6.3 Financial Services

6.3.1 Banking and Capital Markets

The number of SEC staff comments issued to registrants in the banking and capital markets industry has increased year over year. In the current year, the SEC staff’s comments to registrants in the banking and capital markets industry have focused on (1) loans and related allowance for credit losses, (2) cryptocurrency and tokens, and (3) accounting for investments.

For registrants, including those in this industry, the presentation of non-GAAP measures remains a common source of SEC comments. Registrants continue to receive comments related to (1) providing the required quantitative reconciliation to the most directly comparable GAAP measure, (2) enhancing the disclosure about the relevance of non-GAAP measures, and (3) explaining how non-GAAP measures will be presented consistently in future filings. See Section 3.4 for a discussion of comment letter trends related to non-GAAP measures.

6.3.1.1 Loans and Related Allowance for Credit Losses

Examples of SEC Comments

We note that installment loans constituted about [X]% of loans and leases receivable and [Y]% of total nonaccrual loans as of [the end of the second fiscal quarter], as well as a significant portion of provision for credit losses and charge offs for the [fiscal second quarter and fiscal first half]. We also note your disclosure . . . that such loans largely consist of personal, student loan refinancing, and home improvement loans. Please provide us with a table showing additional granularity regarding the balances and changes for different types of installment loans for the periods presented, as well as a discussion of period over period changes and drivers within this category, including reference to items such as weighted average interest rates or fees, as applicable. In future filings, to the extent that installment loans comprise a material portion of key metrics or measures, please enhance your disclosures to provide (here or within MD&A, as appropriate) this same level of granularity, so that investors can get a better sense of trends within this loan category.
We note that [c]ommercial and industrial loans, including specialty lending, grew [period over period]. Please provide us with a table and accompanying narrative showing specific balances and trends for material components of this category, such as significant specialty lending activities, and explaining main growth drivers. Additionally, to the extent that such significant shifts occur in future periods, enhance your disclosures in future periods to provide similar granularity regarding what sectors or loan types are driving the overall category trends, as well as any other key details, such as weighted average interest rates, related income, or fees for such components, as applicable.
We note that liquidations include customer loan payments, refunds on precomputed finance charges, renewals and charge offs. We also note . . . you disclose that the amount charged-off is the unpaid balance less the unearned finance charges and the unearned insurance premiums, if applicable. Please tell us and enhance future filings to disclose the components of liquidations and net losses/charge-offs, including your basis for including refunds on precomputed finance charges in liquidations and if renewals include unearned finance and other charges. Provide us with your proposed disclosure.
Please represent to us that, in future filings, you will provide the maturity disclosures, including providing an over 15 year category, if appropriate for each loan category presented in your financial statements as required by Item 1404(a) of Regulation S-K. Otherwise, tell us why it is appropriate to include this information for only your Commercial and Industrial loans and leases and your Construction loans and leases as presented.
You disclose that your allowance is estimated for loans using a historical loss percentage based on losses arising specifically for each respective loan category, adjusted for various economic and environmental factors that are considered reasonable and supportable related to the underlying loans. Please provide us proposed revised disclosure to be included in future filings that:
- Identifies the key quantitative inputs used in your estimate of the allowance for credit losses;
- Indicates and quantifies how these key quantitative inputs changed from period to period; and
- Quantifies the qualitative component of your estimate and how it interacts with the quantitative component during the period; and
- Summarizes . . . the information requested above and clarify the length of time in your reasonable and supportable forecasts and the reversion method you applied after the reasonable and supportable forecast period. See Item 303(b)(3) of Regulation S-K and ASC 326-20-50-11.
In . . . this policy you disclose your election to exclude accrued interest receivable on loans from your estimate of credit losses. Please represent to us that in future filings you will specifically indicate that you made this election because you write off uncollectible accrued interest in a timely manner and what time periods you consider timely at the individual class of loan level as required by ASC 326-20-50-3C. In your response tell us those time periods or tell us where you have made the required disclosure in your filing or why it is not warranted.

The SEC staff may ask registrants to provide additional quantitative disclosures related to loan and allowance for credit loss balances. For loan balances, the staff may ask registrants to provide further disclosure on the nature of changes between two periods or to enhance disclosures to provide additional granularity in balances. The loan balances on which the staff may ask for enhancements may be balances that historically were smaller and had not been disclosed at the same level as more material balances. Registrants should consider the various types of loans held and evaluate whether current disclosures are sufficient.

Since the adoption of ASC 326 (the “credit losses standard”), the SEC staff has continued to focus on disclosures about a registrant’s allowance for credit losses related to loans. The staff frequently asks registrants to enhance policy disclosures to better explain how their estimate is determined and how their policy is in accordance with the relevant accounting guidance. For most registrants that adopted the credit losses standard on January 1, 2020, their allowance for credit loss policy is mature. However, as registrants evaluate for changes in market conditions, exposure to assets with increased risk, and updates to their policy, they should be cognizant of ensuring that their new disclosures align with the requirements of the standard and provide adequate information to users of the financial statements.

6.3.1.2 Cryptocurrency and Tokens

Examples of SEC Comments

Please tell us, and consider the need to revise your disclosures in future filings for, the items below.
- Describe the rights and benefits conveyed to holders of [the token], as well as any rights and obligations the Company has towards those holders. For example, tell us whether holders of [the token] receive any yield or interest on their tokens.
- Explain the roles and responsibilities of the Company and of [the blockchain] under the arrangement. For example, describe how [the token] is held, who controls the asset, who is responsible for safeguarding the assets, and who holds cryptographic or private key information.
- Describe the terms of any fee arrangements between the Company and [the blockchain] or the Company and users associated with the issuance, payment, holding, or redemption of [the token].
- Where applicable, tell us how the fee arrangements and any other revenue related to [the token] are reflected in your financial statements and how you account for them, and quantify any amounts, as appropriate.
Please tell us, and revise your future filings to disclose, the Company’s consideration of and accounting adoption of Staff Accounting Bulletin No. 121 (“SAB 121”), including quantification of the impact upon adoption, as well as any applicable disclosures required by SAB 121. As part of your response, provide us with your accounting analysis explaining the Company’s conclusions regarding applicability and adoption, including but not limited to discussion of any scoping considerations; whether you or an agent acting on your behalf has a safeguarding obligation or not; and who is responsible in the event of a theft or breach of [the token].

On March 31, 2022, the SEC issued SAB 121, which provides the SEC staff’s view that it would be appropriate for an entity that has an obligation to safeguard crypto assets to record a liability and corresponding asset on its balance sheet at the fair value of the crypto assets. SAB 121 applies to entities that (1) safeguard crypto assets (either directly or by an agent acting on their behalf) and (2) file with the SEC under either U.S. GAAP or IFRS Accounting Standards, as applicable.

Given the SEC staff’s recent statements on crypto assets,1 we would expect to see a focus by the staff on appropriate accounting and disclosures in the coming years. As shown in the comment letters above, the staff may ask registrants to further explain how their tokens and/or blockchains operate. Since disclosures about cryptocurrency are relatively new, registrants may want to enhance such disclosures, especially those discussing risks to the business, investors, and customers.

For additional discussion of the accounting considerations and disclosure requirements related to SAB 121, see Deloitte’s April 6, 2022 (updated July 28, 2022), Financial Reporting Alert.

6.3.1.3 Accounting for Investments

Examples of SEC Comments
Please tell us how your accounting for the . . . equity investment at cost and being “subsequently marked to market upon observable market events” complies with the guidance in ASC 321-10-35-2 and 35-3. In your response, specifically address the following: Explain what you mean by “observable market events.” Tell us whether observable market events include the impairment indicators identified in ASC 321-10-35-2 and, if so, how company specific events such as potential deteriorating earning performance [are] both “observable” and a “market event.” Confirm for us that you considered all impairment indicators, including those identified in ASC 321-10-35-3, whether driven by [specific] events or overall economic environmental factors in assessing impairment . . . . If not, tell us whether inclusion of [specific] factors would impact your impairment assessment . . . . Explain what you mean by “marked to market” given that there is no active market for [the equity investment] and your use of the word “market” does not appear to be consistent with the definitions in the Master Glossary of the FASB Codification. Given your acquisition of a second equity investment without a readily determinable fair value . . . , tell us your consideration for including a policy statement that you carry these investments at cost minus impairment plus/minus observable price changes in orderly transactions for identical or similar investments of the same issuer. You disclose that you consider the period of time a security has been in an unrealized loss position in assessing credit losses or other factors. As the length of time a security is in an unrealized loss position is not a factor in assessing whether credit losses exist as stipulated in ASC 326-30-55-1, please tell us whether a change to your allowance for credit losses on debt securities results from removing the length of time from your assessment. Separately represent to us that you will modify your policy disclosure in future filings to remove the length of time a security is in an unrealized loss position from the factors considered in your credit loss assessment.

Examples of SEC Comments

Please tell us how your accounting for the . . . equity investment at cost and being “subsequently marked to market upon observable market events” complies with the guidance in ASC 321-10-35-2 and 35-3. In your response, specifically address the following:
- Explain what you mean by “observable market events.”
- Tell us whether observable market events include the impairment indicators identified in ASC 321-10-35-2 and, if so, how company specific events such as potential deteriorating earning performance [are] both “observable” and a “market event.”
- Confirm for us that you considered all impairment indicators, including those identified in ASC 321-10-35-3, whether driven by [specific] events or overall economic environmental factors in assessing impairment . . . . If not, tell us whether inclusion of [specific] factors would impact your impairment assessment . . . .
- Explain what you mean by “marked to market” given that there is no active market for [the equity investment] and your use of the word “market” does not appear to be consistent with the definitions in the Master Glossary of the FASB Codification.
- Given your acquisition of a second equity investment without a readily determinable fair value . . . , tell us your consideration for including a policy statement that you carry these investments at cost minus impairment plus/minus observable price changes in orderly transactions for identical or similar investments of the same issuer.
You disclose that you consider the period of time a security has been in an unrealized loss position in assessing credit losses or other factors. As the length of time a security is in an unrealized loss position is not a factor in assessing whether credit losses exist as stipulated in ASC 326-30-55-1, please tell us whether a change to your allowance for credit losses on debt securities results from removing the length of time from your assessment. Separately represent to us that you will modify your policy disclosure in future filings to remove the length of time a security is in an unrealized loss position from the factors considered in your credit loss assessment.

In the current economic environment, the SEC staff may ask registrants to provide additional quantitative and qualitative disclosures related to an issuer’s investment portfolios (i.e., both equity and debt security investments). For both types of investments, the staff may ask registrants to provide additional clarity on disclosed policies, as well as considerations of impairment or credit loss indicators. Further, the staff may compare disclosed policies with the relevant accounting literature to determine whether they are appropriate.

For more information, see Chapter 7 of Deloitte’s Roadmap Current Expected Credit Losses.

6.3.2 Investment Management

The SEC staff’s recent comments to registrants in the investment management industry have focused on the registrant’s goodwill impairment policy and associated disclosures.

6.3.2.1 Fair Values of Reporting Units

Example of an SEC Comment

In future filings, please disclose whether you believe the estimated fair values of your reporting units substantially exceed their carrying values. For any reporting units that have estimated fair values that do not substantially exceed their carrying values, revise your disclosure to provide useful and meaningful information that would allow investors to better assess the probability of a future goodwill impairment.

ASC 350-20-35-1 states, in part, “Goodwill shall not be amortized. Instead, goodwill shall be tested at least annually for impairment at a level of reporting referred to as a reporting unit.” Further, ASC 350-20-35-2, states, in part, “Impairment of goodwill is the condition that exists when the carrying amount of a reporting unit that includes goodwill exceeds its fair value. A goodwill impairment loss is recognized for the amount that the carrying amount of a reporting unit, including goodwill, exceeds its fair value, limited to the total amount of goodwill allocated to that reporting unit.”

Registrants are reminded that under ASC 350-20-35-3A, they “may assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount, including goodwill.” Examples of these qualitative factors are listed in ASC 350-20-35-3C. In accordance with ASC 350-20-35-3D, “[i]f, after assessing the totality of events or circumstances such as those described in [ASC 350-20-35-3C], an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the quantitative goodwill impairment test is unnecessary.” Even in such situations in which there is no impairment, registrants are encouraged to evaluate the extent of their disclosure to enable an investor to understand both their current assessment of goodwill and the potential for future impairment.

6.3.3 Real Estate

The current macroeconomic environment has created ongoing challenges and uncertainty within the real estate industry. Many commercial real estate entities have encountered impacts to their operations, including increased costs of capital, reductions in the volume of real estate transactions, and evolving demands and preferences related to the way people work, live, and shop. Commercial real estate entities should continually monitor, evaluate, and update their accounting and reporting as necessary on the basis of the impact of these events and conditions. For more information, see Deloitte’s May 22, 2023, Financial Reporting Alert.

The SEC staff’s recent comments to registrants in the real estate industry continue to focus on non-GAAP financial measures, especially non-GAAP financial measures as disclosed in SEC registration statements and IPOs. While such registrants have seen a decline in the number of comments issued on other topics, they should be aware of comments related to matters such as (1) fair value disclosures; (2) whether, for U.S. GAAP purposes, real estate acquisitions represent business combinations or asset acquisitions and whether, for SEC reporting purposes, a registrant has acquired a business or real estate operations; (3) capitalization of real estate development, construction, and leasing costs; (4) MD&A considerations, including liquidity and capital resources; (5) consolidation; and (6) early-warning disclosures related to impairments and leasing activities, especially in light of the macroeconomic environment.

