Presentation 6Click Link to Download - RR Donnelley

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Presentation 6Click Link to Download - RR Donnelley

SEC Reporting and Accounting

Muneera Carr, SVP and Chief Accounting Officer, Comerica Bank

Josh Forgione, Ernst & Young

Robert Skubic, KPMG

Luke Alverson, Flowserve


SEC Best Practices


Staff Reviews & Comment Letters

SEC Staff Review Process

• All registrants are reviewed by the SEC at a minimum once every three years

– Selective reviews performed for transactional filings (e.g. Public offerings, business

combination transactions and proxies)

• When all comments are resolved by the registrant

– Letter is provided to confirm that review of filing is complete

– SEC staff comment letters and responses made publicly available 20 business days after

completion of review

• Companies may request SEC staff to reconsider a position and/or registrant response

Comment Letter Process Best Practices

• Share proposed revisions prior to filing them

• Inform staff if you are unable to respond by the requested date

• Tailor responses to SEC comments to the company’s unique facts and circumstances

(avoid copy and pasting of response letters from other SEC registrants)

• Discuss supporting authoritative literature in detail

3


Accounting Conclusions

Considerations in evaluating accounting conclusions

• Faithful application of accounting literature

• Where accounting literature does not address situation:

– Provide information useful to investors and creditors in their decision-making process

– Use professional judgment

• SEC staff will accept reasonable differences in judgment, coupled with transparent

disclosure

• Concurrent documentation enhances credibility of judgment

– Show economic substance

• First, and foremost, the goal of accounting is to always reflect economic reality

• Problems arise when transactions are designed around accounting literature

• Often not consistent with principles of standard

– Provide transparent disclosures

4


SEC Initiatives


IFRS Workplan

SEC staff issues Final Report on IFRS work plan during July 2012

Focus of Workplan

• Development and

application of IFRS

• Independence of

IASB

• Investor education

and understanding

• Effect on US

regulatory

environment

• Impact on issuers

• Human capital

Key concerns

• IFRS is high quality, but

under-developed in areas

• Consistency of application

• Timeliness dealing with

emerging issues

• Effect on regulations & laws

• Design, governance and

funding of IASB

• Knowledge of IFRS varies

• Effect on people, systems,

and processes

Commission to decide on incorporation of IFRS within the

US during 2013 or later

6


PCAOB Initiatives


PCAOB Leadership

PCAOB board members

James R. Doty

Chairman

Jay D. Hanson Lewis H. Ferguson Steven B. Harris Jeanette M. Franzel

Office of the Chief Auditor

Martin Baumann, Chief Auditor & Director of Professional Standards

Jennifer Rand, Deputy Chief Auditor/Deputy Division Director

Greg Scates, Deputy Chief Auditor

Keith Wilson, Deputy Chief Auditor

Division of Registration and Inspections

Helen Munter, Director

8


Audit Committee Communications

PCAOB adopts audit committee communications standard

• In August 2012, the PCAOB adopted Auditing Standard No. 16, Communications with

Audit Committees

– Intended to benefit both the audit committee in fulfilling its oversight responsibilities and the

auditor in performing an effective audit

– Retains or enhances existing PCAOB communications requirements, incorporates certain

SEC communication requirements, and adds new communication requirements that are

generally linked to the performance requirements in other PCAOB standards

– If approved by the SEC, will be effective for public company audits of fiscal periods beginning

after December 15, 2012, including the interim periods beginning after December 15, 2012

• Audits of brokers and dealers will be subject to PCAOB audit committee

communication requirements if the SEC approves the use of PCAOB auditing

standards for audits of such entities

9


Other Topics Under Consideration

PCAOB seeks comment on auditor independence and audit firm rotation

• Intended to begin a dialogue to evaluate alternatives to enhance auditor

independence, objectivity and professional skepticism

– In particular, mandatory audit firm rotation

• Board has reopened the OCA Standard-Setting Agenda comment period until

November 19, 2012 1

PCAOB explores possible changes to auditor's reporting model

• Proposed standard expected to be issued in the first half of 2013 1

PCAOB seeks comment on proposals intended to improve the

transparency of audits

• Expects to adopt final amendments or re-propose amendments for public comment in

the first half of 2013 1 10

1

Updates from the PCAOB Officer of the Chief Auditor (OCA)-Standard Setting Agenda, November

2012


SEC Comments and Trends


Management’s Discussion & Analysis

Management’s Discussion and Analysis - Frequent comments

• Don’t use “stale” or boilerplate language in the overview section

• Provide a complete description of the “liquidity story”

