odom

Jonathan Odom

Partner, National Professional Services Group, PwC US

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