AICPA Conference Recap - Practical Advice for 2012 Reporting

January 2013

MHMMessenger
TM

M AY E R H O F F M A N M C C A N N P. C . – A N I N D E P E N D E N T C PA F I R M

A publication of the Professional Standards Group
From the AICPA’s Annual SEC/PCAOB Current Events Conference:
Practical Advice for 2012 Reporting
The presenters at the conference provided practical staff positions. Chief Accountant James Kroeker
advice on how to make financial reporting more useful left the SEC in July 2012. Paul Beswick has been
to investors. Highlights of the personnel changes serving as Acting Chief Accountant. Subsequent to
announced, advice offered, and resources mentioned the conference, the SEC announced Mr. Beswick’s
throughout the conference are recapped below, and appointment as the agency’s Chief Accountant. The
a reference guide to key contacts and documents is SEC also announced that Division of Corporation
provided in the appendix. Finance Director Meredith Cross will be leaving the
SEC. Lona Nallengara was appointed Acting Director
Practical tip: Stay flexible. Changes in leadership of the Division. He replaced Ms. Cross after her
at the SEC could influence policy and rulemaking departure from the SEC at the end of 2012.
in the coming months.
Practical tip: Don’t overlook any last-minute
There have been a number of important departures rulemaking or interpretations for recently enacted
from the leadership of the SEC. The decisions about laws with near-term effects.
when and how the resulting vacancies will be filled
may have an impact of the direction of future policies The Division of Corporation Finance responded
and the pace of rule-making activities. quickly with the initial guidance needed for the JOBS
Act and the lion’s share of the Dodd-Frank Act. But
Most notably, Chairman Mary Schapiro left the some rulemaking and interpretations related to
Commission in December 2012. Commissioner Elisse these wide-reaching laws remained unfinished at the
Walter has been appointed by President Obama to time of the conference, and the Office of General
take the Chair for an interim period until the empty Counsel was still compiling interpretive guidance on
seat on the Commission is confirmed by Congress. compliance with the Iran Threat Reduction and Syria
This leaves only four Commissioners, including two Human Rights Acts of 2012. The advice provided at
from each major political party, making it more difficult the conference included the following:
to achieve a majority vote on contentious issues.
a. Iran Act. The Iran Threat Reduction Act requires
In addition, there has been turnover in several senior new disclosures of certain business activities
related to Iran by issuers and affiliates. The
reporting requirement takes effect with periodic
reports required to be filed after February 6, 2013.
It requires issuers to disclose the nature and extent
of the activity, the gross revenues and net profits
attributable to the activity, and whether the issuer

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MHMMessenger
or affiliate intends to continue the activity. The SEC The SEC incorporated answers to some of
staff provided a number of clarifications about the open questions in the CD&Is on December
compliance with this Act during the conference. 4, 2012. A link to the CD&Is is provided in the
But participants raised many additional questions, appendix to this Messenger.
some of which were addressed to former Director
of the Division of Corporation Finance, Brian b. JOBS Act. A panel of staff members of the
Lane, who provided the insights of a corporate Division of Corporation Finance summarized the
securities lawyer as part of a panel discussion on key provisions of the JOBS Act, which provides
MD&A. Here are some of the clarifications and certain accommodations to companies that
open questions: qualify as Emerging Growth Companies (EGCs).
The staff advises EGC registrants that they need
• Clarification by SEC staff: Companies cannot to continuously monitor their filing status. This
avoid the disclosures by filing their reports is important because loss of EGC status will
before February 6, 2013. result in more extensive and more costly filing
requirements, and once a company loses its EGC
• Clarification by SEC staff: An “affiliate” refers status for any reason, it generally cannot come
to a person or entity that is directly or indirectly back into the filing system for EGCs. Several
controlled by the registrant. clarifications about the accommodations for EGCs
were provided at the conference:
• Open question: How is “controlled” defined for
purposes of this Act? Does it include a company • EGCs are permitted to delay the adoption of
that is only 10 or 20 percent owned by the new or revised accounting standards by using
registrant? Mr. Lane indicated that, based on the effective dates for non-issuers rather than
his discussions with SEC staff, the Act includes issuers. This permission is limited to accounting
affiliates that are less than 51% owned, but more standards issued by the FASB after April 5,
clarification is needed from the SEC. 2012. It provides flexibility in determining when
a standard may be adopted, but not which
• Clarification by Mr. Lane: The disclosure standards may be adopted. This flexibility does
requirements apply to the period covered by not mean an EGC can apply private company
the report. For example, they would apply to accounting standards.
all 2012 activity in a Form 10-K for a calendar-
year company with a December 31, 2012 year- • Delays in adoption dates of accounting
end. But there would not be a required three- standards are voluntary. If an elective decision
year lookback to prior periods presented in the is made to adopt this accommodation, that
financial statements. policy needs to be prominently disclosed. Once
made, the election applies across-the-board
• Clarification by Mr. Lane: The Iran Act applies to the adoption dates for all new accounting
to foreign private issuers as well as domestic standards. If the EGC elects private company
registrants. adoption dates, it can switch to public company
adoption dates at a later time. However, once
an EGC elects to use public company adoption
dates, that election is irrevocable.

