Insight

SEC’s Corp Fin explains its priorities and concerns

Questions about the new FASB segment reporting standard highlighted at the 2023 AICPA & CIMA Conference.


Staff in the SEC’s Division of Corporation Finance (Corp Fin) explained the Commission’s priorities, disclosure trends and expectations, rulemaking and other recent developments during a panel presentation at the Conference Tuesday morning.

A highlight of the panel was a discussion of the SEC’s anticipated response to including additional measures of segment profit and loss in financial statements as a result of newly issued ASU 2023-07. The staff also provided a good indication of some of the key areas for registrants to look out for in their 2023 year-end reporting. 

“The Division of Corporation Finance provided important reminders for registrants heading into year-end, covering 'nuts and bolts’ issues from their vantage point and considerations heading into 2024. This year the staff focused on emerging areas – segment reporting disclosures and final rulemaking – as well as critical disclosure considerations in the current environment.”

 

— Timothy Brown, KPMG SEC Regulatory Matters Topic Team Leader

 

Segment reporting questions

The FASB released its much anticipated segment reporting standard (ASU 2023-07) on November 27. Read our Defining Issues, FASB issues ASU requiring new segment disclosures.

The new standard permits preparers to report multiple measures of segment profit or loss, as long as one of the measures reported is the measure that is most consistent with GAAP. This means that additional measures of segment profit and loss could start appearing in the notes to financial statements. 

Because the new standard only mandates that one measure be provided, Corp Fin staff indicated that they will consider any additional measures reported to be non-GAAP financial measures, despite being permitted by GAAP. While C&DI 104.01 permits the use of “measures of profit or loss and total assets for each segment required to be disclosed in accordance with GAAP,” the SEC staff indicated that additional non-GAAP measures are not "required or expressly permitted” and therefore are not subject to this exception. Companies that plan to early adopt the ASU and include additional non-GAAP measures in segment disclosures should consult with Corp Fin-OCA staff before filing and consider whether these additional measures comply with existing SEC regulations for non-GAAP measures, including relevant disclosures.

Single reportable segment entities

The new segment reporting standard requires single reportable segment entities to apply ASC 280 in its entirety, which includes reporting the segment measure that is most consistent with GAAP. During discussions on Monday, Associate Chief Accountant Carlton Tartar talked about entities with a single reportable segment and noted that the SEC staff interprets the phrase ‘most consistent with GAAP’ to mean net income. We understand that Tartar’s comments were mostly related to such entities that also have a single operating segment.


Errors continue in non-GAAP financial measures

The Corp Fin staff surprised conference attendees last year by announcing several new and updated C&DIs on reporting non-GAAP financial measures. These C&DIs addressed non-GAAP presentation practices the staff believes do not comply with SEC regulations, such as presenting a non-GAAP measure more prominently than its directly comparable GAAP measure and excluding a normal, recurring operating expense from a non-GAAP measure when the expense is necessary to operate the registrant’s business.

This year the staff noted that these C&DIs did not reduce the number of comments in 2023. Corp Fin is still observing errors concerning the basic requirements, such as:

  • Not properly identifying expenses that are normal and recurring. An example is including adjustments for costs incurred to open a new store location when the registrant has incurred similar costs when opening other new stores. Normal and recurring is considered at the registrant level and not individual locations.

  • Presenting a tailored accounting principle with adjustments that change the GAAP-basis recognition, which the staff believes is misleading. An example is presenting a non-GAAP revenue measure that deducts transaction costs as if the registrant acted as an agent in a transaction when it is a principal under US GAAP. 

Read more in our Issues-in-Depth, Non-GAAP financial measures.

Inventory disclosures lacking

Corp Fin staff observed that when companies have experienced material amounts of inventory losses – whether due to theft, obsolete or outdated inventory, or other circumstances – there has been little to no disclosures in MD&A or the notes to the financial statements about these issues. 

Corp Fin staff reminded registrants that when inventory losses have a material impact on year-on-year results, and if there are known trends or uncertainties that will impact the company’s results of operations or liquidity, MD&A should include discussion of this fact. 

Additionally, registrants should disclose in their risk factors any inventory risk that could or has impacted the company’s business. 

Accountants can help with pay vs performance (PvP) rules

The PvP rules require registrants to disclose specified information about executive compensation. At the heart of the rules is disclosure of ‘actual compensation paid’ as that term in defined by the rules. The SEC staff has been getting questions, many from attorneys and compensation analysts, about how to determine actual compensation paid and the fair value of stock-based compensation. 

The SEC released C&DIs in February, September and November 2023. These C&DIs also address other areas, such as clarifications to the appropriate fair value methodologies. The computations are largely GAAP-based, and therefore Corp Fin Chief Accountant Lindsay McCord urged registrants to involve their accountants in the process.

Read more about the C&DIs in our Defining Issues, New SEC staff C&DIs on pay vs performance disclosures.

 

“Accountants are well positioned to provide assistance in complying with the PvP rules because determining compensation under these rules is largely a GAAP-based exercise, sometimes requiring significant professional judgment. This exercise can be particularly complex when compensation has an equity component.”

 

— Nick Burgmeier, KPMG Partner


 

Erroneously awarded compensation ('clawback') rules draw questions

Registrants had to adopt recovery policies under the clawback rules by December 1, 2023. Upon adopting a recovery policy, a registrant must begin complying with the new requirements of the listing standards and SEC rules.

The Corp Fin staff has already fielded questions about these requirements and reported on some confusion around the use of the check boxes.

  • Checkbox 1 is used to indicate that the filing reflects a correction of an error to previously issued financial statements – i.e. it is checked when the prior period(s) annual financial statements report any accounting error as defined in ASC 250, including the voluntary correction of an immaterial error. It is not checked when the current-year financial statements reflect an out-of-period adjustment that does not change the prior-year financial statements. 

  • Checkbox 2 is checked when those corrections are restatements that require a recovery analysis under the clawback rule. A recovery analysis is triggered for either a Big R or little r restatement.

  • Corp Fin reported confusion about corrections of errors versus changes in accounting principle. Checkbox 1 is not checked when the prior period(s) annual financial statements reflect a change in accounting principle. 

Read more about error corrections and distinguishing between errors and changes in accounting principle in our handbook, Accounting changes and error corrections. Read more about the clawback rules in our Hot Topic, SEC approves clawback listing standards.