SEC Comments and Trends 2013 supplement — an update of current reporting issues Media and entertainment industry supplement December 2013 To our clients and other friends We are pleased to issue this supplement to EY’s SEC Comments and Trends — 2013 supplement (SCORE No. CC0376) that is intended to give you insights into the Securities and Exchange Commission (SEC) staff’s concerns and areas of focus involving media and entertainment (M&E) companies. This publication is based on our review of 101 public comment letters issued to more than 50 M&E registrants between February 2012 and September 2013. These comment letters were issued to M&E companies in all subsectors, including broadcast and cable, filmed entertainment, music, publishing, advertising and interactive media. The SEC staff continues to focus on many of the same topics that we highlighted in the 2012 M&E supplement. The following chart summarizes the most frequent comment areas for M&E companies. Comment area Management’s discussion and analysis* Pro forma disclosures Revenue recognition Executive compensation disclosures Segment reporting Contingencies Consolidation Intangible assets and goodwill * This category includes comments on results of operations, liquidity matters and critical accounting policies. Many M&E companies received management’s discussion and analysis comments in more than one category. The SEC staff continues to question registrants’ disclosures related to significant judgments and estimates, including those related to segment reporting, goodwill impairment, loss contingencies, income taxes and revenue recognition. The SEC staff requests additional information to support registrants’ conclusions and additional disclosures about the facts and circumstances that support significant judgments. In this publication, we have included a list of resources for each topic that may help you better understand the issues. We encourage you to read this M&E supplement in conjunction with our September 2013 SEC Comments and Trends, which discusses matters that relate to all registrants. SEC Comments and Trends Media and entertainment supplement December 2013 Contents SEC reporting issues ....................................................................................................... 1 Management’s discussion and analysis (MD&A) .................................................................................1 Pro forma adjustments ....................................................................................................................3 Executive compensation disclosures .................................................................................................4 Revenue recognition ....................................................................................................... 5 Segment reporting .......................................................................................................... 7 Contingencies ................................................................................................................. 9 Consolidation ................................................................................................................ 10 Goodwill ....................................................................................................................... 11 Intangible assets ........................................................................................................... 13 SEC Comments and Trends Media and entertainment supplement December 2013 SEC reporting issues Management’s discussion and analysis (MD&A) Background and summary of issues noted The SEC staff continues to question the sufficiency and completeness of M&E registrants’ MD&A disclosures of results of operations, critical accounting estimates and liquidity and capital resources, among other topics. At the 2012 AICPA National Conference on Current SEC and PCAOB Developments, the SEC staff highlighted disclosures of results of operations as its most frequent area of comment on MD&A. We continue to see comments from the SEC staff asking M&E registrants to disclose not only what, but why significant changes occurred in their results of operations. Registrants should quantify and discuss the underlying factors that led to significant changes in financial statement line items. The SEC staff has increased its focus on disclosures about significant components of operating expense (e.g., costs of sales) at both the consolidated and segment levels. The SEC staff also has recently questioned registrants’ use of key metrics, including how these metrics explain fluctuations in their results of operations. Analysis of recent trends Results of operations Item 303 (a)(3) of Regulation S-K requires registrants to describe the significant components of revenue and expenses that they believe would help readers understand results of operations. Recently, the SEC staff has asked M&E registrants to include more discussion about significant components of operating results, such as changes in content acquisition costs, licensing expenses and/or advertising prices. The SEC staff often asks registrants to include a more detailed discussion of the disclosures required by Item 303(a)(3), including: • Describe any unusual or infrequent events or transactions or any significant economic changes that materially affect income from continuing operations and the extent to which income was affected (e.g., significant events that may affect a registrant that have been disclosed