04.22.2003

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Updates

The SEC's 2002 "Fortune 500" review of annual reports, coupled with our and our clients' recent 10-K filing season, indicates that the SEC will continue to focus on the following critical disclosure areas in the coming year's periodic reports:

    • Management's Discussion and Analysis (MD&A), particularly:
      • Critical accounting policy disclosure;
      • Non-GAAP financial information;
      • Revenue recognition; and
      • Off-balance sheet arrangements.

None of these issues is breathtakingly new. But cumulatively they provide very useful insight into the SEC's areas of current focus. The published Fortune 500 findings also echo, with more detail, the comments of SEC Division of Corporation Finance speakers over the past 18 months. Please consider consulting this checklist frequently to ensure that earnings releases and MD&A in periodic reports appropriately address the areas most likely to be of interest to the SEC.

Text of SEC's "Fortune 500" Report

This Update and checklist are intended only as resources to complement the SEC's report. You can find the full text of the report at www.sec.gov/divisions/corpfin/fortune500rep.htm. You can find discussion of other recent laws and regulations of interest on our website.

Checklist of Current SEC Disclosure Issues (April 2003)

MD&A Generally

        • Provide information about the existence of known trends, uncertainties and other factors relevant to the company's financial condition and results of operations.
        • Provide a detailed analysis of material year-to-year changes and trends in connection with the company's financial statements.
        • Avoid simply reciting financial statement information without analysis, or providing boilerplate analysis.
        • Give sufficient attention to the topics of liquidity, cash flow and capital resources.

Critical Accounting Policy Disclosure

      • Provide sufficient discussion of the company's critical accounting policies in MD&A, including following the guidance in FR 60 [http://www.sec.gov/rules/other/33-8040.htm] (Cautionary Advice Regarding Disclosure About Critical Accounting Policies).
      • Disclose the company's most difficult and judgmental estimates, the most important and pervasive accounting policies used, and the areas most sensitive to material change from external factors.
      • Consider providing a sensitivity analysis to facilitate an investor's understanding of the impact of the accounting policies on the bottom line.

Non-GAAP Financial Information

      • Use GAAP-based financial information, and provide GAAP-based performance discussions with equal or greater prominence than those based on non-GAAP measures.
      • Comply with the new rules regarding non-GAAP financial information under Section 401(b) of the Sarbanes-Oxley Act of 2002, including, where non-GAAP information is provided:
        • A presentation that gives equal or greater prominence to the most directly comparable financial measure presented in GAAP;
        • A reconciliation to the comparable GAAP measure;
        • A statement of the reasons why management believes that the non-GAAP presentation is useful; and
        • A statement disclosing the additional purposes, if any, for which management uses the non-GAAP financial measures that are not otherwise disclosed.

Revenue Recognition

    • If a company is in a particular listed industry, pay special attention to the issues as identified below:

      • Computer software, computer services, computer hardware and communications equipment. Consider expanding disclosure regarding the company's revenue recognition accounting policy for software and multiple-element arrangements (providing software, hardware and services under the same agreement).
      • Capital goods, semiconductor, and electronic instruments and controls. Improve accounting policy disclosure for deferred revenue, revenue recognition for products with return or price protection features, requirements for installation of equipment and other customer acceptance provisions.
      • Energy. Adequately disclose the material terms of energy contracts.
      • Pharmaceutical and retail. Adequately disclose the revenue recognition policy regarding product returns, discounts and rebates, and improve disclosure of co?op advertising arrangements with retail companies.
    • Review Staff Accounting Bulletin ("SAB") No. 101 [http://www.sec.gov/interps/account/sab101.htm] for guidance on how to apply GAAP to revenue recognition issues in financial statements.

Other Topics, Including MD&A:

Off-Balance Sheet Arrangements, Securities and Financial Assets

        • Expand MD&A as needed to describe the structure, business purpose and accounting for these transactions.
        • Review FR 67 [http://www.sec.gov/rules/final/33-8182.htm] (Disclosure in Management's Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations).
        • Highlight significant assumptions used to determine a gain or loss from a sale of assets, and the potential risk of loss that the company retains in the assets.
        • Review FR 61 [http://www.sec.gov/rules/other/33-8056.htm] regarding expanded and tabular disclosure of off-balance sheet arrangements.
        • Expand footnote disclosure as needed to specify the accounting for off-balance sheet arrangements.

