On December 2, 2010, the SEC posted to its website an updated version of its “SEC Staff Review of Common Financial Reporting Issues Facing Smaller Issuers.” The 56-page presentation addresses some of the issues the Corporation Finance Division’s staff has frequently encountered in the past year while reviewing filings from smaller public companies. It also includes information on SEC rulemaking from the past year of interest to small companies, developments within the Division and an overview of the SEC comment letter process, including what types of filings are reviewed, the three levels of review, and the procedural process for addressing and resolving comments. The review was initially presented at the Forums on Auditing in the Small Business Environment hosted by the PCAOB during 2010.
As part of the review, the staff highlighted certain disclosure issues that are applicable to all issuers, including the following recommendations:
- Provide an overview in the MD&A section that highlights both financial and non-financial key performance indicators as background to understanding the company’s overall performance for the periods.
- In providing a discussion of liquidity, discuss how the company funds its operations by considering what its significant bills are and how it pays those bills. In addition, to the extent the registrant will need additional capital in the future, consider providing a clear discussion of the source of that capital and the consequences if it is unable to obtain capital including a discussion of any going concern consideration.
- Avoid overly vague or “boilerplate” disclosures regarding revenue recognition accounting policy disclosures. Registrants should take care to fully disclose the timing and method for recognizing revenue for each of their material revenue streams.
- The conclusion regarding the registrant’s disclosure controls and procedures should be in clear and unqualified language – effective or not effective. The phrase “adequate” or “effective except for …” are inappropriate.
- It is possible that disclosure controls and procedures can be ineffective even while internal control over financial reporting is effective. However, in this situation, the staff may ask the registrant to support such conclusion. In addition, registrants should consider reassessing conclusions upon the filing of any amendments.
The presentation highlights various accounting and reporting issues that arise in connection with the following areas and provides suggestions and recommendations that small issuers can take to ensure that their disclosure and financial statements comply:
- management’s discussion and analysis
- reverse mergers and “back door” registrations
- business combinations
- goodwill, intangible and long-lived assets
- predecessor financial statements
- equity transactions
- embedded conversion options and freestanding warrants
- revenue recognition
- smaller reporting company status
- disclosure controls and procedures and internal control over financial reporting
- Forms 8-K reporting events under Item 4.01 and 4.02
A copy of the presentation is available at http://www.sec.gov/news/speech/2010/spch1210wc.pdf.