The Center for Audit Quality (CAQ) recently issued highlights
of the March 20 joint meeting between its SEC Regulations Committee and the SEC staff. The SEC Regulations Committee meets periodically with the SEC staff to discuss emerging financial reporting issues relating to SEC rules and regulations. Key topics discussed at the meeting are summarized here.
Non-GAAP financial measures
The SEC staff and committee members discussed examples of non-GAAP measures where the staff believes the measures would be inappropriate, primarily since the measures use individually tailored accounting principles.
In addition to the general discussion, differences in the guidance in ASC 842 and IFRS 16, Leases, as it relates to non-GAAP measures, were considered. Specifically, the differences in the standards would lead to incomparable EBITDA disclosures by domestic registrants applying U.S. GAAP and those by foreign private issuers applying IFRS Standards as issued by the IASB. In light of these differences, the staff clarified that they would continue to object to a non-GAAP measure that adjusts EBITDA to add back any operating lease expense after an entity adopts ASC 842, since these expenses are not recorded as depreciation or interest under ASC 842. Similarly, a measure presented by an IFRS registrant that adjusts EBITDA to deduct depreciation and interest solely related to leases would be considered an individually tailored accounting principle. However, the staff would not object to either a U.S. GAAP or an IFRS registrant separately identifying and disclosing such differences.
The staff encourages registrants to reach out to the staff in the Division of Corporation Finance’s Office of Chief Accountant or the respective Assistant Director office with questions regarding existing or proposed non-GAAP disclosures.
EGC transition issues
The staff also provided feedback on certain emerging growth company (EGC) transition issues as follows:
S-X Rule 3-05 requirement in EGC’s IPO registration statement
- For an EGC that elected the private company transition date for adopting the new revenue guidance in ASC 606 and will therefore adopt the standard for the year ended Dec. 31, 2019 (but will not reflect the adoption in its 2019 quarterly reports), the staff encourages the EGC to present its 2019 quarterly financial information in its 2020 Form 10-Qs under ASC 606 for comparative purposes. The staff also clarified that it expects an EGC that loses this status at Dec. 31, 2019, to reflect the adoption of ASC 606 in its 2019 quarterly financial information required under Regulation S-K, Item 302(a), Selected quarterly financial data, in its 2019 Form 10-K.
- An EGC that elected the private company transition for new accounting standards in an IPO and that subsequently loses EGC status after submitting or filing a registration statement will continue to be treated as an EGC until the earlier of the dates on which either the IPO is consummated or one year after the company ceased to be an EGC. In this scenario, the staff commented that, generally, the registrant should adopt the standard in its next filing after losing EGC status.
The SEC staff and committee members discussed a scenario in which an EGC filing an IPO registration statement is required to provide one year of an acquired entity’s financial statements, pursuant to Regulation S-X, Rule 3-05, Financial statements of businesses acquired or to be acquired
, at the time of the contemplated offering and intends to satisfy the requirement through a combination of pre-acquisition and post-acquisition financial statements. The question that arose was whether the pre-acquisition audited financial statements of the acquired entity could be omitted in any draft or publicly filed registration statement until the EGC is required to provide the
post-acquisition audited financial statements of the registrant. In this scenario, the staff reiterated its position that an acquired entity’s financial statements could not be omitted from any publicly filed registration statement. However, for purposes of a draft registration statement, the staff indicated that a registrant should consult with the staff prior to making such omission.
- S-X Rule 3-05 significance test—The staff indicated that a registrant who utilizes the practical expedient under ASC 842, which allows companies not to recast prior comparative periods, would not be permitted to use interim balance sheets in lieu of the balance sheet for the most recently completed fiscal year-end for purposes of calculating significance.
- Financial statement schedules for significant equity method investees —The staff confirmed that registrants are required to include the schedules in Regulation S-X, Article 12, Form and content of schedules, with the financial statements of significant equity method investees.
- Form 8-K, Item 2.01, Completion of Acquisition or Disposition of Assets, requirement in relation to Rule 3-05 waivers —The staff clarified that a registrant who receives a waiver under Regulation S-X, Rule 3-13, Filing of other financial statements in certain cases, to omit the financial statements of an acquired entity that is determined to be significant under the tests described in Regulation S-X, Rule 1-02(w), is still required to file an Item 2.01 Form 8-K related to the acquisition.
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