• Discuss key drivers of material changes in financial statement line items and the effects of material

industry trends on operations

• Provide robust discussion of critical accounting estimates

Disclosure considerations in the current economic environment

• European sovereign debt exposure

• Liquidity

• Financing availability

• Short term borrowings

• Debt covenants

• Leverage strategies

• Foreign operations

• Risks and uncertainties

• Taxes

• Reporting units at risk for impairment

12


Executive Compensation Disclosures

In order to promote more direct, specific and clear executive

compensation disclosure, registrants are frequently asked to

• Specifically disclose peer companies that were used for benchmarking executive

compensation

• Specify how the peer group was established

• Provide sufficient detail about how competitor information was used in making

compensation decisions for named executive officers

Sample SEC comments

“You state that the 2011 annual on-target bonus amount for each executive officer was based in

part on your board members’ experience with the compensation practices of other companies

and compensation survey data available from outside sources. Please identify the other

companies whose compensation practices were considered by your board of directors in

determining the 2011 annual on-target bonus. Tell us the criteria used in determining the other

companies and describe the elements of corporate performance of the other companies that

were considered in determining your executive compensation.”

Note: SEC comments have been summarized for illustrative purposes

13


Risk Factors

The SEC staff often comments about the specificity and completeness of

registrants’ risk factor disclosures

• Focused on risks associated with cybersecurity and uncertainties related to foreign

operations

• In response to increase in frequency and severity of cyber attacks and breaches, the

SEC staff provided a framework for registrants to consider in evaluating whether to

disclose information about risks and incidents involving cybersecurity

• Material cybersecurity risks or cyber incidents must be disclosed when necessary to

avoid potential misrepresentation in other required disclosures

Sample SEC comments

“You disclose that you recognize that cyber risks and vulnerabilities continue to evolve and that

developing and maintaining adequate security measures may present significant challenges not

only for you, but also for third parties with which you do business. Accordingly, it appears that

your business has been subject to cyber risks. If you have experienced attacks in the past,

please expand your risk factor to state that.”

Note: SEC comments have been summarized for illustrative purposes

14


Goodwill

Registrants should focus on the following relating to goodwill

disclosures:

• Impairment analysis disclosures in critical accounting estimates section of MD&A

– Events occurring since impairment assessment that may be impairment indicators

– Methodologies, including assumptions and models

– Reporting units at risk of failing step one

– Identification of reporting units

• Methodologies followed in testing goodwill and other intangibles for impairment

– Assumptions in recent and continuing environment

• Weak economic conditions continue to impact assessments

• Likely continued SEC focus until improvement in economic conditions

– Valuation models

– Reconciliation of fair values of reporting units to registrants market capitalization

– Use of outside expert does not relieve management of responsibility

Note: SEC comments have been summarized for illustrative purposes

15


Goodwill

• Disclosure concerning reporting units at risk of failing step one of impairment test

– Percent the fair value exceeded carrying value

– Amount of goodwill allocated to reporting unit

– Sensitivity analyses and events that could result in future impairment

• Identification of reporting units

– Identification of segments and reporting units are closely related

– How reporting units are identified and how assets (including goodwill) and liabilities are

assigned to reporting units

– Impact of changes to reportable segments

– Circumstances where aggregation is not appropriate i.e. reporting units do not share similar

economic characteristics

ASU No. 2011-08, Testing Goodwill for Impairment

• Optional “step zero”

– If used, provide discussion of qualitative factors and assessment

– Not widely used in economic environment

Note: SEC comments have been summarized for illustrative purposes

16


Goodwill – sample SEC comments

“To the extent that any of your reporting units have estimated fair values that are not

substantially in excess of their carrying values and goodwill for such reporting units, in the

aggregate or individually, if impaired, could materially impact your results or total shareholders’

equity, please identify and provide the following disclosures for each such reporting unit in

future filings:

• The percentage by which fair value exceeds carrying value as of the most-recent step-one

test.

• The amount of goodwill allocated to the unit.

• A description of the material assumptions that drive estimated fair value.

• A discussion of any uncertainties associated with each key assumption.

• A discussion of any potential events, trends and/or circumstances that could have a

negative effect on estimated fair value

If you have determined that estimated fair values substantially exceed the carrying values of

your reporting units, please disclose that determination in future filings. Refer to Item 303 of

Regulation S-K”

Note: SEC comments have been summarized for illustrative purposes

17


Goodwill – sample SEC comments

“Please expand your critical accounting policy disclosure in future filings to include: (i) a

description of each key assumption used in estimating fair value of the reporting unit and how

the key assumptions were determined; (ii) a discussion of the degree of uncertainty associated

with key assumptions; and (iii) a description of potential events and/or changes in circumstances

that could reasonably be expected to negatively affect the key assumptions. Please show us

what the revisions to your disclosure would look like. If you believe that additional disclosure is

not meaningful to investors, please advise in detail. In addition, please disclose that the fair

value of the XXX and XXX reporting units are substantially in excess of carrying value or provide

disclosure similar to your disclosure related to the XXX reporting unit”