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• EGCs are also provided with an election to opt
out of the requirement for auditor attestation over The staff has issued a small entity compliance
internal control. It is possible that a company guide for conflict minerals. But they are still getting
may meet the definition of an accelerated filer many inquiries, including complicated chemical
and also qualify as an EGC. In these cases, the questions. The staff respectfully suggests that the
registrant is not required to have an audit of its chemistry questions be directed to an appropriate
internal controls. expert rather than the SEC staff. The expectation
at the time of the conference was that more
• When an EGC crosses a disqualifying threshold guidance on other aspects of the rule would be
(such as $1 billion in annual revenues), it will forthcoming from the SEC staff, perhaps as FAQs
lose its EGC status immediately and it will need or C&DIs.
to obtain an audit of its internal controls in the
year it crosses the threshold. For example; if a Additional interpretations of the above laws and rules
calendar-year company passes the threshold are available on the SEC’s website. Links are provided
on December 31, 2012, it must file as a non- to key documents in the appendix to this Messenger.
EGC and it will be required to have an audit of
its internal controls for 2012. If the registrant Practical tip: Be mindful of the “frequent areas
feels this requirement is impossible to meet, it of comment” in filing reviews by the Division of
can contact the SEC staff to discuss a possible Corporation Finance.
exemption for the reporting period during which
the threshold is passed. The Director of the Division of Corporation Finance
and a panel of SEC staff members provided the
c. Dodd-Frank Act. The conflict minerals rules are following advice based on an analysis of topics
arguably the highest-profile and most controversial mentioned frequently in SEC comment letters and
rules related to the Dodd-Frank Act. The staff advised responses from registrants.
participants that the applicable audit standards
are those of the GAO’s “yellow book” standards. a. Responses to comment letters. Corporation
Finance Director Meredith Cross said the
Companies have several options for obtaining the comment letters from the SEC to registrants
required audits of conflict minerals reports. One are getting more targeted, more meaningful,
option is to use the same auditor that audits the and harder for the companies to respond to. At
company’s financial statements. The staff said the same time, the comment letters are getting
this would not be inconsistent with independence posted to the SEC’s website faster, but no
requirements, but the company must disclose earlier than 20 days following the completion
the fee in the “all other” category of its proxy of the filing review. These factors are focusing
statement. Another option is to use a firm other more attention on the correspondence and the
than the company’s audit firm. The yellow book wording of the registrant’s replies in the media.
standards will also permit a non-CPA to perform
the required independent private sector audit of the In view of this expanded visibility, Ms. Cross
conflict minerals report provided the auditor uses cautions that companies need to exercise an
performance audit standards as opposed to the appropriate amount of care when wording their
attestation engagement standard in the yellow book. responses. Some companies may want to obtain

