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November 8, 2016 — CAQ SEC Regulations Committee Releases Highlights of September 27, 2016, Joint Meeting With SEC Staff

Accounting Journal Entry
November 8, 2016

CAQ SEC Regulations Committee Releases Highlights of September 27, 2016, Joint Meeting With SEC Staff

Today, the Center for Audit Quality (CAQ) posted to its Web site the highlights of the September 27, 2016, CAQ SEC Regulations Committee joint meeting with the SEC staff. Topics discussed at the meeting include:
  • Requests for interpretive guidance — The Committee and the SEC staff discussed registrants’ processes related to matters requiring preclearance with the SEC staff and, specifically, auditor involvement in preclearance letters. The staff has observed that “some filing preclearance letters do not reflect the staff’s widely-known views on certain reporting matters and this can make resolution of matters less efficient.” As a result, the staff “is exploring ways to help registrants improve submission quality,” including encouraging involvement of audit firms who might have a more current perspective.
  • Disclosure effectiveness — The SEC’s interest in comments from constituents related to their ongoing disclosure effectiveness initiative was discussed.
  • Non-GAAP measures — The SEC staff’s continued focus on the application of SEC rules governing non-GAAP measures was discussed. The staff “indicated that comment letters on [the use of] non-GAAP measures may be separate and distinct from a routine comment letter relating to the review of periodic filings.” In this regard, registrants that have received comments on their Form 10-K or other filings may separately receive comments on their use of non-GAAP measures or vice versa.
    The following non-GAAP measure presentation and disclosure matters were also covered:
    • The presentation of a full non-GAAP income statement is not permissible under Regulation S-K, Item 10(e).1
    • The evaluation of certain non-GAAP measure adjustments:.
      • Recent comments have focused on “adjustments relating to restructuring charges, acquisitions/purchase accounting items and legal settlements.” The SEC staff’s comments seek to gather additional information about the nature and circumstances specific to each adjustment, which assists the staff in concluding on the appropriateness of the adjustment.
      • The staff is “continuing to evaluate the appropriateness of certain adjustments related to derivatives and pensions.”
      • “Adjustments related to stock-based compensation have not been the focus of efforts to date.”
    • The use of certain non-GAAP per-share performance measures is permitted, but the SEC staff will object to per-share presentation of measures that are “presented as performance measures but appear to be consistent with liquidity measures.” Measures that can be used as liquidity measures are not permitted to be presented on a per share basis. The staff will focus on “the substance of the non-GAAP measure and not management’s characterization of the measure” when making this assessment.2
    • The calculation and presentation of non-GAAP measures that use the pro rata consolidation method (as is common within the real estate industry) is inconsistent with the Commission’s rules for reporting non-GAAP financial measures and recent staff interpretive guidance3 related to individually tailored accounting principles.