Stay informed 2015 SEC comment letter and disclosure trends Entertainment, Media

Stay informed
2015 SEC comment letter and
disclosure trends
Entertainment, Media
& Communications
Current developments
in SEC reporting
December 2015
To our clients and friends:
The business environment within the Entertainment, Media & Communications
(EMC) sector continues to change rapidly due to the emergence of new disruptive
technology along with steady merger and acquisition activity. Consumers are
choosing interactions and experiences with content in mind versus channels or
platforms, and based on what’s most satisfying, relevant, and convenient for them.
Business models across EMC are evolving as companies transform their businesses
to compete. Understanding the SEC staff’s areas of focus will help you make
corresponding changes to your financial reporting to increase the transparency of
your communications with investors and other stakeholders. It’s in that spirit that we
provide you with our third annual publication on the trends in SEC staff comment
letters specific to companies in the EMC sector.
We have analyzed over 600 SEC staff comments issued from November 1, 2014 to
October 31, 2015 to companies in the following subsectors: advertising,
communications, filmed entertainment, publishing, radio/TV/cable broadcasting,
and other, which comprises the casino, cruise, digital media, hotel, music, and video
game subsectors. While some comments are subsector specific, others are applicable
to all companies in the EMC sector and beyond. We have also benchmarked the use
in the sector of non-GAAP measures and certain elements of segment reporting to
further enhance your understanding of current reporting trends.
We hope that a better understanding of these trends, along with specific examples of
comments, will provide you with helpful insights and aid in your production of highquality annual reports.
Please don’t hesitate to reach out to your engagement teams, the PwC contacts listed
on the last page of this document, or me to discuss this information in more detail.
We look forward to working with you in 2016.
Best regards,
Stefanie Kane
US Entertainment, Media & Communications Assurance Leader
Table of contents
SEC developments ........................................................................................................................................................ 2
Overview........................................................................................................................................................................ 3
Management’s discussion and analysis....................................................................................................................... 5
Revenue recognition....................................................................................................................................................15
Business combinations and impairments .................................................................................................................. 17
Segments ..................................................................................................................................................................... 20
Other notable comments............................................................................................................................................ 24
Disclosure effectiveness ............................................................................................................................................. 29
SEC comment letter process ...................................................................................................................................... 30
About PwC’s Entertainment, Media & Communications practice........................................................................... 32
PwC
Stay informed | SEC comment letter trends | Entertainment, Media & Communications
1
SEC developments
Accounting and financial reporting are at the heart of
the SEC’s core mission. Accurate, reliable, and
transparent financial information provides investors
the tools they need to make informed decisions and
build the trust and confidence that promote capital
formation. So it comes as no surprise that 2015 was
another year of heavy interest for the SEC in the
accounting and financial reporting arena.
One area the SEC staff was keenly focused on in 2015
was implementation of the new revenue accounting
standards. Whether by facilitating the identification
and resolution of broad-based practice issues or
encouraging companies to take a fresh look at their
revenue-related internal controls, the SEC staff is
working to promote a successful implementation and
consistent application in the US and around the world.
Revenue is one of the most important financial
measures used by investors across industries and
geographies, and the SEC wants to make sure the
transition to the new standards is a smooth one.
Once the new revenue standards have been
implemented, the accounting in that area will be
largely converged. Still, there was much discussion
throughout 2015 about whether International Financial
Reporting Standards (IFRS) should play a broader role
for domestic US public filings. The SEC staff heard
from a wide array of stakeholders in 2015. Through
those discussions they heard that there is continued
support for the objective of a single set of high-quality,
global accounting standards. However, they also heard
that there is little or no support for the SEC to require
all companies to prepare their financial statements
using IFRS or even to provide US companies an option
to do so (although there is ongoing consideration of
whether US companies should have the option of
providing supplemental IFRS information). So what
does all of this mean? It's not clear what the next steps
are, but Jim Schnurr, the SEC's Chief Accountant, has
remarked that for now, it appears that the most likely
path for advancing the objective of high-quality, global
accounting standards is for the FASB and the IASB to
continue to work together to converge their standards.
During 2015, we also saw a continuation of the SEC’s
agency-wide emphasis on internal controls as the SEC
staff continued to ask questions when a filing disclosed
immaterial accounting errors—especially when there
have been multiple errors. The staff is probing beyond
what happened at the transaction level and is seeking
to understand the root cause of the deficiency—looking
beyond the individual control activities and asking
whether there are broader issues involved. For
instance, if a particular error related to a new line of
business, revenue stream, or geography, they may ask
how the company evaluated whether a deficiency
relates to its risk assessment, monitoring, or control
environment. The SEC staff is also looking closely at
how the company evaluated the severity of the
deficiency—focusing both on the magnitude of the
actual error and on the volume of activity that
reasonably could have been exposed to the deficiency.
The SEC recognizes that a company’s internal controls
form the foundation of accurate financial reporting,
and this is undoubtedly an area of long-term interest.
But the SEC’s interest in financial reporting and
internal controls is not limited to the Commission’s
accountants. The Enforcement Division has expressed
great interest in these areas as well. Enforcement
actions and investigations in the financial reporting
area have increased substantially over prior
years. “Corporate disclosure and financials” is at or
near the top of the list of most frequent whistleblowers
allegations, and internal controls have figured
prominently in several recent enforcement cases,
including some where there were no underlying fraud
charges. Additionally, following on from its
“accounting quality model,” the Division of Economic
and Risk Analysis devoted substantial effort over the
past year to build out its data-driven Corporate Issuer
Risk Assessment tool (known as CIRA), which provides
staff across the agency (including the Enforcement
Division’s Financial Reporting and Audit Task Force)
with more than 100 custom metrics designed to
identify situations or activities that warrant further
inquiry.
2015 was a busy year at the SEC, and with the pending
confirmation of two new Commissioners, the
implementation of securities-based crowdfunding and
further progress on the disclosure effectiveness,
clawback and pay versus performance initiatives on the
horizon, 2016 promises more of the same, but the
continued focus on accounting, financial reporting, and
internal control are sure to remain high on the priority
list. We hope you find the analysis that follows helpful
as you navigate this year's financial reporting season.
John A. May
SEC Services Leader
Stay informed | SEC comment letter trends | Entertainment, Media & Communications
2
Overview
This analysis was based on comments posted on the
SEC’s EDGAR website from November 1, 2014 to
October 31, 2015 related to EMC companies specific
to their periodic filings on Forms 10-K
and 10-Q. Each subsector includes the following
SIC codes:


Advertising - 7310 and 7311
Communications - 3661, 3663, 3669, 4812,
4813, 4822, 4899 and 7200
Radio/TV/Cable Broadcasting - 4832, 4833
and 4841
Publishing - 2711, 2721, 2731, 2732, 2741,
2750, 2761,2771, 2780, and 2790
Filmed Entertainment - 7384, 7812, 7819,
7822, 7829, 7830 and 7841
Other - Due to the lower number of
registrants, this category consists of the
following subsectors and SIC codes:




