1.2 Top 10 Topics in Reviews | DART – Deloitte Accounting Research Tool

The table below summarizes comment letter trends by topic in the 12-month periods ended July 31, 2023 (“review year 2023” or the “current year”), and July 31, 2022 (“review year 2022” or the “prior year”).4

The topics that constitute the current year’s top 10 list are largely consistent with the prior year’s list, with debt joining the top 10 list and climate change dropping out of the top 10.5 Comments on MD&A and non-GAAP measure disclosures continue to increase in number, and these topics are still the two most significant sources of SEC comments since the staff remains laser-focused on them. Given the SEC staff’s focus on ensuring that disclosures provide decision-useful information from management’s perspective, we expect the volume of comments on MD&A to remain high. We also observed an increased number of comments related to acquisitions, mergers, and business combinations, which rose from 10th place in 2022 to 5th place in 2023 (tied for 5th with signatures, exhibits, and agreements) after a rise in merger and acquisition activity over the past several years. In addition, debt moved up two spots to 10th place.

Conversely, climate change (ranked 8th in 2022) fell just outside the top 10 list in 2023. The decrease in rank is largely due to the broad increase in SEC comments issued in the current year from prior years, as further discussed in Section 1.3, which led to a decline in reviews with climate-change comments as a percentage of total SEC reviews that resulted in a comment letter. However, the SEC staff continues to issue comments on this topic and issued such comments to a similar number of registrants in both review year 2023 and review year 2022. The staff has begun to release climate-change-related comment letters for reviews conducted in the late summer and fall of 2023 and continues to focus on climate-change disclosures in advance of an expected final rule.

Further, although not identified as a separate top 10 topic, the impacts of higher interest rates, inflation, supply-chain issues, COVID-19, and the Russia-Ukraine war remained a source of SEC comments over the past year. Such comments have focused on disclosures related to the effects of these macroeconomic and geopolitical challenges on a registrant’s (1) risk factors, (2) MD&A, (3) early-warning disclosures about impairments, and (4) adjustments to non-GAAP measures.

The top 10 topics in reviews with comment letters issued in review year 2023 are as follows:

MD&A — The fact that MD&A remains a leading source of SEC comments reflects the SEC staff’s continuing emphasis on the objective of MD&A, which, as stated in the SEC’s November 19, 2020, final rule, is “to better allow investors to view the registrant from management’s perspective.” While the staff’s comments have addressed various topics of MD&A, the comments have continued to focus on greater transparency in registrants’ disclosures about (1) the underlying factors causing changes in financial statement line items (including the need for quantitative disclosure of how much of a change in a financial statement line item is attributable to each underlying factor, on which the staff has increased its focus — with more than 150 reviews in review year 2023 including comments on this type of disclosure), particularly when multiple or offsetting factors affect line items; (2) material trends and uncertainties that affect results of operations, including quantification of the impact of such trends and uncertainties; (3) liquidity and capital resources, including material cash requirements; and (4) critical accounting estimates.
Non-GAAP measures — While the number of reviews with comments on this topic increased from 188 in review year 2022 to 265 in review year 2023, the non-GAAP issues raised by the SEC staff in the current year are largely the same as those raised in prior years. In December 2022, the Division issued new and updated Compliance and Disclosure Interpretations (C&DIs) on non-GAAP measures, which codified interpretations previously expressed by the SEC staff in comment letters instead of establishing new positions or prohibitions. While many of the comments in the current year refer to the new and updated C&DIs, they do not appear to represent new or different positions on the use of non-GAAP measures. Accordingly, the staff’s comments on this topic continue to focus on (1) whether there is undue prominence of non-GAAP measures, (2) whether certain adjustments are potentially misleading (e.g., the removal of normal, recurring cash operating costs could represent tailored accounting), (3) enhancing the disclosure related to the purpose and use of non-GAAP measures, (4) identification and clear labeling of non-GAAP measures, (5) whether measures are appropriately characterized as liquidity or performance measures, (6) reconciliation requirements, (7) the presentation of the income tax effect of non-GAAP adjustments, and (8) disclosures related to certain financial or operating metrics. SEC comments have also focused on adjustments to non-GAAP measures related to the impacts of COVID-19, the Russia-Ukraine war, and other market events. Further, the SEC staff has publicly spoken about the importance of registrants’ implementation of appropriate controls related to the disclosure of such measures.
Segment reporting — Segment reporting remains a significant source of SEC comments in review year 2023. Like comments on segment reporting issued in previous years, recent comments have specifically addressed (1) the identification and aggregation of operating segments, (2) changes in reportable segments, (3) reporting considerations for entities with a single reportable segment, (4) entity-wide disclosures, and (5) the use of multiple measures of segment performance.
Revenue recognition — After nearly six years since public companies’ adoption of the revenue standard (ASC 606), the revenue-related themes identified in our review of comment letters have stabilized. These themes include (1) disclosure of significant judgments exercised in applying the standard, (2) accounting for performance obligations, (3) capitalization of contract costs, (4) disaggregation of revenue, (5) contract balances, and (6) remaining performance obligations. The largest volume of revenue-related comments focused on the disclosure of significant judgments exercised in applying the standard. Comments on such significant judgments address an array of revenue issues, including (1) the identification of performance obligations, (2) the determination and allocation of the transaction price, (3) the identification of a measure of progress, and (4) principal-versus-agent determinations. Broadly, the SEC staff cautioned against using boilerplate language in disclosures; rather, registrants should provide disclosures that faithfully depict their revenue recognition practices and related accounting policies in a tailored manner.
Acquisitions, mergers, and business combinations (tied with signatures, exhibits, and agreements below) — With higher levels of capital markets activity in the years leading up to 2023, comments on acquisitions, mergers, and business combinations increased this year. Comments on this topic are primarily related to (1) identification of the accounting acquirer, (2) questions about the allocation of the purchase price to identified assets acquired and liabilities assumed, (3) accounting for any contingent consideration, (4) bargain purchases, and (5) required public-company disclosures.
Signatures, exhibits, and agreements (tied with acquisitions, mergers, and business combinations above) — The SEC has specific requirements related to certain signatures, exhibits, and agreements that must be filed with a registrant’s financial statements. With respect to those rules, the SEC staff continues to issue comments related to (1) the form and content of a registrant’s quarterly and annual certifications and (2) material contracts (including requests for such contracts to be filed as exhibits).
ICFR — Comments on ICFR in the current year primarily focused on registrants’ (1) evaluation of the severity of control deficiencies, including those related to immaterial misstatements; (2) evaluation of deficiencies identified in COSO components other than control activities; (3) disclosures of material changes in ICFR, including the impact and remediation of material weaknesses; (4) conclusions that ICFR remains effective after a restatement; (5) disclosures about the framework used to evaluate ICFR; and (6) incomplete or missing ICFR evaluations.
Fair value — The SEC staff continues to ask registrants about (1) valuation techniques and inputs used in fair value measurements (including disclosure requirements for recurring and nonrecurring fair value measurements) and (2) the use of third-party pricing services. In addition, the staff frequently comments on fair value estimates, including those related to revenue recognition, goodwill impairment, and share-based payments.
Inventory and cost of sales — Comments on inventory in the current year have been primarily related to accounting policy disclosures regarding inventory valuation, particularly the policies and estimates associated with the measurement of inventory. In addition, the SEC staff commonly asks registrants about their cost of sales and gross profit measures and requests disclosure of the types of expenses that are included in or excluded from such measures.
Debt — In the current year, comments on debt are primarily related to (1) restrictions on debt and the application of Regulation S-X, Rules 4-08(e), 5-04, and 12-04; (2) financial covenant disclosure; and (3) proper financial statement classification of instruments as either debt or equity.

A number of the aforementioned trends are likely to continue in years to come since comment letter topics have been largely consistent year over year. While it is difficult to predict what new comment letter trends are on the horizon, we look to the Commission’s priorities to help us predict topics of focus in the coming year. Recent SEC disclosure rules and interpretive guidance related to non-GAAP measures and key performance indicators and metrics may result in increased focus and scrutiny from the SEC staff. Given that the staff often focuses on compliance with new reporting requirements, we expect to see comments on disclosures about cybersecurity risks and share repurchases next year. As the SEC works toward issuing a final rule on climate-change disclosures, we expect the Commission to remain focused on how registrants have complied with the existing interpretive guidance. In addition, we expect the SEC staff to continue monitoring the impacts of higher interest rates, tightening credit, inflation, supply-chain and labor issues, geopolitical conflicts, and concerns about the real estate and banking sectors, as well as other emerging market events, and perhaps focus future comments on accounting and reporting related to these matters. These events, coupled with the staff’s focus on ensuring that MD&A provides useful information to investors, mean that comments on MD&A are likely to stay elevated. The staff may also comment on disclosures about the known trends and uncertainties related to income tax as a result of the Inflation Reduction Act and the implementation of the Pillar Two rules issued by the Organisation for Economic Co-operation and Development.