The management discussion and analysis sections of regulatory filings continue to be the leading source of comments from U.S. Securities and Exchange Commission staff, according to a new report by Deloitte.
Under the Sarbanes-Oxley Act, the SEC’s Division of Corporate Finance is required to review registrants at least once every three years. In a survey of recent comment letters, Deloitte said staff have been encouraging registrants to “tell their story” in MD&A so investors can see the company “through the eyes of management.”
MD&A comments often focus, the report says, on enhancing the executive overview to provide an investor with a balanced summary of key drivers, challenges and risks that affect the registrant’s liquidity and results of operations.
As far as results of operations, SEC staff “[have] continued to focus on encouraging registrants to disclose known trends or uncertainties, quantify components of overall changes in financial statement line items and enhance their analysis of the underlying factors that cause such changes.”
Other sections of corporate filings have attracted frequent SEC comments on segment reporting, revenue recognition, income taxes, internal control over financial reporting and the cash flow statement.
For segment reporting, Deloitte reports, the comments indicate that the SEC will likely no longer regard the information package provided to the registrant’s chief operating decision maker “as the determinative factor supporting the identification of a registrant’s operating segments but will treat the CODM package as one of many factors to be considered.”
Revenue recognition comments, meanwhile, continue to “address the completeness and consistency of disclosures about revenue recognition policies, accounting for multiple-element arrangements and principal-versus-agent analysis (i.e., gross or net reporting).”
There have also been substantial industry-specific comments to registrants, Deloitte noted. Comments relating to the oil and gas industry, for example, have focused on understanding how registrants accounted for master limited partnerships, the amount and classification of proved undeveloped reserves and separate disclosure of natural gas liquid reserves.
Banking registrants have been asked about disclosures related to the credit quality of their assets, including the sufficiency of their loan-loss allowances, while comments to retailers have centered on the need for separate disclosure and analysis of online sales in MD&A.