SEC Flash Report - December 2016

December 2016

SEC Staff Updates the Financial Reporting Manual and Compliance and Disclosure Interpretations


The staff of the SEC’s Division of Corporation Finance recently published an update to the Division’s Financial Reporting Manual (FRM).1 The inside cover of the FRM lists a summary of the paragraphs that were updated. 
 
The update amended paragraph 10220.5, which addresses an emerging growth company’s reporting requirements associated with financial statements of entities other than the registrant and pro forma financial information.  An EGC is permitted to present only two years of financial statements for entities other than the registrant in its initial registration statement even if the application of the significance tests otherwise results in a requirement to present three years.  Paragraph 10220.5(a) explicitly extends this relief to an EGC’s acquired real estate operations under Rule 3-14. (The FRM had previously extended this relief to acquired businesses under Rule 3-05 and equity method investees under Rule 3-09.)  Additionally, paragraph 10220.5(c) was amended to explicitly permit an EGC to omit pro forma financial information from its initial registration statement if it reasonably expects that such periods will not be required at the time of the offering.  The guidance is consistent with securities law amendments included in the FAST Act which permit an EGC to omit historical periods from its financial statements if it reasonably expects that such periods will not be included in its effective registration statement.  
 
The update also provides guidance related to reporting implications of certain new accounting standards: 
 
  • The New Revenue Standard (FASB Topic 606) - Paragraph 11120.4 was added to address the presentation of pro forma financial information associated with a significant acquired business in the year of adoption.  If a registrant adopts Topic 606 on a full retrospective basis on January 1, 2018 and acquires a significant business in 2018, it is not required to apply the new revenue standard to pro forma financial information for periods prior to adoption (e.g., the pro forma income statement for the year ending December 31, 2017). 
  • The New Leasing Standard (FASB Topic 842) – Section 11200 was added to address reporting issues related to the adoption of the new leasing standard.  The guidance summarizes the available adoption dates and transition methods.  A calendar year-end registrant is required to adopt the standard on a modified retrospective basis on January 1, 2019, with an initial application date of January 1, 2017.  Paragraph 11210.1 specifies that companies are not required to also retrospectively revise their 2016 financial statements if they file a registration statement on Form S-3 in 2019.2 The guidance indicates that the reissuance of the financial statements in the Form S-3 only accelerates the requirement to recast the 2017 and 2018 financial statements, but it does not change the initial date of the standard’s application. 
  • The New Disclosures about Short-Duration Contracts for Insurance Entities Standard (FASB Topic 944) – Section 11300 was added to address reporting issues related to the adoption of ASU No. 2015-09, Disclosures about Short-Duration Contracts.  Similar to the sections on other new standards above, the guidance summarizes the adoption dates and transition methods.  Paragraph 11310.1 was added to address the disclosure requirements related to claims development tables. ASU 2015-09 requires disclosure of disaggregated claims development tables for each reportable segment which reflect re-estimates of claims by accident year for up to ten years.  Consequently, the guidance indicates that Property and Casualty insurers are no longer required to separately present the consolidated ten-year loss reserve development table required by Securities Act Industry Guide 6 and Exchange Act Industry Guide 4 in their filings. 
 
The staff also updated its C&DIs several times this fall.  Most of these updates are legal in nature and provide guidance on tender offers, Regulation A, Regulation AB, Regulation D, Pay Ratio Disclosure and various other Securities and Exchange Act rules and forms.  One notable interpretation relates to the financial statement requirements in a Regulation A offering.  As noted above, securities law amendments included in the FAST Act permit an emerging growth company to omit historical periods from its financial statements if it reasonably expects such periods will not be included in its effective registration statement.  One of the new C&DIs formally extends this reporting relief to Regulation A filers.  An issuer conducting a Regulation A offering is permitted to omit financial information for historical periods (including financial information of other entities that may be otherwise required) if it reasonably expects those periods will not be required at the time Form 1-A is qualified by the SEC. 

For questions related to matters discussed above, please contact Jeff Lenz or Paula Hamric.
 
1 The FRM is an internal SEC staff reference document that provides general guidance covering several SEC reporting topics. While the FRM is not authoritative, it is often a helpful source of guidance for evaluating SEC reporting issues. The FRM, along with other helpful guidance, can be accessed from the Division of Corporation Finance home page, which is located at: http://www.sec.gov/divisions/corpfin.shtml.
2 Item 11(b)(ii) of Form S-3 requires companies to file restated financial statements if there has been a change in accounting principle and the change requires a material retroactive restatement of the financial statements.