6.3.3.1 Non-GAAP Financial Measures

Examples of SEC Comments

Please tell us how your definition of [funds from operations (FFO)] is consistent with the [National Association of Real Estate Investment Trusts (NAREIT)] definition of FFO. Specifically, tell us how you have determined it was appropriate to exclude financing expense in connection with [Company A] from your definition of FFO.
We note your adjustment for certain items to arrive at Adjusted EBITDA. We further note this adjustment includes $[X] million of [the Property A acquisition- and integration-related] costs for [year 3] and $[Y] million of [Property A acquisition-related] costs for [year 2]. In addition, we note that you adjust for $[Z] million of [Property A integration-related] costs to arrive at Adjusted EBITDA for the nine months ended September 30, [year 4]. Given that the [Property A] acquisition occurred in September [year 1], please clarify for us the nature of these costs. In addition, please tell us if you consider such costs to be normal, recurring, cash operating expenses and how you made that determination. In your response, please address if these expense[s] occur repeatedly or occasionally. Please refer to Question 100.01 of our Compliance & Disclosure Interpretations on Non-GAAP Financial Measures.
We note your adjustment for “Acquisition related costs and efficiency initiatives” in your reconciliation of Adjusted EBITDA. Please clarify the nature and scope of costs related to efficiency initiatives included in this adjustment and provide an analysis for each component of this adjustment as to whether or not this adjustment complies with Item 10(e) of Regulation S-K. Specifically address Non-GAAP Financial Measures Compliance and Disclosure Interpretations, Question 100.01 in detail for those components in your response.
We note the reconciliation of [combined net operating income (NOI)]. Please tell us how you determined it was appropriate to present a measure that includes 100% of NOI related to your unconsolidated joint ventures. We refer you to Question 100.04 of the Division’s Compliance and Disclosure Interpretations for Non-GAAP Financial Measures.
We note that you reconcile NOI attributable to common stockholders, a non-GAAP measure, from net income (loss) on your net leased and other real estate portfolios attributable to common stockholders, which also appears to represent a non-GAAP measure. Please reconcile your NOI measure to the most directly comparable financial measure calculated and presented in accordance with GAAP pursuant to Item 10(e)(1)(i)(B) of Regulation S-K.
We note that your disclosure . . . references [a] reconciliation . . . , which appears to be in the form of a full non-GAAP income statement. In future periodic filings, to avoid a non-GAAP prominence issue, please include a reconciliation that begins with the most directly comparable GAAP measure, which appears to be Net income, and reconciles down to NOI. Refer to Question 102.10 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations.
We note that you adjust your non-GAAP pro rata balance sheet and income statement for your proportionate economic ownership of each asset in your portfolio that [is] not wholly-owned which substitutes an individually tailored accounting principle for the one in GAAP. Please describe the changes you expect to make to your presentation in light of . . . Question 100.04 of the updated Non-GAAP Compliance and Disclosure Interpretations issued on May 17, 2016.
In arriving at FFO, you start with net income attributable to [Company A] and make adjustments for redeemable non-controlling interests and preferred stock dividends. As a result, it appears FFO, and ultimately Company FFO, are attributable to common shareholders and redeemable non-controlling interest holders. Please clarify and/or revise the labeling of your non-GAAP financial measures in future filings to adequately reflect what is being presented.
We note your presentation of FFO per share and [adjusted FFO] per share for the [periods]. In future earnings releases, please reconcile these non-GAAP per share measures to GAAP earnings per share. Please refer to Question 102.05 of the updated Compliance and Disclosure Interpretations issued on May 17, 2016.

As noted above, the SEC staff has continued to focus on non-GAAP financial measures in its recent comments to registrants in the real estate industry. Issues addressed in such comments have included (1) the presentation of non-GAAP financial measures more prominently than GAAP measures, (2) pro rata consolidation adjustments, (3) clearer labeling, (4) the reconciliation of non-GAAP per-share measures to the most directly comparable GAAP measures, and (5) the use of misleading adjustments and application of tailored accounting principles. In recent years, the SEC staff has heightened its focus on adjustments that remove normal, recurring cash operating expenses from non-GAAP measures. See Section 3.4 for additional information.

Registrants in the real estate industry should also be aware of Questions 102.01 and 102.02 of the C&DIs on non-GAAP financial measures, which indicate that FFO as defined by NAREIT as of May 17, 2016,2 as well as FFO per share, will continue to be accepted as a performance measure. The presentation of any FFO measure in a manner that departs from NAREIT’s definition (e.g., adjusted FFO, core FFO), or as a per-share amount based on such a modified measure, is subject to the prohibitions in Regulation S-K, Item 10(e), and should be treated as a performance measure or a liquidity measure. If modified FFO is considered a performance measure, it may be presented on a per-share basis; if a modified FFO per share is, in substance, a liquidity measure, presentation on a per-share basis is prohibited. Acceptability of FFO per-share measures, or modified FFO per share, does not override the prohibition against the presentation of cash flow per-share data and other per-share measures of liquidity.

FFO may be reported gross or net of noncontrolling interest adjustments. When the FFO calculation takes into account noncontrolling interest adjustments, the registrant should clearly label the measure to reflect “FFO attributable to common stockholders” or “FFO attributable to the company.”

In December 2022, in response to the high volume of SEC comments and questions from issuers, the SEC staff issued new and updated C&DIs on how it evaluates non-GAAP measures. This updated guidance provides greater insight into, and examples of, misleading measures and adjustments and provides further clarity when a non-GAAP measure is more prominent than a GAAP measure. For more information, see Section 3.4 and Deloitte’s December 18, 2022, Heads Up.

