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Disclosures relating to a change in accounting principle, a change in estimate, and a correction of an error often receive attention in SEC staff comment letters. Comments request further quantitative and qualitative analysis on the accounting and disclosure judgments applied by management in these areas.
The SEC staff comments relating to accounting changes and errors asked registrants to provide:
  • additional information regarding management’s evaluation of materiality in accordance with SAB Topics 1.M and 1.N; and
  • clarification regarding whether adjustments relate to a change in estimate or correction of an error.
Comment Examples
Guidance references
  • With respect to the impact of the error on the current year we note qualitatively you do not expect it to be material to your profitability or trends in the current year. Please explain why the error is quantitatively immaterial to the current year in light of your guidance.
  • You disclose that during the second quarter there was a change in your allowance for credit loss estimates. You also disclose that as a result of an accounting change, your estimate for the allowance for credit loss was impacted and resulted in a one-time release of a portion of your allowance for credit loss. Please explain the facts and circumstances management considered which resulted in the decision to make the change, and tell us how you determined that the change in accounting was a change in estimate.
  • Please provide us your materiality analysis supporting the determination that the errors were immaterial to the two quarters affected and did not require a restatement of financial results in amended Forms 10-Q considering the guidance in SAB Topic 1.M and ASC 250. Please identify the factors that most impacted your conclusion that the errors were immaterial.
  • Please tell us and quantify in the notes to your financial statements in annual and quarterly reports the aggregate amount and related earnings per share impact of changes in contract estimates for each period presented. Refer to ASC 250-10-50-4 and 270-10-45-14 for guidance. Please also revise your results of operations disclosure in MD&A to separately quantify gross favorable and gross unfavorable changes in estimates material to either consolidated or segment results, accompanied by an appropriate level of analysis. Please provide us with your intended revised disclosure.
  • As part of your restatement, we see that you have made other adjustments for inventory valuation, loss on settlement of debt, equity transactions and certain accruals. Please separately describe the nature of each set of related adjustments recorded as part of the restatement and tell us why it was appropriate to adjust your historical financial statements. Refer to ASC 250-10-50-7, SAB Topics 1M and 1N.
  • We note that you corrected errors related to prior fiscal year consolidated financial statements within your current Form 10-K. You disclose the adjustments to correct deferred tax assets were not material to your previously issued consolidated financial statements based on your evaluation of both quantitative and qualitative factors. In this regard, please provide us with your materiality assessment which includes the considerations outlined in SAB Topic 1.M as the adjustments to income tax benefit and net income for the prior fiscal year appear to be quantitatively material.
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