March 29, 2017

2016 Trends in SEC Comment Letters

By Karrissa Chatergoon, Senior Manager, Assurance Services

Contributor Kim Lamplough, Partner, Assurance Servicecs

2016 Trends in SEC Comment Letters Assurance

The Securities and Exchange Commission (“SEC”) has had a strong focus on non-GAAP measures and management’s discussion & analysis (“MD&A”) for the past three years, so it is not surprising that these were the top topics of focus in comment letters issued in 2016. We noted that there was an overall decline in the overall number of comment letters issued by the SEC; however, the topics generally remained consistent with the prior year.

The primary topics of comment letters issued in 2016 were as follows:

Non-GAAP Measures

The SEC seems to be paying very close attention to ensure that these custom metrics are not misleading. The comments on non-GAAP measures regarding compliance and disclosure interpretation were mainly around (1) issuers presenting a most comparable GAAP measure, (2) performance measures that exclude normal, recurring expenses necessary for the business to operate, including inconsistencies between excluding non-recurring charges but not non-recurring gains, (3) ensuring that non-GAAP measures are consistent between periods and that if there are any changes, the issuer is disclosing the reasons for the change, (4) reconciling non-GAAP measures to the most comparable GAAP measures, and (5) if non-GAAP measures are presented, an explanation of why it is useful to investors.

We would expect to see comments on this topic to rise, if registrants are not proactively addressing the concerns of the SEC.

Management’s Discussion and Analysis

The SEC comment letters around this topic were aimed at having registrants explain the results of their operations in MD&A in more detail. This includes identification and quantification of factors that resulted in changes or that would have a material effect on the earnings of the company in the future. The objectives of MD&A are to provide a narrative on the financial statements, discussing trends and information that allows investors to assess likely future performance based on past results. Disclosures should enable users to see the company through the “eyes of management” and should be transparent, tailored, consistent, and comprehensive. It is important to note that the MD&A should focus on “whys” and “future and current implications.” Some recent comments on MD&A were (1) inclusion of discussion in order to facilitate the understanding of operations, (2) discussion on cash flow trends and the reason for changes in cash flows, (3) disclosure of obligations and any possible violations.

Fair Value

Many fair value comments relate specifically to valuation techniques and inputs used to determine fair value. Certain comments include (1) specificities on valuation techniques and sensitivity of Level 2 and 3 measurements, and (2) the use of third party pricing services.

Revenue Recognition

Even while many issuers are focused on the new revenue recognition standard effective January 1, 2018, the current standard and its appropriate application is still under scrutiny. Revenue recognition comments surround the issues of (1) completeness and explanatory policy disclosures, (2) disclosures and adjustments for sales returns, rebates and breakage revenue, (3) accounting for multiple-element arrangements, and (4) gross vs. net reporting of revenue. Additionally, with regards to the new revenue recognition standard coming into effect, it is expected that the disclosure includes the description of the standard, its adoption date, the method of adoption to be utilized, and the impact the adoption is expected to have on the financial statements and other significant matters.


The number of comments related to segments has been increasing in current years. The focus of the comments are (1) companies being able to identify and aggregate operating segments, identify the chief operating decision-maker (“CODM”) of these segments and the information used by the CODM; (2) qualitative factors to support the aggregation of segments, (3) reporting segment changes, and (4) identifying products or services by segments and disclosures related to total revenues by customers for each product or service identified. It is important to note that segments should be re-assessed in light of business changes.

Income Taxes

Income taxes continue to be a focus of SEC comments, although the framework has been in place for many years. The most recent comments continue to focus on (1) disclosures and tax impacts of U.S. and foreign tax jurisdictions, (2) valuation allowances, and (3) tax rate reconciliations. Any change in tax positions without substantial disclosures could result in a comment letter being issued.


The focus on this topic has declined by about 25% from previous years, based on the letters issued; however, SEC staff continues to comment on (1) the timing of the impairment test and disclosures made after the test is performed, (2) management’s estimates used in the impairment model, and (3) triggering events identifications. Since impairments usually involve complex estimates and management judgement, these comment letters may not be very easy to resolve, and the SEC may continue to push back on these even after first response.

Business Combinations

Also a very complex topic, the comments from the SEC for business combinations and mergers and acquisitions continue to be a focus. Some of the most recent comments relate to identifying the acquirer of a business and whether it is an asset acquisition or an acquisition of a business. Other comments relate to purchase price allocations, fair value, determination of key assumptions, and allocations of goodwill to reporting segments. In tying this back to business segments, it may be necessary to reevaluate reporting segments after business combinations.

Finally, other newer topics in the SEC comment letters included internal control matters and other compliance. Some of the common comments are those relating to changes in internal control and the disclosure and evaluation of deficiencies identified. General comments related to other compliance issues including incorrect filing dates, absent exhibits, incorrect and/or missing signatures, and required certifications which are likely remedied by an amended filing.

In conclusion, since many of these areas of discussion may continue to be in the focus of ongoing comment letters, it is important that companies respond to the SEC appropriately. Companies should seek clarification from SEC staff if questions are unclear or not understood, and should draft responses with consideration that the document will become public. It is not necessary for companies to rush to respond to comments, but rather ensure that input is received from the company’s accountants and lawyers and that technical support is provided for the accounting and disclosure, including any disclosure for future filings.

Reviews of Forms 10-K, 10-K/A, 10-Q, and 10-Q/A and comment letters:

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