Appendix C — SEC Staff Review Process and Sample SEC Comments Related to the Statement of Cash Flows

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SEC Staff Review Process

The SEC’s Division of Corporation Finance (the “Division”) conducts selective and required reviews of filings made under the Securities Act and the Exchange Act. In 2019, the Division established a new organizational structure for its disclosure program. The new structure consists of the following four groups:

Disclosure Review Program — Performs most of the selective and required reviews. Reviews are conducted by the following seven review offices:
- Energy & Transportation.
- Finance.
- Life Sciences.
- Manufacturing.
- Real Estate & Construction.
- Technology.
- Trade & Services.
Registrants are assigned to a specific review office on the basis of their industry, and each office is staffed by professionals with specialized industry, accounting, and disclosure review expertise. Before the organizational change, each registrant subject to a disclosure review was assigned to one of 11 assistant director offices.
Specialized Policy and Disclosure — Handles matters related to international corporate finance, mergers and acquisitions, structured finance, and corporate governance.
Office of Risk and Strategy — Provides guidance to Division staff on emerging risks and related disclosures.
Office of Assessment and Continuous Improvement — Evaluates the effectiveness of the Disclosure Review Program.

For more information on the new organizational structure, including the name of the chief and the senior adviser of each review office, see the Division’s announcement.

The SEC’s Web site includes an overview that explains the Division’s filing review and comment letter process. The overview aims to increase transparency in the review process and expresses the staff’s willingness to discuss issues with registrants. The overview indicates that the Division focuses “on critical disclosures that appear to conflict with Commission rules or applicable accounting standards and on disclosure that appears to be materially deficient in explanation or clarity.” In addition, the overview notes that the “Division completes many filing reviews without issuing comments.”

The overview encourages registrants to view the comment letter process as a dialogue and states that “[i]f a company does not understand a comment or the staff’s purpose in issuing it,” the company may “seek clarification [first] from the examiner” and then from “the staff member who approved the comment.”1 In addition, registrants may request “[a]t any time during the filing review process . . . that the staff reconsider either a previously-issued comment or its view of the company’s response to a comment.” Although the Division does not require registrants to follow a formal protocol for seeking reconsideration, such a request should be directed to the chief of the office conducting the review. Further, registrants “should feel free to involve the Disclosure Program Director, the Division’s Deputy Director or Director at any stage in the filing review process.”

Registrants may also involve the SEC’s Office of the Chief Accountant (OCA) during any stage of the review process. Unlike the Division’s role, which is to address matters related to the age, form, and content of registrants’ financial statements that are required to be filed, the OCA’s role is to address questions concerning a registrant’s application of GAAP. Guidance on consulting with the OCA is available on the SEC’s Web site.

A registrant that receives an SEC comment letter should generally respond within the time frame indicated in the letter or proactively communicate with the SEC staff regarding expected timing. See Appendix B of Deloitte’s Roadmap SEC Comment Letter Considerations, Including Industry Insights for more information about responding to SEC comment letters. The registrant should continue to respond to any requests for more information until it receives a letter from the Division stating that the Division has no further comments. A registrant that does not receive a completion letter within a reasonable amount of time after submitting a response letter should call its SEC staff reviewer (named in the letter) to ask about the status of the review. If the review is complete, the registrant should request a completion letter.

To increase the transparency of the Division’s review process, comment letters and company responses to those letters are made public, via the SEC’s Web site, at least 20 business days after the Division has completed its review of a periodic or current report or declared a registration statement effective. See Appendix C of Deloitte’s Roadmap SEC Comment Letter Considerations, Including Industry Insights for tips on searching the SEC’s comment letter database.

In certain instances, the SEC staff may conclude that a registration statement or offering document is so deficient that the staff will defer review until such filing is amended to address the deficiencies. Historically, the staff has communicated this to registrants on a confidential basis. Since 2018, however, in a manner consistent with the SEC’s effort to improve transparency, letters requiring registrants to amend their filings to resolve the deficiencies before the staff commences its review have been made public via the SEC’s Web site within 10 days of issuance. Thus far, the issuance of such letters has been limited.

