Monday, December 17, 2018

SEC plans to focus on Brexit, LIBOR, and cyber disclosure in upcoming 10-Ks

By John Filar Atwood

In the upcoming filings season, staff of the SEC’s Division of Corporation Finance intends to focus on reviewing disclosure surrounding Brexit, the LIBOR transition, and cybersecurity, according to the Division’s chief accountant Kyle Moffatt. He joined Director William Hinman and other CorpFin officials to discuss developments in the Division at the AICPA’s conference on SEC and PCAOB developments.

On the issue of Brexit, Hinman said that he was asked by SEC Chairman Jay Clayton about the quality of disclosure on the topic. The staff already had a review underway, Hinman noted, and was finding a wide range of depth and detail in the Brexit disclosures.

He advised that the staff knows that the impact of Brexit is hard to predict. Most companies are only in the discussion stage, he said, but in the financial sector some companies have already taken steps to address Brexit. Hinman said that in upcoming filings, the staff feels that more than just boilerplate, bullet point risk disclosure is called for.

Hinman also discussed the transition away from LIBOR. It is unclear what the new standard will be, he noted, but the staff is examining what kind of backstop arrangements companies have if they are not quoting LIBOR. In general, the staff is looking for companies to share what they are thinking regarding the move away from LIBOR.

With respect to cybersecurity, Hinman advised companies to be sure their disclosure fits the company and is not just boilerplate. He pointed to the cyber guidance released by the staff earlier in 2018, and asked companies to be thoughtful about their stock trading policies in this context.

He said that the staff is seeing more disclosure on how boards oversee the management of cybersecurity risk. He emphasized that the Division does not intend to dictate what a board should do but is simply seeking disclosure on what the board is doing to address cyber risks.

Moffatt said that financial statements and financial reporting ultimately is about communication. To that end, the staff is continually encouraging companies to raise the bar on the level and quality of their disclosure.

He said the staff is focused on the importance of controls and procedures as they relate to non-GAAP measures. Hinman said the Division considers why management is using a non-GAAP measure and whether that is to dress up the numbers or if it is actually needed. If the staff feels that a company is dressing up the numbers, it will ask for additional disclosure on why the non-GAAP measure is important, he added.

In upcoming filings reviews, Moffatt indicated that the staff will be looking closely at revenue recognition. Whenever there is a new standard issued, he noted, the staff takes a close look at the related disclosure. He warned that if revenue recognition disclosure is missing, the staff will follow up with a comment.

Patrick Gilmore, Deputy Chief Accountant in the Division, said that in addition to revenue recognition the staff will be looking for clear disclosure on performance obligations, principal versus agent judgments, and disaggregated revenue. He recommended that if a company deems an item immaterial, it should consider whether it needs to be in the disclosure document.

On a separate disclosure panel, Sandra Peters, global head of the CFA Institute, said she is seeing a move away from the reporting of traditional financial information and toward bigger projects and broader governance issues. Keith Higgins, a partner at Ropes & Gray and former director of the Division of Corporation Finance, said that the SEC wants to see disclosure on how companies expect to adapt to the major issues of the day, such as climate change. The staff is interested in the long-term issues that a company is worried about, he added.

Higgins advised that although corporate boards manage the disclosure process, they should not micromanage the actual disclosure. Similarly, audit committees are responsible for overseeing the financial statement process, but they are not the preparers, he said. However, boards and audit committees need to ensure that the appropriate policies and procedures are in place surrounding important disclosure items, such as non-GAAP financial measures, he stated.