On April 26, 2012, the CAQ posted the highlights of the March 27, 2012, CAQ SEC Regulations Committee (the “Committee”) meeting. Topics discussed at the meeting included (1) current financial reporting matters, (2) implementation and interpretation of recent SEC releases, (3) observations related to XBRL filings, (4) capital formation initiatives, (5) SEC staff and other initiatives, and (6) current practice issues. Many of these topics are discussed in more detail below.

Current Financial Reporting Matters

Management’s Use of Third-Party Pricing Services

The SEC staff gave an update on “using third-party pricing services for estimating and disclosing the fair value of investment securities and other financial instruments,” a topic it had discussed at the 2011 AICPA National Conference on Current SEC and PCAOB Developments. The staff indicated that it does not have enough information to determine whether registrants have adequately considered the staff’s comments and provided the related disclosures.

Disclosures Under Regulation S-X, Rule 3-10

The SEC staff indicated that it “has not encountered many issues” with registrants’ application of the staff’s interpretive guidance on “customary” subsidiary guarantee release provisions in paragraph 2510 of the SEC Financial Reporting Manual (FRM). The staff noted that it was recently asked a question about whether a “subsidiary’s guarantee [that] would be released in the event of [1] the parent’s partial sale of its interest in the subsidiary or [2] the subsidiary’s issuance of its own equity to a third party” would be considered “customary.” The staff concluded that in this situation, “the relief provided in [Regulation S-X, Rule 3-10¹ would not be available” because the guarantee would not be considered “full and unconditional.”

Loss Contingency Disclosures

The Committee believes that registrants have continued to improve their loss contingency disclosures as a result of the SEC staff’s expectations regarding these disclosures. The staff noted that it has discussed these disclosures with the legal community.

Goodwill Impairment Disclosures

The SEC staff has observed improvement in registrants’ (1) MD&A disclosures related to goodwill impairment, which have generally been consistent with the requirements in Section 9500 of the FRM, and (2) disclosures in the financial statement notes. Further, the staff indicated that although it does not have sufficient information to assess registrants’ qualitative assessments in goodwill impairment tests under ASU 2011-08,² it would expect such assessments to be performed “in situations in which a registrant’s industry and entity-specific operating results [have improved or] it is clear that the fair value of a reporting unit is in excess of its carrying value.”

Disclosure of Risk Factors When Significant Operations Are in Jurisdictions That Are Not Subject to PCAOB Inspection

The SEC staff indicated that when a registrant’s principal audit firm “is located in a country or jurisdiction for which the PCAOB is not allowed to perform inspections,” the staff has requested the registrant to “disclose this fact under a separate risk factor heading.” The staff would not object if registrants’ disclosures note that the “PCAOB does not have access to inspect any auditors in the particular country or jurisdiction and that the lack of access . . . is not limited to the registrant’s auditors.”

Canadian Auditor’s Report

The SEC staff highlighted that in some recent Canadian filings on Forms 20-F and 40-F, the related audit reports did not “unreservedly and explicitly” state that the financial statements were prepared in accordance with “IFRS as issued by the IASB.” The staff reiterated that issuers must include such a designation if they wish to omit the U.S. GAAP reconciliation.

Implementation and Interpretation of Recent SEC Releases

CF Disclosure Guidance: Topic No. 3 — Cybersecurity

While the SEC staff has “limited experience with respect to . . . disclosures provided in response to this guidance,” the staff expects registrants to consider whether they need to provide cybersecurity risk disclosures in future filings after assessing the materiality of such risks.

CF Disclosure Guidance: Topic No. 4 — European Sovereign Debt Exposure

The SEC staff noted that although it is still early in the 2011 filing review process, certain financial services registrants have improved their disclosures about the exposures of certain countries to European sovereign debt (e.g., by providing details on a country-by-country basis). However, the staff has observed that registrants could still improve their disclosures about the use of credit default swaps to mitigate risk. In addition, the staff stressed that these disclosure requirements are not limited to (1) European exposures or (2) financial institutions. Accordingly, “registrants in other industries [and with] exposures . . . outside of Europe” should consider the staff’s interpretive guidance to the extent that it applies to them.

Observations Related to XBRL Filings

The SEC staff has observed that most registrants have complied with the XBRL phase-in requirements. In addition, the staff noted that “use of the 30-day grace period . . . has not been extensive” and that “most filings are made within two weeks.” The staff also indicated that it will continue to focus on XBRL compliance but will monitor the most recent phase-in group more heavily. Further, the staff is exploring whether to give registrants the option of submitting their XBRL interactive data filings in “xhtml” (also known as “in-line” XBRL).

Capital Formation Initiatives

The meeting highlights briefly summarize the Jumpstart Our Business Startups (JOBS) Act,³ which is designed to help smaller companies raise “public and private capital in the U.S. financial markets.” While certain provisions of the JOBS Act became effective immediately, others will require further SEC rulemaking. Thus far, the SEC’s Division of Corporation Finance has issued the following three sets of frequently asked questions on the JOBS Act:

• Confidential Submission Process for Emerging Growth Companies (April 10, 2012).
• Changes to the Requirements for Exchange Act Registration and Deregistration (April 11, 2012).
• Generally Applicable Questions on Title I of the JOBS Act (April 16, 2012).

