September 18, 2018 — CAQ SEC Regulations Committee Releases Highlights of July 12, 2018, Joint Meeting With the SEC Staff

CAQ SEC Regulations Committee Releases Highlights of July 12, 2018, Joint Meeting With the SEC Staff

On September 17, 2018, the Center for Audit Quality (CAQ) posted to its Web site the highlights of the July 12, 2018, CAQ SEC Regulations Committee joint meeting with the SEC staff. Topics discussed at the meeting include:

Disclosures required by ASC 6061 — The SEC staff shared observations from its filing reviews of issuers that have adopted ASC 606. The SEC staff indicated that, on the basis of the limited reviews it has conducted thus far, no trends or conclusions can be identified. However, the SEC staff encouraged audit committees to discuss ASC 606 disclosures with management and external auditors to (1) evaluate the quality of a company’s disclosures in accordance with the requirements in ASC 606 and (2) consider feedback from investors and regulators. The SEC staff suggested that audit committees consider discussing topics that may require “the use of significant judgments in the application of the revenue standard, such as the identification of performance obligations,” gross versus net accounting, and disclosures of disaggregated revenue. In addition, the SEC staff reminded registrants that although their existing ASC 606 disclosures may not be “materially deficient, [registrants] may choose to revise or improve [their] disclosures in future filings.” The SEC staff expects to continue issuing comments as it reviews disclosures under the SEC Division of Corporation Finance’s filing review program.
Serious deficiencies letters — In certain situations, the SEC staff may suspend its review of a registration statement or offering document that contains serious deficiencies and notify the registrant, in a formal letter, that no further review will be performed until such deficiencies are resolved. Historically referred to as “bedbug letters,” these notifications were previously confidential. However, on June 12, 2018, the Division of Corporation Finance announced that such letters would be included in a registrant’s public filing history. In this announcement, the SEC staff indicated that bedbug letters would be published no later than 10 days after issuance for publicly filed documents. The SEC staff clarified that bedbug letters for draft registration statements, which are submitted to the SEC on a confidential or nonpublic basis, will not be published until the complete SEC correspondence related to the offering is published, which generally occurs “no sooner than 20 business days after the completion of the review.”
Smaller reporting companies (SRCs) — On June 28, 2018, the SEC amended the definition of SRC to include (1) registrants with a public float of less than $250 million and (2) registrants with both revenue of less than $100 million and public float of less than $700 million. The amendments also increase the net revenue threshold in SEC Regulation S-X, Rule 3-05(b)(2)(iv),2 to $100 million, which is consistent with the revenue threshold established in the SRC definition above. Therefore, a registrant that acquires a business that exceeds 50 percent significance will not be required to provide the financial statements for the earliest of the three most recent fiscal years if the acquired business reported less than $100 million in revenue in its most recently completed fiscal year. The Committee and SEC staff discussed transition issues related to the amendments, which became effective on September 10, 2018. The SEC staff stated that transition guidance would be provided and also noted the following:
- The amendments to the definition of an SRC should not be applied in documents filed before the September 10, 2018, effective date.
- A registrant that gains SRC status under the revenue threshold must “wait until the determination date to evaluate whether [it] qualif[ies] as an SRC based upon [its] public float . . . at that time.” Question 130.04 of the SEC Compliance and Disclosure Interpretations on the Exchange Act Rules states that “the determination date for smaller reporting company status is the last business day of the second fiscal quarter.”
Connecting the Dots
For a discussion of the relief provided to SRCs and a summary of the key changes in the amendment, see Deloitte’s July 2, 2018, Heads Up. In addition, on August 10, 2018, the SEC released Amendments to the Smaller Reporting Company Definition — A Small Entity Compliance Guide for Issuers. The guide provides further transition examples and clarifies that a registrant that newly qualifies as an SRC on the basis of the amended definition “has the option to use the SRC scaled disclosure accommodations” applicable to SRCs “in its next periodic or current report due on or after September 10, 2018, [and] for transactional filings without a due date, in filings or amended filings made on or after September 10, 2018.”
SEC Regulation S-X, Rule 3-103 waivers — This rule permits the substitution of certain narrative or condensed consolidating financial information in lieu of separate financial statements for guarantors of registered debt securities, when specific criteria are met. SEC Regulation S-X, Rule 3-13,4 provides the SEC with the authority to waive financial statement requirements (Rule 3-13 waivers) in situations in which such information may not be material and such waiver would be consistent with investor protection. The Committee and SEC staff discussed the applicability of Rule 3-13 waivers to certain Rule 3-10 requirements. The SEC staff stated that waivers related to Rule 3-10 are granted “in limited circumstances when literal application [of Rule 3-10] results in disclosures beyond those intended by the rule.”