–
–
–
–
–
–
Digital Media - 3672
Cruise lines - 4400
Casino - 7900
Music - 3651 and 3652
Video games - 7948
Hotel - 7011
Certain registrants may cross multiple EMC and
non-EMC subsectors. For consistency of evaluation,
the analysis was based on the SIC codes above and
indicated on the SEC’s EDGAR website. To ensure
our analysis appropriately reflected EMC trends,
companies operating in the EMC sector outside of
the listed SIC codes were also included in our
review.
This year’s review indicates that disclosures with
regard to management’s discussion and analysis
(MD&A) continue to be the area of most frequent
comments and reflects the staff’s ongoing
sentiment that registrants should “tell their story”
in the MD&A to allow investors to see the company
“through the eyes of management.” In addition to
MD&A, some other frequent comment areas are
revenue recognition, business combinations and
impairments, and segments.
MD&A
Revenue recognition
Business combinations
and impairments
Segments
0
20
40
60
80
100
120
140
160
180
200
As required by the Sarbanes-Oxley Act of 2002,
SEC staff reviews every registrant at least once
every three years. The SEC staff reviews many
registrants more frequently, especially larger
companies. In our review of the SEC staff’s recent
comment letters of EMC companies, we saw a slight
decline in the number of overall comments from
the prior year.
Number of SEC comments
2015
2014
2013
In addition, we saw an increase in comments
related to controls and procedures - internal
control over financial reporting and a recurring
focus on Regulations S-X/S-K compliance, loss
contingencies, and income taxes.
On the following pages, we dive deeper into each of
these areas and provide examples of the comments
posted.
.
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3
Subsector breakdown
In addition to analyzing the number of comments by topic, our analysis also looked at the number of comments
received by each subsector. Communication companies, the largest EMC subsector, continue to receive the
most comments, representing nearly half of the comments issued to EMC companies in 2015
2015 Breakdown by subsector
2014 Breakdown by subsector
12%
18%
13%
4%
47%
5%
43%
6%
17%
15%
12%
8%
Communication
Communication
Radio/TV/Cable Broadcasting
Radio/TV/Cable Broadcasting
Advertising
Advertising
Publishing
Publishing
Filmed Entertainment
Filmed Entertainment
Other
Other
Financial reporting trend analysis
In addition to our analysis of the comment letters issued by SEC, this year we have also performed a financial
reporting trend analysis, specifically focusing on the use of non-GAAP measures and segment reporting. We
analyzed the disclosures included in a sample of annual reports on Form 10-K and fourth quarter earnings
releases on Form 8-K for domestic registrants’ filing posted to EDGAR between November 1, 2014 and October
31, 2015. For the purpose of our analysis, we selected registrants from each subsector on a sample basis, using
revenue as a metric, to achieve approximately 75% coverage within each subsector, resulting in the analysis of
more than sixty EMC registrants.
Stay informed | SEC comment letter trends | Entertainment, Media & Communications
4
Management’s discussion
and analysis
Management’s Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) is a
critical component of registrants’ communications
with investors and continues to be the top area for
comment by the SEC staff in 2015. The key
objectives of MD&A are to provide a narrative
explanation of the financial statements that enables
investors to see the company through the eyes of
management, to offer context to the financial
statements, and to provide information that allows
investors to assess the likelihood that past
performance is indicative of future performance.
We have found that the majority of SEC staff
comments in this area are not aimed at meeting
specific technical requirements, but rather at
enhancing the quality of disclosures to meet
these objectives.
The requirements themselves are set forth in Item
303 of Regulation S-K, which identifies five
categories of disclosure in MD&A: liquidity, capital
resources, results of operations, off-balance-sheet
arrangements, and contractual obligations.
Additional guidance is also contained in Financial
Reporting Release (FRR) 36 and FRR 72. More
recently, the SEC has renewed its commitment to
coordinate with the FASB on their joint disclosure
effectiveness project to develop recommendations
focused on improving and streamlining disclosure
requirements. Ultimately, this project is expected to
result in updates to Regulations S-K and S-X that
may reduce the costs and burdens on companies
and eliminate duplicative disclosures in MD&A, but
may also identify opportunities to increase the
transparency of information, which may lead to
new requirements. In the meantime, absent formal
rule changes, SEC comments in the past year
related to MD&A reflect this initiative to streamline
disclosures by asking registrants to tailor
boilerplate language in areas such as risk factors
and legal proceedings, avoid duplication (e.g.,
between critical accounting policy and summary of
significant accounting policy disclosures), and
eliminate outdated information.
In doing so, the comment letter process has
reinforced the well-established MD&A objectives
that disclosures should be: (1) transparent in
providing relevant information, (2) tailored to the
company’s facts and circumstances, (3) consistent
with the financial statements and other public
communications, and (4) comprehensive in
addressing the many business risks that exist in
today’s economic environment. Results of
operations is the area that has received the most
attention in SEC comment letters relative to these
objectives.
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5
MD&A breakdown of topics
General observations on the population of SEC staff
comments include the following:

Known trends: The SEC staff has asked
registrants to disclose known trends affecting
the business, in particular, disclosure of events
that have occurred and how those events may
be positive or negative indicators of future
performance. Examples include loss of a
significant customer, development of new
programming/products that might increase
future revenues or reduce costs, entering a new
market, or an acquisition that is expected to
impact operating results. In addition, they
encourage the discussion of key operating
metrics used by management, coupled with an
analysis of the relationship between such
metrics and GAAP results.

Drivers behind fluctuations: Many comments
relate to improving registrants’ disclosures of
significant fluctuations between periods,
including pricing, volume, the impact of
acquisitions, and currency movements. The
SEC staff has asked for more detailed
descriptions related to the specific factors
driving such fluctuations and for registrants to
quantify each factor separately, even when they
net to an insignificant change overall.

Consistency of information: The SEC staff often
reviews public information for consistency with
the information included in a registrant’s
periodic filings. When management discusses
events or trends on earnings calls, social media
channels, investor materials, or the company’s
website, the SEC staff may question why such
matters are not also addressed in MD&A.

Segment discussion: SEC staff comments have
also encouraged the use of a segment analysis if
such analysis would provide readers with a
more in-depth understanding of the
consolidated results. The segment analysis may
be integrated with the discussion of the
consolidated results to avoid unnecessary
duplication.
14%
11%
62%
13%
Results of operations
Liquidity and capital resources
Other
Non-GAAP measures
Results of operations
SEC staff comments continue to focus on the
requirements of S-K Item 303(a)(3), reminding
registrants that the results of operations section
should provide readers with a clear understanding
of the significant components of revenues and
expenses, as well as events, transactions, and
economic trends that have resulted in or are likely
to cause a material change in the relationship
between costs and revenues.
The SEC staff has frequently issued comments
specifying that MD&A should not simply repeat
information provided elsewhere in the filing;
rather, it should explain the underlying drivers
behind changes in the financial position, results of
operations and cash flows of registrants.
Increasingly, registrants are being challenged to
quantify the impacts that such factors have had,
especially when an account has been impacted by
multiple factors.
Stay informed | SEC comment letter trends | Entertainment, Media & Communications
6
Example: MD&A – Results of operations comments
1 In future filings, please enhance your overview
to discuss the likely impact of known trends,
demands, commitments, events or uncertainties
which are reasonably likely to have material effects
on your financial conditions or results of
operations. For example, it appears that your
business has changed significantly over the last two
years because of your acquisitions. However, you
do not provide a thorough discussion of how you
believe the acquisitions will impact your revenues
or net income going forward. This discussion
should address the effect the acquisitions have had
on your gross margins, cost of revenues and
earnings per share. For more information, refer to
the Commission Guidance Regarding
Management’s Discussion and Analysis of Financial
Condition and Results of Operations (Release Nos.
33-8350, dated December 29, 2003), and Section
III of the Interpretative Rule on Management’s
Discussion and Analysis (Release Nos. 33-6835, 3426831, dated May 18, 1989).
2 We encourage you to consider the following
revisions as set forth in Section III.A of SEC
Release No. 33-8350. We believe these revisions
will improve your disclosures by making them
clearer and concise. Specifically: (a) Use a tabular
presentation to provide a comparison of the
company’s results in different periods, which could
include line items and percentage changes as well
as other information determined to be useful.
(b) Refocus the narrative text portion of the
disclosure on analysis of the underlying business
reasons for known changes, events, trends,
uncertainties and other matters.
3 Your disclosures present the changes in
revenues and expenses from year to year. However,
the underlying reasons for changes from the prior
period do not appear to be fully provided. In this
regard, tell us what consideration you gave to
providing a more robust analysis of the reasons for
increases or decreases for both your consolidated
and segment results. To the extent that increases
are material and are indicative of material trends
based on multiple reasons, tell us how you
considered quantifying and discussing each of the
reasons provided. In addition, tell us what
consideration you gave to providing disclosures
that provide similar transparency to the
information provided regarding the period to
period changes discussed in your year-end earnings
call and investor presentations. For guidance,
please refer to Item 303(a)(3) of Regulation S-K
and Instruction 4 to paragraph (303)(a) of
Regulation S-K and Section III.B.4 of SEC Release
33-8350.
4
You appear to have only limited discussion of
your segment sales. In future filings, please disclose
in greater detail the business reasons for changes
between periods in the sales and operating income
(loss) of each of your segments. In circumstances
where there is more than one business reason for
the change, please quantify the incremental impact
of each individual business reason discussed on the
overall change in the line item. Please provide us
your revised disclosures for fiscal 2013 as compared
to fiscal 2012. Refer to Item 303(a)(3) of
Regulation S-K, SEC Release No. 33-8350 and
FRR 501.04.
Liquidity and capital resources
A key objective of the liquidity and capital
resources discussion is to provide a clear picture of
the registrant’s ability to generate cash and to meet
existing known or reasonably likely future cash
requirements. In accordance with items 303(a)(1)
and (2) of Regulation S-K, the SEC staff expects the
liquidity and capital resource discussion to address
material cash requirements, sources and uses of
cash, and material trends and uncertainties related
to a registrant's ability to use its capital resources to
satisfy its obligations. General observations on
the population of SEC staff comments include
the following:

Events impacting liquidity: The SEC staff has
asked registrants to discuss known trends,
events, or uncertainties that are reasonably
likely to impact future liquidity. Such events
could include entry into material commitments,
loss of customers or contracts, treasury stock
repurchase programs, or plans for significant
capital expenditures.

Debt agreements and related covenants:
Comments from the SEC staff have requested
expanded disclosure of the material terms of
Stay informed | SEC comment letter trends | Entertainment, Media & Communications
7
debt agreements, including an indication of
compliance with financial covenants. In
situations where there has been or is projected
to be a violation with regard to covenant
compliance, registrants should provide a
detailed description of the covenants, the target
and actual covenant measures for the most
recent reporting period, and an indication of
the sensitivity of those measurements, if
applicable. Other items potentially impacting
the availability of credit should also be made
clear, including limitations on the ability to
draw on existing lines of credit, or other
borrowing limitations.


