The panelists tackled topics including recent Corp Fin rulemaking, recommendations about how to disclose issues related to Brexit and LIBOR, and the use of non-GAAP measures.
This year’s SEC Speaks conference sponsored by PLI featured panels relating to developments at the Division of Corporation Finance and the SEC’s Office of the Chief Accountant.
Recent initiatives. Corporation Finance Director Bill Hinman said that the Division’s focus has been on capital formation. He outlined several recent initiatives by Corp Fin, including guidancefor the Commission’s new rules relating to scaled disclosure for smaller reporting companies. The new rule added over a thousand companies to the smaller reporting company definition, Hinman said.
Corp Fin is also looking at private placement exemptions and the definition of accredited investor. Hinman said that the staff is heading towards issuing a concept release in this area to gain input on the current "patchwork" of different exemptions with the view towards coming up with something more unified and to get away from the current binary system where accredited investors get to invest in a wide range of opportunities without limit, while everyone else does not get to invest even one dollar.
Hinman also drew attention to the SEC’s concept release on Rule 701 securities issued by non-reporting companies pursuant to compensatory arrangements. He said that it has been suggested that the SEC’s current approach might need a refresh in light of the changing economy; in particular, participants in the "gig economy."
Among other recent Corp Fin developments, Hinman noted that reporting companies, after the enactment of recent legislation, can now use the Regulation A exemption. The Commission has also proposed changes to Regulation S-X Rules 3-10 and 3-16 to streamline financial disclosure requirements applicable to registered debt offerings for guarantors, issuers of guaranteed securities, and affiliates.
Brexit and LIBOR. Corp Fin Chief Risk Officer Shelly Luisi addressed issues related to Brexit and the transition away from LIBOR. Regarding Brexit, Luisi said that the Division has seen a wide variety of disclosures—some tailored, some generic. She observed that the larger the company is, the more likely it is that it will disclose detailed disclosures about the impact of Brexit. She also drew attention to Director Hinman’s recent speech in London, where he outlined six disclosure topics relating to Brexit that Corp Fin will keep in mind when evaluating 2018 annual reports.
With respect to LIBOR, which will probably cease to exist after 2021, Luisi advised, many contracts using LIBOR extend past 2021 and have no fallback language for when LIBOR ceases to be available. She observed that the most common disclosures related to the LIBOR transition Corp Fin has seen in 10-Ks relate to simply the existence of the exposure to LIBOR’s demise, although the exposure is rarely quantified. Other disclosures involve the cost of credit, the possible impact on a company’s assets and liabilities, and contractual issues that do not provide a fallback rate, according to Luisi. If companies are not already aware of their LIBOR exposure risks, the time has come to evaluate these risks, Luisi cautioned.
Non-GAAP. Much of the accounting panel at SEC Speaks centered on non-GAAP measures. Corp Fin Chief Accountant Kyle Moffatt said that one of the biggest issues involves the Compliance and Disclosure Interpretation (C&DI) regarding individually tailored accounting principles. It is important to acknowledging that companies do communicate information about non-GAAP measures, Moffatt implored. The SEC is focused on two areas when it comes to non-GAAP disclosures. The first is the importance of disclosure controls and procedures to prevent errors and the manipulation of numbers. Second, he emphasized that audit committees need to pay attention to non-GAAP measures, according to Moffatt.
Former Commissioner Daniel Gallagher inquired if the disclosure of non-GAAP measures is indicative that GAAP is deficient. SEC Chief Accountant Wesley Bricker advised that GAAP is supposed to provide common reporting for similar economic transactions, regardless of the industry. The job of GAAP is to provide comparability across industries, and that is why there is a lot of space for non-GAAP, Bricker explained. When you find a consistent answer across industries, you lose some texture of a particular industry with particular levels of understanding and management’s views, according to Bricker.
Former SEC Commissioner Cynthia Glassman, who was also appearing at the conference as a commentator, asked about the role of audit committees in non-GAAP measures. Bricker replied that audit committees should be seen as role models. Audit committee members should ask for the auditor’s candid views about non-GAAP measures and whether those views are consistent with the way management is making decisions.
Former SEC Chair Elisse Walter noted that during her tenure, the accounting guidance for the oil and gas industry was updated after decades and asked about the Commission’s current projects to update guidance. Moffatt said that when the Division revises Industry Guide 3 on statistical disclosure by bank holding companies, the goal is to be principles-based as compared to rules-based and to make the revised guide not as prescriptive. He added that the SEC has staffed the task of revising the guidance with people that have experience in the industry and with contacts to the banking regulators.
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