“Considering the materiality of goodwill to your financial statements . . . please tell us and

consider expanding future filings to explain in more detail how you determine your reporting units

for purposes of your goodwill impairment tests. In your response, please tell us each of your

reporting units, the amount of goodwill allocated to each reporting unit, and to the extent that any

components have been aggregated, the basis for such aggregation”

Note: SEC comments have been summarized for illustrative purposes

18


Reportable Segments

Staff comments focus on registrants’ conclusions about identifying and

aggregating operating segments

• Continued focus on providing entity-wide disclosures with respect to products and

services, revenues attributable to individual foreign countries, and revenues from

major customers

• Aggregation of operating segments should help users make better informed

judgments about the registrant

– Staff requests current and projected financial information for operating segments that have

been aggregated to support the registrant’s conclusion that such operating segments are

economically similar

• SEC staff requests for supplementary information include:

– Operating results package regularly reviewed by the Chief Operating Decision Maker

(CODM), Board of Directors and segment managers

– Operating results provided to CODM to prepare for earnings calls

• Registrants’ assessments should be consistent with other publicly available

information

– MD&A, press releases, investor presentations, etc.

19


Reportable Segments – sample SEC comments

“Please explain further how you considered paragraph .. in determining that the Company had

only one operating segment. In this regard, tell us what information the CODM regularly received

with regards to each product group. If the CODM received information beyond revenue data,

then please explain further why this information was not considered useful to managing your

business and allocating resources. Also, tell us when you began refining your enterprise

management processes and tell us the specific point in time that management determined

additional segment disclosures were necessary. Please provide a copy of a typical report

provided to your CODM ..and a copy of the reports provided after the segments changed ...”

“We note that your CODM evaluates performance and makes decisions regarding allocation of

resources based on total company results and therefore you have concluded that you operate in

one segment. However, we further note that remarks made in your February XX, 20XX earnings

call indicate that you have multiple segments including….”

Note: SEC comments have been summarized for illustrative purposes 20


Loss Contingencies

Staff comments focus on disclosures for reasonably possible losses, the

clarity and timeliness of loss contingency disclosures and policies for

accruing legal costs

• The range of reasonably estimable losses in excess of amount accrued or that losses

cannot be estimated or are immaterial should be disclosed

– Consider materiality to the financial statements as a whole, not just balance sheet

– SEC staff does not object to aggregation

– SEC staff challenges unclear disclosures

• Reassessment should be performed each period and disclosures should evolve over

time

– SEC staff may seek to understand process for evaluating ability to estimate

• SEC staff will challenge “surprise” disclosures and accruals

Note: FASB decided to remove contingencies project concluding

that existing guidance is appropriate. Continued focus is on the

enforcement of this guidance.

21


Loss Contingencies – sample SEC comments

“You disclose that you believe the results of legal matters will not have a material adverse effect

on your financial condition but might be material to your operating results or cash flows for any

particular period. Please disclose in future filings, if true, that the results of legal matters will not

have a material effect as opposed to a material adverse effect. In addition, please disclose one of

the following:

• The amount or range of reasonably possible losses above the amount accrued

• [That any] such amount above the amount accrued is not material to the financial statements

The amount cannot be estimated, along with disclosure describing why not.

• To the extent you are not able to estimate the amount or range of reasonably possible losses

above the amount accrued, please also supplementally provide us with a specific and

comprehensive discussion of your efforts to make an estimate . . . along with a description of

the procedures you have in place to attempt [to] make an estimate in future periods… Please

disclose in greater detail the specific nature [of] each contingency or group of similar

contingencies”

Note: SEC comments have been summarized for illustrative purposes 22


Loss Contingencies – sample SEC comments

“You disclose the amount of any incremental liability arising from these matters is not expected to

have a material adverse effect on your consolidated financial condition. Please revise your

disclosure in future filings to also state, if true, the amount of any incremental liability is not

expected to have a material adverse effect on your results of operations”

“We note that you have settled a lawsuit on [specific date] and have accrued $[XX] million related

to the settlement. Please provide to us a chronological analysis supporting management’s

compliance with ASC 450 regarding this lawsuit. Please ensure that you address each of the

reporting periods affected, the timing of the accrual, and the disclosures provided”

Note: SEC comments have been summarized for illustrative purposes 23


Non-GAAP Financial Measures

Registrants should focus on the following related to non GAAP financial

measures:

• Non-GAAP measures should not have greater prominence than GAAP measures

• Disclosure of how the non-GAAP measure is useful to investors (e.g., SEC staff is

skeptical if cash operating expenses are excluded)

– Helps demonstrate measure is not misleading

• Consistency between SEC filing and other public documents (e.g., press releases,

website, analyst conferences)

• Staff focus more on compliance with presentation and disclosure requirements than

appropriateness of the non-GAAP measure itself

Sample SEC comments

“We see that you present non-GAAP financial information and the related reconciliation required

by Regulation S-K Item 10(e) in the form of an “adjusted” income statement. Please tell us how

your presentation considers the guidance set forth in Compliance and Disclosure Interpretation

102.10. Under the cited guidance, it is generally not appropriate to present a non-GAAP income

statement for purposes of reconciling non-GAAP measures to the most directly comparable

GAAP measures.”

