SEC Regulations Committee July 12, 2018 — Joint Meeting with SEC Staff
NOTICE: The Center for Audit Quality (CAQ) SEC Regulations Committee meets periodically with the staff of the SEC to discuss emerging financial reporting issues relating to SEC rules and regulations. The purpose of the following highlights is to summarize the issues discussed at the meetings. These highlights have not been considered or acted on by senior technical committees of the AICPA and do not represent an official position of the AICPA or the CAQ. As with all other documents issued by the CAQ, these highlights are not authoritative and users are urged to refer directly to applicable authoritative pronouncements for the text of the technical literature. These highlights do not purport to be applicable or sufficient to the circumstances of any work performed by practitioners. They are not intended to be a substitute for professional judgment applied by practitioners.
These highlights were prepared by a representative of CAQ who attended the meeting and do not purport to be a transcript of the matters discussed. The views attributed to the SEC staff are informal views of one or more of the staff members present, do not constitute an official statement of the views of the Commission or of the staff of the Commission and should not be relied upon as authoritative.
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SEC Regulations Committee
Securities and Exchange Commission
Observers and Guests
Christine Davine, Chair
Steven Jacobs, Vice-Chair
Division of Corporation Finance (Division)
Kyle Moffatt, Chief Accountant
Patrick Gilmore, Deputy Chief Accountant
Lindsay McCord, Deputy Chief Accountant
Craig Olinger, Senior Advisor to the Chief Accountant
Shelly Luisi, Associate Director - Chief Risk Officer
>A. New Revenue Recognition Disclosures under ASC 606
The staff shared some observations from its limited number of reviews of first-time
adopters of the new revenue standard, ASC 606, Revenue from Contracts with
Customers, but believes it is too early to consider any observations to be trends or
otherwise noteworthy. The staff will continue to review the new disclosures in the
normal course of the Division’s filing review program and will issue comments to
the extent that there appear to be material items that conflict with the standard, or
material disclosures that are missing.
As with any other area of GAAP, the staff noted that to the extent a company’s prior
disclosures are not materially deficient, the company may choose to revise or
improve its disclosures in future filings. The staff also encourages audit committees
to engage with management and the external auditors in understanding where a
company is relative to the standard’s requirements and investor and regulatory
feedback. Particular areas that are good topics to include in the discussion are the
use of significant judgments in the application of the revenue standard, such as the
identification of performance obligations and principal versus agent determinations,
as well as the disclosures relating to disaggregation of revenue streams.
>B. Release through EDGAR of Serious Deficiency Letters
The staff discussed a recent announcement that “serious deficiency letters” will be
made public via EDGAR within 10 calendar days of issuance. In some cases, a
registration statement or offering document is so deficient that the staff will send the
registrant a serious deficiency letter indicating that the staff is deferring its review of
the filing until it is amended to resolve the deficiencies.
The staff clarified that a serious deficiencies letter would be released within 10
calendar days of issuance only for publicly filed registration statements or offering
documents. With respect to draft submissions on a non-public basis, the staff will
continue its standard practice of issuing letters for any deficient documents. This
correspondence would only be released with the entire SEC correspondence after
completion of the review process in the normal timeframe (that is, no sooner than 20
business days after completion of the review).
>C. Recent Amendments to SRC Definition – Transition Questions
On June 28, the Commission approved amendments to raise the thresholds in the
smaller reporting company (SRC) definition, thereby expanding the number of
companies eligible to comply with current scaled disclosure requirements. Under the
amendments, a company with less than $250 million of public float as of the relevant
determination date will be eligible to provide scaled disclosures as an SRC. A
company with less than $100 million in annual revenues1 and either no public float
or a public float that is less than $700 million as of the relevant determination date
will also be eligible to provide scaled disclosures as an SRC.
In addition, the amendments revise Rule 3-05(b)(2)(iv) of Regulation S-X to increase
the net revenue threshold in that rule from $50 million to $100 million. As a result, a
company may omit financial statements of businesses acquired or to be acquired for
the earliest of the three fiscal years otherwise required by Rule 3-05 if the net
revenues of that business are less than $100 million in its most recently completed
The Committee and staff discussed various transition questions related to the
implementation of these amendments. The staff clarified that the amendments
cannot be applied to any filing made before September 10, 2018, the effective date of
the amendments. The staff also clarified that, for the SRC definition, the guidance in
Exchange Act Rules CDI 130.04 is still applicable, that is “the determination date for
smaller reporting company status is the last business day of the second fiscal
quarter.” Therefore, a company whose revenues fall below the threshold will have to
wait until the determination date to evaluate whether they qualify as an SRC based
upon their public float (or lack thereof) at that time.
The staff also noted that they intend to issue guidance to assist registrants with
additional transition and other questions including whether the amendments can be
applied to filings on or after September 10, 2018 for periods or events that occurred
prior to the effectiveness. Meanwhile, registrants are encouraged to call the Office of
Small Business Policy (202-551-3460) with questions
The Committee inquired about the application of Rule 3-13 to Rule 3-10 of
Regulation S-X. The staff indicated that it grants relief in limited circumstances
where literal application results in disclosures beyond those intended by the rule.
[Note: Subsequent to the meeting, the SEC on July 24 issued a release proposing,
among other things, to revise Rules 3-10 and 3-16 of Regulation S-X. See Release
No. 33-10526.. Comments are due 60 days after posting in the Federal Register.]
>E. Financial statement requirements in an S-4 and/or merger proxy for an
operating company merging with a SPAC
The Committee and the staff discussed transactions in a Form S-4 and/or merger
proxy for which public Special Purpose Acquisition Companies (SPACs) are
consummating mergers with private operating companies. In particular, the audit
requirements for the private operating company in the Form S-4/merger proxy prior to consummation of the transaction were discussed.
>F. Emerging Growth Company (EGC) Transition Issues
The Committee and the staff discussed the status of EGC issues raised at prior
meetings related to losing EGC status in the year public companies are required to
adopt new accounting standards when they have elected to use private company
dates. Generally, if an EGC loses its status after it would have had to adopt a
standard absent the extended transition, the issuer should adopt the standard in its
next filing after losing status. The staff recently objected to a request for relief from
adopting a new accounting standard in the year the company lost its EGC status due
to becoming a large accelerated filer. In addition, the staff indicated registrants are
encouraged to discuss specific facts and circumstances with the staff.
>G. Other Items Discussed
Critical Audit Matters (CAMs)
The Committee and the staff discussed PCAOB Auditing Standard (AS)
3101, The Auditor’s Report on an Audit of Financial Statements When the
Auditor Expresses an Unqualified Opinion, and specifically perspectives,
observations, expectations and training relating to the future implementation of
The staff observed that comments are still being issued on individually tailored
accounting principles in relation to non-GAAP measures.