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Journal entry — Highlights released of CAQ SEC Regulations Committee’s June 27, 2012, meeting

Published on: Aug 14, 2012

Yesterday, the Center for Audit Quality (CAQ) posted highlights of the June 27, 2012, CAQ SEC Regulations Committee joint meeting with the SEC staff. Noteworthy topics are summarized below.

Current Financial Reporting Matters

Classification of Cash/Short-Term Investments Held in Jurisdictions Where Indefinite Reinvestment Assertion Has Been Made

The SEC staff indicated that merely holding cash and short-term investments in foreign jurisdictions for which a registrant asserts that these assets have been indefinitely reinvested would not result in the requirement to classify such assets as restricted cash on the balance sheet.

SEC Staff Remarks on Non-GAAP Pension Accounting Financial Measures

The SEC staff discussed recent situations in which registrants have presented non-GAAP financial measures related to pension and postretirement benefit amounts. For each, the staff reminded registrants of the need to avoid using non-GAAP financial measures that are confusing (or potentially misleading) by clearly disclosing (1) the nature of an adjustment, (2) a “quantitative context for the actual and expected returns on plan assets,” and (3) a reasonable basis for the financial measure’s purpose and how it is useful to an investor.

In some instances, registrants have changed their method of accounting for pension plan investments from deferral to immediate recognition of gains and losses attributable to the change in fair value of the pension plan investments. The SEC staff has observed that some registrants have presented non-GAAP financial measures that “remove the actual gain or loss from the performance measure and include an expected long-term rate of return.”

The SEC staff also observed that registrants have presented other instances of unclear non-GAAP financial measures, including those that “remove a portion of pension expenses.” The staff noted that it may comment when adjustments are labeled “non-cash” or “non-recurring” but the corresponding liability is cash-settled or the “adjustment is reasonably likely to recur within two years or there was a similar adjustment within the prior two years.”

Pro Forma Adjustments for Items With “Continuing Impact”

Regulation S-X, Rule 11-02(b)(6), provides three criteria for proper inclusion of pro forma adjustments, including the criterion that such adjustments are “expected to have a continuing impact on the registrant.” Historically, the SEC staff has interpreted “continuing impact” to refer to events that are “expected to impact operations or would continue to recur for a period greater than twelve months from the initial occurrence.” However, the staff clarified its revised view that “continuing impact” refers to events that do not have a “one-time” impact and that interest or amortization expenses related to bridge loans with a term or life of less than 12 months may be included as pro forma adjustments. No changes were noted in the way transaction expenses related to business combinations1 are treated for pro forma purposes.

Revision to Previously Filed Annual Financial Statements in Connection With a New or Amended Registration Statement (Other Than Form S-82) for Retrospective Adjustments

The SEC staff indicated its expectation that registrants evaluate the materiality of items that require retrospective adoption to their historical annual financial statements (e.g., discontinued operations, segment changes, and the adoption of new accounting standards) in a new or amended registration statement — after such changes have been reported in a subsequent interim period. The staff further noted that it does not intend to “discourage registrants from complying with retrospective application in historical periods in situations in which the effect of adoption is immaterial to those prior periods.” However, the staff indicated that because of inconsistencies between interim periods that reflect a retrospective change and prior annual historical periods that do not, it expects registrants to evaluate the materiality of the retrospective adjustments and may comment if the effects of such adjustments appear to be material to the annual historical financial statements. Furthermore, the SEC staff noted that past accommodations granted to give registrants relief from filing updated annual historical financial statements would continue to apply; however, the staff also noted that it does not intend to provide such accommodations in the future.

Confidential Reviews of Initial Registration Statements Under the JOBS Act

For substantially complete emerging growth company (EGC) IPO registration statements received under the confidential submission process, the SEC staff noted that it has been able to meet its targeted 30-day review period. The staff has identified instances in which a company filing an IPO did not qualify as an EGC. In other instances, the staff noted situations in which IPO registration statements were not substantially complete, at which point the staff notified the registrants that it would defer its review until substantially complete versions had been received.