6.3.3.2 Fair Value Disclosures

Examples of SEC Comments

We note you calculated the fair value for certain long-lived assets utilizing projected future discounted cash flows. Please tell us how you determined it was not necessary to provide quantitative information about the significant unobservable inputs used in the fair value measurement of these assets. Please refer to ASC 820-10-50-2(bbb).
We note that following the initial measurement of loans secured by real estate, the Company will determine fair value by utilizing or reviewing market yield data, discounted cash flow modeling, collateral asset performance, local or macro real estate performance, capital market conditions, debt yield or loan-to-value ratios, and borrower financial condition and performance. Given this policy, please tell us why the level 3 investments in real estate debt have been valued at cost, as adjusted for changes in foreign currency.
Please tell us and expand your disclosure [of estimated NAV per share for each class of shares] to explain in further detail how total NAV is allocated to each class of [shares] in your calculation of estimated NAV per share for each class. In your explanation, please include discussion of how proceeds from the sale of [Class A] shares that are used to pay organization and offering expenses of [Class B] Shares, [Class C] Shares and [Class D] Shares [impact] your calculation of estimated NAV for each class of [shares]. Lastly, explain to us how the company is reimbursed for organization and offering expenses of [Class B] Shares, [Class C] Shares and [Class D] Shares sold in the offering.
Please address the following with respect to your net asset value disclosure:
- Expand your disclosure to include a discussion of the methodologies used to calculate net asset value.
- Tell us whether your calculation of property fair value includes any other material assumptions (e.g. revenue or expense growth rates) and tell us what consideration you gave to providing disclosure about these assumptions (including sensitivity analyses).

The SEC staff has focused on various disclosures related to fair value. Specifically, it has issued comments on disclosures required under ASC 820, including comments on (1) the need to provide quantitative information about inputs to fair value measurement of assets and (2) the appropriateness of classifying fair value measurements as Level 1, 2, or 3 in the footnotes to the financial statements. Registrants should ensure consistency of disclosures about the fair value of assets in their portfolios.

In its comments to registrants in the real estate industry on fair value disclosures, the SEC staff has also focused on disclosures about NAV. The staff has asked registrants that disclose NAV to expand their disclosures to include further discussion of the methods and inputs used in their calculations. When registrants have disclosed qualitative information elsewhere in filings or in other filings, the staff has asked for such information to be included in the financial statements. In addition, the staff has issued comments addressing the allocation of NAV to different classes of shares.

6.3.3.3 Real Estate Acquisitions

Examples of SEC Comments

We note you acquired [Entity A] during [the fiscal year] for cash consideration of approximately $[X] billion. Please tell us how you considered the requirements to provide audited financial statements of the acquired business in accordance with Rule 3-05 of Regulation S-X, and unaudited pro forma financial information related to this transaction in accordance with Article 11 of Regulation S- X.
We note your initial consolidation of certain joint venture entities during [fiscal year 1] and the first quarter of [fiscal year 2]. Please tell us what consideration you gave to providing audited financial statements of the acquired entities and unaudited pro forma financial information. Reference is made to Rule 3-14 of Regulation S-X and Article 11 of Regulation S-X.
[We] note your disclosure relating to your acquisition of complete ownership of [Portfolio A]. Please tell us how you considered the requirements of Items 2.01 and 9.01(a)–(b) of Form 8-K with respect to this acquisition.
We note that your acquisition of [Property A] was recorded as an asset acquisition. We further [note] your disclosure . . . that acquisitions of properties with in-place leases are accounted for as a business combination. Please tell us how recording the [Property A] acquisition as an asset acquisition complies with your policy.
Please provide us with your significance test for the [Facility A in Location B] acquired on [Date X]. As part of your response, tell us how you considered the need to present audited historical financial statements and unaudited pro forma information for this acquisition in accordance with Rule 3-14 of Regulation S-X.
Please explain to us how you arrived at the conclusion that your acquisition of [Property A] should be accounted for as an asset acquisition.
We note . . . that [Acquiree A] terminated its employees immediately preceding the acquisition and you did not acquire an assembled workforce. . . . To the extent employees of [Acquiree A] were hired by your external manager at the time of acquisition, please address the following:
- Tell us if [your external manager] hired the employees responsible for leasing, tenant management, and managing and supervising your operational processes.
- Tell us if the employees are considered critical to the creation of outputs.

Under SEC reporting rules, an acquisition by a registrant is treated as either an asset or a business for SEC reporting purposes. The definition of a business in Regulation S-X, Rule 11-01(d), for SEC reporting purposes differs from that in ASC 805 for accounting purposes. If an acquiree meets the definition of a business in Rule 11-01(d), the acquiree would be within the scope of Regulation S-X, Rule 3-05 or Rule 3-14. Rule 3-05 requires a registrant to provide full financial statements (and pro forma financial information) for significant acquired or to be acquired businesses. However, Rule 3-14 requires a registrant to file only abbreviated income statements (and pro forma financial information) for significant acquired or to be acquired real estate operations that meet certain requirements. Because the requirements of Rules 3-05 and 3-14 are different, it is important for a registrant to determine whether it acquired a real estate operation (which is subject to Rule 3-14). As a result, from an SEC reporting standpoint, the SEC staff may ask a registrant to provide an analysis supporting its conclusion that its acquisitions are real estate operations under Rule 3-14. When a registrant has not provided financial statements for an acquired or to be acquired real estate operation under Rule 3-14, the staff may ask the registrant to provide an analysis in support of its conclusion that the acquisition or potential acquisition did not trigger the rule’s requirement to file related financial statements.

