This article from BNA suggests that most SEC comment letters will continue to focus on MD&A in 2014. The expected continuation of this trend was reinforced by the SEC Accounting staff at an AICPA conference. Another area of significant interest will be disclosure of cybersecurity risks, instigated by Congress (and perhaps also by recent security breaches in retail), requesting more details on how a potential breach could affect operations and performance.
MD&A shortcomings identified by the staff at the conference include the following:
- segment reporting;
- the impact of business combinations on the value of goodwill;
- the use of non-GAAP performance measures; and
- pension plan operations.
Companies were urged to provide details and specificity but to avoid disclosure overload. (No problem there, of course.) Apparently, there's just "too much meaningless ‘boilerplate'… that provides investors with no meaningful information."
Common staff comment requests include quantifying components of changes and metrics and enhancing analysis of underlying causal factors leading to those changes. As noted in an analysis by Deloitte, other typical comments include "in addition to discussing how volume and product mix affect a registrant's results of operations, the registrant should explain other potential influences, such as pricing changes, acquisitions, new contracts, inflation, and foreign exchange rates….'" With regard to critical accounting policies, these "should be restricted to only those issues requiring significant management estimates and judgment, and not a recitation of accounting policy disclosures from the footnotes." Companies were also urged to focus on early-warning disclosures about factors that could have a material impact and "off-balance-sheet arrangements, especially ones that might cause the registrants material difficulties, any support to the arrangement that the registrant had provided, and how debt covenants, capital ratios, credit ratings, or dividends accruing from the arrangements could affect operations."
A similar analysis by EY corroborated the conclusion above that companies are consistently urged "to disclose not only what but why significant changes occurred in their results of operations. Registrants should quantify and discuss the underlying factors that led to significant changes in financial statement line items." EY also noted that "the SEC wants more discussion in MD&A of operating expenses that have affected income of … each business segment so an investor can better understand the entity's overall business." EY also noted the common insistence on quantification, with the staff asking companies to
- "not only describe but quantify key metrics in MD&A for each period presented";
- "discuss how metrics are calculated and whether there are any limitations in their calculation";
- "provide metrics on a disaggregated basis, such as by segment, geography or revenue stream (e.g., breaking down same-store sales between e-commerce and in-store sales)"; and
- "ensure that key metrics used to explain fluctuations from period to period are linked to the financial statements (e.g., using the increase in the number of customers to explain revenue growth)."