Examples of SEC Comments

The extracts in this publication are specifically related to the statement of cash flows and have been reproduced from comments published on the SEC’s Web site. Dollar amounts and information identifying registrants or their businesses have been redacted from the comments.

For a discussion of SEC comment letters to registrants on additional topics, see Deloitte’s Roadmap SEC Comment Letter Considerations, Including Industry Insights.

Category Classification

Examples of SEC Comments

Please tell us your basis for classifying the capitalization of contract costs as an investing cash flow activity as opposed to an operating activity.
We note that you present increases and decreases in book overdrafts as cash flows from financing activities. In this regard, please provide us with your basis for reporting changes in book overdrafts as cash flows from financing activities instead of cash flows from operating activities. Also, clarify whether the overdraft is with a bank.
Please explain why you classified your short-term investments as trading and why the corresponding cash flows have been classified as investing instead of as operating in your Statements of Cash Flows. See ASC 320 and ASC 230-10-45-20.

ASC 230 requires entities to classify cash receipts and cash payments as operating, investing, or financing activities on the basis of the nature of the cash flow. Many of the SEC staff’s comments are related to understanding the classification or potential misclassification among these three cash flow categories. In some cases, the SEC staff has raised questions about the presentation of cash inflows resulting from a transaction in a manner inconsistent with the underlying balance sheet classification.

Net Versus Gross Presentation

Examples of SEC Comments

Please revise the other assets and liabilities, net line item to present changes in other assets separately from other liabilities and further breakout any material components. Refer to ASC paragraphs 230-10-45-7 and 45-29.
We note that you present the caption Investments in property and equipment, net. Please revise future filings to separately present the cash inflows and cash outflows for property and equipment on a gross basis as discussed in ASC 230-10-45-26.

The SEC staff may challenge whether it is appropriate to report the net amount of certain cash receipts and cash payments on the face of the statement of cash flows. Generally, cash payments should not be presented net of cash receipts in the statement of cash flows. However, ASC 230-10-45-7 through 45-9 state that although reporting gross cash receipts and gross cash payments provides more relevant information, financial statement users sometimes may not need gross reporting to understand certain activities. Further, the netting criteria in ASC 230-10-45-8 (turnover is quick, the amounts are large, and the maturities are short) must be met for an entity to present investing and financing activity on a net basis. Accordingly, the SEC staff may ask a registrant to revise the presentation or to explain (in accordance with ASC 230) why it is appropriate to report certain cash flows on a net basis rather than on a gross basis.

Extended Vendor Payable Arrangements

Example of an SEC Comment

We note your “Accounts Payable days” are [X] days as of [the fiscal year-end]. We further note your Accounts Payable days [have] increased substantially over the past ten years . . . . Please tell us if you are engaging in supply chain finance operations and mechanisms, such as reverse factoring or similar methods to increase your Accounts Payable days. Otherwise, please explain how you have been able to achieve such extended accounts payable terms with your suppliers.

The SEC staff has recently issued comments to registrants that use extended vendor-payable arrangements involving the participation of a paying agent or other financial institution. Under such programs, the paying agent or financial institution may settle the payment obligation directly with the registrant’s supplier, for a fee, earlier than the extended payment term. Because there is no explicit authoritative guidance on these arrangements, the SEC staff has challenged registrants’ determinations of whether the payments under such programs (1) constitute trade payables, which would represent operating activities, or (2) are more akin to debt, which would represent financing activities. In addition, the staff has encouraged registrants to provide enhanced disclosures about their extended vendor payable arrangements, such as the following:

A description of the program, including relevant terms, related risks, and impacts on the registrant’s working capital, liquidity, and capital resources.
Amounts settled through the program, including relevant terms, related risks, and impacts on the registrant’s working capital, liquidity, and capital resources.
Amounts remaining in trade payables at year-end for which the registrant’s supplier has elected early payment (i.e., the balance sheet impact).

See Section 7.13 for interpretive views on how supplier finance programs (also referred to herein as extended vendor-payable arrangements) are presented in the statement of cash flows.

Footnotes

Contact information is provided in the concluding paragraph of a comment letter.

Confidential and Proprietary — for Use Solely by Authorized Personnel

This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.