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.

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.

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.


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).


The SEC staff’s comments have included questions related to the following:  

  • The initial measurement of equity method investments in a joint venture. 

  • Management’s evaluation of whether an other than temporary impairment should be recognized based on loss in value of an equity method investment.

  • Disclosures related to and the timing of impairment charges.

  • We note that the carrying value of your equity method investment exceeds its fair value. Please tell us how you considered the guidance in ASC 323-10-35-32 in determining that this loss in value of your investment was not other than temporary. 

  • Your disclosure includes the estimated value of your equity investment in a joint venture transaction. In light of your determination of the fair value of the contributed properties and the gross proceeds of recently issued related debt, please clarify for us how you determined your equity interest valuation. Please reference the authoritative accounting literature management relied upon.

  • We note you calculated the fair value of certain real estate investments for your impairment evaluation. Please tell us how you determined it was not necessary to provide quantitative information about the significant unobservable inputs used in the fair value measurement of these assets. Please refer to ASC 820-10-50-2(bbb).


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.

Liabilities and accrual estimates

The SEC staff comments for liabilities, payables, and accrual estimates focused on:

  • The disclosure of restructuring charges and the related liabilities; 

  • The nature of the accounts payable balance and the appropriate disclosure of components of such balance; 

  • The amount of contingent consideration recognized, including where that amount was reflected in the financial statements; and 

  • The accounting literature referenced to either include or exclude a liability from the accounting records.

  • Revise the disclosures of your restructuring activities in future filings to also provide the information required by ASC 420-10-50-1(a), (b), and (d).

  • Please separately disclose, either on your balance sheet or in your footnotes, any elements of accounts payable and other accrued payables that exceed 5% of total current liabilities or explain to us why it is not required. Refer to Rule 5-02(20) of Regulation S-X.

  • Please tell us how you determined it was not necessary to record a liability as of the period end date. Within your response, please reference the authoritative accounting literature management relied upon.

  • In future filings please disclose, as required by ASC 805-30-50-1(c), the amount of contingent consideration recognized as of the acquisition date and an estimate of the range of outcomes (undiscounted) or, if a range cannot be estimated, that fact and the reasons why you cannot estimate a range. 

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;

  • 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.

  • 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.


The SEC staff has focused on the areas in the implementation of ASC 842, Leases, requiring significant judgment. Specifically, comments have requested more information on:

  • The accounting for variable lease payments, including the basis of measuring these payments if variable payments are dependent on an index or a rate;

  • The determination of the weighted-average discount rate used to discount leases, including how the rate was determined or calculated for each class of lease; and

  • The accounting for material lease agreements with significant estimated construction costs associated with the lease.

In addition to the above areas of judgment, the SEC staff has also provided comments regarding omitted ASC 840 disclosures. Under ASC 842, companies are required to continue to provide ASC 840 disclosures for all periods that are reported in accordance with ASC 840, or otherwise explain why these disclosures are not necessary.

With the changes to the financial statements as a result of the adoption of ASC 842, some registrants have included lease-related adjustment in their non-GAAP measures. The SEC staff has asked companies whether the changes to their non-GAAP measures are appropriate given the staff’s guidance over such measures.

  • Please tell us and revise to disclose how you determined your weighted average discount rate on operating leases. See ASC 842-20-50-3(c)(3).

  • We note your disclosure that you have certain lease agreements structured with a fixed base rent adjusted periodically for inflation or changes in fair market value of the underlying real estate. Please provide us with additional details regarding the terms of the rent adjustments including the basis for determining the adjustments. Please also tell us how you are accounting for leases structured with these adjustments both at the commencement of the lease and subsequently. Specifically address whether any of these lease agreements include variable lease payments that depend on an index or a rate.

  • In future filings, please provide the required ASC 840 disclosures for all periods that continue to be reported in accordance with ASC 840 or explain why such disclosures are not required. Reference is made to ASC 842-10-65-1(jj).

  • We note you include adjustments in arriving at net operating profit after taxes that appear to remove your operating lease rent expense under GAAP and replace it with estimated depreciation and include lease adjustments in arriving at average invested capital. Please tell us your basis for including each of these adjustments, how you determined the amount of these adjustments, how the adoption of ASC 842 was considered for continuing to present these adjustments and how your presentation complies with the guidance in Question 100.04 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations.

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Bob Sands

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