"Restructuring" Discussions

      • Expand the company's disclosure of restructuring charges and justify/fully explain the company's accounting for such charges.
      • Include a complete description of each component of total restructuring charges.
      • Identify and fully describe the timing of cash payments to be made under the restructuring plan.
      • Disclose when the company expects the restructuring plan to be completed.
      • Highlight the nature and reasons for adjustments or reversals of restructuring charges.
      • Include a reasonably detailed discussion of the events and decisions that gave rise to the restructuring plan.
      • Discuss the reasonably likely material effects of management's plans on financial position, future operating results and liquidity (for example, reduced depreciation, reduced employee expense, etc.) and quantify these effects and when the company expects to realize them.
      • Discuss material revisions to the plans and the timing of their execution, including the nature and reasons for any revisions.
      • Consider including a period-by-period analysis of restructuring charges with financial statements, including:
        • The original restructuring charge;
        • Cash payments made;
        • Non-cash payments used;
        • Reversals or adjustments to the charges and non-cash write-downs (impairments, etc.); and
        • Disclosure of the adjustment or reversal for each material component of the total restructuring charges.

"Impairment Charge" Discussions

      • Expand disclosure (including financial statement disclosure) as needed to describe:

        • Specific assets that were impaired, including whether those assets were held for use or for sale;
        • The facts and circumstances (specific events and decisions) that led to the impairment charge; and
        • The assumptions or estimates the company used to determine the amount of the impairment charge.
      • Identify any material assets analyzed for impairment for which the company has not yet recorded an impairment charge.

Goodwill and Other Intangible Assets

      • Describe the methodology and assumptions or estimates used to test goodwill and other intangible assets for impairment.
      • Highlight any reporting units for which goodwill impairment charges are reasonably likely to occur.
      • Review SFAS No. 142 [http://www.fasb.org/st/summary/stsum142.shtml] regarding accounting for goodwill and other intangible assets and required testing for impairment.
      • Review financial statement disclosure to ensure that it:
        • Reflects impairments;
        • Clearly describes the company's accounting policy for measuring impairment, including how reporting units are determined and how goodwill is allocated to those reporting units; and
        • Provides the disclosures required by SFAS No. 142.

Pension Plans

    Clearly describe:
    • Significant assumptions and estimates used to account for pension plans, and how those assumptions and estimates are determined.
    • Source of return data used to determine the company's expected return assumption.
    • The assumptions, estimates and data source used to determine the discount rate.
    • The effect that pension plans had on results of operations, cash flow and liquidity, including:
      • The amount of expected pension returns included in earnings; and
      • The amount of cash outflows used to fund the pension plan.
    • Any expected change in pension trends, including:
      • Known changes in the expected return assumption and discount rate to be used during the next year; and
      • The reasonably likely impact of the known change in assumption on future results of operations and cash flows.
    • The amount of current unrecognized losses on pension assets and the estimated future effect of those losses on future pension expense.
    • A sensitivity analysis that expresses the potential change in expected pension returns that would result from hypothetical changes to pension assumptions and estimates.

       In addition:

Segment Reporting

      • Review SFAS No. 131 [http://www.fasb.org/st/summary/stsum131.shtml] and SEC rules for guidance on when the company must report separate financial information about an operating segment, as well as the specific disclosure requirements once the operating segments are identified.
      • Avoid inappropriately aggregating multiple segments, or inadequately explaining the basis for aggregating information.

Environmental and Product Liability Disclosure

      • For environmental and product liability disclosure, provide a meaningful analysis as to why the amounts charged in each period were recorded and how the company determined the amounts.
      • Review SFAS No. 5 [http://www.fasb.org/st/summary/stsum5.shtml], FIN 14, SOP 96-1 and SAB 92 regarding the general in formation that companies with environmental and product liabilities must disclose, including:
        • The nature of a loss contingency;
        • The amount accrued;
        • An estimate of the range of reasonably possible loss;
        • Significant assumptions underlying the accrual; and
        • The cost of litigation.
      • Review SAB 92 regarding additional specific disclosure requirements for such liabilities.

Securities Held for Investment

    • Review SFAS No. 115 [http://www.fasb.org/st/summary/stsum115.shtml] and SAB 59 for guidance on accounting for equity securities with readily determinable fair values and for all investments in debt securities.
    • For unrealized losses that are temporary and therefore not recognized in net income, explain or justify how the company determined that these losses are still considered temporary.
    • Expand disclosure to describe the specific factors that the company uses to determine whether unrealized losses are temporary and other-than-temporary.
 

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