Stranded cash: For companies with foreign
operations, the SEC staff has focused on the
registrant’s ability to repatriate cash to the
United States in order to meet significant
upcoming obligations, such as debt repayments
or mandatory pension contributions.
Comments have focused on the relationship
between liquidity needs and the income tax
assertion about management’s intent to
permanently reinvest foreign earnings. The
SEC staff has asked companies to quantify the
amount of cash held overseas and the amount
of incremental deferred tax, if any that would
be recorded if cash were to be repatriated. This
is also a common topic in SEC staff comments
related to income taxes.
Cash flow analysis: One of the common
criticisms in the liquidity analysis is when
registrants simply repeat information readily
found on the face of the statement of cash
flows. Instead, registrants should disclose the
underlying factors driving changes in operating
assets and liabilities and the related cash flows.
Example: MD&A – Liquidity and capital resources
comments
1
Please expand your discussion of liquidity and
capital resources to identify and discuss factors
relevant to providing an understanding of your
current and future liquidity and capital resources,
particularly in relation to your financing
arrangements. Your disclosure should discuss
expectations regarding your debt levels and
servicing abilities as well as your sources and uses
of cash.
2
We note your disclosure that the revolving
credit facility contains certain affirmative and
negative covenants customary for this type of
facility and includes financial covenant ratios with
respect to a maximum leverage ratio and a
maximum balance sheet leverage ratio. Please
revise to disclose the nature of any covenants that
limit, or are reasonably likely to limit, your ability
to undertake financing. For example, these debt
covenants may include debt incurrence restrictions,
limitations on interest payments, restrictions on
dividend payments and various debt ratio limits.
Also, please disclose if you were in compliance with
the covenants at December 31, 2014.
3 We note you have not provided U.S. income
taxes on the undistributed earnings of your foreign
subsidiaries which you consider to be permanently
reinvested. Please revise future filings to quantify
the amount of undistributed earnings for which you
have not provided deferred taxes. Refer to ASC
740-30-50-2(b).
4 In future filings, please provide a more
informative analysis and discussion of changes in
operating cash flows, including changes in working
capital components, for each period presented. In
doing so, please explain the underlying reasons for
and implications of material changes between
periods to provide investors with an understanding
of trends and variability in cash flows. Please
ensure your discussion and analysis is not merely a
recitation of changes evident from the financial
statements. Refer to Item 303(a) of Regulation S-K.
Stay informed | SEC comment letter trends | Entertainment, Media & Communications
8
Non-GAAP measures
Companies often supplement their GAAP financial
reporting with non-GAAP information that is
intended to provide additional insight into the
financial performance of the business. A non-GAAP
financial measure is a numerical measure that
adjusts the most directly comparable measure
determined in accordance with GAAP. Such
measures provide supplemental information
regarding a company’s historical or future financial
position, performance, cash flows, or liquidity.
They generally convey changes to the business that
are organic separate from those that may be
considered unusual, infrequent, or not
representative of underlying trends. Registrants
should be careful in not presenting their non-GAAP
financial measures more prominently than their
GAAP measures in terms of the order of
presentation or the degree of emphasis. If
discussion of non-GAAP measures precedes or is
more in depth than GAAP measures, a company
may receive comments from the staff.
A company has flexibility in which non-GAAP
financial measures it chooses to report, if any, and
how it calculates such metrics, subject to certain
restrictions. Therefore, a limitation inherent in
non-GAAP financial measures is that they are
subjective and may not be comparable to similarly
titled non-GAAP financial measures used by other
companies, including peers. When including a nonGAAP financial measure, companies should ensure
the non-GAAP financial measure is reconciled to
the appropriate GAAP measure and determine
whether the non-GAAP measure is a measure of
operating performance or liquidity in determining
the appropriate GAAP financial statement measure
to reconcile to. For example, many companies
utilize EBITDA as a non-GAAP measure, which
could be viewed either as a measure of operating
performance, which should be reconciled to net
income, or a liquidity measure which should be
reconciled to operating cash flows.
When evaluating whether and how to disclose nonGAAP measures, registrants should ensure that
they understand and adhere to the applicable rules.
When non-GAAP financial information is presented
in periodic reports filed with the SEC, registrants
are required to include:

The reasons why management believes
that the non-GAAP measure is relevant
to investors;

The additional purposes, if any, for which
management uses the non-GAAP measure;

The most directly comparable GAAP financial
measure with equal or greater prominence to
facilitate comparability among other
registrants; and

A reconciliation to the comparable
GAAP measure
Below are some of the circumstances that
generated questions in the comment letters
reviewed in our analysis:

Giving greater prominence to non-GAAP
results over GAAP results

Use of terminology that implies a non-GAAP
measure is a standard measure, e.g., a measure
that includes adjustments to the standard
definition of EBITDA should not be labeled
"EBITDA"