Connecting the Dots
On July 24, 2018, the SEC issued a proposed rule 5 to simplify and streamline the disclosure requirements in Rule 3-10 and Rule 3-16.6 See Deloitte’s July 31, 2018, Heads Up for further information. The SEC is seeking feedback on the proposed rule, and comments are due 60 days after the proposed rule is published in the Federal Register.
Audit requirements for transactions involving special-purpose acquisition companies (SPACs) — The Committee and SEC staff discussed the audit requirements for transactions in which a SPAC (a public shell company) consummates a merger with a private operating company; such transactions are generally conducted using a Form S-4 or merger proxy. When the transaction closes, the former private operating company generally becomes the predecessor entity and, within four days of the closing, the SPAC is required to file a Form 8-K including all the information that would be required if the former private operating company was registering securities on a Form 10 (a “Super Form 8-K”).7 Because the former private operating company is considered the predecessor to the registrant, the financial statements included in the Super Form 8-K must be audited by a PCAOB-registered accounting firm in accordance with PCAOB standards. The discussion addressed the audit requirements for the private operating company financial statements included in the Form S-4 or merger proxy before the consummation of the transaction.
Transition from emerging growth company (EGC) status — EGCs may use adoption dates applicable to nonpublic companies for as long as they remain EGCs. A registrant may lose EGC status for a variety of reasons including gaining large accelerated filer status, exceeding revenue or debt thresholds, or passage of time since its initial public offering.8 The Committee and SEC staff discussed the impact of a registrant’s loss of EGC status in the year it would have been required to adopt a new accounting standard had it not been able to defer such adoption as an EGC. A registrant generally should reflect the adoption of the new standard in its next filing after losing EGC status. The SEC staff noted that a recent request to delay adoption of new accounting standards upon loss of EGC status following qualification as a larger accelerated filer was rejected. However, the SEC staff continued to encourage registrants to discuss specific fact patterns with the SEC staff as appropriate.
Critical audit matters (CAMs) — The Committee and SEC staff discussed the “perspectives, observations, expectations and training” related to the future application of CAM disclosures required by PCAOB Auditing Standard No. 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion.
Non-GAAP measures — The SEC staff noted that it continues to issue comments about the use of individually tailored accounting principles in non-GAAP measures.9

Footnotes

FASB Accounting Standards Codification (ASC) Topic 606, Revenue From Contracts With Customers.

SEC Regulation S-X, Rule 3-05, “Financial Statements of Businesses Acquired or to Be Acquired.”

SEC Regulation S-X, Rule 3-10, “Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.”

SEC Regulation S-X, Rule 3-13, “Filing of Other Financial Statements in Certain Cases.”

SEC Release No. 33-10526, Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities.

SEC Regulation S-X, Rule 3-16, “Financial Statements of Affiliates Whose Securities Collateralize an Issue Registered or Being Registered.”

See paragraph 12220.1 of the SEC Division of Corporation Finance’s Financial Reporting Manual (FRM).

See paragraph 10110.4 of the FRM.

Refer to Section 4.3.3 of Deloitte’s A Roadmap to Non-GAAP Financial Measures for further discussion of individually tailored accounting principles.