In a number of recent comment letters, the SEC has focused on companies’ discussions of their critical accounting policies in Management’s Discussion and Analysis of Financial Conditions and Results of Operations.

For example, in a comment letter addressed to an internet-based marketing services provider, the SEC staff noted that the company’s discussion of critical accounting policies appeared to be an almost verbatim copy of the accounting policies disclosed in the notes to financial statements and that the discussion in the MD&A should “supplement, not duplicate,” the descriptions in the notes. The SEC directed that the disclosures regarding critical accounting policies in the MD&A provide, “as necessary,” greater insight into the quality and variability of information in the consolidated financial statements; address specifically why the accounting estimates or assumptions may change; and analyze the factors relating to how the company arrived at its estimates; and provide a sensitivity analysis. Given the SEC’s comments, it may be prudent for companies to review their discussion of critical accounting policies in the MD&A to determine whether additional disclosure is warranted.

The SEC also continues to focus on revenue recognition policies. Recent comment letters included questions related to recognition of revenue on the percentage-of-completion basis and in connection with contracts where there are both goods and services delivered. In addition, the SEC also questioned a company about its policy of recognizing revenue with respect to “new” products only when the product is formally accepted by the customer and with respect to “established” products upon delivery of the product. The company explained that a new product becomes an established product if the installation process and the post-delivery acceptance provisions have become routine, and there is a demonstrated history of the product meeting specifications.