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Understanding SEC Comment Letter Trends – How to Improve Financial Reporting & Communication with Stakeholders

The Securities and Exchange Commission (SEC) is required to review every public company’s financial statements at least once every three years. During their review, they may provide comments to a company where they identify accounting treatment or disclosures that appear to be inconsistent with or deficient to the SEC and/or GAAP accounting and disclosure guidance. These comments may require the company to provide additional information, explain its accounting policies and judgments, or even potentially restate its financial statements.

SEC comment letters provide insights into the SEC staff’s views and expectations on various accounting, reporting, and disclosure issues and identify areas of accounting and reporting where companies are incorrectly applying rules and guidance.

Responding to the SEC’s comments can become a regulatory burden for the company and potentially become a source of reputational risk and investor scrutiny if the SEC’s review results in a restatement of financial statements. By understanding SEC comment letter trends, companies can improve their disclosure quality and compliance with SEC rules and regulations and be alert to potential areas of concern or controversy affecting other public companies.

The following topics have been trending in SEC comment letters:

Management’s Discussion & Analysis (MD&A)

• AREAS OF FOCUS: Comments have been focused on greater transparency in underlying factors causing changes in financial statement line items. Other areas of focus are material trends and uncertainties that affect the results of operations, liquidity and capital resources, and critical accounting estimates.
  
  
• HOW CENTRI CAN HELP:  Our team of experts can assist in the preparation of MD&A disclosures or perform a thorough review of a company’s MD&A to ensure compliance with the SEC’s rules, as well as consistency with industry practices.

Non-GAAP Measures

• AREAS OF FOCUS: The SEC issued Compliance and Disclosure Interpretations (CDIs) in December 2022 that clarified the requirements for presenting and reconciling non-GAAP measures to the most directly comparable GAAP measures, and the importance of using clear labels and accurate descriptions for non-GAAP measures. Whenever these types of statements are updated, the SEC staff pays close attention to compliance.
  
  
• HOW CENTRI CAN HELP: Our financial reporting team stays updated on the latest developments and trends in this area, and can help your company follow best practices for non-GAAP measures and ensure appropriate disclosure and reconciliation to comparable GAAP measures.

Segment Reporting

• AREA OF FOCUS: In response to the FASB-issued Accounting Standards Update (ASU) No. 2023-07 requiring public companies to disclose more information about their reportable segment expenses and other changes, SEC comments this year will likely focus on these related disclosure enhancements.

• HOW CENTRI CAN HELP: Our financial reporting and technical accounting teams work closely with client teams to develop or enhance disclosures around the identification and reporting of the significant segment expenses, as well as developing control activities over how the chief operating decision maker (CODM) is using these reported expenses to measure segments’ profit or loss.

Revenue Recognition

• AREA OF FOCUS: Revenue recognition accounting continues to be a focus area for the SEC. Staff comments generally focus on identifying performance obligations, significant judgments, estimating variable consideration, allocating transaction price, and disaggregation disclosures.

• HOW CENTRI CAN HELP: Our team of experts can assist with the preparation of revenue recognition footnotes and related required disclosures in the financial statements, performing technical accounting analyses for various revenue streams.

Debt, Quasi-debt, Warrants & Equity

• AREA OF FOCUS: Some common areas of SEC comment letters are the classification of instruments as either equity, temporary equity or debt securities, disclosures and accounting for conversion and redemption features, as well as the disclosure of the material terms, restrictions and accounting methods of debt agreements.
  
  
• HOW CENTRI CAN HELP: In combination with Centri’s Audit Readiness services, our technical accounting experts advise clients on complex accounting issues, and our valuation team performs valuations of various complex financial instruments.

Fair Value Measurement

• AREA OF FOCUS: The SEC regularly provides feedback from registrants related to valuation techniques and inputs to valuation models.
  
  
• HOW CENTRI CAN HELP: Whether it’s related to goodwill impairment, share-based awards, or purchase price allocations, our valuation team has the technical skills to prepare complex valuations with an in-depth understanding of the reporting requirements and key areas of concern to your auditors and the SEC.

Disclosure Controls & Internal Control over Financial Reporting (ICFR)

• AREA OF FOCUS: The SEC continues to focus on the identification and disclosure of material weaknesses and the effectiveness of ICFR and disclosure controls and procedures (DC&P).
  
  
• HOW CENTRI CAN HELP: Our SOX compliance and internal audit advisory team helps companies establish internal controls that are a value add for your business, remediating material weaknesses, recommending process improvements, and enhancing the reliability of your financial statements.

Climate Change Matters

• AREA OF FOCUS: While the SEC continues to work towards the issuance of new rules on climate-change disclosures, the staff continue to increase focus on current climate related disclosures when reviewing public-company filings aligning with its “Dear Issuer” letter.

• HOW CENTRI CAN HELP: Our ESG and Sustainability Advisory practice is focused on how the SEC is approaching climate change issues and helps companies stay up-to-date with ever-changing regulations.

Income Taxes

• AREA OF FOCUS: The SEC’s focus on income taxes has remained consistent over recent years, focusing on valuation allowances, the tax impact of significant transactions, income tax rate disclosures, and the omission of other required disclosures.

• HOW CENTRI CAN HELP: Our tax advisory team ensures your business meets the latest requirements and executes the right strategy to minimize its tax liabilities. We’ll help you minimize risks without increasing the pressure on your internal team.

Acquisitions, Mergers, & Business Combinations

• AREA OF FOCUS: As we look to an increase in transaction activity, SEC comment letters on this topic have been centered around the accounting and disclosure of contingent consideration arrangements, including the fair value measurements. Additional areas of focus are distinguishing between an asset acquisition and business combination and the identification of the accounting acquirer.

• HOW CENTRI CAN HELP: Business acquisition transactions have challenging and intricate accounting and regulatory matters. Our mergers & acquisitions (M&A) advisory team is well-versed on these topics and provides companies with successful strategic planning and execution and creating transformative value through the transaction life cycle. In addition, our technical accounting experts can assist you evaluating business combination transactions.

Centri is your trusted partner for SEC financial reporting and compliance. We keep track of the latest SEC guidance and comment letters to help you prepare accurate and timely filings. Our teams of experts can assist you with any SEC-related challenges, from IPO readiness and mergers and acquisitions to SOX compliance. Whether you are a public or private company, Centri can help you achieve your business goals. Contact us to learn more.

Derek Kearns

Partner | SEC, Financial Reporting & SPAC Practice Leader | CPA

Derek is a Partner at Centri Business Consulting and the leader of the firm’s SEC, Financial Reporting, & SPAC Practice. He has more than 23 years of accounting experience in both public and private industries. View Derek Kearns's Full Bio

Yoland Sinclair

Director | CPA

Yoland is a Director at Centri Business Consulting. She has over 10 years of experience in public accounting and accounting advisory experience. View Yoland Sinclair's Full Bio