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Corp Fin observations ahead of year-end reporting

Joining repeat reminders, Pillar II and AI emerge as disclosures that require close attention.

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With year-end quickly approaching, Staff in the SEC’s Division of Corporation Finance touched on several Form 10-K disclosure topics at the 2024 AICPA & CIMA Conference on Current SEC and PCAOB Developments. Heading this year’s list were remarks about disclosure topics that generate the most comment letters: MD&A and segment reporting. 

Corp Fin provided important reminders for registrants heading into year-end, covering issues that should be top of mind for preparers. Additionally, AI disclosures were highlighted as an emerging area of concern. The underlying message was simple: Companies should provide meaningful and tailored disclosures for the benefit of investors. 

Timothy Brown

KPMG SEC Regulatory Matters Topic Team Leader

Further reinforcement on segment reporting

Revisiting last year’s remarks, Corp Fin indicated that it will not object to additional measures of segment profit or loss in the notes to the financial statements that are not calculated in accordance with GAAP… as long as the company complies with both the provisions of ASC 280 as well as the SEC’s non-GAAP rules (Reg G and Item 10(e) of Reg S-K). 

They also indicated that the location of any disclosures made solely to comply with the SEC’s rules is not prescribed, other than being within the filing that includes such measures. 

In response to questions about circumstances where the Staff ultimately objects to a non-GAAP segment measure of profit or loss disclosed in the notes to the financial statements, they stated that the removal of that measure solely because it does not comply with SEC non-GAAP rules will not be considered the correction of an error under ASC 250. 

This may occur if the Staff deems a measure to be misleading, but it is included in the CODM package. In contrast, if a measure is modified or removed because it does not comply with ASC 280 (e.g. the CODM does not use the measure to assess segment performance and decide how to allocate resources), its removal would constitute the correction of an error.

Corp Fin emphasized that companies should ensure their ICFR and disclosure controls and procedures are appropriately designed for segment disclosures. 

Lastly, the Staff remarked that auditors are responsible for auditing to US GAAP, and are not responsible for auditing companies’ compliance with the SEC non-GAAP rules.

We encourage preparers wanting to report multiple measures to work with their auditors to navigate various compliance issues, including the necessary disclosures and implications such disclosures may have on the audit report.

Read our Hot Topic, SEC staff clarifies segment reporting disclosures

MD&A disclosures – important reminders

While MD&A disclosures feature every year at the Conference, some of this year’s reminders touched on emerging issues.

Regarding liquidity analysis, the Staff explained that too often companies limit their disclosure to variances reported in the cash flow statement (e.g. disclosing the net change in accounts receivable). They stressed the importance of, and requirement to, provide a quantitative and qualitative discussion of the underlying reasons for these reported changes. 

Further, if a company has negative operating cash flows, Corp Fin expects it to provide detailed disclosures about its ability to fund operations. A company needs to ensure that such disclosure is consistent with its going concern analysis and related disclosures in the financial statements and notes. 

The following MD&A disclosures apply to Pillar II developments.

  • Looking back, if reported income tax is materially affected by tax law changes due to Pillar II, companies are required to describe the economic change and the effect it had on income.

  • Looking forward, companies must describe – quantitatively and qualitatively – any reasonably likely effects on future operations, to the extent they are material.

Corp Fin expects ‘warning disclosures’ about the likely impact of known regulation changes, and Pillar II is not an exception. The Staff emphasized that Pillar II-related disclosures in MD&A should continue to evolve as more information becomes available. For example, a company might not be able to initially quantify the potential impact of Pillar II, but in a later period will have sufficient information to estimate a range of reasonably likely outcomes.

The Staff stressed the importance of accurate and tailored AI disclosures. With increasing use of and focus on AI in the day-to-day operations of many companies, providing relevant disclosures that accurately reflect a company’s place on their journey will be important for investors. AI is the topic of a Day 3 panel so we expect to hear more. 

MD&A disclosures continue to be a theme in SEC Staff comments. With the number of new issues emerging, it’s always a good idea for companies to stand back and take a fresh look at what they’ve drafted against key issues discussed by management as part of the financial reporting process.

Erin McCloskey

KPMG Partner, Department of Professional Practice

>> Non-GAAP measures – comments continue

Corp Fin continues to reiterate the same themes in complying with the non-GAAP rules. 

  • The prominence principle requiring disclosure of a comparable GAAP measure with equal or greater prominence applies wherever a non-GAAP measure appears in a filing.  

  • Under the labeling requirement, companies need to clearly explain the non-GAAP adjustments made to a measure.

  • Companies should continue to consider whether a non-GAAP measure is misleading or a tailored accounting principle – especially when introducing a new measure, or revising a measure that was previously disclosed.

Read our in-depth guide, Non-GAAP financial measures.

    >> Executive compensation clawback rules – further clarifications

    Corp Fin clarified that when a recovery analysis indicates no recovery, a brief explanation of why the recovery policy resulted in no actual recovery should be provided. They indicated that simply stating that there was no recovery is insufficient disclosure.

    Discussion continued on the use of the two check boxes that were added to the cover page of Form 10-K by the new rules. 

    • Box 1 is to be checked when the filing contains the correction of an error, whether it constitutes a ‘Big R’ or a ‘little r’ that is either required or voluntary. 

    • Box 2 should be checked even if (1) no incentive compensation was awarded to executives relating to the period or (2) incentive compensation was received by executives but not impacted by the error.  

    Read more about these rules in our Hot Topic, Implementing compensation clawback requirements

    >> SPACs

    Existing rules and disclosure requirements for de-SPAC transactions are now closely aligned with those of traditional IPOs. For example, if a target in a de-SPAC transaction qualifies as an emerging growth company, it may follow the related reporting requirements.

    The Staff also clarified the following.

    • If a registrant becomes the parent (often referred to as a PubCo) of both the SPAC and the target business (OpCo) in a de-SPAC transaction, the PubCo’s financial statements are required to be included in the de-SPAC registration statement.

    • During the periods that the SPAC is considered the registrant, its financial statements must be audited and reviewed under PCAOB standards. This includes financial statements for periods prior to the de-SPAC transaction, when those financial statements are included in a filing. 

    Registrants were also reminded to disclose net tangible book value per share as adjusted and the difference against the offering price.  The objective of this disclosure is to show the SPAC’s net assets contributed to the de-SPAC registrant. 

    Read more about these rules in our Defining Issues, SEC finalizes SPAC rules.

    >> Rule 3-05 waiver requests

    The Staff continues to receive Rule 3-05 waiver requests and provided some best practices as these requests tend to be very complex and fact specific. Best practices to reach a timely resolution to any request include the following.

    • Transparency is key. Provide sufficient details relating to the transaction, including the background, reason for the request, the significance tests/calculations and any information that can be disclosed in lieu of the information that may be the subject of the request.

    • Companies may provide an alternative request in its initial letter in case the Staff does not agree with the company’s position.

    Companies can expect a call from the SEC Staff relating to the request, and they encourage a dialogue to discuss their facts and circumstances. 

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