in the press but not disclosed in an SEC filing) • Describe any other significant components of revenue or expense necessary to understand the results of operations (e.g., components of cost of sales) • Describe any known trends, events or uncertainties that have had or are expected to have a material effect on sales, revenue or income from continuing operations (e.g., increased programming costs) • Discuss the extent to which material increases in net sales or revenue are due to increased sales volume, new products or services or higher sales prices and, if possible, quantify each factor’s effect on net sales • Discuss any relevant segment information necessary to understand the registrant’s results of operations, including the effect the performance of a particular product line may have had on those results SEC Comments and Trends Media and entertainment supplement December 2013 1 SEC reporting issues Examples SEC staff comment letters: Understand the results of operations: Throughout your discussion, please quantify each factor cited that contributed to the changes in revenues and expenses. For example, on page XX you disclose that the increase in digital revenue was driven by continued success of streaming services, growth of digital downloads in the U.S. and emerging digital markets in Europe and certain emerging territories, partially offset by the continued decline in global advertising revenue, but you do not quantify any of these factors. Please revise your disclosure and ensure that your revised disclosure is sufficiently detailed in explaining the factors cited and analyzing the underlying reasons for the factors. Trend that may have a material effect on revenue: Please consider expanding this section to discuss how the following trend affects or is expected to affect your results of operations: The rapid increase in the amount of revenue attributable to digital offerings. Results of operations — key financial metrics To allow investors to view registrants from management’s perspective, the SEC staff has historically focused on whether MD&A incorporates the key performance metrics used to manage the business and assess performance. While we continue to see comments on such metrics, the SEC staff also frequently requests that M&E registrants: • Not only describe, but quantify key metrics in MD&A for each period presented • Discuss how metrics are calculated and whether there are any limitations in their calculation • Provide metrics on a disaggregated basis, such as by segment, geography or revenue stream • Ensure that key metrics used to explain fluctuations from period to period are linked to the financial statements (e.g., using the increase in the number of customers to explain revenue growth) • When a registrant uses key metrics to explain fluctuations in the financial statements, the connection to the appropriate financial statement line items should be clear. For example, average monthly users may be used to illustrate revenue per average user and help explain a change in sales. Example SEC staff comment letter: Results of operations — key financial metrics Please clarify and disclose the circumstances under which a subscriber would no longer be considered a subscriber and would no longer be reflected in subscriber metrics. In connection with this, tell us whether any subscriber metrics include inactive accounts or other accounts for which an annual fee has not been received and, if so, the basis for their inclusion. EY resources • Compendium of significant accounting and reporting issues — 2012 AICPA National Conference on Current SEC and PCAOB Developments (SCORE No. CC0364), 10 December 2012 • 2012 SEC annual reports — Form 10-K (SCORE No. CC0360), November 2012 SEC Comments and Trends Media and entertainment supplement December 2013 2 SEC reporting issues Pro forma adjustments Background and summary of issues noted Over the past couple of years, the SEC staff has been increasingly commenting on how registrants have complied with the requirements of Article 11 of Regulation S-X for pro forma financial information disclosed in Form 8-K filings, registration statements and certain proxy statements. Pro forma financial information is intended to help investors understand the effects of a significant transaction, such as an acquisition or disposition, that has either occurred or is probable after the date of the historical financial statements (or is not fully reflected in the historical financial statements) by presenting financial information “as if” the transaction had occurred earlier. The SEC staff continues to challenge whether pro forma adjustments are (1) directly attributable to each specific transaction, (2) factually supportable and (3) expected to have a continuing impact (income statement only). However, the SEC staff has recently shifted its view on the continuing impact criterion. Analysis of recent trends In addition to meeting the directly attributable and factually supportable criteria, pro forma adjustments related to the pro forma income statement must have a continuing impact on the registrant. In the October 2012 SEC Comments and Trends — An analysis of current reporting issues, we said the SEC staff had recently modified its view that items should be considered to have a continuing impact if they occur more than one time, rather than over a period greater than 12 months, which historically had been the SEC staff’s view. As a result, the SEC staff requested that some registrants conform their adjustments to