In addition, from an accounting standpoint, the SEC staff has asked registrants with material acquisitions to elaborate on their process and policies for determining whether the acquired assets, including acquired real estate that is subject to a lease, qualify as a business or an asset acquisition under U.S. GAAP (ASC 805). This determination is important, especially in the real estate industry, because the accounting for an asset acquisition differs from the accounting for a business combination and can require management to use judgment, especially when assessing the screen under ASC 805, to determine whether substantially all of the fair value of the acquired assets is concentrated in a single asset or asset group. In acquisitions accounted for as business combinations, all transaction costs must be expensed as incurred. In asset acquisitions, however, transaction costs are capitalized as part of the purchase price. The SEC staff has asked registrants to enhance their disclosures to discuss the accounting policies they apply to property acquisitions, including policies for allocating value to identified intangible assets and for recognizing acquisition-related costs.

For more information, see Chapter 3 of Deloitte’s Roadmap SEC Reporting Considerations for Business Acquisitions and Deloitte’s Roadmap Business Combinations.

6.3.3.4 Capitalization of Real Estate Development, Construction, and Leasing Costs

Examples of SEC Comments

We note that you capitalize indirect costs clearly related to the construction and improvements of investment properties and that for the fiscal year . . . invested approximately $[X] million in development properties as well as approximately $[X] million in capital expenditures and tenant improvements. Please disaggregate the amounts between development, redevelopment and leasing of real estate and tell us the amount of indirect costs capitalized by segment for each year presented or tell us why you believe such disclosure is not beneficial for investors.
We note your disclosure that direct and indirect leasing costs associated with the acquisition of tenants are capitalized. Please tell us how [you] determined it was appropriate to capitalize indirect costs. Reference is made to ASC Topic 842-10-30-9 through 10; and ASC Topic 842-30-25-10. In your response, tell us the amount of indirect costs capitalized in each period presented in your financial statements.
We note that you capitalized development costs of $[X] million, $[Y] million and $[Z] million in [year 4], [year 3] and [year 2], respectively. Given the temporary suspension of repositioning work due to Covid-19, your disclosures which highlight the continued [development in City A] which has been ongoing since [year 1] and the conversion of the office tower in [City B] which has been ongoing since [year 2], please tell us more about the factors that led to the significant increase in capitalized development costs during fiscal [year 4]. Please ensure that MD&A disclosures fully address the facts and circumstances that drove the change and whether disproportionate fluctuations in trends are expected to recur. See Item 303(b)(2)(i) and (ii) of Regulation S-K.
We note that you capitalize and depreciate tenant improvements when you are considered to be the owner of such improvements over the estimated useful lives of the improvements, not to exceed 40 years. Please expand your disclosure to explain how you determine whether you or the tenant is the owner of the improvements, citing relevant accounting literature. In addition, please tell us how you considered ASC 842-10-35-6 in determining the amortization period of tenant improvements.

The SEC staff may ask registrants to enhance their disclosures about the capitalization of real estate development, construction, and leasing costs (including their accounting for these costs). For example, the staff has asked registrants to clarify their accounting policy for capitalizing or deferring costs in accordance with ASC 835-20, ASC 842-10, and ASC 970-10. It has also requested quantitative disclosures of certain expenses that are being capitalized, such as soft costs (e.g., interest and payroll).

In addition, the SEC staff has asked registrants to expand their disclosures about capital expenditures (either on the face of the statement of cash flows or in MD&A) to disclose expenditures related to new properties (e.g., acquisitions, new development) separately from expenditures related to existing properties (e.g., redevelopment, improvements, construction-in-progress). Registrants should ensure consistency of disclosures about capital expenditures in all of their communications, including earnings calls, press releases, supplementals, periodic filings, and any other broader company communications. The SEC staff may ask registrants to consider whether certain expenses should be classified as operating expenses. Registrants should consider Regulation S-X, Rule 5-03, in determining the appropriate classification of expenses.

The SEC staff has also asked registrants to enhance their disclosures about the capitalization of tenant improvements. Specifically, the staff has asked registrants how they determined (1) whether the lessee or the lessor is the owner of the improvements and (2) whether the improvements are capitalizable or should be accounted for as lease incentives. Registrants should consider the definition of lease incentives in ASC 842-10-55-30.