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legal reviews that are every bit as rigorous as • The SEC believes it is critical for companies to
those obtained for their filings. Federal law (18 answer the question “Why?” For example, “Why
U.S.C. § 1001), in effect, makes it a crime to lie did revenues increase?” The disclosures should
to the government. This law could expose the identify the underlying causes of any increase
company to liability if any of the statements in in the volume of sales. The reasons for any
its replies are inconsistent with other statements changes in the mix of revenues by segment may
made as part of the company’s disclosure record also need to be discussed.
or are not 100% accurate.
• In light of the current economic environment,
b. MD&A. A panel discussion on MD&A provided some companies are being asked to disclose
insights from corporate executives. The the effects of events in Europe on the results of
executives noted that the MD&A can be a operations, including segment sales, margins,
challenge to write for several reasons, including and any effects on significant suppliers or
the need to find the right balance between customers that may have a material impact
transparency and information overload and the on results of operations. If there are material
fact that the guidance is spread across multiple offsetting impacts, the staff advises that all
sources. In effect, writing a good MD&A, said material impacts should be discussed, even if
one corporate participant, is more a matter of the net effect on a line item is immaterial.
complying with the “spirit” of the regulations
than one of complying with the letter of the law. • The staff recommends the use of metrics to help
companies tell their story. The metrics should
Perhaps, not surprisingly, a panel of SEC staff not be measures that would be considered non-
members from the Division of Corporation Finance GAAP measures, but they may be industry-
noted that MD&A is at the top of the list of frequent specific, such as comparable store sales in the
topics for SEC staff comment letters. Since it is retail industry.
the single most frequent area of comment, MD&A
was the subject of a number of observations and • The MD&A has a forward-looking focus, and
advice, including the following: registrants are required to disclose any known
trends and uncertainties that the company
• Within MD&A, the SEC staff comments focus reasonably expects will have a material effect
most frequently on the company’s results of on income, either favorable or unfavorable. The
operations, followed by liquidity and critical staff points out that this is sometimes the most
accounting estimates. informative disclosure in the MD&A.

• The staff notes that information in the MD&A • The table of contractual obligations provides
sometimes repeats information presented in some flexibility in the handling of items involving
the financial statements or it uses boilerplate uncertainties. However, the footnotes to the
language. As a result, many SEC comments ask table should discuss what is included in the table
for more information. For example, companies and what is not, and the commentary should link
may be asked to identify, quantify and discuss back to the liquidity discussion.
the factors that led to changes in financial
statement line items.

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• Recommended reference materials include evidence outweighs the negative. Because this can
the SEC’s 2003 MD&A Interpretive Release be a difficult determination, the staff’s comments
and Topic 9 of the SEC’s Financial Reporting often focus on the question of “Why now?”
Manual.
Factors to consider in weighing the evidence
c. Segment reporting. Another frequent area of include the magnitude and duration of past losses,
comment involves the identification of operating magnitude and duration of current profitability,
segments and their aggregation into reporting whether the current profitability is sustainable, and
segments. Registrants are urged to tell a complete management’s forecast. It is important to choose
story when responding to comment letters to factors that are independently verifiable, and
provide an understanding of the judgments any forecasts used in connection with valuation
involved. For example, the discussion of segments allowances for deferred tax assets should
might include information about how the chief consider their reliability by taking into account
operating decision maker makes allocation an assessment of how management’s forecasts
decisions or assesses performance. Companies have compared with actual results in the past
are also advised to continually monitor the facts and whether the forecast used to evaluate the
and circumstances that affect segment reporting. DTA is consistent with the other forecasts used
The FASB and IASB are currently conducting in the registrant’s financial statements, including
post-implementation reviews of their standards forecasts used to evaluate impairment of goodwill,
for segment reporting. The SEC staff said it is too long-lived intangible assets or to assess the going
soon to comment on what effect this might have on concern uncertainty.
their filing review or their future comment letters.
e. Loss contingencies. In recent years, SEC staff
d. Income taxes. The SEC staff noted that a decision comments have focused on both the content and
to establish or reverse a valuation allowance the timing of disclosures about reasonably possible
for deferred income tax assets often requires ranges of losses. These comments relate to the
considerable judgment including an evaluation of requirement that companies must disclose an
the relevant facts and circumstances. However, estimated loss or range of losses when it is at least
they reminded registrants of their view that it reasonably possible that a loss has been incurred.
would be difficult to conclude that losses due to This is another area of accounting that involves
an economic downturn would be an aberration significant judgment and the SEC comments are
that did not justify a need to establish a valuation intended to ensure the company tells the full story.
allowance. They also reminded registrants that The staff cautioned registrants to keep in mind
cumulative losses in recent years represent that, even if the SEC clears a loss contingency in
significant negative evidence that is difficult (but one year, it may make comments in future years
not impossible) to overcome when assessing if there are changes and the disclosures do not
the realizability of deferred tax assets (DTA). appear to be evolving in a timely manner.