the more-than-one-time view. However, at the 2012 AICPA National Conference on Current SEC and PCAOB Developments, the SEC staff clarified that the historical 12-month rule of thumb to evaluate the continuing impact criterion continues to be appropriate. The staff also said that adjustments for certain items that affect the pro forma income statement for a period of 12 months or less may be considered to have a continuing impact, and the evaluation will depend on the individual facts and circumstances. For example, an adjustment for interest expense on a bridge loan that may be incurred for a period of less than 12 months might be considered to have a continuing impact. Example SEC staff comment letter: Pro forma adjustments Pro forma adjustments (pursuant to Article 11 of Regulation S-X) shall give effect to events that are directly attributable to the offering, factually supportable and expected to have a continuing impact. If you continue to believe your adjustments (g) and (j) are appropriate, provide a detailed explanation supporting your conclusion and justify how your accounting treatment is consistent with Article 11 of Regulation S-X. SEC Comments and Trends Media and entertainment supplement December 2013 3 SEC reporting issues Executive compensation disclosures Background and summary of issues noted The SEC staff focuses its reviews on registrants’ compensation discussion and analysis in an effort to promote more direct, specific and clear disclosures. The SEC staff issues comments requesting that M&E companies provide more detailed information about the process they use to determine the executive compensation of each named executive officer. The comments primarily include requests for M&E companies to enhance disclosures on performance targets. Analysis of recent trends Item 402 of Regulation S-K specifies the required disclosure related to director and executive officer compensation. Item 402 disclosures are required in most proxy or information statements, as well as in Form 10-K filings and various registration statements. The SEC staff routinely requests that registrants provide details of individual and corporate performance criteria and targets, both quantitative and qualitative, for each named executive. This may include specific quantitative financial targets, such as a dollar threshold for revenue or operating income, rather than a statement that bonuses are based on target revenue and operating income. If the disclosure of these targets would result in competitive harm, a registrant is allowed to omit the information, but it must instead disclose the likelihood or the difficulty of achieving these undisclosed targets. Example SEC staff comment letter: Performance criteria Please supplement your disclosure in future filings to describe the general nature of the qualitative performance targets considered in assessing individual performance. Where a specific qualitative measure was a material component in the compensation committee’s decision regarding individual performance, please explain how the compensation committee considered the factor in determining the level of individual performance and resulting compensation paid. Please confirm your understanding that you should discuss qualitative measures rather than just listing them. Item 402(s) of Regulation S-K requires a registrant to discuss and analyze its broader compensation policies and actual compensation practices for all employees, including non-executive officers, if risks arising from those compensation policies or practices are “reasonably likely to have a material adverse effect on the company.” The SEC staff often requests that registrants that do not present any 402(s) disclosures explain why the disclosure is not necessary and describe the process they used to reach that conclusion. EY resources • • 2013 proxy statements: An overview of the requirements (SCORE No. CC0362), November 2012. Hot Topic: SEC final rule: Proxy disclosure enhancements (SCORE No. CC0289), 18 December 2009. SEC Comments and Trends Media and entertainment supplement December 2013 4 Revenue recognition Revenue recognition Background and summary of issues noted Given the significance of revenue and the complexity of certain revenue recognition guidance, the SEC staff continues to focus on several revenue recognition topics and expects robust disclosure of a registrant’s accounting policies and discussion of the key terms of significant revenue arrangements. This past year, we have seen the SEC staff increase its focus on the enhanced description of judgments and policies related to multiple-element arrangements. Although the number of comments related to gross versus net revenue presentation declined slightly compared with the prior year, this topic is a challenging area on which M&E registrants should continue to focus. Analysis of recent trends Multiple-element arrangements expects further Over the last several years, the SEC staff has frequently asked M&E registrants about disclosures of their multiple-element arrangements or the applicability of the multiple-element revenue guidance. Specifically, the SEC staff comments on the following areas: improvement in • Overall disclosure — Provide a complete description of rights and obligations, separate from the discussion of the accounting for those rights and obligations • Disclosure of significant deliverables — Disclose the judgments made in concluding whether a deliverable is or is not a separate unit of accounting, and, if a deliverable