May 22, 2018 — CAQ SEC Regulations Committee Releases Highlights of March 13, 2018, Joint Meeting With the SEC Staff

CAQ SEC Regulations Committee Releases Highlights of March 13, 2018, Joint Meeting With the SEC Staff

On Wednesday, May 16, 2018, the Center for Audit Quality (CAQ) posted to its Web site the highlights of the March 13, 2018, CAQ SEC Regulations Committee joint meeting with the SEC staff. Topics discussed at the meeting include:

SEC personnel and committee update — A number of personnel changes in the Division of Corporation Finance’s Office of the Chief Accountant (CF-OCA) were highlighted, including the appointments of Kyle Moffatt as chief accountant and Patrick Gilmore and Lindsay McCord as co-deputy chief accountants and the reassignment of the points of contact for certain prefiling letter topics.
Financial reporting implications of tax reform legislation — The Committee discussed with the SEC staff certain financial reporting matters related to the impact of the Tax Cuts and Jobs Act1 (the “Act”).
- Non-GAAP measures — The SEC staff indicated that adjustments related to the impact of the Act in a company’s non-GAAP financial measures may be appropriate, depending on the circumstances. However, any such adjustments should be balanced and not just for select provisions of the Act (i.e., no “cherry picking” of non-GAAP adjustments).
  Further, certain registrants may also wish to consider making adjustments that “attempt to depict a ‘normalized’ tax rate” between comparable periods to enhance comparability of periods before and after tax reform (i.e., adjustments in which the new tax rate is applied to periods before enactment). However, the SEC staff commented that such adjustments to non-GAAP measures may not be appropriate because they may not reflect alternative judgments, tax strategies, or other actions that a registrant may have taken if the lower tax rate had applied to all periods presented.
- SEC Regulation S-X, Article 11,2 pro forma financial information — Registrants are encouraged to discuss their specific facts and circumstances regarding pro forma financial information with the CF-OCA if they are contemplating reflecting the impact of the Act on historical periods as a material event in pro forma financial information presented pursuant to SEC Regulation S-X, Rule 11-01(a)(8).3
Waivers of financial statements required by SEC Regulation S-X, Rule 3-094 — The SEC staff discussed written requests for waivers under SEC Regulation S-X, Rule 3-13,5 related to annual financial statements required for equity method investments pursuant to Rule 3-09, when the required significance tests yield anomalous results. The staff indicated that a registrant may request that the SEC extend any relief granted to both current and future filings for which the same type of Rule 3-09 financial statements would be required, provided that the facts have not changed and the investment continues to be insignificant in future periods.

