SEC staff discusses current financial reporting matters at the September 2012 meeting

Summary

The Center for Audit Quality (CAQ) recently issued highlights of the joint meeting on September 25 between its SEC Regulations Committee (the Committee) and the SEC staff. This bulletin summarizes a variety of topics addressed at that meeting, including disclosures related to fair value measurements and the Iran Threat Reduction and Syria Human Rights Act, draft registration statements confidentially submitted for review by emerging growth companies, and comments related to certain practice issues with the contractual obligations table presentation. This bulletin also includes interpretation and implementation issues related to certain recent SEC releases.

The Committee meets periodically with the SEC staff to discuss emerging financial reporting issues relating to SEC rules and regulations. The highlights of joint meetings between the Committee and the SEC staff only summarize matters discussed and do not represent official positions of the AICPA or the CAQ, nor are they authoritative positions or interpretations issued by the SEC or its staff. The CAQ does not update or delete meeting highlights for subsequent positions taken by the SEC staff or for the issuance of subsequent highlights or authoritative accounting or auditing literature that supersedes the matters previously discussed.

A. Current financial reporting matters

Fair value disclosures

The SEC staff shared observations related to fair value disclosures resulting from their reviews of recent filings. These observations were categorized into three general areas related to the application of Accounting Standards Update (ASU) 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.

Iran Threat Reduction and Syria Human Rights Act

The SEC staff discussed the Iran Threat Reduction and Syria Human Rights Act of 2012 (the Act), which was signed into law on August 10, 2012. The law was self-executing, meaning that no additional rulemaking is required for the disclosure requirements to be effective. The Act expands the types of transactions and other activities with Iran and Syria that are subject to sanctions and holds U.S. entities liable if their foreign subsidiaries undertake these transactions and activities.

The Act adds new Section 13(r) to the Securities Exchange Act of 1934 (Exchange Act), requiring reporting companies to provide quarterly and annual disclosures of their or their affiliates' engagement in certain business activities relating to Iran. The definition of affiliate is contained in Rule 12b-2 of the Exchange Act. Registrants are required to disclose:

  • The nature and extent of activities engaged in by the company and its affiliates
  • Gross revenues and net profits generated from the activities
  • Whether the company or its affiliates intends to continue the activity

Reporting companies must also file a notice with the SEC indicating they have provided the above disclosures. The SEC staff plans to issue implementation guidance to assist reporting companies in providing the required notice under new Section 13(r). The first disclosures under the Act are required in interim and annual reports that are required to be filed on or after February 6, 2013. Thus, the disclosures will be required in 2012 Form 10-Qs and Form 10-Ks that have a due date after February 6, 2013.

Take note

Since December 31, 2012 annual and quarterly reports have a due date after February 6, the new disclosures will be required in those reports, regardless of the actual filing date.

Confidential review process for draft registration statements of emerging growth companies

The Jumpstart Our Business Startups (JOBS) Act, which was signed into law on April 5, allows a new class of issuers known as "emerging growth companies" (EGCs) to submit certain draft Securities Act of 1933 (Securities Act) registration statements for confidential review by the SEC staff. The staff provided their views on the following two matters.

Auditors' consents

The Securities Act provides that if any expert, such as an independent accountant, is named as having prepared or certified any part of a registration statement, the written consent of the expert must be filed with the registration statement. The SEC staff confirmed their view, as found in the FAQs on Confidential Submission Process for EGCs in Questions 7 and 10, that an auditor's consent is not required for a draft registration statement submitted for confidential review.

Named underwriters

The SEC staff indicated that their approach to reviewing confidential submissions of registration statements is similar to the approach for reviewing filed registration statements. In general, when the registration statement does not include a named underwriter in the first amendment submitted confidentially to the SEC staff for review, the staff will likely defer reviewing the submission until an underwriter is named.

B. Implementation and interpretation of recent SEC staff releases

Financial Reporting Manual

Subsequent to the meeting, on October 4, the staff of the Division of Corporation Finance (CorpFin) issued an update to its Financial Reporting Manual, with updates dated as of June 30, 2012. The updates address

  • Financial statements to be provided in a proxy statement for the disposal of a business
  • Auditor association with amounts from inception for development stage companies
  • PCAOB auditor registration and report requirements in connection with a reverse merger
  • Reporting requirements in a reverse acquisition with a domestic registrant that is not a shell company

JOBS Act Frequently Asked Questions

The SEC staff noted that many of the recent questions received by the staff surrounding the JOBS Act relate to specific fact patterns that do not appear applicable to a broader audience. The SEC staff encourages registrants to contact them directly with specific questions that are not addressed in the FAQs.