is deemed to be perfunctory, disclose the reasons supporting this conclusion • Disclosure of relative selling price — Provide an analysis of how total arrangement consideration was allocated to each unit of accounting, explaining how the estimated selling price for each unit of accounting was determined and any significant assumptions used in this determination • Disclosure of recognition — Provide a discussion of the timing and pattern of recognition for each unit of accounting The SEC staff disclosures of accounting policies and judgments for multiple-element arrangements. Registrants should carefully review their disclosures, conform them to the multiple-element disclosure requirements in ASC 605-25 and provide a comprehensive discussion of judgments involving the identification, separation and recognition of multiple-element arrangements. Example SEC staff comment letter: Multiple-element arrangements We note your disclosure that you enter into arrangements with customers to sell different impressionbased advertisements. Please tell us more about these multiple-element arrangements, including the products and services involved, the fee arrangements, and over what periods you recognize revenue. SEC Comments and Trends Media and entertainment supplement December 2013 5 Revenue recognition Sales incentives Many registrants offer sales incentives, including discounts, rebates, price protection and promotional products, to customers. Under ASC 605-50, consideration given to a customer is presumed to be a reduction to revenue unless the vendor receives an identifiable benefit and can reasonably estimate the fair value of that benefit. The SEC staff questions M&E registrants about the accounting for incentive programs, especially when the registrant records a portion of the incentives within expense. In addition, the SEC staff often requests that M&E registrants disclose the amount of discounts or allowances and the corresponding effect these incentives have on the results of operations regardless of their classification as an expense or reduction of revenue. Example SEC staff comment letter: Sales incentives Please tell us whether you pay any volume discounts to advertisers or their media agencies, and how you account for these volume discounts. Registrants should clearly disclose their accounting policies related to sale incentives provided to customers. When there are new incentive programs or changes in their structure or participation rates, MD&A should include a discussion of the terms of the programs and their effect on operations, if material. EY resources • Compendium of significant accounting and reporting issues — 2012 AICPA National Conference on Current SEC and PCAOB Developments (SCORE No. CC0364), 10 December 2012 SEC Comments and Trends Media and entertainment supplement December 2013 6 Segment reporting Segment reporting Background and summary of issues noted At the 2012 AICPA National Conference on Current SEC and PCAOB Developments, the SEC staff highlighted segment reporting as one of the most frequent comment areas. For M&E registrants, the following are recurring themes the SEC staff focuses on: • Identifying operating segments • Aggregating operating segments • Providing appropriate entity-wide disclosures with respect to products and services, revenues attributable to individual foreign countries and revenues from major customers Consistent with the prior year, the SEC staff often requests that M&E registrants supplementally provide a discussion of their internal structure or an organization chart and examples of resource allocation decisions to support the identification of operating segments. Under ASC 280, segment disclosures are based on a “management approach” and should be consistent with a registrant’s internal management reporting structure. The SEC staff requests information that is provided to an M&E registrant’s chief operating decision maker (CODM), board of directors and audit committee. When the CODM regularly receives reports that present discrete operating results for business units of the registrant below the operating segment level identified by the registrant, the SEC staff presumes that the CODM uses these reports to manage and assess performance and allocate resources. The SEC staff also continues to request that M&E registrants supplementally provide a detailed analysis of how all factors were considered in reaching the conclusion that aggregation of operating segments was appropriate. ASC 280 requires that aggregated operating segments have “similar economic characteristics,” such that they would be expected to have similar long-term financial performance. The SEC staff challenges registrants’ conclusions to aggregate operating segments when historical or projected financial information suggests that the operating segments do not have similar economic characteristics. In addition, the SEC staff often requests that registrants disclose disaggregated revenue by product and service, individual foreign country or significant customers when the registrant’s other disclosures indicate that this information is required by ASC 280. The SEC staff continues to comment on certain themes, but it is increasing its scrutiny of segment reporting disclosures and expects M&E registrants to continually monitor business developments that may affect the identification or aggregation of operating segments. Analysis of recent trends Identification of operating segments The SEC staff expects M&E registrants to tell their “complete story” in responding to segment reporting comments. In explaining the identification of operating segments, M&E registrants should analyze how the CODM makes resource allocation decisions and assesses performance. Furthermore, the SEC staff frequently comments when a registrant identifies only one operating segment. The SEC staff may challenge how decisions can be made about performance and resources for the company as a whole without evaluating discrete financial information at lower levels. SEC Comments and Trends Media and entertainment supplement December 2013 7 Segment reporting Example SEC staff comment letter: Identification of operating segments From your disclosures, it appears that small publications and large publications are a significant portion of your total operations. Please tell us the information on small and large publications that is regularly provided to the chief operating decision maker, and how such information is used to allocate resources and assess performance. In connection with this, explain your consideration in reporting small and large publications as separate reportable segments pursuant to ASC 280-10-50-(1-9), and provide an analysis of the small and large publications against the criteria therein. Given that the SEC staff presumes that reports received by the CODM are used to allocate resources and assess performance, management is more frequently participating in discussions with the SEC staff to explain how discrete financial information is used and how management assesses performance and allocates resources. Aggregation of operating segments Increasingly, the SEC staff reviews the registrant’s website, analyst presentations and information throughout its public filings and questions inconsistencies with a registrant’s conclusion that operating segments can be aggregated based on similar economic characteristics. For example, a discussion of diverging trends or differing results among business lines could indicate that operating segments may not be economically similar. Example SEC staff comment letter: Aggregation of operating segments Please tell us whether you consider theatrical and home entertainment distribution to be separate operating segments. Your response should provide a detailed analysis under ASC Topic 280-10-50-1 and 280-10-50-3 through 50-9. If you consider theatrical and home entertainment distribution to be separate operating segments, please provide us with a detailed analysis of your aggregation criteria for such segments. In particular, please address the significant differences with regard to the profitability for theatrical versus home entertainment. Continuous monitoring of segment reporting We have seen an increase in the frequency of repeat segment comments in a subsequent year’s review. We believe this is linked to the SEC staff’s emphasis on registrants having processes in place to continuously reassess their conclusions as circumstances may change over time. For example, the SEC staff may want to understand how a change in a registrant’s internal reporting due to a significant acquisition or changes in performance among operating segments affected segment reporting conclusions. EY resources • Financial reporting developments — Segment reporting — Accounting Standards Codification 280 (SCORE No. BB0698), December 2012 SEC Comments and Trends Media and entertainment supplement December 2013 8 Contingencies Contingencies Background and summary of issues noted Loss contingencies have been a frequent area of comment over the past several years. At the 2012 AICPA National Conference on Current SEC and PCAOB Developments, however, the SEC staff noted that it has seen improvement in the accounting and disclosure of loss contingencies. We have also noted an overall decline in the number of comments related to loss contingencies from the prior year. The staff nevertheless has continued to focus on M&E registrants’ processes for estimation and disclosure and has been challenging whether disclosures evolve appropriately as matters progress. Analysis of recent trends The SEC staff acknowledges that the recognition and disclosure of contingencies require judgment; therefore, it is important that M&E registrants “tell their whole story” in their disclosures and in any comment letter responses relating to loss contingencies. Furthermore, the SEC staff expects loss contingency disclosures to evolve over time as the contingency progresses and new information becomes available. The “story” should include how each matter has developed over time and how key developments have affected the disclosures or amounts recognized in the financial statements. When a loss contingency is settled, the SEC staff will generally revisit prior-period disclosures to see whether those disclosures were adequate and whether the loss recognized at the time of settlement was recorded in the correct period. That is, the SEC staff has focused on whether a registrant records a loss in the first period the loss is estimable and probable, which may be a period prior to the settlement of the loss. The SEC staff also has focused on a registrant’s process each reporting period for developing an estimated loss or range of loss, particularly when the registrant has legal cases that remain open for several years. If a registrant has not disclosed an estimate of the reasonably possible loss or range of loss and continues to state that such an estimate cannot be made, the SEC staff may ask the registrant to provide supplemental