As more registrants have returned to profitability f. Revenue recognition. The SEC staff comments
this year, questions have arisen about when a on revenue recognition have been focusing on
valuation allowance can be reversed. The short the question of whether collection is reasonably
answer is that it can be reversed when the positive assured, which may not be the case for certain

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MHMMessenger
transactions, including revenues from sales to be especially troublesome. This practice was
customers in the Eurozone. In addressing this discussed at the June 2012 joint meeting of the
question, registrants should consider a number AICPA’s CAQ SEC Regulations Committee, and
of factors, including their historical past-due additional information is available in the meeting
collection practices and write-off history, as well highlights on the CAQ’s website.
as any track record of unfavorable resolutions
in collection disputes or any history of modifying i. Other areas. Additional areas of advice from the
payment terms or of not enforcing liens. SEC staff include pro forma financial information,
consolidation of variable interest entities,
g. Goodwill impairment. Recent SEC staff disclosures about cybersecurity, and Rule 3-10
comments about goodwill impairment have focused issues involving disclosure requirements for
on a perceived gap in disclosures from period to guarantors of registered securities and the effect
period, particularly in the period of impairment. of subsidiary guarantee release provisions.
Reasons such as “soft market conditions” or They also include various issues related to
an “economic downturn” are considered overly specific industries and auditor considerations.
vague in light of the number of periods spanned
by the weak economy. If the company conducted The SEC has issued guidance on the
an interim impairment test, that fact should be MD&A disclosures related to cybersecurity
disclosed, along with the factors that triggered the risks and the circumstances that may
interim test, even if no impairment was identified. constitute customary subsidiary release
Additionally, the staff expects disclosures from provisions. Links to these resources are
companies that are at risk of failing step 1 of the provided on the appendix to this Messenger.
goodwill impairment test and they expect reasons
for impairment that answer the question of “Why?” The staff discussed two issues related to auditor
Specifically, registrants should consider the considerations:
following questions: What happened in a specific
period that gave rise to the impairment charge in • Registrants should consider including
that period rather than earlier or later? How were risk factors in their filings when they have
key assumptions affected? Why did those changes material operations in non-PCAOB inspected
occur? Is the impairment a result of known trends jurisdictions.
that are expected to affect income?
• References to the “standards of the PCAOB”
h. Non-GAAP measures. The staff continues to issue in auditors’ reports for issuers should not be
comments about the use of non-GAAP measures. termed simply “auditing standards.” This term
Registrants are reminded that presentation of is too limiting and does not include the other
misleading non-GAAP income statements is PCAOB standards, such as independence
prohibited in earnings releases furnished to the standards, with the result that the term may
SEC on Form 8-K, as well as in filings with the imply the auditor did not comply with the
SEC. Misleading non-GAAP measures violate standards other than auditing standards.
Regulation S-K, even if the measure is reconciled References to auditing standards may,
to a GAAP measure. Use of non-GAAP measures however, be appropriate in auditors’ reports
with adjustments for pension-related items can for non-issuers conducted in accordance with

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standards issued by the AICPA and known as
US Generally Accepted Auditing Standards
(US GAAS). These standards might be
applicable in certain situations when the
financial statements of an acquired entity are
presented under Rule 3-05 of Regulation S-X.

The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.
Please contact your MHM service provider to further discuss the impact on your financial statements.

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AICPA Conference Recap - Practical Advice for 2012 Reporting

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AICPA Conference Recap - Practical Advice for 2012 Reporting