Excluding charges or liabilities that
require cash settlement from non-GAAP
liquidity measures
In connection with the new discontinued
operations accounting standard, registrants not
meeting the criteria for discontinued operations
may seek to utilize non-GAAP measures to present
adjusted results excluding the disposed of business.
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9
Example: MD&A – Non-GAAP measures comments
1
We note that your discussion in the Executive
Overview appears to highlight non-GAAP net
income, a non-GAAP financial measure, more
prominently than net income calculated in
accordance with U.S. GAAP. Pursuant to the
guidance outlined in Rule 10(e) of Regulation S-K,
GAAP measures should be presented with equal or
greater prominence than any non-GAAP measures.
Please revise by reorganizing your disclosures and
include a more balanced discussion accordingly.
Registrants disclosing non-GAAP
measures in earnings release
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2
We refer to your discussion and presentation
of “segment operating profit” throughout your
MD&A. In this regard, please revise your disclosure
to provide a reconciliation of this measure to the
most directly comparable GAAP financial measure
of operating performance. Refer to Item 10(e)(1)(i)
of Regulation S-K. In addition, since this measure is
not the measure of profit disclosed in Note 20 Segment Data, it does not appear appropriate to
label this measure as “segment operating profit.”
3
We note from your disclosure that Adjusted
EBITDA adjusts for $XX million related to noncash compensation and other. Please provide us
more details as to the nature and amounts included
in this line item and how such amounts reconcile to
the amounts included in the financial statements or
notes to the financial statements.
4
We note your disclosure that you believe that
Adjusted EBITDA is helpful as an indicator of the
company’s financial performance and capacity to
operationally fund capital expenditures and
working capital requirements. Please tell us how
you considered Item 10(e)(1)(ii)(A) of Regulation SK. In this regard, we note that the description of the
measure suggests its usefulness in part as a
liquidity measure and the measure appears to
exclude items that require cash settlement.
Non-GAAP analysis
Our analysis indicates that nearly all companies
disclose non-GAAP measures in their earnings
release (95%) and roughly 80% of companies
across the EMC sector disclose non-GAAP
measures in their Form 10-K.
Yes
No
Registrants disclosing non-GAAP
measures in Form 10-K
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Yes
No
Furthermore, we found that even when registrants
disclose non-GAAP measures in their Form 10-K
filings, they tend to include more measures in their
earnings release (an average of three as compared
to two in the form 10-K).
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10
The most commonly reported non-GAAP measures include earnings before tax, depreciation and amortization
(EBITDA), adjusted EBITDA/margin, adjusted EPS, and free cash flow. This was consistent across most of the
subsectors included in our analysis.
Most common types of non-GAAP measures disclosed in Form 10-K:
14
12
Number of Registrants
10
8
6
4
2
0
Advertisting
Communication
Radio/TV/Cable Broadcasting
Publishing
Filmed Entertainment
Other
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11
Non-GAAP performance measures typically exclude one or more income or expense item from a corresponding
GAAP measure. The figure below reflects the most frequent items excluded from GAAP measures.
Top 5 non-GAAP adjustments
Debt-related items
Restructuring charges
Acquisition/ Integration divestiture related costs
Stock Based Compensation
Goodwill/ Intangible/Other Asset Impairment Loss
0
5
10
15
20
25
Number of Registrants
Advertising
Communication
Radio/TV/Cable Broadcasting
Publishing
Filmed Entertainment
Other
Stay informed | SEC comment letter trends | Entertainment, Media & Communications
12
Other MD&A comment trends
Critical accounting estimates
EMC companies use many estimates in the areas of
revenue recognition, recoverability of content costs
(e.g., film or production costs), estimated useful
lives of tangible and intangible assets, fair values,
pension and postretirement obligations, and asset
impairments. Estimates that are subject to a higher
degree of uncertainty and have a potential to
materially impact the registrant’s financial position
and results of operations must be disclosed and
discussed by management in MD&A. The SEC staff
often requests that companies provide more
transparency with respect to how such estimates
are determined, including the key assumptions and
their volatility, and what impact changes to the
estimates will have on the financial statements
(i.e., a sensitivity analysis).
Example: Critical accounting estimates comments
1 We note that revenue on shipments is reduced
for estimated price protection, which you record as
contra-revenue under the authoritative guidance
for revenue recognition. Please tell us in more
detail about the significant terms of price
protection that you offer to your customers, the
material estimates and assumptions used to
determine the amount of contra-revenue recorded
each period; how accurate your estimates and
assumptions have been in the past, and how you
evaluate your sales agreements including price
protection to determine that the price is fixed and
determinable at the time of sale.
2 We note that two of your accounting policies
and estimates that require the most significant
judgments and estimates relate to revenue reserves
and cost of revenue reserves. Given, that these
estimates require significant judgment and given
that it is difficult for investors to understand the
impact of these reserves, for both revenue and cost
of revenue reserves please disclose a reserve roll
forward for the periods presented. If you believe the
amounts are immaterial, tell us why. Also, describe
for us the financial statement entries used to
account for these reserves.
3 We note that your discussion of critical
accounting policies as it relates to goodwill is
generic, and does not provide any significant
insight as to the assumptions used in this analysis
such as market multiples, control premiums, future
increases in operating expenses and margins or the
discounts rates and other assumptions used. In
light of the fact that approximately XX% of your
recorded goodwill balance relates to your segments
A and B which have experienced operating losses
during all periods presented in your consolidated
financial statements, please revise this section to
focus on the sensitivity aspects of your critical
accounting policies, that is, the likelihood that
materially different results would be reported
under different conditions or assumptions. More
specifically, please provide a sensitivity analysis
which describes how the use of different
assumptions such as revenue and expense growth
rates, discount rates, etc. would impact your
goodwill impairment analysis for these segments.
In addition, please include a discussion as to how
your actual results of operations for the current
period have compared to the estimates and
assumptions used in your prior periods goodwill
impairment analysis for these segments.
Key indicators of financial condition and operating
performance
Financial measures often tell only part of how a
company manages its business. Therefore, when
preparing MD&A, companies should consider
whether disclosure of all key variables and other
factors that management uses to manage the
business would be material to investors, and
therefore required. If companies disclose material
information (historical or forward-looking) other
than in their filed documents (such as in earnings
releases or publicly accessible analysts' calls or
company website postings) they also should
evaluate whether that information should be
included in MD&A, either because it is required or
because its omission would render the filing
misleading. Companies should consider their
communications and determine what information
is material and required in, or would promote
understanding of, MD&A. Many EMC companies
disclose non-financial business and operational
data, including various average revenue per
customer metrics, unique visits, market share, fleet
utilization, views, etc. Where a company discloses
such information, and there is no commonly
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13
accepted method of calculation, registrants should
provide an explanation of the calculation to
promote comparability across companies within the
industry.
Example: Key indicators of financial condition and
operating performance
1 In your discussion of revenue for the periods
presented, you refer to additions of new customers
and increases in custom reporting projects. We
further note that in recent earnings release calls
and presentations you discuss certain non-financial
metrics such as numbers of clients and markets.
Please describe for us the key performance
indicators management uses in managing your
business and tell us what consideration was given
to disclosing such measures in your MD&A. Refer
to Section III.B of SEC Release 33-8350.
other non-financial performance indicators are
used in considering these arrangements, please
acknowledge them as well.
3 In your 10-K, you note that you charge
advertisers based upon the number of impressions
per “website visitor.” Please define “website
visitor,” clarifying whether this metric is the same
as “unique visitor” used later in your discussion and
in your most recent 10-Q. Additionally, please
provide information regarding the average amount
of impressions per website visitor and the average
amount charged per impression.
2
You make several references to indicators such
as “unique visitors,” “mobile unique visitors,” and
“number of reviews.” In your disclosure, please
indicate how these non-financial performance
indicators are tied to your revenue, including
whether they are used in considering economic
arrangements between yourself and advertisers. If
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14
Revenue recognition
As many registrants are preparing to implement the
new revenue recognition standard, the SEC
continues to question the application of the current
standard, specifically in the areas of revenue policy,
disclosures, and gross or net basis reporting.
In addition to requesting general policy
information, the SEC staff often requests that
registrants clearly state how their revenue
recognition policies comply with SAB 104,
particularly the four criteria that generally must be
met in order for revenue to be recognized. The staff
will also ask how these four criteria may be applied
in the context of the company’s specific facts and
circumstances. For example, the SEC may inquire
how the company assessed whether collectability is
“reasonably assured” and how the company
determined the sales price is “fixed or
determinable.”
When reviewing the disclosures in a registrant’s
revenue recognition policy footnote, the SEC staff
may check for completeness and consistency of the
policy and the various revenue streams with what is
described in other parts of the Form 10-K, such as
the business section, the MD&A, earnings calls, and
the company’s website. Registrants are encouraged
to ensure that their revenue recognition
disclosures: (1) include the nature, type, and term
of the various significant revenue streams; (2) avoid
“boilerplate” language when it comes how the four
criteria are met; (3) discuss relevant information
regarding any significant uncertainties (such as
sales returns, variable considerations etc.); and (4)
describe all aspects of the revenue policy, including
discounts, rebates, promotions, warranties etc.
Also, with more complex revenue transactions and
significant judgements, the SEC staff may ask for
more detailed and specific disclosures.
to arrive at values for each of the units of
accounting, and the periods over which revenue
should be recognized.
Example: Revenue recognition comments
1 Please tell us in detail the nature of your
advertising revenues from sponsored access,
promotional programs and online display
advertising on your managed and operated
networks and your partner networks. Please tell us
if such advertising revenues are part of multiple
element arrangements and if so, provide us with an
analysis of your revenue recognition policy for such
arrangements.
2 We note your disclosure that revenues on
multi-use tickets are recognized over the estimated
number of uses expected for each type of ticket and
are adjusted periodically during the season. In that
regard, clarify for us the nature of each type of
multi-use ticket, how it works, and whether it has
an expiration date or not. Explain to us how you
recognize revenues based on the estimated number
of uses and why the revenue recognition based on
the estimated number of uses is more appropriate
as compared to using an estimated usage period.
3 You disclose that third-party evidence is
generally not available because your service
offerings are highly differentiated and you are
unable to obtain reliable information on the pricing
practices of your competitors. In light of your
highly differentiated service offerings, please
describe for us how you determine that each
element in your multiple element arrangements has
stand-alone value. Refer to ASC 605-25-25-5.
Another area of focus within revenue recognition is
related to the nature of, and accounting for,
multiple-element arrangements and whether
registrants evaluated these arrangements under
ASC 605-25. Multiple-element arrangements
require judgement. SEC staff comments may
include questions about determining the
appropriate units of accounting, determining the
appropriate valuation techniques and assumptions
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15
Principal versus agent
Companies in the EMC sector may act as
intermediaries between other companies and end
customers. For example, they could be fulfilling
obligations to deliver programming, selling internet
media services on behalf of another company, or
hosting game software on their platform. In these
cases, registrants should determine whether to
present revenue on the gross or net basis, which
requires analysis of the arrangement using criteria
listed in ASC 605-45. The analysis is aimed at
determining whether the company acts as a
principal or an agent in the arrangement with the
end customer. The SEC staff comments frequently
request that registrants provide the detailed
analysis of the factors listed in the authoritative
guidance. Although the conclusion is an area of
significant management judgment, greater
emphasis is placed on who is the primary obligor
and who bears inventory risk.
Example: Revenue recognition - principal versus
agent comments
1 Please expand your proposed disclosure to
identify the types of agreements for which you are
recording revenues on a gross and net basis.
2
Please tell us and disclose in your “Critical
Accounting Policies and Estimates” section the
nature of the subscription revenues that results in
either a gross or net presentation. In addition, tell
us and disclose the factors you considered in
concluding that the gross or net presentation is
appropriate. Refer to ASC 605-45-45 in your
response.
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16
Business combinations
and impairments
Business combinations
Mergers and acquisitions activity has escalated over
the past couple of years, resulting in the SEC staff
continuing to comment on various aspects of
acquisition accounting and disclosure. Acquisitionrelated accounting and disclosure requirements can
be complex, and will vary based on the structure of
the transaction and the nature of the assets
acquired and liabilities assumed. ASC 805,
Business Combinations, requires extensive
disclosures to enable users to evaluate the nature
and financial effects of a business combination.
Companies should carefully consider the applicable
disclosure requirements, both in the period of the
acquisition and in subsequent periods.
For companies in the EMC sector, the SEC staff
comments have focused on:



Purchase price allocations, including
questions about how fair value was
determined and the key assumptions used,
The reasons for significant adjustments to
the initial purchase price allocation and
why such information was not available at
an earlier date, and
How the company evaluated whether the
transaction was the purchase of assets or
a business.
The SEC staff has also questioned the omission of
pro forma financial information required by
ASC 805-10-50-2.
In addition to comments directed at the disclosures
in Form 10-K and Form 10-Q, the SEC staff has also
commented on compliance with the requirements
to present pro forma financial information related
to significant business combinations in accordance
with Article 11 of Regulation S-X in Form 8-K and
certain registration statements. The Article 11 pro
formas are in addition to the pro forma information
required by ASC 805. The calculation and
presentation of pro formas under Article 11 and
ASC 805 will differ in many respects.
Example: Business combinations comments
1 Please tell us in detail how you determined the
discount rates for the contingent consideration and
intangible
assets.
2
We note your response to comment 1, which
indicates the Company began a process to analyze
and map the patents to the respective technology
post-acquisition pursuant to the measurement
period guidance in ASC 805-10-25-13 through 2515. We also note your response indicates that this
process was time consuming and completed during
the 4th quarter of 2014. Please tell us what
adjustments were recorded during the 4th quarter
of 2014 and whether the measurement period is
still open.
3
We note that in connection with the Company’s
acquisition you allocated a portion of the purchase
price to goodwill and other intangibles. Please
explain to us and revise to disclose the nature of the
other intangibles acquired, how you determined or
calculated the fair values attributable to these
intangibles, and the useful lives assigned to each
type of intangible asset.
4 We note that the Company A and Company B
acquisitions were asset acquisitions since you
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17
concluded that there was “not sufficient continuity
of the acquired entity’s operations prior to and after
the transaction to qualify as a business.” Please tell
us how you considered ASC 805-10-55-4 to 55-9 in
your conclusion.
5 We note that the pro forma revenues disclosed
are but a fraction of the consolidated revenues
reported on page XX. Please reconcile these
amounts for us and describe for us the pro forma
adjustments underlying the supplemental pro
forma disclosures. As applicable, please expand
your disclosure of supplemental pro forma
information for the Company ABC acquisition as
required by ASC 805-10-50h.1, -50h.3 and -50h.4.
Goodwill and long-lived and indefinite-lived
intangible asset impairments
The SEC staff continues to issue comments
related to goodwill, indefinite-lived intangible
assets, and long-lived asset impairments and
related disclosures.
SEC staff comments have requested details
surrounding companies’ quantitative impairment
tests and the related assumptions. For reporting
units whose fair values are not substantially in
excess of their carrying amounts (“at risk” reporting
units), the SEC staff has asked registrants to
disclose additional quantitative and qualitative
information consistent with the guidance outlined
in the Division of Corporation Finance Financial
Reporting Manual Section 9510.3. The staff has
commented on registrant’s compliance with the
disclosure requirements in Regulation S-K Item
303(a)(3)(ii) to discuss a known uncertainty specifically as it relates to disclosing potential for a
material impairment charge. Even when registrants
have provided disclosures before recording the
impairment charge, the SEC staff has noted that
registrants should disclose the specific events and
circumstances that led to the charge in the period of
impairment. Registrants should avoid using
generalization when describing what contributed to
the impairment such as “general downturn in the
economy.” Instead, the disclosures should be
specific as to why the charge occurred and what
specifically in the business and forecasted
information changed that prompted the
impairment charge.
Registrants may also receive comments
from the SEC staff when no impairment charge is
recorded during the annual assessment, but other
publicly available data indicates the presence
of a negative trend that could impact the
impairment assessment.
Long-lived assets
The themes of SEC staff comments related to longlived assets are consistent with those for goodwill
and other indefinite-lived intangible assets.
Additional information about the level of
uncertainty and sensitivity of key assumptions
related to “at risk” assets or asset groups has been a
point of focus by the SEC staff. In some instances,
the SEC staff requests details of the impairment
analysis and challenges registrants’ conclusions
relative to how registrants considered economic
challenges, operating losses at a specific segment,
or the impairment of similar assets as a potential
trigger event.
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18
Example: Goodwill and long-lived and indefinitelived intangible asset impairments comments
1
Noting continued and significant operating
losses in your December 31, 2014 Form 10-K, for
each reporting unit that is at risk of failing step
one of the goodwill impairment test, please revise
future filings to disclose the following:
 Percentage by which fair value exceeded
carrying value as of the date of the most
recent test;
 Amount of goodwill allocated to the
reporting unit;
 Description of the methods and key
assumptions used and how the key
assumptions were determined;
 Discussion of the degree of uncertainty
associated with the key assumptions. The
discussion regarding uncertainty should
provide specifics to the extent possible
(e.g., the valuation model assumes recovery
from a business downturn within a defined
period of time); and
 Description of potential events and/or
changes in circumstances that could
reasonably be expected to negatively affect
the key assumptions.
2 It appears your sole valuation technique was
comprised of your market capitalization on the
measurement date multiplied by an implied control
premium. Explain the assessment and rationale
used to conclude that current market capitalization
equates to fair value.
3
Please advise us how you evaluated changes in
conditions and circumstances as a potential
triggering event to perform an interim goodwill
impairment test for the reporting unit A. We noted
that the reporting unit A operating income was
negative for both the year ended December 31, 2014
and the quarterly period ended March 31, 2015;
your new successful locations do not become
cashflow positive for several months; and you are
evaluating whether to continue to expand your A
segment. Also, please tell us the percentage by
which fair value exceeded the carrying value of the
reporting unit A at December 31, 2014. Please refer
to ASC 350-20-35-30 and ASC 350-20-35-3(c)
through (g).
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19
Segments
Persistent remarks by the SEC staff highlight the
continued importance of accurate segment
disclosures in public filings. Historically an area of
focus for the SEC staff, segment reporting gained
further prominence as a result of observations
made by an SEC staff member at the 2014 AICPA
National Conference on Current SEC and PCAOB
Developments. Specifically, the staff announced its
plans to refresh its approach to reviewing segment
disclosures. In addition to the areas of focus
indicated in last year’s comment letters, registrants
should be prepared for the possibility of new trends
emerging in the future based on the staff’s
reconsideration of segment disclosures. Future
comment letters might question:



The identification of the Chief Operating
Decision Maker (CODM)
Relying too heavily on the CODM reporting
package to identify operating segments
(i.e., registrants should also consider the
basis on which budgets and forecasts are
prepared, the basis on which executive
compensation is determined, and the
overall organizational/management
structure)
Assessment of classes of customers when
aggregating operating segments
Currently, the most frequent SEC staff comments
related to segments relate to the proper
identification of operating segments and the
aggregation of operating segments into reportable
segments. The SEC staff routinely requests
documentation supporting the registrant’s
identification of operating segments. Registrants
are often asked to provide copies of the CODM
reporting package, as well as any other financial
information regularly reviewed by the CODM, to
allow the SEC staff to consider whether the
information is consistent with the registrant’s
identification of its segments. This is particularly
important for those companies that assert that they
operate as a single segment. However, as noted
above, the staff has indicated that the CODM
package should not be the only information
considered when identifying operating segments.
Registrants should understand that the staff
reviews publicly available information, such as
earnings calls, press releases, investor
presentations, and registrant websites, to evaluate
its consistency with companies’ financial reporting
conclusions and related disclosures about operating
and reportable segments.
Example: Segment comments
1
We note that as a result of your plan to divest
certain parts of your business that you operate in a
single business segment. We further note your
discussion of different lines of business and your
disclosure that business A has a lower gross margin
than business B or business C. Please refer to ASC
280-10-50 and provide us with the following
information with respect to your organization and
lines of business: Describe for us the company's
internal management reporting process, including
organization and reporting structure; Identify the
company's chief operating decision maker
("CODM") and describe the basis for this
determination; Identify any segment managers and
describe their responsibilities; Describe how
budgets are developed and resources are allocated
throughout your organization; Describe how
performance of the different lines of businesses is
evaluated; Describe how performance of senior
managers within the different lines of business is
evaluated, including consideration of compensation
and performance bonuses; Describe for us the
internal management reports, including the nature
of and level of detail of financial information,
reviewed by your CODM for allocating resources
and evaluating performance within your
organization; and identify any lines of business that
you believe meet the definition of an operating
segment that are aggregated within your
reportable segment.
2 You indicate that you do not distinguish or
group your operations on a geographical basis
when measuring performance and as a result you
believe you have a single reportable geographic
segment for disclosure purposes. However, on page
20, you indicate that you have organized your
owned operations into 3 regions and management
for each region reports directly to your senior
management and are responsible for the day-to-day
operations, guest experience, and profitability of its
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20
operations. These disclosures appear to contradict
each other. Please clarify.
Aggregation
The SEC staff routinely issue comments related to a
registrant’s conclusion that its operating segments
satisfy the “economic similarities” criterion for
purposes of aggregation. Information such as
analyst presentations and public filings are often
used by the staff when considering the
appropriateness of aggregation. Comment letters
frequently request additional information from
registrants, such as historical/projected gross and
operating margins, to support the assertion that
aggregated operating segments exhibit similar
long-term financial performance. In addition,
demonstrating similar long-term performance is
not in and of itself sufficient to support the
appropriateness of aggregation. All of the
qualitative criteria outlined in ASC 280 should be
considered, including (1) the nature of a registrant’s
products and services, and (2) the type or class of
customer for those services. Registrants are
reminded that the aggregation criteria are meant to
set a high hurdle to overcome.
3 Please explain to us how you considered the
aggregation criteria and quantitative thresholds of
ASC 280-10-50-11 through 50-19 in determining
that your operating segments do not meet the
criteria for separate disclosure as reportable
business segments.
4 Please provide us with a clear description of
the nature of the products for each of your major
product lines. In this regard, please also describe
any major similarities and differences among the
product lines. You state that many of the products
are based on the same underlying technology, and
that serves as part of your basis for concluding they
are similar products. Please explain to us the nature
of customization or enhancements that is done to
the base underlying technology in order to create
the product lines that you reference. We note that
you serve four diverse target markets, please
explain to us how each of your product lines serves
each target market. Given the diversity of your end
markets, please explain to us why you believe the
products serving those end markets are
substantially similar. To the extent available, please
provide us with revenue and gross profit by product
line for your last two fiscal years. Within your
analysis please address any significant differences
between revenue growth rates and gross margin
percentages for each of your product lines.
5 We note that you believe your operating
segments continue to have similar economic
characteristics despite recent variability in your
operating segments’ financial performance
measures. As you are aware, operating segments
may be aggregated if (1) aggregation is consistent
…ASC 280, (2) the operating segments are similar
in all of the qualitative areas listed in ASC 280-1050-11, and (3) the segments…characteristics.
Regarding (2), paragraph 68 in the Basis for
Conclusions provides insight into how to assess
similarity of products and services. It states that
“[a]n enterprise with a relatively narrow product
line may not consider two products to be similar,
while an enterprise with a broad product line may
consider those same two products to be similar.” It
appears your qualitative analysis may have been
performed at too broad a level. Specifically, your
analysis is based upon the fact that all your brands
operate … provide guests with array
of … experiences. However, we note that some of
your brands are more premium in nature than
others in your portfolio, with a significant disparity
in….customer income profiles at those brands.
Please help us further understand your basis for
aggregating your operating segments into a single
reportable segment and whether your assessment
continues to be appropriate in light of the factors
noted above.
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21
Segment reporting analysis
Depending on how the CODM assesses operating performance and allocates resources, the basis of
segmentation used by registrants may vary, for example, based on geography, line of business, product or
service type, or a combination thereof. Of those registrants reporting more than one segment, nearly 60%
determined their segments based on line of business followed by products/services at just over 20%.
Basis of segmentation
6%
22%
14%
58%
Products & Services
Line of Business
Geography
Combination
The segment reporting guidance is conceptually based on a “management approach” (ASC 280-10-5). Segment
disclosures should be consistent with a registrant’s internal management reporting structure to enable investors
to view the registrant’s financial reporting similarly to the way management does. The objective of the
management approach is to allow financial statement users to see through the eyes of management the entity’s
performance, assess future cash flows, and make more informed judgements about the entity as a whole. It is
presumed that investors would prefer disaggregated information. Therefore, operating segments should not be
aggregated unless the specific criteria outlined in ASC 280 are met. These criteria are generally designed to
prevent aggregation unless providing the more detailed (disaggregated) information would not enhance an
investor’s understanding of the entity. We noted most companies (approximately 77%) have more than one
reportable segment.
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22
Average number of segments, number of companies with multiple
reporting segments, and number of companies with one segment
3*
Other
Filmed Entertainment
5
2*
3
2
Publishing
3*
9
3*
9
3
Radio/TV/Cable Broadcasting
2*
Communication
Advertising
14
7
3
2*
1
5
* average # of reportable segments
by sub-sector
All Radio/TV/Cable Broadcasting
companies sampled reported more
than one segment
Number of companies with more than one reportable segment
Number of companies with one reportable segment
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23
Other notable comments
Included below are additional categories receiving
some level of focus by the SEC staff in comments
issued to EMC companies in 2015.
Controls and procedures
The SEC staff continues to focus on internal control
over financial reporting (ICFR) and we have seen
an increasing volume of comments in this area.
Registrants should continue to carefully evaluate
the ICFR and disclosure controls and procedures
(DC&P) implications that may be implied by their
responses to the SEC staff, even when the SEC staff
has not raised a question regarding internal
control. Under Part I, Item 4,of the Form 10-Q and
Part II, Item 9A of Form 10-K, registrants are
required to disclose material changes in ICFR and
annually provide management’s report on ICFR
and, if applicable, the attestation report of the
registrant’s registered public accounting firm.
Recent SEC staff comments reflect their concern
that not all material weaknesses are being properly
identified, evaluated, and disclosed. Specifically,
they continue to question why a restatement did
not result in the reporting of a material weakness.
Over the past year, several SEC staff members have
emphasized the fact that there are a low number of
material weaknesses reported in the absence of a
restatement or other known material error,
implying that it is possible the “could factor” (i.e.,
the potential exposure to an error greater than the
one that actually occurred) is not being correctly
evaluated. Also, the SEC staff has continued to
question when registrants have multiple control
deficiencies where a material weakness was not,
calling into question the appropriateness of
registrants' "aggregation" assessment (i.e., whether
the deficiencies that are not individually material
weaknesses could represent a material weakness in
the aggregate).
The SEC staff has also questioned registrants when
there is no explicit conclusion about the
effectiveness of DC&P or when management has
concluded that ICFR is ineffective while DC&P is
effective. Although separately assessed, it is
important to remember that there is substantial
overlap between the processes considered DC&P
and those considered part of ICFR. Nearly all of
ICFR falls within the scope of DC&P, whereas there
are aspects of DC&P that extend beyond what is
considered part of ICFR. As such, it is rare that a
material weakness in ICFR would not also result in
DC&P being considered ineffective.
Item 308 of Regulation S-K requires registrants to
disclose any change in the company’s ICFR that has
materially affected, or is reasonably likely to
materially affect, the registrant’s ICFR each
quarter. Changes requiring disclosure include
changes in internal control made in the process of
remediating previously identified material
weaknesses, as a result of the integration of
significant acquisitions, or due to the
implementation of new information technology
systems. The SEC staff often looks to information
contained in companies’ current reports, on their
websites, and in other sources to identify potential
changes in ICFR.
Example: Controls and procedures comments
1 We note your disclosure that the results for the
fiscal year ended December 31, 2014 include
corrections of accounting errors that relate to the
fiscal year ended December 31, 2013. In addition,
we note that fiscal years ended 2013, 2012, 2011,
2010, and 2009 also include amounts relating to
corrections of accounting errors. Your disclosure
states that these adjustments were not considered
material individually or in the aggregate to
previously issued financial statements but because
of the significance of these adjustments, you have
revised the respective balance sheets and
statements of cash flows. In light of the significance
of some of the adjustments, as well as the recurring
incidence of errors, particularly in regard to income
taxes, please tell us your consideration that a
material weakness in internal control over financial
reporting existed because of these accounting
errors in addition to the material weakness that you
have disclosed.
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24
2 Please explain to us how you concluded that
your disclosure controls and procedures were
effective in light of the material weakness that
prevented you from concluding that your ICFR was
effective.
3 Please provide us a robust chronology of the
circumstances that caused and led to the discovery
of the errors, and please elaborate on any internal
control deficiencies that allowed the misapplication
of certain accounting provisions to prevail over
time and explain whether these amounted to a
material weakness.
4 You indicate that the errors were discovered
during the Company’s year-end financial statement
close process. Tell us how the Company was able to
implement the remediation actions necessary in
order for both Company management and the
independent accountant to conclude that both the
disclosure controls and procedures and internal
control over financial reporting were both effective.
5 We note you concluded that your disclosure
controls and procedures were effective as of March
31, 2015. You also disclose that there were no
changes in your internal control over financial
reporting during the quarter ended March 31, 2015
that have materially affected, or are reasonably
likely to materially affect, your internal control over
financial reporting. In light of the fact that you
concluded in your Form 10-K for the year ended
December 31, 2014 that your disclosure controls
and procedures were not effective as of December
31, 2014 due to the existence of a material weakness
in internal control over financial reporting, please
explain to us how you were able to conclude that
disclosure controls and procedures were effective at
March 31, 2015.