Connecting the Dots
See Deloitte’s recently issued A Roadmap to SEC Reporting Considerations for Equity Method Investees for additional guidance on the application of Rule 3-09. The Roadmap combines the SEC’s guidance on reporting for equity method investments with Deloitte’s interpretations (Q&As) and examples in a comprehensive, reader-friendly format. Appendix B of Deloitte’s 2017 edition of SEC Comment Letters — Including Industry Insights also provides information about best practices for submitting Rule 3-13 waivers.
New accounting standards
- Interplay between SEC Regulation S-X, Rule 5-03(b),6 and GAAP — The guidance under Rule 5-03(b) has not been amended since the issuance of new accounting standards for revenue recognition and leases,7 and the SEC staff is encouraging registrants to submit live examples of potential inconsistencies in income statement classification that may arise between these new accounting standards and Rule 5-03(b).
- Presenting comparable periods under ASC 6068 within MD&A9 — Registrants who have adopted ASC 606 using the modified retrospective adoption method may present additional MD&A disclosures on a supplemental basis. To facilitate a comparable MD&A discussion, two supplemental presentations were discussed:
  - Registrants may voluntarily present prior periods before the adoption of the new revenue standard assuming the adoption of ASC 606 provided that (1) they can calculate the impact of the line items presented, (2) such disclosure does not represent a full income statement, and (3) the presentation is not more prominent than the discussion of the reported results of operations for the historical periods.
  - Registrants may supplementally present a discussion of the current period results which reflect the adoption of the new revenue standard assuming ASC 605 was still in effect during the current period to provide comparability to prior periods. However, the discussion of the historical results of operations under ASC 606 should be given prominence. Such disclosure should be included only in the period of adoption and should be comparable to the disclosures provided pursuant to ASC 250 in the financial statements.
Use of most recent year-end financial statements in assessing SEC Regulation S-X, Rule 1-02(w),10 significance in an IPO — A company submitting a draft registration statement has the ability to calculate the significance of an acquisition occurring after year-end using its most recent fiscal year-end financial statements, even if such financial statements are not included in the draft registration statement, provided that such audited financial statements will be included at the time of the first public filing. A registrant should alert the office of the assistant director of the Division of Corporation Finance if it plans to calculate significance in this manner. See Deloitte’s July 11, 2017, Heads Up (updated August 24, 2017) for additional information about the nonpublic review of draft registration statements.
Audit requirements in pre-transaction periods following a reverse merger involving two operating companies — A nonpublic operating company may be considered the accounting acquirer in a reverse merger with a public operating company. As a result, the financial statements of the nonpublic accounting acquirer will represent the financial statements of the issuer once the period including the reverse merger is reported in a periodic filing (i.e., Form 10-K or Form 10-Q filing).
Financial statements reissued in either an annual periodic filing or a registration statement once the period in which the consummation of the merger is reported must include a PCAOB opinion for all periods for which financial statements are presented. Other disclosures for the previously nonpublic accounting acquirer such as (1) supplemental financial information of selected quarterly financial data provided pursuant to SEC Regulation S-K, Item 302;11 (2) segment reporting disclosures;12 and (3) earnings per share disclosures13 should also be included at this time.
“For example, a public operating company (“PubCo”) completed a reverse merger with a non-public operating company (“OpCo”) in May 2018. OpCo was the accounting acquirer and both companies have a December 31 year-end. The historical financial statements presented for the issuer for 2017 and 2016 in the December 31, 2018, Form 10-K will be those of OpCo. The historical financial statements for those years, in addition to the current year, must comply with the audit requirements of an issuer. Therefore, all years presented must be audited in accordance with PCAOB standards.”
Other items discussed — Registrants are encouraged to discuss with the SEC complex fact patterns related to:
- The presentation of pro forma adjustments applied to conform the adoption of a new accounting standard for an acquired entity to that of the registrant. See Deloitte’s July 20, 2017, Heads Up for more information.14
- The adoption of new accounting standards upon the loss of emerging growth company status.15

Footnotes

H.R. 1/Public Law 115-97, “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution on the budget for fiscal year 2018.”

SEC Regulation S-X, Article 11, “Pro Forma Financial Information.”

SEC Regulation S-X, Rule 11-01(a)(8), “Presentation Requirements.”

SEC Regulation S-X, Rule 3-09, “Separate Financial Statements of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons.”

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

SEC Regulation S-X, Rule 5-03, “Income Statements.”

The new accounting standards for revenue recognition and leases are FASB Accounting Standards Codification (ASC) Topic 606, Revenue From Contracts With Customers, and FASB Accounting Standards Update (ASU) No. 2016-02, Leases, respectively. Note that when effective, ASU 2016-02 will supersede ASC 840, Leases, and add ASC 842, Leases.

For titles of FASB Accounting Standards Codification references, see Deloitte’s “Titles of Topics and Subtopics in the FASB Accounting Standards Codification.”

SEC Regulation S-K, Item 303, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

SEC Regulation S-X, Rule 1-02(w), “Definitions of Terms Used in Regulation S-X: Significant Subsidiary.”

SEC Regulation S-K, Item 302, “Supplementary Financial Information.”

Pursuant to ASC 280.

Pursuant to ASC 260.

See paragraph 3250.1(m) of the SEC Division of Corporation Finance’s Financial Reporting Manual (FRM).

See paragraph 10230.1 of the FRM.