August 01, 2011
"Latest Comments from the Commission" intends to highlight some of the more frequently appearing quotes from recent SEC comment letters. For a complete listing of SEC comment letters and registrants' responses, please visit the commission's website at www.sec.gov.
In lieu of our regular column on Latest Comments from the Commission, we bring you some highlights of the topics discussed at the June 28, 2011 meeting by the Center for Audit Quality (CAQ) SEC Regulations Committee. CAQ meets periodically with the staff of the SEC to discuss emerging financial reporting issues relating to SEC rules and regulations. In their most recent meeting on June 28, the SEC staff shared a number of observations on financial reporting matters. 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. In addition, these highlights are not authoritative positions or interpretations issued by the SEC or its staff. The highlights were not transcribed by the SEC and have not been considered or acted upon by the SEC or its staff. Accordingly, these highlights do not constitute an official statement of the views of the Commission or of the staff of the Commission.
A. NOTIFICATION OF COMPLETION OF EXCHANGE ACT FILING REVIEW
The letter the Division staff sends to registrants upon completion of the review of their Exchange Act filings contains the following new paragraph with no implication to the registrants:
We have completed our review of your filing(s). We remind you that our comments or changes to disclosure in response to our comments do not foreclose the Commission from taking any action with respect to the company or the filing[s] and the company may not assert staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States. We urge all persons who are responsible for the accuracy and adequacy of the disclosure in the filing[s] to be certain that the filing(s) include(s) the information the Securities Exchange Act of 1934 and all applicable rules require.
B. LOSS CONTINGENCY DISCLOSURES
The accounting and disclosure of loss contingencies continues to be an area of focus in filing reviews. The SEC staff's views and observations on loss contingency disclosures are summarized below:
- Registrants must comply with ASC 450, Contingencies.
- Registrants should use language in their disclosures that is consistent with ASC 450 (e.g., "reasonably possible loss" as opposed to "potential loss").
- Disclosures should not have confusing, contradictory or unclear language.
- Aggregation of contingencies for disclosure purposes is acceptable and helps mitigate registrants' confidentiality concerns.
- If a registrant discloses that a contingency is not estimable, the SEC staff may request supplemental information about the registrant's process and efforts to conclude an amount is not estimable.
- Registrants must also comply with other requirements related to disclosures of loss contingencies, including Regulation S-K Item 103, Legal Proceedings, which has different disclosure objectives than ASC 450, and SAB Topic 5-Y, Accounting and Disclosures Related to Loss Contingencies.
C. DEFINITION OF "FULL AND UNCONDITIONAL" RELATED TO GUARANTEED SECURITIES UNDER RULE 3-10 OF REGULATION S-X
Members of the Committee and the SEC staff discussed certain aspects of the full and unconditional guarantee requirement in Rule 3-10 of S-X. The SEC staff indicated they would update the Committee as developments occur.
D. REVERSE MERGERS
In June 2011, the SEC issued an Investor Bulletin on risks of investing in reverse merger companies noting the SEC and U.S. exchanges recently suspended trading in a more than a dozen reverse merger companies, citing a lack of current, accurate information about these companies and their finances. Reverse mergers currently are a major focus of the SEC. The SEC staff commented that reverse merger entities must have transparent disclosures to help investors understand the nature of the entity and that for certain reverse mergers the SEC staff is concerned about the sufficiency of the related Form 8-K disclosures, which must be consistent with Form 10 (i.e., Exchange Act registration disclosures).
E. STUDY OF IFRS APPLICATION
The Division staff is nearing completion of its study of the application of IFRS. The SEC staff expects to publicly release observations later this year.
F. NON-GAAP FINANCIAL MEASURES
Regulation G, General rules regarding disclosure of non-GAAP financial measures, prohibits disclosure of misleading non-GAAP financial measures in filings, press releases and other public disclosures. For example, the exclusion from a non-GAAP financial measure of normal, cash operating expenses necessary to operate the business could be misleading.
SEC Trends & Developments - Summer 2011 Issue