Subsequent to the meeting, on September 28, CorpFin issued an additional set of FAQs on Title I of the JOBS Act. These additional FAQs address topics including the applicability of the JOBS Act to mergers and acquisitions transactions, the financial statement requirements under the JOBS Act for certain other types of transactions not involving an initial equity public offering, and the potential for former Exchange Act reporting companies to be EGCs.

Grant Thornton Guidance

Additional information on the Title I FAQs can be found in NDS 2012-04, JOBS Act: SEC staff implementation FAQs on Title I.

Conflict minerals and extractive industry payments rulemaking

The SEC recently adopted two rules mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The SEC Final Rule, Conflict Minerals, requires certain issuers to disclose their use of conflict minerals that originated in the Democratic Republic of the Congo or an adjoining country and whether payments for those minerals contributed to the violence in that area. The SEC Final Rule, Disclosure of Payments by Resource Extraction Issuers, requires resource extraction issuers to disclose certain payments made by the issuer, a subsidiary, or another entity controlled by the issuer, to the U.S. government or foreign governments to further commercial development of natural resources.

The SEC staff is accepting inquiries about the implementation of and compliance with these rules and will consider the best way to disseminate information, which may include the possible publication of implementation guidance.

Subsequent to the meeting, in early November, CorpFin issued two small entity compliance guides, Disclosure of Payments By Resource Extraction Issuers and Conflict Minerals Disclosure. The small entity guides explain key provisions of the rules and summarize disclosure requirements.

Grant Thornton Guidance

Additional information on the conflict minerals Final Rule can be found in NDS 2012-06, Conflict Minerals Disclosure.

International Financial Reporting Standards (IFRS) Work Plan

The SEC staff issued a final report, Work Plan for the Consideration of Incorporating International Financial Reporting Standards into the Financial Reporting System for U.S. Issuers, on July 13, 2012. The report provides the SEC staff's observations and findings in six focus areas. However, the report did not include any recommendations on whether or how the U.S. should move to IFRS. The SEC staff stated at the meeting that it does not have any plans to take further actions in response to the IFRS Work Plan.

During the meeting, the SEC staff noted that many registrants in Canada have recently completed or are in the process of completing their initial adoption of IFRS. CorpFin staff indicated they will review filings of Canadian registrants following their ordinary review process, and the review approach toward companies that apply IFRS has not changed. The SEC staff noted that Canadian reporting requirements are similar to U.S. requirements, so the reviews may provide additional insight about the adoption of IFRS. The SEC staff will consider whether any information obtained from the IFRS filing review process would be relevant to the Commission's consideration about further incorporating IFRS into the financial reporting system in the U.S.

C. Current practice issues

Contractual obligations table presentation

Regulation S-K, Item 303(a)(5) requires a tabular disclosure of a registrant's known contractual obligations as of the latest fiscal year end balance sheet date. The specifically named types of contractual obligations include the following, with a goal of presenting a meaningful snapshot of cash requirements arising from contractual payment obligations:

  • Long-term debt
  • Capital leases
  • Operating leases
  • Purchase obligations
  • Other long-term liabilities reflected on the registrant's balance sheet under GAAP

The Committee discussed with the SEC staff the presentation of certain items such as interest payments, unrecognized tax benefits, and expected payments or contributions related to pension or OPEB plans. The SEC staff noted that the extent to which these items should be included in the contractual obligations table is a matter of judgment and depends on the specific facts and circumstances of each registrant. However, if uncertainties exist as to the timing or amounts of contractual obligations such that the amounts are excluded from the table, a registrant should include footnotes to the table that describe the nature and extent of these obligations and provide transparency into which contractual obligations are included in the table and which are not.

Example

A registrant with fixed rate debt obligations where the amount and timing of interest payments are known with a high degree of certainty and precision should include those interest payments in the contractual obligations table.

On the other hand, if a registrant's interest payments relate to variable rate obligations where the timing and amounts are highly uncertain, the SEC staff would not object to discussing those obligations in a footnote to the table rather than including the amounts in the table.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.