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.
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(10/1/2018 – 9/30/2019)*
|Relative change in number of letters compared to the Prior Period*|
|4||Fair value measurement
|5||Management's discussion and analysis||Down|
|6||Terrorist nation sponsor reporting
|8||Disclosure controls and ICFR||Flat|
|9||Goodwill and other intangibles||Down|
|10||Accounting changes and error corrections
*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 230 and 220, 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:
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. Required disclosures include:
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:
SEC staff comments asked registrants to disclose quantitative and qualitative information about business knowingly conducted with state sponsors of terrorism. For all such business activity, the SEC staff has requested disclosure of:
The list of countries that are subject to US sanctions and/or are identified as state sponsors of terrorism is dynamic and subject to change. Registrants can reference the US Department of State and the Office of Foreign Assets Control websites for the most recent listing of such countries.
Accounting for income taxes requires the application of significant judgment and the use of estimates. The SEC staff has focused on the quality of the disclosures around these judgments and estimates, frequently commenting on:
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 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:
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: