Chapter 18 — Reporting Considerations for SEC Registrants | DART

Chapter 18 — Reporting Considerations for SEC Registrants

The SEC staff continues to focus on the relationship between implementation issues under the leasing standard and certain SEC reporting requirements. These requirements pertain mostly to the inclusion, presentation, and disclosure of certain financial information before and after adoption of the leasing standard.

18.1 SAB Topic 11.M Disclosures

The SEC staff has continued to emphasize the importance of providing investors with disclosures that explain the impact that new accounting standards are expected to have on an entity’s financial statements (“transition disclosures”).1 Such disclosures include information that investors may need to determine the effects of adopting a new standard and how the adoption will affect comparability from period to period. Transition disclosures should include not only an explanation of the transition method elected (as discussed in Chapter 16) but also information about the impact that the leasing standard is expected to have on an entity’s financial statements. The SEC staff has highlighted that, in the past, transparent disclosures about the anticipated effects of a new standard in multiple reporting periods preceding its adoption have prevented market participants from reacting adversely to significant accounting changes. In addition, the staff has indicated that it expects to see robust qualitative and quantitative disclosures about (1) the anticipated impact of new standards and (2) the status of management’s progress in implementation as the adoption date of the new standard approaches. Registrants that have not yet adopted the leasing standard, such as EGCs that have elected to use the non-PBE effective date of ASC 842, should continue to focus on providing appropriate disclosures in the periods leading up to adoption of the standard.

The SEC staff has also reiterated that a registrant should provide transparent transition disclosures that comply with the requirements of SAB Topic 11.M and has indicated that when a registrant is unable to reasonably estimate the quantitative impact of adopting the leasing standard, the registrant should consider providing additional qualitative disclosures about the significance of the impact on its financial statements.2

There will not be a one-size-fits-all model for communicating the impact of adoption, but entities could consider providing (1) a short narrative that qualitatively discusses the impact of the change or, to the extent available, (2) tabular information (or ranges) identifying the expected accounting under the leasing standard, such as amounts or ranges of newly recognized ROU assets and liabilities. The following are sample disclosures that an entity could provide about qualitative aspects of the impact of adoption, depending on its specific facts and circumstances:

ASC 842 provides a package of transition practical expedients that allow an entity to not reassess (1) whether any expired or existing contracts contain a lease, (2) the lease classification of any expired or existing lease, and (3) initial direct costs for any existing lease. We expect to elect the package of transition practical expedients.
As disclosed in note X, we currently have operating lease commitments of $X billion on an undiscounted basis. Upon adoption of ASC 842, we expect substantially all of these commitments will be recognized as ROU assets and liabilities, on a discounted basis.
We [are implementing/have implemented] a new enterprise-wide lease accounting system and are [implementing/modifying] internal controls to address the collection, recording, and accounting for leases in accordance with ASC 842.

If an entity chooses to provide quantitative disclosures, it should consider including information reflecting the entity’s selected transition method (i.e., the modified retrospective method either as of the beginning of the earliest comparative period or as of the beginning of the year of adoption by using the Comparatives Under 840 Option — see Section 16.1.1), since stakeholders would benefit from perspective on the overall impact of adoption as well as any opening adjustments to retained earnings.

Footnotes

1

See SAB Topic 11.M.

2

This was announced by the SEC observer at the September 22, 2016, EITF meeting. See Deloitte’s September 22, 2016, Financial Reporting Alert for additional information about the SEC staff’s comments on transition issues.

18.2 Financial Statements and Other Affected Financial Information in Exchange Act Reports, Registration Statements, and Other Nonpublic Offerings

18.2.1 Adoption as of the Beginning of the Year of Adoption by Using the Comparatives Under 840 Option

As discussed in Section 16.1.1, entities that elect to adopt the leasing standard as of the beginning of the year of adoption by using the Comparatives Under 840 Option will recognize the effects of applying ASC 842 as a cumulative-effect adjustment to opening retained earnings but will not adjust prior periods. Thus, in both quarterly and annual reports after adoption, an entity would not be required to recast its prior-period financial statements and disclosures to comply with the leasing standard since an entity applying this transition method is permitted to report historical comparative periods in accordance with ASC 840.

18.2.1.1 Annual Disclosures Needed in Quarterly Filings for the Year of Adoption

Although ASC 842 may not require entities to provide certain of the prescribed disclosures discussed in Chapter 15 in interim financial statements, SEC rules and staff interpretations require registrants that first adopt a new accounting standard in an interim period to include both annual and interim disclosures in the first interim period after the adoption of the standard and in each subsequent quarter in the year of adoption. Specifically, Section 1500 of the FRM states:

[Regulation] S-X Article 10 requires disclosures about material matters that were not disclosed in the most recent annual financial statements. Accordingly, when a registrant adopts a new accounting standard in an interim period, the registrant is expected to provide both the annual and the interim period financial statement disclosures prescribed by the new accounting standard, to the extent not duplicative. These disclosures should be included in each quarterly report in the year of adoption.

As a result, a registrant that first adopts the leasing standard in an interim period will need to comply with ASC 842’s full suite of disclosure requirements in that quarter and each subsequent quarter in the year of adoption, to the extent that the disclosures are material and do not duplicate existing information.

18.2.1.2 Registration Statements and Other Nonpublic Offerings

Because the Comparatives Under 840 Option transition method does not affect prior-period financial statements, an entity is not required to provide any additional retrospectively restated financial statement disclosures or information beyond the transition disclosures discussed above for the financial statements included or incorporated by reference into a registration statement filed or other nonpublic offering document prepared after the quarter of adoption.

18.2.2 Adoption as of the Beginning of the Earliest Comparative Period Presented

As discussed in Chapter 16, entities that elect to adopt the standard as of the beginning of the earliest comparative period presented will recognize the effects of applying ASC 842 as a cumulative-effect adjustment to retained earnings as of the beginning of the earliest period presented in their annual financial statements and restate the information for the prior years for all years presented in their annual financial statements for the year of adoption. In its quarterly reports, if the registrant first adopts the leasing standard in an interim period, and in its annual report after adoption, an entity would recast the prior-period financial statements, disclosures, and other information (e.g., MD&A3 and summarized financial information related to the statements of comprehensive income for each affected quarterly period and the fourth quarter in the affected year4) to comply with ASC 842.

Example 18-1

Form 10-Q That First Reports the Adoption of the Leasing Standard

Company A adopts the leasing standard on January 1, 2019, and uses the “date of initial application” method, retrospectively restating comparative periods to reflect the standard. Provided that A first adopts the standard in its interim periods, when A files its Form 10-Q for the quarter ended March 31, 2019, it must retrospectively restate its financial statements for the adoption of ASC 842 for the comparative interim period ended March 31, 2018. Further, A must update MD&A for the interim period ended March 31, 2018, to reflect the retrospective adoption of the leasing standard. However, there is no immediate requirement for A to restate the annual financial statements presented in its Form 10-K for the year ended December 31, 2018. When A files its 2019 Form 10-K, it would restate the comparative 2018 and 2017 financial statements and disclosures to comply with ASC 842. The date of initial application is January 1, 2017, because this is the first day of the comparative three-year period presented in the 2019 Form 10-K.

Ordinarily, an entity is not required to present the restated annual prior-period financial information (i.e., for 2018 and 2017) until the subsequent Form 10-K is filed (i.e., the 2019 Form 10-K). However, Section 18.2.2.2 addresses circumstances in which the affected comparative periods (i.e., 2018 and 2017) may need to be restated before the filing of the subsequent Form 10-K.

In addition, under SEC Regulation S-K, Item 302(a), if a registrant reports a material retrospective change (or changes), such as the adoption of the leasing standard, for any of the quarters within the two most recent fiscal years or any subsequent interim periods, the registrant must disclose (1) an explanation for the material change(s) and (2) summarized financial information reflecting such change(s) for the affected quarterly periods, including the fourth quarter. Summarized financial information, which is required in a Form 10-K and certain registration statements when a material retrospective change occurs, should include, at a minimum:

Net sales or gross revenues.
Gross profit (or costs and expenses related to net sales or gross revenues).
Income (loss) from continuing operations.
Net income (loss).
Net income (loss) attributable to the entity.
Earnings (loss) per share.

Since this requirement only applies when there is a material retrospective change, a registrant may not have provided such information in its most recent Form 10-K. However, upon reporting a change in accounting policy that represents a material retrospective change, a registrant would be required to include such disclosures in its next Form 10-K or retrospectively restated financial statements filed in conjunction with a registration statement, as discussed below.

18.2.2.1 Annual Disclosures Needed in Quarterly Filings for the Year of Adoption

As discussed in more detail in Section 18.2.1.1, SEC rules and staff interpretations require registrants that first adopt a new accounting standard in an interim period to provide both annual and interim disclosures in the first interim period after the adoption of a new accounting standard and in each subsequent quarter in the year of adoption.

18.2.2.2 Registration Statements and Other Nonpublic Offerings

For registrants that adopt the leasing standard as of the beginning of the earliest comparative period presented and first adopt a new standard in an interim period, the requirement to retrospectively restate the annual preadoption financial statements and other affected financial information may be accelerated when the preadoption financial statements are reissued, as discussed in ASC 855-10-25-4 (see also Form S-3, Item 11(b)(ii)). Such reissuance may occur when a registrant (1) files a new or amended registration statement, (2) files a Form S-8, (3) files a prospectus supplement to a currently effective registration statement (e.g., an existing Form S-3 that already is effective but upon which the registrant wishes to draw down or issue securities), or (4) prepares an offering document in connection with an issuance of securities in a nonpublic offering. The discussion below addresses these requirements in the context of the adoption of ASC 842. A registrant may need to similarly consider other retrospective changes, such as changes in segment presentation under ASC 280 and presentation of discontinued operations under ASC 205-20. These considerations would not apply to an emerging growth company (EGC) that elects to adopt the leasing standard for the first time in its annual report rather than in its quarterly reports as permitted. See Section 18.7 for more information.

18.2.2.2.1 New or Amended Registration Statements (Other Than Form S-8)

If a registrant files a new or amended registration statement (including post-effective amendments)5 before it files the Form 10-Q that first reports the adoption of the leasing standard (i.e., before the filing of the first-quarter 2019 Form 10-Q), the registrant is not required (or permitted6) to file updated financial statements for prior periods to reflect the adoption of the leasing standard. However, the registrant should consult with its legal counsel and independent accountants regarding the appropriate disclosure to provide in the registration statement.

If a registrant files a new or amended registration statement after it files the Form 10-Q that first reports the adoption of the leasing standard and chooses to adopt the standard as of the earliest comparative period presented, the registrant generally must file updated financial statements that reflect the standard for the relevant comparative periods. Thus, a calendar-year-end registrant would update the financial statements included in the 2018 Form 10-K (i.e., for 2018 and 2017) to reflect the leasing standard for the applicable periods. Because the leasing standard refers to the “earliest comparative period presented,” the SEC staff has clarified that the reissuance of the financial statements in the 2018 Form 10-K accelerates the requirement to retrospectively restate the financial statements for 2018 and 2017; however, it does not change the date of initial application (i.e., January 1, 2017, for a calendar-year-end registrant). Accordingly, the financial statements for 2016 that are included or incorporated by reference in the new or amended registration statement would not be retrospectively restated for the leasing standard. The financial statements for 2016, the earliest year presented, will reflect the legacy ASC 840 accounting requirements. See paragraph 11210.1 of the FRM for further discussion.

In addition, other affected financial information (e.g., MD&A7 and summarized financial information8) also should be updated to reflect the retrospectively restated financial statements.

Connecting the Dots

Additional Disclosure Requirements

As discussed above, a registrant that reports a material retrospective change must disclose summarized financial information. Since this requirement only applies when there is a material retrospective change, a registrant’s previous Form 10-K may not include such disclosures. Nonetheless, when retrospectively restating the financial statements and other affected financial information in advance of filing a new or amended registration statement, a registrant must include summarized financial information for the quarters within the two most recent fiscal years to reflect the adoption of the leasing standard or other material retrospective changes.

For new or amended registration statement that normally incorporate the financial statements by reference (e.g., Form S-3), the registrant may file updated financial statements as well as other affected financial information that reflects the retrospectively restated financial statements on Form 8-K; alternatively, the registrant can include the retrospectively restated financial statements and related information in its registration statement. If the retrospectively restated financial statements are filed on Form 8-K, the Form 8-K will be incorporated by reference into the registration statement and will update the affected sections of the registrant’s previously filed Exchange Act reports (e.g., Form 10-K). Because they were not incorrect when filed, prior Exchange Act reports should not be amended (i.e., the registrant should not file a Form 10-K/A). For more information, see Topic 13 of the FRM.

To prepare itself for a potential filing of a new or amended registration statement, a registrant is permitted to file updated financial statements and other affected financial information that reflect the retrospectively restated financial statements in a Form 8-K once the adoption of the leasing standard has been reported in the first-quarter Form 10-Q. However, the registrant is not required to do so until immediately before a registration statement is filed. If the registrant expects to file a new or amended registration statement, it may file the Form 8-K simultaneously with or any time after the filing of the Form 10-Q that reports the adoption of the leasing standard but before or simultaneously with the filing of the new or amended registration statement.

Example 18-2

Registration Statement Filed After Adoption of the Leasing Standard

Facts

On February 28, 2019, Company A, an SEC registrant, files its Form 10-K for the year ended December 31, 2018. ASC 842 is adopted by A on January 1, 2019, and applied as of the earliest comparative period presented. On April 28, 2019, A files its Form 10-Q for the quarter ended March 31, 2019, and reflects the adoption of the leasing standard for the periods presented.

Example 1

Company A files a new registration statement on May 15, 2019, and A must either (1) include financial statements and other affected financial information that reflect the adoption of the leasing standard for the annual periods ended December 31, 2018, and December 31, 2017, or (2) incorporate by reference a previously filed Form 8-K that contains financial statements and other affected financial information that reflect the adoption of the leasing standard for the annual periods ended December 31, 2018, and December 31, 2017. In both cases, the financial statements for December 31, 2016, included or incorporated by reference in such filings would reflect the application of ASC 840.

Example 2

Company A files a new registration statement on April 10, 2019, before it files the Form 10-Q reflecting the adoption of the leasing standard. Company A is not required (or permitted) to (1) include in its registration statement updated financial statements that reflect the adoption of the leasing standard or (2) incorporate by reference a Form 8-K containing updated financial statements and other affected financial information that reflected the leasing standard. However, A should consult with its legal counsel and independent accountants regarding the appropriate disclosure to provide in the new registration statement.

18.2.2.2.2 Form S-8

The requirements for a Form S-8 are addressed in Question 126.40 of the SEC staff’s C&DIs on Securities Act forms:

C&DI — Securities Act Forms

Question 126.40

Question: After its Form 10-K is filed, a registrant has a change in accounting principles (or changes in segment presentation or discontinued operations), which will cause the financial presentation in its subsequent Form 10-Qs to differ from that in its most recent Form 10-K. In this situation, Item 11(b)(ii) of Form S-3 would require the annual audited financial statements filed in the Form 10-K to be restated to reflect the change in accounting principles (or changes in segment presentation or discontinued operations). Would General Instruction G.2 of Form S-8, which requires that “material changes in the registrant’s affairs” be disclosed in the registration statement, also require such restatement?

Answer: Not necessarily. Form S-8 does not contain express language similar to Item 11(b)(ii) of Form S-3, requiring the restatement of financial statements to reflect specified events. The fact that financial statements eventually will be retroactively restated does not necessarily mean that there are “material changes in the registrant’s affairs,” thereby requiring the financial statements to be restated for inclusion, or incorporation by reference, in a Form S-8. In other words, financial statements for which Item 11(b)(ii) of Form S-3 would require restatement may not necessarily need to be restated for incorporation by reference in a Form S-8. The registrant is responsible for determining if there has been a material change and, if so, the related information that is required to be disclosed in a Form S-8. Correspondingly, it is the auditor’s responsibility to determine if it will issue a consent to use of its report in a Form S-8 if there has been a change in the financial statements in a subsequent Form 10-Q and the financial statements in the Form 10-K have not been retroactively restated.

Accordingly, if a registrant adopted ASC 842 as of the beginning of the earliest comparative period presented, it is generally not required to update its previously issued financial statements to reflect the adoption of the leasing standard when these financial statements are incorporated by reference into Form S-8, unless the adoption of ASC 842 constitutes a “material change in the registrant’s affairs.”

18.2.2.2.3 Prospectus Supplements to Registration Statements That Currently Are Effective

For currently effective registration statements (e.g., an existing Form S-3) upon which a registrant wishes to draw down or issue securities, the registrant may use a prospectus supplement. Paragraph 13110.2 of the FRM indicates that “a prospectus supplement used to update a delayed or continuous offering registered on Form S-3 (e.g., a shelf takedown) is not subject to the Item 11(b)(ii) updating requirements.” Rather, the prospectus must be updated “in accordance with S-K 512(a) with respect to any fundamental change.”

The filing of a prospectus supplement does not constitute a reissuance of the financial statements included or incorporated in the currently effective registration statement. Management of a registrant that adopts the leasing standard as of the beginning of the earliest comparative period presented, in consultation with legal counsel, should determine whether the retrospective presentation of leases under ASC 842 constitutes a fundamental change. (For more information, see SEC Regulation S-K, Item 512(a).) If the registrant and its legal counsel determine that the retrospective adjustment to present the adoption of the leasing standard is a fundamental change, updated financial statements and other affected financial information should be filed on Form 8-K or included in the registration statement, as described above. However, if the registrant and its legal counsel determine that the retrospective adjustment for the adoption of the leasing standard is not a fundamental change, the financial statements do not need to be updated but the registrant should consult with its legal counsel and independent accountants regarding the appropriate disclosure to provide in the prospectus supplement.

18.2.2.2.4 Nonpublic Offerings

Financial statements subject to retrospective changes may also be included in (i.e., reproduced) or incorporated by reference into a nonpublic offering document, such as a private placement memorandum in accordance with SEC Regulation D or Rule 144A of the Securities Act:

Financial statements included in a nonpublic offering document — We believe that, under U.S. GAAP, entities are generally required to update the financial statements for prior periods to reflect the adoption of the leasing standard if it is adopted as of the earliest comparative period presented. Accordingly, the considerations related to updating the financial statements for the adoption of the leasing standard would be similar to those discussed in Section 18.2.2.2.1.
Financial statements incorporated by reference into a nonpublic offering document — We believe that the considerations related to restating the financial statements for the leasing standard would be the same as those discussed in Section 18.2.2.2.3.

Footnotes

3

See Section 9830 of the FRM for guidance on MD&A in registration statements.

4

See SEC Regulation S-K, Item 302(a).

5

Registrants that file a proxy statement with the SEC should also consult this guidance. For information about Schedule TO (used to file tender offers), see paragraph 14310.3 of the FRM.

6

See the highlights of the June 23, 2009, CAQ SEC Regulations Committee joint meeting with the SEC staff.

7

See footnote 3.

8

See footnote 4.

18.3 SEC Regulation S-X, Rules 3-09 and 4-08(g) — Financial Statements and Summarized Financial Information for Equity Method Investments

Under SEC Regulation S-X, Rules 3-09 and 4-08(g), registrants are required to evaluate the significance of an equity method investee in accordance with the tests in SEC Regulation S-X, Rule 1-02(w) (i.e., the asset, investment, or income test), to determine whether they must provide the investee’s financial statements, the investee’s summarized financial information, or both. Under these rules, the prescribed significance tests are performed annually in connection with the filing of a Form 10-K (i.e., at the end of the registrant’s fiscal year). Accordingly, significance is not remeasured when updated financial statements that reflect retrospective adjustments are filed in a Form 8-K (or are included in or incorporated by reference into a registration statement).

As indicated in Topic 11 and paragraph 2410.8 of the FRM, when a change in accounting is retrospectively applied in financial statements included in a registrant’s Form 10-K, the registrant is not required to recalculate the significance of an equity method investee under Rules 3-09 and 4-08(g). Therefore, for periods before the date of initial adoption of the leasing standard, registrants may continue to measure the significance of their equity method investees by using the information from their preadoption financial statements.9

Footnotes

9

For a discontinued operation, a registrant should be mindful that significance under Rules 3-09 and 4-08(g) should be measured for each annual period presented in the financial statements on the basis of amounts that were retrospectively restated. Consequently, as a result of retrospective adjustments for a discontinued operation, a previously insignificant equity method investee may become significant. For additional information, see Deloitte’s Roadmap Impairments and Disposals of Long-Lived Assets and Discontinued Operations.

18.4 Permissibility of Non-PBE Adoption Dates for Other Entities’ Financial Statements or Financial Information Required in a Registrant’s Filings

At the July 20, 2017, EITF meeting, the SEC staff announced that it would not object when certain PBEs elect to use the non-PBE effective dates solely to adopt the FASB’s revenue and leasing standards. The staff announcement clarifies that the ability to use non-PBE effective dates to adopt the revenue and leasing standards is limited to the subset of PBEs “that otherwise would not meet the definition of a public business entity except for a requirement to include or inclusion of its financial statements or financial information in another entity’s filings with the SEC” (referred to herein as “specified PBEs”).

While the staff announcement is written in the context of specified PBEs, the principal beneficiaries of the relief will be registrants that include financial statements or financial information prepared by specified PBEs in their own filings. Regulation S-X rules under which such filings may be prepared could include:

Rule 3-05, “Financial Statements of Businesses Acquired or to Be Acquired.”
Rule 3-09, “Separate Financial Statements of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons.”
Rule 3-14, “Special Instructions for Real Estate Operations to Be Acquired.”
Rule 4-08(g), “Summarized Financial Information of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons.”

Under the leasing standard, there is one adoption date for PBEs and another (later) adoption date for non-PBEs.

The ASC master glossary defines a PBE, in part, as a business entity that is “required by the [SEC] to file or furnish financial statements, or [that] does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing)” (emphasis added). The definition further states that “[a]n entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC. In that case, the entity is only a public business entity for purposes of financial statements that are filed or furnished with the SEC.”

Before the staff’s announcement, certain nonpublic companies applying the PBE definition in the adoption-date criteria would have been required to use the PBE adoption dates for the revenue and leasing standards. While the SEC staff announcement provides considerable and welcome relief to registrants preparing to adopt the leasing standard, it is purposely narrow in scope and should not be applied by analogy to the adoption-date assessment for any other standards besides the revenue and leasing standards. The SEC staff announcement does not preclude specified PBEs from adopting the provisions of the revenue and leasing standards on the adoption date applicable to all other PBEs if a specified PBE wishes to use the PBE adoption date.

In November 2019, the FASB issued ASU 2019-10, which, among other things, amends the effective dates of ASC 842 for non-PBEs to fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. At the 2019 AICPA Conference on Current SEC and PCAOB Developments, the SEC staff announced that it would not object if specified PBEs adopt ASC 842 by using ASU 2019-10’s timelines that apply to non-PBEs. This position was subsequently codified in ASU 2020-02. We understand that the SEC staff will not object if specified PBEs adopt ASC 842 on the basis of the additional deferral of the effective dates of ASC 842 for non-PBEs to fiscal years beginning after December 15, 2021, under ASU 2020-05.

Example 18-3

Company A, a publicly traded manufacturer, holds equity method investments in three of its nonpublic suppliers. After applying the Regulation S-X significance tests, A has determined that it must include summarized financial information for Suppliers X, Y, and Z (under Regulation S-X, Rule 4-08(g)) in its SEC filing. The only reason X, Y, and Z meet the definition of a PBE is because they are required to include their financial information in A’s SEC filing (i.e., they qualify as specified PBEs). Consequently, X, Y, and Z plan to use the non-PBE adoption dates of the revenue and leasing standards when preparing their own stand-alone financial statements. When including the summarized financial information of X, Y, and Z in its own SEC filing, A is not required to adjust the suppliers’ financial statements to reflect the PBE adoption date of the revenue and leasing standards.

Connecting the Dots

Including Financial Statements or Financial Information of Specified PBEs

A registrant that has passed certain significance tests required by SEC Regulation S-X may need to include in its SEC filing the financial statements or financial information of another entity. We believe that, in a manner consistent with Topic 11 of the FRM, it is also appropriate for the registrant to use financial information prepared by specified PBEs that apply non-PBE adoption dates when performing these significance tests. However, on the basis of paragraph 3250.1(m) of the FRM, if pro forma financial information is being prepared under SEC Regulation S-X, Article 11, to reflect the acquisition of a significant business, the registrant must still conform the acquired company’s adoption dates and transition methods to its own in the pro forma presentation for the periods after adoption.

Further, non-PBEs are permitted, as a practical expedient, to use the risk-free rate as their discount rate when applying ASC 842 (see Section 7.2.3). At the October 21, 2020, CAQ SEC Regulations Committee joint meeting with the SEC staff, the SEC staff discussed the impact of an acquired company’s use of this practical expedient to adopt ASC 842 when a registrant must evaluate the acquired company for significance and, in some cases, provide separate financial statements for the acquired company. The SEC staff indicated that it would not object if a registrant uses financial statements that reflect the risk-free rate practical expedient to measure significance, since doing so would result in higher ROU assets and thus would yield a higher measure of significance under the asset test. The risk-free rate practical expedient should be “the only difference between those financial statements and a PBE set of financial statements.” However, the SEC staff stated that financial statements provided in accordance with SEC Regulation S-X, Rule 3-05, are PBE financial statements and thus may not reflect the risk-free rate practical expedient. Therefore, a registrant would need to assess whether an adjustment to use the relevant incremental borrowing rate that would apply to each lease (as opposed to using the risk-free rate) would be material and necessitate revision before such financial statements are provided in accordance with Rule 3-05.

18.5 Changes in Internal Control Over Financial Reporting

Registrants are required to disclose any material changes in their ICFR in a Form 10-Q or Form 10-K in accordance with SEC Regulation S-K, Item 308(c). Accordingly, registrants will need to be mindful of these disclosure requirements when establishing new controls and processes related to the adoption of the leasing standard. For further discussion of ICFR, see Appendix E.

18.6 The Effects of Accounting Changes by a Successor Entity on the Predecessor-Period Financial Statements

At the March 23, 2017, CAQ SEC Regulations Committee joint meeting with the SEC staff (the “March 2017 CAQ meeting”), the SEC staff discussed the effect on predecessor-period financial statements of accounting changes by a successor, specifically when the successor’s basis of accounting differs from that of its predecessor because of a change in control, pushdown accounting, or fresh-start reporting. For example, this situation would arise if (1) a transaction that occurs on November 15, 2018, causes a change in basis for which a successor/predecessor black-line presentation is required and (2) the successor entity retrospectively adopts a new accounting standard that is effective as of January 1, 2019. This matter is particularly important in light of the significance of the leasing standard and the lack of comparability that would result if the registrant chooses to adopt the standard as of the earliest comparative period presented but does not adjust the predecessor-period financial statements. As noted in the highlights of the March 2017 CAQ meeting, the SEC staff commented on the applicability of paragraph 13210.2 of the FRM to this topic. In the staff’s view, the need to reflect the impact of discontinued operations in predecessor periods “does not apply to any other accounting changes.” Subsequently, at the September 26, 2017, CAQ SEC Regulations Committee joint meeting with the SEC staff, the SEC staff observed that there is no requirement in U.S. GAAP or other regulations to retrospectively adjust predecessor-period financial statements in response to accounting changes by a successor entity.

18.7 Adoption of ASC 842 for an EGC That Elected Private-Company (Non-PBE) Adoption Dates

An EGC may elect to adopt new accounting standards on the basis of effective dates that apply to a private company that is not a PBE (this provision is referred to as the extended transition provision), including the option to first adopt a new standard in annual financial statements. However, such an election is available only for as long as the entity qualifies as an EGC. Questions have been raised regarding the transition provisions applicable when an entity loses EGC status after the effective date for a PBE but before the effective date for an entity that is not a PBE. As discussed in paragraph 10230.1 of the FRM, the SEC staff generally expects an EGC that loses its EGC status to comply with PBE requirements in the first filing after loss of EGC status. Further, the staff encourages EGCs to (1) review their plans to adopt accounting standards upon the loss of EGC status and (2) consult with the Division of Corporation Finance if they do not believe that they will be able to comply on a timely basis with the requirement to reflect new accounting standards. The scenarios discussed below reflect our general understanding of how an EGC that elected to use the extended transition provision would reflect the leasing standard after the deferral of adoption dates for non-PBEs (i.e., under ASU 2019-10 and ASU 2020-05).

18.7.1 Scenario 1: Calendar-Year-End Registrant Loses Its EGC Status on December 31, 2021

Assume that a registrant is a calendar-year-end EGC; has elected to take advantage of the extended transition provisions and adopt the leasing standard by using a private company (non-PBE) adoption date; has elected the Comparatives Under 840 transition method; and loses its EGC status on December 31, 2021. We believe that such a registrant should adopt the leasing standard in its next filing after losing status on the basis of the guidance in paragraph 10230.1(f) of the FRM, which states, in part:

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. However, depending on the facts and circumstances, the staff may not object to other alternatives.

We understand that given the above facts, the SEC staff would not object if the registrant were to:

Adopt ASC 842:	For the annual period beginning on January 1, 2021.
First present the application of ASC 842 in its:	2021 annual financial statements included in its 2021 Form 10-K.
Present the application of ASC 842 in its summarized financial information (Item 302(a)) for its:	2021 summarized financial information in its 2021 Form 10-K. Further, we believe that the registrant should provide clear and transparent disclosures that the summarized financial information for each quarterly period presented in its 2021 Form 10-K do not mirror the information in its 2021 Forms 10-Q for the current year. Note that while the requirement in Item 302(a) only applies when a material retrospective change has occurred, the SEC clarified that a registrant’s loss of EGC status would represent a retrospective change whose materiality would need to be evaluated because the registrant would adopt ASC 842 in the Form 10-K for “both the full fiscal year and interim periods within that fiscal year.” See footnote 70 of SEC Final Rule No. 33-10890 for more information.
Present the application of ASC 842 in its quarterly interim financial statements for its:	2021 comparable quarterly periods presented in Forms 10-Q in 2022.

18.7.2 Scenario 2: Calendar-Year-End Registrant Loses Its EGC Status on December 31, 2022

Assume the same facts as in Scenario 1, except the registrant loses its EGC status on December 31, 2022. On the basis of the guidance outlined in Scenario 1, we believe that the SEC staff would not object if the registrant were to:

Adopt ASC 842:	For the annual period beginning on January 1, 2022.
First present the application of ASC 842 in its:	2022 annual financial statements included in its 2022 Form 10-K.
Present the application of ASC 842 in its summarized financial information (Item 302(a)) for its:	2022 summarized financial information in its 2022 Form 10-K. Further, we believe that the registrant should provide clear and transparent disclosures that the summarized financial information for each quarterly period presented in its 2022 Form 10-K do not mirror the information in its 2022 Forms 10-Q for the current year. Note that while the requirement in Item 302(a) only applies when a material retrospective change has occurred, the SEC clarified that a registrant’s loss of EGC status would represent a retrospective change whose materiality would need to be evaluated because the registrant would adopt ASC 842 in the Form 10-K for “both the full fiscal year and interim periods within that fiscal year.” See footnote 70 of SEC Final Rule No. 33-10890 for more information.
Present the application of ASC 842 in its quarterly interim financial statements for its:	2022 comparable quarterly periods presented in Forms 10-Q in 2023.

18.7.3 Scenario 3: Calendar-Year-End Registrant Qualifies as an EGC on or After December 31, 2022

Assume the same facts as in Scenario 1, except the registrant qualifies as an EGC through the end of the transition period (i.e., through December 31, 2022) or later. We believe that the registrant could:

Adopt ASC 842:	For the annual period beginning on January 1, 2022.
First present the application of ASC 842 in its:	2022 annual financial statements included in its 2022 Form 10-K.
Present the application of ASC 842 in its quarterly interim financial statements for its:	2023 quarterly periods presented in Forms 10-Q in 2023. The registrant is encouraged, but not required, to present the 2022 comparable quarters under ASC 842 in its Forms 10-Q in 2023. If the registrant does not present the comparable quarters under the new standard, the SEC staff would expect the registrant to provide clear and transparent disclosures that the prior-period information is presented on a basis different from that of the current year.

In accordance with Item 302(a), a registrant is required to provide summarized financial information related to the statements of comprehensive income for each affected quarterly period and the fourth quarter in the affected year when a material retrospective change has occurred. However, the SEC clarified that if a registrant qualifies as an EGC and adopts ASC 842 for the first time in its annual report on Form 10-K, the change would not be viewed as retrospective when the registrant provides disclosures in accordance with Item 302(a), because an EGC is permitted to use non-PBE adoption dates and ASC 842 permits non-PBEs to first adopt the leasing standard in an annual period rather than an interim period. This scenario differs from Scenarios 1 and 2 above since the registrants in those examples had lost EGC status and were no longer permitted to use non-PBE adoption dates.10

The above would apply for a registrant that qualifies as an EGC on December 31, 2022, and subsequently loses its EGC status.

Footnotes

10

See SEC Final Rule No. 33-10890, footnote 70, for additional information.

18.8 PBE’s Use of Private-Company (Non-PBE) Elections

In November 2021, the FASB issued ASU 2021-09, which allows lessees that are private companies (not PBEs) to make an accounting policy election by class of underlying asset, rather than on an entity-wide basis, to use a risk-free rate as the discount rate when measuring and classifying leases (see Section 7.2.3 for more information). Before the issuance of ASU 2021-09, ASC 842-20-30-3 permitted such lessees to “use a risk-free discount rate for the lease, determined using a period comparable with that of the lease term, as an accounting policy election for all leases” (emphasis added).

An entity should exercise caution in using the alternative accounting policies applicable to private companies (non-PBEs) if the entity expects that it may undergo an IPO or that its financial statements or other financial information may be included in another company’s SEC filing. Such an entity undergoing an IPO, even if it qualifies as an EGC — or an entity whose financial statements or other financial information may be included in another company’s SEC filing in the future under Rules 3-05, 3-09, and 4-08(g) — would be considered a PBE. Therefore, such an entity would no longer be permitted to apply private-company (non-PBE) elections and any previously elected private-company alternatives would need to be retrospectively eliminated from the company’s historical financial statements before such statements or information can be included in its IPO registration statement or other entities’ SEC filings.

18.9 Interaction Between Non-EGC’s ASC 842 Adoption Date and Its IPO Registration Statement

The financial statement impacts of adopting ASC 842 are significantly affected by the adoption date, since all lease liabilities are discounted on the basis of the discount rate as of that date. As discussed at the July 29, 2020, CAQ SEC Regulations Committee joint meeting with the SEC staff, the SEC staff reiterated its “view that an IPO registration statement of a non-EGC should apply the PBE adoption dates for all standards that apply the PBE definition, including Topic 842. However, if an entity believes it has a reasonable basis to support an alternative conclusion under GAAP and SEC rules and regulations, the staff is available for consultation.” Thus, even a non-EGC that undertakes an IPO several years after adopting ASC 842 (e.g., an IPO in 2026 after adoption of ASC 842 in 2022) would need to push back the adoption date of ASC 842 to the PBE adoption date, if the impact would be material.