Regulations S-K/S-X and other reporting
requirements
When preparing financial statements, registrants
must be diligent in ensuring transactions and
disclosures are appropriately reflected in the
financial statements. Another equally important
item that is sometimes overlooked is compliance
with the instructions for the preparation of Form
10-K and Form 10-Q. It is important to ensure
compliance with the rules governing signatures,
certifications, exhibits, as well as the appropriate
inclusion of any required consents (such as those
from the independent registered public accounting
firm and from other named third party experts).
Various provisions of Regulations S-K and S-X
address description of business (including
seasonality), supplementary financial information,
and separate financial statements. Regulation S-T
outlines the general rules and regulations for
electronic filings, while Regulation S-K (primarily
Item 601 as it relates to exhibits) outlines nonfinancial requirements specific to filings under the
Securities Act of 1933 and Exchange Act of 1934. In
comment letters, the SEC staff often requested
amendments to filings that were not compliant with
the requirements referenced above.
Example: Regulations S-K/S-X and other reporting
requirements comments
1 Please provide an enhanced discussion of your
business model and specific components of your
operational structure. This discussion should
include: how, where, and by whom your product is
manufactured or procured; product development;
the impact of government regulations on your
business, the number of employees you retain, etc.
Please see Item 101 of Regulation S-K.
2 We note your disclosure that your business
segment is dependent upon a few major customers.
We also note the disclosure that sales to your
largest customer accounted for approximately 35%
of total net revenue during 2014. Please confirm
that in future filings you will disclose the names of
any customers who accounted for ten percent or
more of your revenues and whose loss would have a
material adverse effect on the company, if
appropriate. In your response, please provide us
with your proposed revised disclosure. Refer to
Item 101(c)(1)(vii) of Regulation S-K.
3 It appears as though your equity investment
exceeded the reporting thresholds of Rule 3-09 of
Regulation S-X in the two earliest reporting periods
of this Form 10-K. Please either include such
financial statements in your Form 10-K or explain
for us why they are not required. Provide us your
calculations made pursuant to Rule 3-09(a) of
Regulation-X.
4 We note from the discussion of your debt
obligations and their related covenants that your
Senior Secured Credit Facilities and Senior Notes
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25
contain restrictions on your payment of dividends.
Please revise the notes to your financial statements
to disclose the significant terms of the restrictions
on your ability to pay dividends that are provided
for under the terms of your debt agreements. Refer
to the guidance outlined in Rule 4-08(e) of
Regulation S-X.
5 We note your disclosure that revenues are
derived from products and services. In this regard,
please tell us your consideration of separately
presenting revenues and related costs applicable to
revenues from tangible goods, services and other
revenues pursuant to Rule 5-03(b)(1) and (b)(2) of
Regulation S-X.
Loss contingencies
The disclosure requirements of ASC 450,
Contingencies, continue to be a challenging area for
registrants and a focus of the SEC staff. Under the
guidance, companies must record an accrual for a
loss contingency when it is probable that a loss has
been incurred and the amount of the loss can be
reasonably estimated. In instances where the
criteria for accrual have not been met, disclosure
may be required if the loss is reasonably possible.
For loss contingencies that meet the criteria for
disclosure, registrants should include a description
of the nature of the contingency and an estimate of
the possible loss or range of loss (or a statement
that such an estimate cannot be made). To alleviate
registrants’ concerns that disclosure of such
information may impact the outcome of litigation,
the SEC staff has accepted disclosure of estimated
exposure on an aggregated basis, rather than
requiring separate disclosure for each individual
matter. In certain situations, when a registrant
discloses that an estimate of the possible loss or
range of loss cannot be made, the SEC staff has
questioned the procedures undertaken in
attempting to develop the estimate or range and the
factors leading to the inability to develop such
estimates.
Disclosure of the nature, timing, and amount of a
loss contingency should generally not be disclosed
for the first time in the period in which the loss is
recorded. The SEC staff has frequently evaluated
the disclosures in periods prior to that in which a
loss is recorded and commented on a lack of
adequate “early-warning” or foreshadowing
disclosures. Such comments often request
additional information to understand the triggering
event for recording the loss and whether such
losses should have been recorded in an earlier
period. The SEC staff expects that loss contingency
disclosures will be updated regularly, both
qualitatively and quantitatively, for developments
in the related matters and as more information
becomes available.
Example: Loss contingencies comments
1 Please tell us how you have complied with the
disclosure requirement in ASC 450-20-50- 4 to
either disclose an estimate of the possible loss or
range of loss in excess of amounts accrued, or
provide a statement that such an estimate cannot
be made.
2 We note the discussions relating to the
lawsuits filed in January 2015 but note that you did
not provide all the disclosures required by FASB
ASC 450-20-50, including management's
conclusion or inability to conclude on the
probability of loss and any related accrual. Please
confirm that you will comply fully with the
guidance in future filings. Please provide us with
your proposed revised disclosure.
3 You disclose that in management's opinion
claims not disclosed involve amounts that would
not have a material adverse effect on your
consolidated financial position if unfavorably
resolved. Please also disclose in future filings the
expected impact on your cash flows and results of
operations.
4
For a number of your legal proceedings
disclosed in Item 3 you disclose the claims are
without merit and/or you plan to vigorously defend
them. If there is at least a reasonable possibility
that a loss exceeding amounts already recognized
may have been incurred, in your next periodic
filing, please either disclose an estimate (or, if true,
state that the estimate is immaterial in lieu of
providing quantified amounts) of the additional
loss or range of loss, or state that such an estimate
cannot be made. Please refer to ASC 450-20- 50.If
you conclude that you cannot estimate the
reasonably possible additional loss or range of loss,
please tell us: (1) explain to us the procedures you
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26
undertake on a quarterly basis to attempt to
develop a range of reasonably possible loss for
disclosure and (2) for each material matter, what
specific factors are causing the inability to estimate
and when you expect those factors to be alleviated.
We recognize that there are a number of
uncertainties and potential outcomes associated
with loss contingencies. Nonetheless, an effort
should be made to develop estimates for purposes
of disclosure, including determining which of the
potential outcomes are reasonably possible and
what the reasonably possible range of losses would
be for those reasonably possible outcomes. You
may provide your disclosures on an aggregated
basis. Please include your proposed disclosures in
your response.
Income taxes
Income tax related disclosures and analysis
continue to be an area of focus for the SEC staff. In
particular, comments have requested that
registrants expand their discussion of significant
fluctuations and transactions and provide
additional insight into material factors affecting
trends. The SEC staff has also focused on
enhancing registrants’ disclosures relating to the
tax rate reconciliation and management’s
conclusion over the need for a valuation allowance.
Tax rate reconciliation
Recent comments from the SEC staff have inquired
about the nature of certain line items in the tax rate
reconciliation and their consistency with
information disclosed elsewhere in the registrant’s
filing. When there was a substantial difference
between the effective tax rate and statutory rate,
the SEC staff has asked registrants to enhance their
disclosures and discussion of the trends and
variability of material components within the
reconciliation.
Valuation allowances
The SEC staff continued to scrutinize registrants’
assessments of the realizability of deferred tax
assets, an area that involves significant judgment.
In comment letters, the SEC staff asked registrants
to explain the nature and weight of the positive and
negative evidence considered in their assessment.
The SEC staff has further requested that registrants
discuss whether the assumptions and future trends
considered in this assessment are consistent with
the assumptions used in other assessments, such as
those prepared to evaluate goodwill, intangible or
tangible asset impairments.
Repatriation of foreign earnings and related impact
on liquidity
ASC 740 states that when earnings of a foreign
subsidiary are indefinitely reinvested, registrants
should disclose the nature and mount of the
temporary differences for which no deferred tax
liability is established, as well as changes in
circumstances that could make the temporary
differences taxable. In addition, registrants are
required to disclose either the amount of
unrecorded deferred tax liability or state that itis
impracticable to estimate. The SEC staff has asked
registrants to provide additional information when
registrants disclose that is not practicable to
determine the amount of unrecognized deferred tax
liability. The staff has also focused on how
companies’ liquidity needs are impacted by an
indefinite reinvestment assertion and have asked
registrants to expand their MD&A to discuss the
availability of funds in the US and foreign
jurisdictions and how that may impact liquidity.
Example: Income taxes comments
1 We note you disclose federal and state net
operating loss carryforwards and provide
information about their expiration. Please tell us
how you considered also separately disclosing the
amounts and expiration dates of foreign net
operating loss and tax credit carryforwards
pursuant to ASC 740-10-50-3.
2 Given your history of pretax operating losses,
please provide us with a detailed analysis of the
positive and negative evidence you considered, and
the weight you placed on each factor, in
determining that no additional valuation allowance
was warranted. Refer to ASC 740-10-30-16
through 25.
3 You disclose that the benefits in 2014 are
principally related (in part) to “the reversal of
deferred taxes on earnings deemed permanently
reinvested.” Please tell us and disclose the change
in circumstances that led you to conclude that they
are now deemed permanently reinvested, since it
appears that they previously were not.
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27
4 We note your provision for foreign income
taxes represented approximately 75% of your
foreign income before provision for income taxes
for the year ended December 31, 2014. Please tell us
and disclose in future filings why foreign operating
income and foreign income taxes had such a
disproportionate impact on your effective income
tax rate. Tell us and disclose whether you expect
this trend to continue, and whether it was due to
changes in economic and business conditions, or
income tax systems and rates in foreign countries
where you derive operating income.
5 We note your disclosure that the effective
income tax rate for the year ended December 31,
2014 was 19% and was impacted by a $25 million
tax benefit related to the decline in value of an
entity within segment A. Please provide us more
details about the nature of this tax benefit and tell
us where this amount is included in the
reconciliation of the U.S. statutory rate to the
effective tax rate.
6 We note in your disclosure that the
determination of the amount of unrecognized U.S.
income tax liabilities with respect to certain foreign
earnings which have been reinvested abroad is not
practical. Please revise to disclose the amount of
undistributed earnings of foreign subsidiaries that
are considered indefinitely reinvested. Please refer
to ASC 740-30-50-2.b.
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28
Disclosure effectiveness
The SEC staff is in the midst of a broad, ongoing
project to evaluate the requirements of Regulation
S-K and certain provisions of Regulation S-X for all
registrants. SEC Chair Mary Jo White has
emphasized that disclosure effectiveness continues
to be an area of focus for the SEC staff. This effort
evolved out of a JOBS Act requirement for the SEC
staff to evaluate ways to modernize and simplify the
registration process and reduce the costs and other
burdens associated with Regulation S-K
requirements for issuers that are emerging growth
companies.
While the SEC staff has been clear that current
disclosure requirements are not broken, there
appears to be widespread support for identifying
targeted recommendations to minimize duplicative
and overlapping requirements, eliminating
disclosures that are not useful, and reducing the
costs and burdens of financial reporting to
preparers.
Through this initiative, the SEC is looking for ways
to update and modernize its disclosure system
while continuing to provide material information.
The SEC staff has been clear that reducing
disclosure is not the objective of this important
project, but they have indicated that they believe
the initiative can reduce costs and burdens on
companies. While the disclosure effectiveness
project may identify and eliminate duplication or
overlaps in disclosure requirements, it may also
identify gaps in information that investors would
find useful, in which case it may lead to additional
disclosure requirements.
On September 25, 2015, the SEC published its first
request for comment from the disclosure
effectiveness initiative. The request for comment
focuses on the portions of Regulation S-X that
address financial information of entities other than
the registrant (e.g., acquired businesses, equity
method investees, guarantors). The application of
these rules can be complex, and many consider
them to be disproportionately burdensome to
smaller registrants since they are more likely to
trigger the quantitative thresholds in these rules.
The project may serve as an opportunity to further
scale disclosure requirements for the various
classes of registrants. The SEC is soliciting input on
how this financial information is used by investors
and what changes would facilitate the disclosure of
the most useful information.
In advance of formal rule making, registrants can
still take action to make disclosures more effective
and streamlined by:



Reducing repetition – Registrants should
think before repeating something. For
example, MD&A should not simply repeat
information, such as critical accounting
policies, provided elsewhere. Greater use of
hyperlinks and cross referencing where
applicable and appropriate can also
decrease unnecessary duplication.
Eliminating outdated information –
Disclosures should evolve over time.
Companies and their representatives
should regularly evaluate their disclosure
to determine whether they are material to
investors.
Avoiding boilerplate language –
Disclosures should be tailored for the
entity. For example, risk factors should be
less generic and explain how these items
would affect the company if they came to
pass.
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29
SEC comment letter process
The SEC’s Division of Corporation Finance
(CorpFin) has a long history of reviewing selected
filings made under the Securities Act of 1933 and
the Securities Exchange Act of 1934. The intent of
the review is to monitor and enhance compliance
with applicable disclosure and accounting
requirements.
Until Sarbanes-Oxley, these reviews were periodic
and not subject to specific intervals. Section 408 of
the Sarbanes-Oxley Act requires the SEC to review
those who issue Exchange Act reports no less
frequently than once every three years. A
significant number of companies are selected more
frequently. CorpFin does not publicly disclose the
criteria it uses to select companies and filings for
review, but Section 408 asks the SEC to consider
the following selection criteria:






Issuers with material restatements of
financial results
Issuers that experience significant volatility
in their stock price as compared to other
issuers
Issuers with the largest market
capitalization
Emerging companies with disparities in
price to earnings ratios
Issuers whose operations significantly
affect any material sector of the economy
Any other factors that the SEC may
consider relevant
Once a company or filing is selected, the extent of
the review may be (1) a full cover-to-cover review,
(2) a review of the financial statements and related
disclosures (e.g., MD&A), or (3) a targeted review
of one or more specific items of disclosure. The
identified reviewer concentrates on critical
disclosures that appear to conflict with SEC rules or
the applicable accounting standards and on
disclosure that appears to be materially deficient in
explanation or clarity. They evaluate the disclosure
from an investor’s perspective and ask questions
that an investor might ask when reading the
document.
CorpFin performs its reviews through 11 Assistant
Director (AD) offices organized based on
specialized industry, accounting, and disclosure
expertise. An issuer’s AD assignment is shown in
EDGAR following the basic company information
that precedes the company’s filing history. This
organizational structure can sometimes explain
why multiple companies in the same industry
receive very similar comments around the same
time.
Responding to SEC Comment Letters
The SEC staff’s comments are based primarily on a
company’s disclosure and other public information,
such as information on the company’s website, in
press releases, discussed on analysts calls, etc.
(nonpublic information, such as whistleblower tips
and PCAOB inspection findings, can also be a
source of comments). SEC staff comments reflect
their understanding of the applicable facts and
circumstances. In comments, the SEC staff may
request that a company provide supplemental
information so the staff can better understand the
company’s disclosure, or may ask that the company
provide additional or different disclosure in a
future filing or change the accounting and the
disclosure by filing an amendment.
When responding to the SEC staff, keep these best
practices in mind:


Own the process—Companies should
leverage the knowledge and experience of
their auditors and SEC counsel, but it’s
important to maintain ownership. As with
any project, there should be a clear owner
and project manager coordinating the input
from various sources and developing a
response.
Don’t rush—Companies should evaluate
how long they believe it will take to
respond. Although the letter from the SEC
staff will request a response in 10 business
days, it is acceptable for management
(usually through a call by counsel to the
SEC staff) to request more time if 10 days is
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30




not sufficient. A thoughtful and complete
response is better than a quick reply.
Think about future filings—Companies
should discuss letters received as soon as
possible before they are planning to file a
registration statement with their auditors
and counsel to determine if there are any
implications to the content and timing of
the registration statement. Questions about
timing can also be discussed with the SEC
staff as well as the possibility of an
expedited review of a company’s response.
Ask the SEC staff—Companies can call the
SEC staff if they do not understand the
comment. The objective should not be for
the company to explain their position, but
to gain clarification when a comment or
aspects of a comment is unclear.
Remember that comments become public—
Comments become part of the public
domain once submitted and resolved.
Comments and the related responses are
posted to the SEC’s website no earlier than
20 days after the review is completed or the
registration statement is declared effective.
Even those comment letters related to
Emerging
Growth Companies that have been
submitted confidentially are eventually
made
public. CorpFin will redact any information
subject to a Rule 83 confidential treatment
request without evaluating the substance of
that request.
Don’t rely solely on precedent—previous
comments and responses of other
companies may provide useful information
but should not be the primary basis of the
response. Each comment is based on
specific facts and circumstances and may
involve different levels of materiality.
Accordingly, the reason the staff accepted a
response for one company may not be
applicable in another situation. Make sure
the response is appropriate based on the
company’s specific facts and applicable
accounting literature.


Address the intent of the question—
Consider, if possible, the objective of the
SEC staff comment. Sometimes providing a
complete answer that addresses the intent
of the question can stave off future
comments.
Provide planned disclosures—Many
comments request additional disclosure in
future filings. To ensure there is a meeting
of the minds, provide the SEC staff with a
draft of the applicable disclosure, even if
the data used is from a prior period. This
can allow the SEC staff to assess whether
the narrative sufficiently addresses their
comment and may prevent future
comments on the
same disclosure.
The company or its representatives should feel free
to involve the SEC’s Office of the Chief Accountant
(OCA) (distinct from CorpFin’s Office of Chief
Accountant) at any stage in this process. Generally,
OCA addresses questions concerning the
application of GAAP while CorpFin resolves
matters concerning the age, form, and content
of financial statements required to be included
in a filing.
Closing a Filing Review
When a company has resolved all SEC staff
comments on an Exchange Act registration
statement, a periodic or current report, or a
preliminary proxy statement, CorpFin provides the
company with a letter to confirm that its review of
the filing is complete.
When a company has resolved all SEC staff
comments on a Securities Act registration
statement, the company may request that the SEC
declare the registration statement effective so that
it can proceed with the transaction.
A more detailed discussion of the filing review
process used by the Division of Corporation
Finance can be found on the SEC’s website at:
http://www.sec.gov/divisions/corpfin/cffilingrevie
w.htm
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31
About PwC’s Entertainment,
Media & Communications
practice
As audit, accounting, and business advisors to the
world’s leading Entertainment, Media and
Communications companies, PwC has an insider’s
view of trends and developments driving the
industry. PwC has depth and breadth of experience
working globally across the key industry sectors
including: communications, television, film, music,
internet, video games, advertising, publishing,
radio, out of home advertising, sports, business
information, theme and amusement parks, casino
gaming and more. But perhaps even more
significantly, we have aligned our practice around
the issues and challenges that are of utmost
importance to our clients in these sectors, such as
digital transformation, future business models,
globalization, emerging markets, and changing
operational dynamics. For more information about
this publication or PwC, please contact:
Stefanie Kane
US Entertainment, Media & Communications
Assurance Leader
(646) 471-0465
[email protected]
Acknowledgments
This publication represents the efforts and ideas of
many individuals within PwC, including members
of the US Entertainment, Media & Communications
Industry Group and the National Professional
Services Group. The following PwC personnel
contributed to the content or served as technical
reviewers of this publication:
Bud Swartz
Partner
(973) 236-4172
[email protected]
Karen Keelty
Partner
(973) 236-4624
[email protected]
Jacob Young
Senior Manager
(973) 236-7351
[email protected]
Binita Mehta
Senior Manager
(973) 236-4600
[email protected]
Visit our websites at:
http://www.pwc.com/us/en/industry/entertainment-media/index.jhtml
http://www.pwc.com/us/en/industry/communications/index.jhtml
Stay informed | SEC comment letter trends | Entertainment, Media & Communications
32
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© 2015 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the
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