1.2 Top 10 Topics in Reviews

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, particularly when multiple or offsetting factors affect 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 focus5); (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 — The number of reviews with comments on this topic increased slightly year over year (265 in review year 2023 compared with 276 in review year 2024). However, the issues raised by the SEC staff in the current year are largely consistent with those raised in the prior year. In December 2022, the Division issued new and updated 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 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. 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 2024. 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 seven years since public companies’ adoption of the revenue standard (ASC 606), the revenue-related themes 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.

Inventory and cost of sales — Comments on inventory and cost of sales increased in review year 2024, reflecting a continued focus on inventory valuation and the completeness of cost of sales. Inventory comments are 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.

Intangible assets and goodwill — In the current year, the SEC staff issued a greater number of comments on disclosures about significant judgments and estimates associated with intangible assets and goodwill. Comments on these items are primarily related to disclosure of (1) methods and significant assumptions used in the quantitative impairment test; (2) the percentage by which estimated fair value exceeds carrying value for each reporting unit and the specific key assumptions used in the fair value determination; (3) the weighted-average amortization period for intangible assets subject to amortization in total and by major intangible asset class; (4) triggering events that require assessment; and (5) qualitative factors that were incorporated into the performance of a quantitative analysis, as well as the result of that analysis.

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 valuation techniques and inputs used in fair value measurements (including disclosure requirements for recurring and nonrecurring fair value measurements). In addition, the staff frequently comments on fair value estimates, including those related to revenue recognition, goodwill impairment, and share-based payments.

Acquisitions, mergers, and business combinations — 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.

Income taxes — While the volume of comments on income taxes increased in the current year, the nature of such comments remained consistent year over year. Comments on this topic continue to focus on ASC 740 disclosures, primarily valuation allowances, tax effects of significant or unusual transactions, and noncompliance with disclosure requirements.