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.
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.
