sec reporting & disclosures & hot topics in … objectives 2 to provide an overview of...
TRANSCRIPT
SEC Reporting & Disclosures & Hot Topics in Accounting
Life Sciences Accounting & Reporting Congress
March 22, 2016
1
Learning Objectives
2
To provide an overview of current SEC comment letter and hot topics
To provide highlights of new accounting topics affecting life sciences companies
To highlight the ongoing disclosure effectiveness initiative
SEC Comment Letter Trends and Hot Topics
New Accounting Guidance
Disclosure Effectiveness
3
SEC Comment Letter Trends
4
Comments in 2015
• 15% - MD&A / Results of Operations
• 13% - Fair value
• 10% - Non-GAAP measures
• 9% - Revenue recognition
• 8% - Taxes
• 7% - Segment reporting
*Source – www.auditanalytics.com
MD&A
5
• Leading source of SEC comments
• More than half of registrants receiving comments are given comments on MD&A
• SEC expecting MD&A that is easier to follow and understand
• Efficient and less redundant disclosures
• Focus on objectives of MD&A included in Item 303 of Regulation S-K
• Additional discussion is useful and encouraged by SEC staff
MD&A
6
Critical accounting policies/estimates
• No copying accounting policies footnote
• How they were derived
• Accuracy in the past and potential future changes
Results of operations
• Quantification of factors contributing to changes in revenue / income
• Changes in reserve accounts
• Key financial metrics
MD&A
7
Disclosure requirements
• Clear definition and description of calculation
• Material limitations
• How it relates to performance
Metrics/KPI’s – Does anyone disclose KPIs in MD&A or elsewhere?
MD&A
8
Non-GAAP Financial Measures Disclosure Requirements
• Clear labeling / description / context / terminology
• GAAP measure should be more prominent
• Disclose why the non-GAAP measure is useful to investors
• Disclose how management uses non-GAAP measures
• Reconciliation of non-GAAP measures to nearest GAAP measure
• Misleading disclosures are not allowed anywhere
MD&A
9
R&D expenses
• Project-level data • Both current and future expenses
Patents
• Type of protection • Expiration dates • Jurisdictions
Liquidity
• Business trends – sources and uses of cash • Don’t state the obvious
Revenue Recognition
10
Adjustments to revenue
• Focus on all reductions of revenue (rebates, returns, chargebacks, etc.) and the qualitative factors used in estimates
• Request for expanded disclosures include:
– Differentiate between activity related to current year and prior year sales activities – both for provisions and actuals
– Explain business reason for fluctuations in each type of adjustment to revenue and how fluctuations impact future estimates
Revenue Recognition
11
Multiple-element arrangements
• Focus on disclosures required by ASC 605-25-50 – Nature of the arrangement – Significant deliverables – Timing of delivery or performance
• The SEC has requested additional details regarding:
– Better description of obligations / rights – Whether deliverables represent a separate unit of
accounting – Total consideration and how the consideration is
allocated among units
Revenue Recognition
12
Milestones payments
• Disclosures should be at the individual milestone level (ASC 605-28-50)
• Enhanced disclosures requested on when revenue is recognized and the accounting policies applied
Revenue Recognition
13
Collaboration Agreements SEC focus • Adequate disclosure - allow reader to fully understand
collaboration arrangements • Particular focus on revenue recognition. • Contingent payment obligations should be included in
Contractual Obligations table Example Comment Letter Please tell us how you account for revenue from your collaboration agreements, including any upfront or milestone payments received, and cite the appropriate accounting guidance that you apply.
14
Segment Reporting
Areas of focus
• Providing useful information to investors in the most clear efficient manner
• Identification of the Chief Operating Decision Maker (CODM)
• Emphasis on the need for effective controls specific to segment reporting
• Careful consideration if aggregation is acceptable • Benchmark cautiously • Data availability
15
Segment Reporting
SEC expects companies to clearly explain:
• Overall management/organization structure
• How budgets and forecasts are approved and monitored
• How executive comp and employment decisions made
• Specific financial information provided to CODM for allocating resources / assessing performance
– Other information and consistency with above
– Changes in business (acquisitions, economics)
Consider the investor perspective
Segment Reporting
16
Benchmarking
• Big Pharma – average number of segments is ~2 based on review of 20 large Pharma companies
• Consider the uniqueness of your organization structure and specific company circumstances
Company # of
Segments Astra Zeneca 1
Gilead Sciences 1
AbbVie 1
Amgen 1
Briston-Myers Squibb 1
Astellas 1
Biogen 1
Celgene 1
Roche 2
Teva 2
Eli Lilly & Co 2
Novo Nordisk 2
Baxter International 2
7 Other 3-5
Income Taxes
17
• Reinforced during December 2015 AICPA conference
• Rate reconciliation
– Unclear labeling
– Inappropriate aggregation
– Inconsistencies with other disclosures
– Corrections of errors labeled as changes in estimates
– Effect of foreign jurisdictions
• Uncertainty in sustainability of historical income tax rates
• Realizability of deferred tax assets
– Weighting of positive and negative evidence
• Foreign taxes
#2 on list of reasons for
restatements (derivatives is #1);
one of leading reasons for MWs
Statement of Cash Flows
18
• Gross/net presentation of borrowing
• Restricted cash
• Accounts payable related to capital expenditures
• Contingent consideration liabilities
• Noncontrolling interests
#3 on list of reasons for restatements
19
SEC Chair Mary Jo White stated at the December 2015 AICPA National Conference:
It is hard to think of an area more important than ICFR to our shared mission of providing high-quality financial information that investors can rely on.
The SEC continues to: • Challenge disclosures addressing only accounting error
rather than control implications
• Request additional detail on material weaknesses identified
Internal Controls over Financial Reporting
SEC Comment Letter Trends and Hot Topics
New Accounting Guidance
Disclosure Effectiveness
20
21
Revenue Recognition
• At the December AICPA Conference, FASB noted another one-year deferral appears unlikely (even though 75% of companies have not started yet)
• Consistency of application of the standard will be problematic across the same industry and even within the same company since different indicators can be emphasized (e.g., for transfer of control)
• SEC expecting updates to recent accounting
pronouncements disclosures – Only 2 of 20 “big Pharma” companies reviewed have
disclosed an update in their 2015 10-K filing – completed initial assessment and expectations
Revenue Recognition
22
Practical advice from December AIPCA conference:
• Buy-in from top management
• Understand structure
• Identify a strong project manager
• Representation from all corporate functions and business units
• Assess outside vs. internal resources
• Assess impact, impact workstream (use existing processes/controls), integrate/implement
• Lessons learned: communicate x3, assume nothing, rework, long process
23
• Final standard released in Feb 2016
– Effective 2019 for public companies
– Significant changes since exposure draft
• All leases will be on lessee’s balance sheet
– Exception: leases with term of 12 months or less (no low-value exemption in GAAP)
• Definition changed, but most leases today will be leases tomorrow
• Additional disclosures for both lessees and lessors (incl. residual value)
• Transition requires modified retrospective approach and includes optional practical expedients
New Leasing Standard
24
• Multi-step process: – understand your lease populations (incl. service
contracts) and systems – analyze the standard – determine your end state – plan, resource and communicate
• Maintain alignment with other departments: Tax, Treasury, Corporate Real Estate, Legal, IT, etc.
• Quite a few differences between FASB and IASB which will be a problem especially for multi-nationals
• Impairment considerations
• Structure of new leases
New Leasing Standard
Effective Standards for Q1 2016 Calendar year public companies
25
ASU Title
2015-02 Consolidation (Topic 810): Amendments to the Consolidation Analysis
2014-16 Determining Whether the Host Contract in a Hybrid Financial Instrument Issued in the Form of a Share Is More Akin to Debt or to Equity
2014-12 Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance target Could Be Achieved after the requisite Service Period
2014-13 Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity
2015-01 Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items
2015-03 Simplifying the Presentation of Debt Issuance Costs
2015-04 Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets
2015-05 Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
2015-06 Earnings Per Share (Topic 260): Effects on Historical Earnings per Unit of Master Limited Partnership Drawdown Transactions
2015-07 Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share
2015-09 Insurance: Disclosures about Short-Duration Contracts
2015-12 Plan Accounting: Defined Benefit Pension Plans
2015-16 Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments
Effective Standards for Q1 2016 Calendar year public companies
26
2015-02 – Consolidation (Topic 810)
• Reassessment for consolidation as a VIE for all legal entities
2015-03 & 2015-15 – Debt Issuance Costs
• Retrospective application – analysis to be performed on all debt outstanding at BS periods presented
SEC Comment Letter Trends and Hot Topics
New Accounting Guidance
Disclosure Effectiveness
27
28
• SEC/FASB engaged in studies of disclosure effectiveness • To improve effectiveness of disclosures by clearly
communicating information most important to f/s users
• SEC is looking to eliminate duplicative disclosure and expand disclosure in areas that warrant additional information to meet investor needs
• SEC commented favorably on expanded use of tabular and visual disclosures as a common effective way to communicate financial information to investors
• September 2015 request for comment
Disclosure Effectiveness
29
• Start now, if you haven’t already!
• Focus on material information and eliminate outdated or immaterial information
• Identify and eliminate duplicative information
• Focus on items important to investors
• Involve all relevant parties
Disclosure Effectiveness
Thank You
30
Questions?
Lindsi Scanlan, Senior Manager
T: (610) 613-7783
Contact Information
31
Ryan Dolan, Managing Director
T: (978) 317-9398