Current SEC and PCAOB Developments: Key Takeaways from the AICPA Conference

Even as a fully virtual event, the AICPA’s annual conference on SEC and PCAOB issues in December may not have fit your busy schedule. Have no fear: I attended and tried hard to miss nothing of import, from the Guns N’ Roses intro music to some meaty trends and issues discussed by the SEC staff. The following are my thoughts on some of the most relevant discussions.

Your revenue better really be revenue

In case you hadn’t heard, the SEC Division of Corporation Finance staff takes a very dim view these days when it comes to attempted adjustments to GAAP revenue. Deputy Chief Accountant Patrick Gilmore made the staff’s position crystal-clear by warning of objections to:

Adding back sales discounts, return allowances, and other concessions to revenue as adjusted gross sales. The Division staff simply won’t consider that result to be “revenue.” Subtracting certain revenue-reducing amounts from GAAP revenue and reporting it as non-GAAP “net revenue.” That really isn’t “revenue;” you might persuade the SEC to accept “adjusted gross profit,” although even that is not a given.

Don’t get cute with segment reporting

Inaccurate reporting of revenue is like sucking bone marrow from regulators and investors. Yet more companies are reporting enterprisewide revenue by shuffling segment treatments in a way that is inconsistent with GAAP, the Division staff warned. If yours is one of those companies…well, this conference put you on notice.

So, what exactly are filers doing to draw the staff’s ire? Here are some examples:

• Presenting a segment’s revenue exclusive of discounts and returns that they must deduct under GAAP.
• Using varying approaches to measure segment profit or loss. Calculate one segment’s profit differently than GAAP and you might be fine under ASC 280. But try one formula here and another there across multiple segments, and you are likely asking for a comment letter.
• Handling segment income or expense line items without hewing to GAAP principles. For example, the Division described one company that calculates segment profit with the standard formula but figures segment revenue by adding back promotional expenses. 

COVID-19 disclosures: They’re the new reality

I get it, the pandemic probably will affect your company’s financials differently tomorrow than it did today. But resist the temptation to reuse cookie-cutter GAAP disclosures or skimp on long-term impact analysis. Companies that do that are asking to get questioned by the Division staff, Deputy Chief Accountant Gilmore warned.

For example, if your company takes on debt to survive the COVID-19 economy, then your team should disclose how that debt will be repaid over the long term. Also, think hard about whether adjustments to COVID-19 that your execs make during earnings calls are material enough to be included in filings.

Bottom line, your disclosures should cover:

• COVID-19 impacts
• Management’s outlook on future impacts
• How management is responding to the pandemic
• How the company is planning for unexpected developments 

COVID-19 non-GAAP adjustments: Are they really appropriate?

Moving into the non-GAAP arena, always remember to check the SEC’s non-GAAP rules and C&DIs and evaluate whether a COVID-19 adjustment is:

• Directly attributable to COVID-19 and the pandemic economy
• Incremental to your company’s normal operations
• Quantifiable in a way that is not estimated or hypothetical

Assuming that standard is met, then consider these questions the Division staff raised for us:

1. Are you applying COVID-19 adjustments consistently from period to period and to all non-GAAP measures that might be affected?
2. Are you adjusting for lost revenue? If so, you are essentially hypothesizing there was no COVID-19 crisis. That’s inappropriate in the SEC world.
3. Is an adjustment really incremental to your company’s normal operations? Gilmore raised the example of additional sanitation costs, which might be incremental this year but not next year if they become the norm. Hazard pay to employees to perform new duties probably would be okay with the Division staff; compassion pay to laid-off workers might not be.

Don’t jump the gun on new MD&A rules

If your company files calendar-year financials, you may opt to early apply the newly streamlined management discussion and analysis (MD&A) and Regulation S-K disclosure rules on your 2020 10-K. If so, just remember: you can early apply item by item only if your team adopts all aspects of the revised rules. 

Pay attention when the SEC talks materiality

Your team may be freaking out a bit over how to meet the newly expanded human capital disclosure requirements under Regulation S-K, Item 101(c). It helps to apply a common sense test, Division Chief Accountant Lindsay McCord said. Assess whether the human capital measures are material to understanding your business and then tailor your disclosure to the unique circumstances.

This blog was reposted from the SEC Professionals Group website. The SEC Pro Group is a community of in-house professionals who actively prepare and file financial reports with the U.S. Securities and Exchange Commission. Learn more about membership.