Current Practice Issues

Application of ASU 2011-05 to Parent-Only and Guarantor Financial Statement Reporting Requirements

The SEC staff indicated that registrants must prepare the condensed financial information required by Regulation S-X, Rule 3-10 (i.e., guarantor financial statements) and Regulation S-X, Rules 5-04⁴ and 12-04⁵ (i.e., parent-only financial information), in accordance with Regulation S-X, Article 10⁶ (i.e., the guidance applicable to interim financial statements). Consequently, when adopting ASUs 2011-05⁷ and 2011-12⁸ a registrant must include a statement of comprehensive income in its condensed consolidating and parent-only financial information (in either one continuous statement or two separate statements). Such interpretations have been reflected in FRM paragraphs 2515.2 and 2810.1, which were updated in April 2012.

Disclosure Requirements for an Existing Registrant That No Longer Meets the Definition of a Smaller Reporting Company

The SEC staff clarified its views on situations in which an existing registrant that no longer meets the definition of a smaller reporting company (SRC) “files a new or amended registration statement or proxy/information statement before it is required to file its first Form 10-K” under the more comprehensive “other reporting company” disclosure requirements. Under Regulation S-K, Item 10(f)(1), an SRC assesses its filing status as of the end of its second fiscal quarter. Under Regulation S-K, Item 10(f)(2), if a registrant loses SRC status, it would begin reporting as an “other reporting company” on the first-quarter Form 10-Q for its next fiscal year.

Because each registration and proxy statement has its own requirements, the SEC staff indicated that registrants should follow the specific form’s instructions to determine the extent of disclosure required. For example, Form S-3 does not specify any content requirements other than the requirement for registrants to incorporate by reference their most recently filed periodic reports. If an SRC files a new Form S-3 registration statement after it files a Form 10-K as an SRC but before the SRC files its first Form 10-K as an “other reporting company,” it may incorporate by reference the annual reports previously filed on Form 10-K that were prepared under Regulation S-X, Article 8.⁹ However, if the SRC initially files a new Form S-1 in the fiscal year after its determination that it no longer qualified as an SRC, it would be required to “include or incorporate by reference the disclosures applicable to [other reporting companies]” because Form S-1 requires specific disclosures, such as financial statements that comply with Regulation S-X. Note that this interpretation applies to all required registration items (e.g., MD&A), and is not limited to financial statement requirements. In addition, the SEC staff indicated that when registrants are required to retrospectively adjust (i.e., recast for the effects of discontinued operations, segment changes, or the adoption of new accounting standards) previously issued annual financial statements, they would also be expected to consider the respective registration statements’ form requirements to determine whether recast financial statements and disclosures may be scaled back. An entity’s use of a Form 8-K to provide recast financial information does not affect this analysis.

In addressing an SRC’s significant business acquisition during the period after the issuance of the entity’s last Form 10-K as an SRC but before the issuance of the entity’s first Form 10-Q as an “other reporting company,” the SEC staff pointed out that “[o]nly a registrant that is [an SRC] may present financial statements of an acquired significant non-reporting business in accordance with Article 8 of Regulation S-X.” Accordingly, to be eligible to apply Article 8 in such situations, a registrant would need to file its initial Form 8-K reporting the acquisition on or before the last day of the fiscal year for which the registrant still met the SRC requirements (i.e., it could not apply Article 8 if the initial Form 8-K was filed in the fiscal year after the entity’s determination that it no longer met the SRC criteria).

Pro Forma Financial Information

The SEC staff reiterated the views it expressed at the 2011 AICPA Conference that pro forma adjustments must (1) be factually supportable, (2) be directly attributable, and (3) have a continuing impact. The staff further clarified that it would be rare for costs “that a company expects to incur as a public company” to be pro forma adjustments “since such costs are not directly attributable to the transactions for which pro forma information is presented.” However, the staff noted that depending on the facts and circumstances, a registrant may disclose the types and ranges of such costs.

In addressing a situation in which pro forma financial statements are prepared to reflect a business combination but the registrant must also give effect to discontinued operations because the discontinued operations “did not trigger a separate reporting requirement (i.e., less than 10% significant),” the SEC staff noted that the periods “for which pro forma adjustments are presented generally should be based on the transaction that is triggering the pro forma reporting requirements (i.e., the business combination) and therefore the pro forma adjustment for the discontinued operations would be limited to only the most recent year and interim period.” However, the SEC staff clarified that there may be circumstances in which a registrant concludes that the discontinued operations are material to investors, in which case a registrant would include pro forma income statements for the most recent three years (two for SRCs) and comparative interim periods.

Disclosure Requirements for Auditor Changes Within an International Network Under Regulation S-K, Item 304

Under Regulation S-K, Item 304(a)(2),¹⁰ a registrant that has changed its auditor from one firm to another within the same international network must disclose whether, within the past two years, it consulted with the new auditor on the “application of accounting principles or the report to be rendered by the auditor.” The SEC staff clarified that it would not object if such a registrant excludes from Item 4.01 of Form 8-K disclosures about consultations it had with other members of the same global network that are performed in the normal course of the audit.

[1] SEC Regulation S-X, Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.”

[2] FASB Accounting Standards Update No. 2011-08, Testing Goodwill for Impairment.

[3] For additional information on the JOBS Act, see Deloitte’s April 2, 2012, Heads Up.

[4] SEC Regulation S-X, Rule 5-04, “What Schedules Are to Be Filed.”

[5] SEC Regulation S-X, Rule 12-04, “Condensed Financial Information of Registrant.”

[6] SEC Regulation S-X, Article 10, “Interim Financial Statements.”

[7] FASB Accounting Standards Update No. 2011-05, Presentation of Comprehensive Income.

[8] FASB Accounting Standards Update No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.

[9] SEC Regulation S-X, Article 8, “Financial Statements of Smaller Reporting Companies.”

[10] SEC Regulation S-K, Item 304, “Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.”