September 16, 2016 — CAQ SEC Regulations Committee Releases Highlights of June 14, 2016, Joint Meeting With SEC Staff

Non-GAAP measures — The Committee and the SEC staff discussed certain issues related to non-GAAP financialmeasures and the related Compliance and Disclosure Interpretations (C&DIs) that were issued by the SEC in May ofthis year. These issues include:

• When considering the issuance of C&DI 100.04, which addresses tailored accounting principles used in a non-GAAP measure, the SEC staff stated that “it may be appropriate“ for a registrant to present measures that adjust revenue and expense for the anticipated impact of adopting the new revenue recognition guidance in ASC 6061 (the “new revenue standard”).2
• The SEC staff is still considering whether companies that adopt the new revenue standard using the modified retrospective method could “show supplemental revenue (and expense) amounts in MD&A [that disclose] what revenue (and expense) would have been for a particular historical period if the new revenue standard had been applied in that period.”
• The application of the prohibition on presenting per share liquidity measures to adjusted earnings before income and taxes (adjusted EBIT) and adjusted earnings before interest, taxes, depreciation, and amortization (adjusted EBITDA) on a per share basis “will depend on the nature of the adjustments and on whether the measure is, in substance, a performance measure.”3
• The staff discussed its focus on the “reasonableness of the tax rate being used relative to the level of non-GAAP earnings and the transparency of the tax effects of non-GAAP adjustments.”4
  Editor’s Note: SEC scrutiny of non-GAAP measures continues, and the SEC staff has remarked publicly that the quarter following the issuance of the updated C&DIs would be “a great opportunity for companies to self-correct” any items considered in the C&DIs.5 The intense focus on these measures results from the increased use of these measures, the nature of the adjustments, and the progressively large difference between the amounts reported for GAAP and non-GAAP measures. See Deloitte’s A Roadmap to Non-GAAP Financial Measures for additional information on the presentation and use of non-GAAP measures.

Industry Guide 3 and revised FDIC coverage disclosures — The differences between SEC Industry Guide 3 and the FASB’s amendments to FDIC insurance coverage disclosures6 were evaluated. The SEC staff asked registrants to provide feedback on these differences when commenting on the Commission’s Concept Release, Business and Financial Disclosures Required by Regulation S-K. Comments were due July 21, 2016.

Changes in ICFR in preparation for the adoption of the new revenue standard — The SEC staff is still considering the need for additional guidance in applying the requirement to disclose changes in internal control over financial reporting (ICFR) in accordance with SEC Regulation S-K, Item 308(c),7 “when those changes are in periods that precede the date of adoption and do not impact the preparation of [an entity’s] financial statements until the new standard is adopted.”

Requirement to provide restated financial statements when a Form S-3 registration statement is filed after the registrant has filed its first Form 10-Q reflecting full retrospective adoption of the new revenue accounting standard — The requirement to provide restated financial statements when a Form S-3 registration statement is filed after the registrant has filed its first Form 10-Q reflecting a full retrospective adoption of the new revenue accounting standard was further discussed. In such a situation, a registrant would generally be required to recast all prior periods of the financial statements included or incorporated by reference into the registration statement for the impact of the new standard. The SEC staff indicated that it would be willing to consult with registrants that conclude it is impracticable to revise one or more comparable periods using the guidance on accounting changes in ASC 250,8 but “noted that consultation is not required.”

Transition questions related to the new leasing standard, ASU 2016-029 — The SEC staff is considering various implementation issues related to the date of initial application of the new leasing standard, including interim-period considerations and how to apply the guidance to previously issued financial statements that are required to be recast for a new or amended registration statement after the registrant has applied the new leasing standard in a set of interim financial statements, but before the annual financial statements for the year of adoption have been issued.

Differing adoption dates for ASU 2014-0910 — The Committee discussed the relationship between the new revenue standard and SEC Regulation S-X, Rules 3-05,11 3-09,12 and Article 11,13 including various scenarios in which an acquired business or significant equity method investee would be deemed a public business entity and may need to adopt the new revenue standard before implementation by the registrant (acquirer/investor). The SEC staff will continue to evaluate these scenarios.

Implications of General Instruction A.4 of Form 10-K on Form S-3 — Specific implications related to the General Instruction A.4 of Form 10-K, which addresses the timing of financial statement schedules required by SEC Regulation S-X, Article 12,14 were discussed in the context of filing a new or amended registration on Form S-3. The SEC staff indicated that it prefers to address such implications on a case-by-case basis.