SEC Regulations Committee
Joint Meeting with SEC Staff
Held Virtually on September 21, 2022
NOTICE: The Center for Audit Quality (CAQ) SEC Regulations Committee meets periodically with the staff of the SEC to discuss emerging financial reporting issues relating to SEC rules and regulations. The purpose of the following highlights is to summarize the issues discussed at the meetings. These highlights have not been considered or acted on by senior technical committees of the AICPA and do not represent an official position of the AICPA or the CAQ. As with all other documents issued by the CAQ, these highlights are not authoritative and users are urged to refer directly to applicable authoritative pronouncements for the text of the technical literature. These highlights do not purport to be applicable or sufficient to the circumstances of any work performed by practitioners. They are not intended to be a substitute for professional judgment applied by practitioners.
These highlights were prepared by a representative of CAQ who attended the meeting and do not purport to be a transcript of the matters discussed. The views attributed to the SEC staff are informal views of one or more of the staff members present, do not constitute an official statement of the views of the Commission or of the staff of the Commission and should not be relied upon as authoritative. Users are urged to refer directly to applicable authoritative pronouncements for the text of the technical literature.
As available on this website, highlights of Joint Meetings of the SEC Regulations Committee and the SEC staff are not updated for the subsequent issuance of technical pronouncements or positions taken by the SEC staff, nor are they deleted when they are superseded by the issuance of subsequent highlights or authoritative accounting or auditing literature. As a result, the information, commentary or guidance contained herein may not be current or accurate and the CAQ is under no obligation to update such information. Readers are therefore urged to refer to current authoritative or source material.
SEC Regulations Committee
Securities and Exchange Commission
Jonathan Guthart, Chair
John May, Vice-Chair
Staff from the Division of Corporation
Timothy Brown, KPMG
Erin McCloskey, KPMG
Kavish Singh, PwC
Dennis McGowan, CAQ
Annette Schumacher Barr, CAQ
Erin Cromwell, CAQ
Jennifer Chang, Moody’s
Swami Venkaraman, Moody’s
II. RECENT UPDATES AND DEVELOPMENTS
A. Staff Update
The staff noted the following developments in the Division:
- As announced in a recent press release, the Division plans to add an Office of Crypto Assets and an Office of Industrial Applications and Services to the Division’s Disclosure Review Program.
- Cicely LaMothe was named the Acting Deputy Director of the Division’s Disclosure Program, following the departure of LizAnn Eisen.
- Shelly Luisi, formerly the Division’s Chief Risk Officer, has been named the SEC’s Chief Risk Officer.
III. CURRENT FINANCIAL REPORTING MATTERS
A. Applicability of S-K Item 302(a), Supplementary financial information -- Disclosure of material quarterly changes when financial statements are retrospectively revised in connection with a new Form S-3
In December 2021, the AICPA Insurance Expert Panel (IEP) virtually met with the SEC staff and asked for guidance on the transition date for ASU 2018-12
: Targeted Improvements to Long-Duration Contracts
when a new registration statement is filed in the year of adoption. Specifically, a fact pattern similar to the following was addressed:
A calendar year-end registrant adopts the ASU 2018-12
on January 1, 2023, with a transition date of January 1, 2021. In May 2023, the registrant files its Form 10-Q for the quarter ended March 31, 2023, which reflects the adoption of ASU 2018-12
for all periods presented. In June 2023 the registrant files a registration statement on Form S-3 that incorporates by reference the registrant’s Form 10-K for the year ended December 31, 2022 (which includes the registrant’s financial statements for the years ended December 31, 2022, 2021, and 2020), as well as the registrant’s Form 10-Q for the quarter ended March 31, 2023. Assume that the impact of adopting ASU 2018-12
is material to all periods.
Item 11(b)(ii) of Form S-3 requires retrospective revision of the pre-event audited financial statements that are incorporated by reference in the Form S-3 to reflect a subsequent change in accounting principle. Does the reissuance of the registrant’s financial statements change the transition date of ASU 2018-12
to January 1, 2020 because it is the beginning of the earliest comparative period presented?
Subsequent to the IEP virtual meeting, the staff provided the following response:
The reissuance of the financial statements in Form S-3 accelerates the requirements to provide the financial statements for the years ended December 31, 2022 and 2021, with retroactive application, but it does not change the transition date of the accounting standard.
Given this background, the Committee asked the staff whether the registrant in the above fact pattern would be required to provide summarized quarterly financial data disclosure pursuant to Item 302(a) of Regulation S-K in connection with the reissuance of its annual financial statements in connection with the Form S-3 if the registrant’s December 31, 2022 Form 10-K did not include disclosure pursuant to Item 302(a).
The staff noted that Form S-3 does not include a specific requirement to provide Item 302(a) disclosures. If the registrant had previously provided Item 302(a) summarized quarterly financial data disclosures in its December 31, 2022 Form 10-K, the registrant would need to consider whether or not its original disclosures in the Form 10-K continue to be appropriate in light of a retroactive change to the financial statements. A registrant may need to modify or supplement the original disclosures as part of this consideration, such as when the retroactive change is material. Additionally, the staff noted that Form S-1 would require Item 302(a) disclosure pursuant to Item 11(g).
While the issue raised by the Committee was in the context of ASU 2018-12
, the SEC staff observed that their views would apply to other retrospective changes for which the company is revising financial statements for the purpose of Form S-3.
B. Interpretation of SEC’s definition of a business in S-X Rule 11-01(d)
The Committee asked the staff whether there have been any changes to its interpretation of the definition of a business in S-X Article 11 as it specifically relates to the presumption that the acquisition of a separate entity, subsidiary, or division is a business.
The staff indicated that there have been no changes to its interpretation of the definition of a business and continue to apply the presumption that an acquisition of a separate entity, subsidiary or division is a business. That said, there may be limited circumstances in which the staff might not object to a registrant’s conclusion that the presumption is overcome based on the principles in S-X Rule 11-01(d) which address the continuity of the acquired entity’s operations prior to and after the transaction.
The staff also clarified that any of the criteria outlined in S-X Rule 11-01(d)(2) that are not applicable should not be considered in an analysis of the definition of a business under S-X 11-01(d)
C. Non-GAAP Financial Measures (NGFMs)
Given the current inflationary environment, the Committee asked the staff for its views regarding the presentation of an NGFM that substitutes one acceptable method of accounting under GAAP for another acceptable method of accounting under GAAP. Specifically, the Committee asked whether a registrant that reports its inventory on a LIFO basis would be allowed to disclose an NGFM showing the impact of reporting its inventory on a FIFO basis.
The staff noted that they have historically not objected to the presentation of an NGFM which substitutes one acceptable GAAP method of accounting for another acceptable GAAP method of accounting. However, they noted that they have historically objected to an NGFM that substitutes an unacceptable accounting method or an accounting method that while not acceptable under the registrant’s basis of accounting, is acceptable under a different accounting framework (e.g., US GAAP vs. IFRS).