Implementation and Interpretation of Recent SEC Releases

Topic No. 5, “Staff Observations Regarding Disclosures of Smaller Financial Institutions” of the SEC Division of Corporation Finance Disclosure Guidance

In discussing CF Disclosure Guidance Topic No. 5,3 which was issued to address SEC staff observations related to MD&A and accounting policy disclosures of smaller financial institutions, the staff noted it “would welcome consideration of the guidance by financial institutions of varying sizes to the extent it was deemed applicable.”

Capital Formation Initiatives

SEC Advisory Committee Recommendations on Small and Emerging Businesses

The SEC staff indicated that the SEC Advisory Committee on Small and Emerging Businesses is considering whether to recommend extending certain of the provisions related to emerging growth companies in the Jumpstart Our Business Startups (JOBS) Act to other types of companies that would not be considered emerging growth companies under the JOBS Act.

Staff and Other Initiatives

Financial Reporting Manual

At the meeting, the SEC staff discussed its pending FRM update, which was formally issued on July 11, 2012.

Rulemaking Status for Conflict Minerals and Extractive Industry Payments

The SEC staff indicated that it continues to focus on rulemaking related to conflict minerals and extractive industry payments as required under Sections 1502 and 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Editor’s Note: The SEC announced that on August 22, 2012, it will hold an open meeting to consider approving final rules related to both conflict minerals and extractive industry payments.

Current Practice Issues

Measuring Significance of “Related Businesses” Under the Income Test

In the March 2012 FRM update, paragraph 2020.8 will be revised to indicate that “[f]or purposes of the [Rule 3-05]4 income test, [an entity should] use absolute values when some of those related businesses5 report losses and others report income.” This revision differs from the staff’s historical view that, in the determination of significance under the income test, related businesses (i.e., those under common control or management) reporting income would be grouped together and those reporting losses would be grouped separately.

The SEC staff noted that the updates to paragraph 2020.8 were designed to provide “guidance in response to ‘put-together’ transactions in which previously unrelated business[es] are acquired at one time (often in connection with an IPO) and other transactions in which the acquired businesses are deemed related under criteria (ii) and (iii) of Rule 3-05(a)(3) of Regulation S-X (i.e., the acquired businesses were not under common control or management).” In addition, the staff indicated that the revised paragraph was not intended to apply to acquisitions of multiple businesses qualifying for presentation in combined financial statements, which would require the acquired businesses to be under common control or management. The staff also indicated that after further consideration, it may clarify FRM paragraph 2020.8.

Financial Reporting Requirements in a Reverse Spinoff

In connection with reverse spinoffs, the SEC staff discussed the financial reporting requirements for a legal “spinnee” and the legal “spinnor” during the pre- and post-spinoff period. The staff provided an illustrative example and applicable FRM and U.S. GAAP guidance that registrants should consider in determining the appropriate presentation for the reverse spinoff. However, the staff “did not express any views as to the appropriate reporting.” The staff asserted that it will continue to assess “the various reporting requirements for the legal spinnee and legal spinnor in reverse spinoffs and will consider whether or not further guidance should be provided in this area.”


[1] For additional information, see paragraph 3250 of the SEC Financial Reporting Manual (FRM).

[2] See Section 13100 of the FRM for additional information on retrospective adjustments related to Form S-8.

[3] CF Disclosure Guidance Topic No. 5, Staff Observations Regarding Disclosures of Smaller Financial Institutions.

[4] Regulation S-X, Rule 3-05, “Financial Statements of Businesses Acquired or to Be Acquired.“

[5] Under Rule 3-05(a)(3), related business are defined as (1) those that are under common control or management, (2) those in which the acquisition of one business is conditional on the acquisition of other businesses, or (3) those in which each acquisition is conditioned on a single event.

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