6.3.3.5 MD&A, Including Liquidity and Capital Resources

Examples of SEC Comments

We note your disclosure . . . that you paid $[X] million, comprised of $[X] million of cash dividends and $[X] million reinvested by stockholders, in cash. We further note your [Form 10-Q disclosure] where you indicate that cash distributions exceeded net income for the reporting period. In future Exchange Act reports, please revise your disclosure to provide the relationship between distributions paid and cash flow from operations, and disclose the source of any shortfall.
We note your disclosure . . . that to maintain the Company’s status as a REIT, payment-in-kind interest, a non-cash source of income, must be paid out to stockholders in the form of dividends for the year earned, even though the Company has not yet collected the cash. We further note your dividends paid to stockholders exceeded the net cash provided by operating activities. To the extent your dividends were not paid out of operating cash flows, please tell us what consideration you gave to disclosing the source of your dividend payments.
We note your disclosure throughout your filing about rising interest rates and inflation. Please disclose any known trends or uncertainties that have had or are reasonably likely to have a material impact on your cash flows, liquidity, capital resources, cash requirements, financial position, or results of operations arising from, related to, or caused by the rising interest rates and inflation. Trends or uncertainties may include the impact of interest rates and inflation . . . as well as decrease in demand . . . and increase in default and delinquency rates.
We note your updated disclosures within Use of Estimates . . . and your Cautionary Note Regarding Forward-Looking Statements . . . which highlight some potential risks related to the adverse impact of economic conditions including, among other things, impacts from rising interest rates. Please revise your discussion to specifically describe how increased interest rates impact your results of operations, including:
- Expected changes to your product mix, including specific challenges or opportunities a rising interest rate environment presents in the near-term . . . and the impact ongoing supply chain challenges or disruptions may have on your ability to make these changes; . . .
- Adjustments to your planned capital expenditures;
- Expected impacts to your short-term funding costs; and
- The impact on liquidity resulting from your variable-rate debt outstanding.

The SEC staff frequently requests disclosures that investors can use to evaluate the registrant’s ability to maintain or increase its historical distribution yield, especially in light of the macroeconomic conditions. When GAAP cash flow from operations is insufficient to cover the total distributions paid during a particular period, the staff may inquire about the cash resources used to cover the shortfall, such as borrowings or offering proceeds. Registrants should adequately disclose the risks associated with paying distributions in excess of GAAP cash flow from operations. In addition, the staff may request disclosures that compare earnings (or FFO) with paid distributions, including amounts reinvested through a distribution reinvestment plan. The staff asks registrants to disclose these items on a current as well as a cumulative basis so that financial statement users can better understand the relationship between earnings (or FFO) and distributions. Further, the staff may ask how the presentation of distributions complies with U.S. GAAP.

Given the current macroeconomic conditions, the SEC staff has requested expanded disclosures about the impact of these conditions on the registrant. Specifically, the staff has requested disclosures of known trends or uncertainties that affect the registrant’s cash flows, financial position, and results of operations. Registrants should adequately disclose the risks of such macroeconomic conditions, such as rising interest rates and inflation, and the conditions’ material impact on the financial statements.

6.3.3.6 Consolidation

Examples of SEC Comments

We note that you have [an X percent] interest in [Entity A]. Please provide to us an analysis discussing your basis in accounting for the joint venture investment using the equity method, and cite the accounting literature [relied] upon. In your response, elaborate how [Entity A Investee]’s ability to participate in major decisions equates to shared decision making ability, detailing the characteristics of [its] participation rights and how such rights are substantive. Further, clarify what happens in situations where the parties do not agree and whether contractually one party has the ability to break any deadlock.
We note that you have consolidated [joint ventures (JVs)] for which you are the primary beneficiary. Please tell us how you have met the disclosure requirements of ASC 810-10-50-5A or revise accordingly in future filings.
We note that you consolidate certain VIEs as a result of being the primary beneficiary. We further note . . . that you acquired an additional [X]% equity in [Fund A], resulting in consolidation of that JV. Please tell us your consideration of presenting the assets and liabilities of consolidated VIEs separately on the face of the consolidated balance sheets in accordance with ASC 810-10-45-25.
Your disclosure indicates you acquired ownership interests in . . . consolidated ventures which have noncontrolling interests of $[X] as of [the fiscal year-end]. Please address the following:
- Tell us to what the balance of $[X] million Investments in real estate membership interests as of [the fiscal year-end] relates. If this represents your interest in unconsolidated entities, tell us how you considered the requirements to provide financial information for significant equity method investees that constitute over 20 percent of your consolidated assets pursuant to Rule 8-03(b)(3) of Regulation S-X;
- If such amount is your interest in consolidated entities, tell us how you determined that you should consolidate such investments given your ownership interests for each joint venture is less than 50%. Additionally given that you have not reflected a balance in noncontrolling interests as of [the fiscal year-end], tell us how you have accounted for such consolidated investments and presented interests in such joint ventures which you consolidate but do not own.
We note that . . . you completed the acquisition of an 80% noncontrolling ownership interest in [Company A] and that you are accounting for such acquisition using the equity method of accounting. In order to better understand the Company’s accounting for this transaction please further tell us the following:
- How the Company considered the variable interest guidance in ASC 810-10-15-14 and whether the acquisition resulted in an acquired VIE; and
- If the acquisition did not result in the acquisition of a VIE, how the Company considered the guidance under ASC 810-10-15-8, ASC 810-10-15-8A and ASC 810-10-15-10a such that it resulted in the Company owning 80% of the [A] group but not consolidating the [A] group.

