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SEC update was presented on June 3, 2016 by David Lynn from Morrison Foerster. This presentation begins with the opening question, “Is the Staff still reviewing filings?”. The presentation provides an answer to the question giving these following reasons for why comment letters are down around 30%.
- The Staff has worked on the efficiency of the comment process, particularly through the efforts of the Office of Disclosure Standards;
- The Staff is more focused from an industry perspective;
- The transparency of the comment process has increased to the point where issuers can readily anticipate issues; and
- The back and forth in the comment process has been decreasing
The presentation continues on the topic of Non-GAAP measures as discussed by the Staff including
- The Staff has said that they will focus on companies using non -GAAP measures to accelerate the recognition of revenue earlier than allowed under GAAP
- The Staff will also challenge companies reporting adjusted earnings on a per share basis when they appear to look to much like measures of cash flow
- It is also expected that the Staff will comment when companies “cherry-pick” non-GAAP measures
- The Staff recently updated the Non -GAAP Measures Compliance and
Disclosure Interpretations to reflect a number of new and revised interpretive positions
A list of non-GAAP presentations that could be misleading are listed in this presentation such as
- A performance measure that excludes normal, recurring, cash operating expenses necessary to operate the business
- A non-GAAP measure that adjusts a particular charge or gain in the current period and for which other, similar charges or gains were not also adjusted in prior periods, unless the change between periods is disclosed and the reasons for it explained.
The presentation continued by providing examples of non-GAAP presentations that fail to give “equal or greater prominence” to the comparable GAAP measure as well as the disclosure of tax effects on non-GAAP measures.
The second topic covered by the SEC update was SEC comments: Revenue Recognition. This section of the presentation touched on SAB topic 11.M disclosures, requirements for revised financial statements, consistency of filings versus elsewhere, cybersecurity disclosure, little “r” and big “R” restatements, and typical revenue recognition comment areas such as
-gross versus net reporting
-software revenue recognition
-service revenue recognition
-principal vs. agent transactions
-Revenue recognition for long-term construction and production contracts
The presentation provides the following information on audit committee disclosure.
- Over the past four years, there has been a substantial increase in attention to the role played by the audit committee of the board of directors and the audit committee-auditor relationship.
- Several groups have noted the importance of the audit committee and its oversight responsibilities with respect to the auditor, while at the same time citing a lack of transparency about this relationship and the overall role that the audit committee plays within the issuer.
- In 2015, the SEC issued Rel. No. 33-9862, a concept release soliciting comment on many of the audit committee/auditor disclosure concepts that have been “encouraged” over the past few years.
The SEC update continues by answering what Magnum Hunter Resources case can tell the audience about internal controls and concludes with the closing question, “What are the latest practices regarding related party transaction disclosures?”. To answer this question, the audience is provided with information regarding the Auditing Standard No.18 which deals with related party transactions, significant unusual transactions, and a company’s financial relationships and transactions with its executive officers. The answer is also found when discussing related party transactions, related party lists, and related databases.