Note: SEC comments have been summarized for illustrative purposes

24


Liquidity & Capital Resources

Frequent questions on disclosures in the liquidity and capital resources

section of MD&A focus on

• Sources and uses of cash and the availability of cash to fund liquidity needs

• Implications of liquid assets held by foreign subsidiaries when there is an assertion

for tax purposes that earnings of those foreign subsidiaries have been indefinitely

reinvested

• Transparency in the contractual obligations table and its footnotes for interest

payments and other items

• Comprehensive disclosures about material debt covenants

– Request for expanded disclosure when there is an elevated risk of default or when

management has concluded it is reasonably likely that covenants will not be met in the future

Note: SEC comments have been summarized for illustrative purposes

25


Liquidity & Capital Resources – sample SEC

comments

“If significant to an understanding of your liquidity, in future filings please clarify the amount of

cash and investments held outside of the US. Additionally, to the extent material, please

describe any significant amounts that may not be available for general corporate use related to

cash and investments held by foreign subsidiaries where you consider earnings to be indefinitely

invested. Also, address the potential tax implications of repatriation.”

“In future filings, please revise your table of contractual obligations to include interest

payments on your long-term debt/notes payable to increase transparency of cash flows. When

estimating variable interest payments, you may use your judgment to determine whether or not to

include estimates of future variable rate interest payments in the table or in a footnote to the

table. Regardless of whether you decide to include variable rate estimated interest payments in

the table or in a footnote, you should provide appropriate disclosure with respect to your

assumptions.”

Note: SEC comments have been summarized for illustrative purposes

26


Pension

Accounting Policy Changes

• Registrants who have changed their accounting policies to accelerate the recognition

of gains and losses in net income have become a recent focus

– Non-GAAP measures containing pension or other postretirement benefit-related adjustments

may be confusing to investors

– Disclosures must provide a reasonable basis about why management believes the non-

GAAP measure provides useful information to the investors

Expected long-term rate of return and the assumed discount rate

• Staff frequently challenges these disclosures

– Registrants should provide enough company specific information to help investors

understand the judgments they make to arrive at these assumptions

Sample SEC comments

“Please provide a more company-specific description of the basis used to determine the expected

long-term rate of return on assets for your pension plans. For example, disclose the expected rate

of return or range for your equity and debt securities. Please also disclose the historical rates of

return on assets for the most recent 10-year period and 20-year period on a total asset level and

for the two asset allocation categories utilized.“

27


Fair Value Disclosures

Three themes identified, which were shared at the September 2012 AICPA

Banking Conference and the September 2012 CAQ SEC Regulations

Committee Meeting:

• Instances in which ranges of significant inputs disclosed were significantly wide

• Use of multiple valuation techniques without disclosing the value determined under

each method

• Qualitative disclosures (e.g., discussion of sensitivity analyses performed) were too

vague

Generally SEC has accepted an approach by registrants to address

comments in future filings

Update from the Division of Corporation Finance – AICPA Banking

Conference http://sec.gov/news/speech/2012/spch091212sc.pdf

28


Pro Forma Financial Information: Pro Forma

Adjustments

At the December 2011 AICPA Conference, the SEC staff discussed the

criteria in Article 11 of S-X:

i. Factually supportable,

ii. Directly attributable and

iii. Continuing impact

At the March 2012 CAQ SEC Regulations Committee Meeting, Staff

confirmed its view that it would be rare that costs of going public would

be appropriate pro forma adjustments under Article 11

For costs that do not meet the pro forma criteria, specific facts and

circumstances will dictate whether a company may (or should):

• Disclose the types and range of costs that it expects to incur, or

• Consider those costs projections subject to Regulation S-K.

29


Pro Forma Financial Information: Pro Forma

Adjustments

At the June 2012 CAQ SEC Regulations Committee Meeting, the SEC staff

communicated that it has modified its view expressed at the 2011 AICPA

Conference about what adjustments qualify as having “continuing

impact” under Article 11 of Regulation S-X

• Historically, “continuing impact” meant impact on operations for a period of greater

than 12 months from date of initial occurrence

• Now, if not “one time” may have continuing impact (excluding transaction expenses)

Examples:

• Interest expense for a bridge loan under twelve months

• Acquired intangible asset with a short amortizable life (e.g., six months)

Subsequently, questions have arisen about how the views related to

“continuing impact” may impact inventory step-up adjustments to fair

value

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