The SEC staff has commonly focused on registrants’ involvements with VIEs and joint ventures and has inquired about consolidation assessments.

The SEC staff may also ask for additional information and disclosures about non-VIE joint ventures, particularly when (1) a registrant uses the equity method of accounting and either has a majority ownership interest or is the general partner or managing member or (2) the qualitative disclosures about such arrangements are not robust. Disclosures about these arrangements should include a discussion of the ownership structure as well as the governance provisions that led the registrant to conclude that it does not have a controlling financial interest in the joint venture. In addition, the staff routinely asks for clearer qualitative disclosures when there are amendments to management agreements or changes in ownership structure or percentages that do not result in a change to a registrant’s consolidation conclusion.

For additional discussion of consolidation, see Section 2.2.

6.3.3.7 Early-Warning Disclosures — Impairments and Leasing Activities

Examples of SEC Comments

For each impaired property in [years 2, 3, and 4], tell us the holding period assumed for the property in your impairment analysis performed in [year 1] and the rationale behind that holding period given your repositioning strategy.
We note that you have recorded impairment expenses for each of the three years presented. Please expand your disclosure to better describe the impaired properties, the factors that led to impairment and whether or not you believe these impairments to represent a trend, to the extent this remains a significant expense line item.
Please address the following with respect to tenant bankruptcies and other store closings. Please provide the information requested separately for tenant bankruptcies and other store closings:
- Please tell us the gross number of tenant bankruptcies and store closings during [year 1], [year 2] and year to date [year 3] and the gross number of stores affected.
- Please tell us the gross leasable area of stores affected by tenant bankruptcy and store closings.
- Please provide us with an analysis of the gross amount of lost rent as a result of tenant bankruptcies and store closings from the date of lease termination or bankruptcy through the original lease termination date for each future annual period impacted.
We note that you recognized $[X million] and $[Y million] in lease termination income in [year 2] and [year 1] respectively. We further note your disclosure . . . that a number of your tenants have declared bankruptcy in recent years. Please tell us what consideration you have given to discussing recent tenant bankruptcies and the impact of those bankruptcies on current and future operations in your MD&A.
We note your agreement established on [date X, year 1] and amended in [month Y, year 2] to sell [A properties] for an aggregate sales price of $[X] million. . . . We further note you recorded an impairment charge of $[Y] million related to the [A properties] during the quarterly period ended March 31, [year 2]. Please tell us how you determined it was unnecessary to record an impairment charge for the [A properties] during the year ended December 31, [year 1].

The SEC staff has frequently asked registrants in the real estate industry to enhance their disclosures about the inputs used in their asset recoverability tests and the valuation techniques used to develop nonrecurring measurements of fair value. SEC comments on this topic are consistent with those discussed in Section 2.11.

Also, over the past few years, as circumstances in certain real estate subsectors have deteriorated and as macroeconomic conditions evolve, the SEC staff has asked registrants in the real estate industry that lease property to entities in certain subsectors to enhance their disclosures related to rental performance, leasing activities, and the impact of tenants’ financial difficulties and market conditions on the registrants’ current and future operations. The trend of tenants’ financial difficulties has affected all sectors of the real estate industry given the macroeconomic effects of inflationary conditions, worldwide conflicts, changes in tenant workplace preferences, and supply-chain disruptions. The staff continues to request early-warning disclosures that alert investors to the underlying conditions and risks that a registrant faces before a material charge or decline in performance is reported. In addition, the staff may use hindsight, after an impairment or charge is reported, to inquire why the registrant did not include any early-warning disclosures in prior periods leading up to the period in which the impairment was recorded. The staff expects registrants to clearly disclose emerging risks related to impairments and other macroeconomic events in all relevant sections of their SEC filings, including the risk factors section, MD&A, the business section, legal proceedings, DC&P, ICFR, and financial statements. It has recommended that registrants discuss how management and the board of directors manage these emerging risks. In MD&A, registrants should address material known trends, including the actual impact of these emerging risks as well as potential future impacts. The staff expects a registrant’s disclosure of these emerging risks and related trends to evolve and become more company-specific as more information becomes known to the registrant.

See Section 3.1 for additional information on early-warning disclosures.

Footnotes

See, for example, (1) SEC Chief Accountant Paul Munter’s July 7, 2023, statement on the potential pitfalls of purported crypto “assurance” work; (2) SEC Chair Gary Gensler’s April 4, 2022, prepared remarks on crypto markets; and (3) Chair Gensler’s March 9, 2023, op ed in The Hill on getting crypto firms to do their work within the bounds of the law.

In December 2018, NAREIT issued an updated definition of FFO that did not alter the fundamental definition of FFO. Although the SEC has not updated its C&DIs to include the restated definition of FFO, registrants may continue to use NAREIT’s definition of FFO that is in effect at the time of the filing of the financial statements as long as the adjustments are consistent with the updates made by NAREIT. Nevertheless, registrants should exercise caution when using an update to the definition originally issued by NAREIT in May 2016.