information so it can better understand the evolution of the litigation matter and the specific factors resulting in the company’s inability to make an estimate. The SEC staff may challenge disclosures that imply a need for precision in estimating the loss or range of loss because US GAAP does not require a level of certainty or confidence when estimating the range of loss. Additionally, in evaluating a registrant’s process, the SEC staff may ask how the registrant considered past experience with similar matters specific to the company or more generally to its peers. Example SEC staff comment letter: Accounting for and disclosure of loss contingencies We note the open cases disclosed have been outstanding for several years, but you have not disclosed an estimate of the reasonably possible loss or range of loss for any. If you conclude that you cannot estimate the reasonably possible additional loss or range of loss for any of these cases, please explain to us (1) the procedures you undertake on a quarterly basis to attempt to develop a range of reasonably possible loss for disclosure and (2) what specific factors are causing the inability to estimate a loss 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. SEC Comments and Trends Media and entertainment supplement December 2013 9 Consolidation Consolidation Background and summary of issues noted Recently, the SEC staff has been asking registrants to provide more disclosures related to consolidated variable interest entities (VIEs), particularly when the registrant has operations in foreign jurisdictions (e.g., the People’s Republic of China, or PRC) that limit direct foreign ownership. Analysis of recent trends When a foreign jurisdiction limits a registrant’s direct ownership in an entity, the registrant may enter into contractual arrangements with the entity that give it the power to control the entity. Through these contractual arrangements, a registrant would consolidate the entity under the Variable Interest Model if the entity is a VIE and the registrant determines it is the VIE’s primary beneficiary. The SEC staff expects registrants to avoid boilerplate disclosures of the facts and circumstances they evaluated to determine the primary beneficiary and reach their consolidation conclusions. For example, the SEC staff has cautioned M&E registrants that merely listing the contractual arrangements between a VIE and the registrant does not provide sufficient insight into the judgments the registrant made in evaluating whether to consolidate the VIE. Registrants should discuss specific contractual terms and the effect on Registrants should describe the terms of the contractual arrangements such as duration, renewal rights, mutual consent provisions and revocability clauses, and how those terms convey power and benefits to the registrant. Registrants also should consider disclosing contractual provisions or other circumstances that might limit their ability to exercise power and how such limitations were evaluated in reaching their conclusion. their ability to Example SEC staff comment letter: Consolidation of VIEs control a VIE. Revise your disclosures to include the terms of each of the VIE agreements along with a discussion of which party or parties have renewal rights. Also, revise to clarify how you considered each of these agreements in concluding that you are the primary beneficiary of the VIEs and specifically address the agreements from which you obtain effective control over the VIEs and those that provide you the ability to receive substantially all of the economic benefits of the VIEs. Furthermore, the SEC staff often inquires about the risks and restrictions related to a registrant’s VIE operations in foreign jurisdictions and how contractual arrangements comply with the local laws and regulations in those jurisdictions. The SEC staff applies these principles broadly in its comments to registrants. Therefore, all M&E registrants with interests in material VIEs should closely evaluate their disclosures and discuss the significant contractual terms that affect their consolidation conclusions. EY resources • Compendium of significant accounting and reporting issues — 2012 AICPA National Conference on Current SEC and PCAOB Developments (SCORE No. CC0364), 10 December 2012 • Financial reporting developments — Consolidation and the Variable Interest Model — Determination of a controlling financial interest (SCORE No. BB1905), June 2013 SEC Comments and Trends Media and entertainment supplement December 2013 10 Goodwill Goodwill Background and summary of issues noted Registrants’ disclosures about goodwill impairment, in both the notes to the financial statements and MD&A, remain an area of focus for the SEC staff. Specifically, the SEC staff routinely challenges the information disclosed about reporting units that are at risk for impairment and the conclusions reached about whether such reporting units have been properly evaluated for impairment. The SEC staff also has continued to request additional information and disclosure about a registrant’s goodwill impairment testing policies. Recently, the SEC staff has been requesting supplemental information and more robust disclosures about the events and circumstances evaluated in a qualitative assessment resulting from the adoption of ASU 2011-08 and the “full story” behind the timing and results of interim impairment tests and any impairment charges. Analysis of recent trends Timing of interim impairment tests and charges Registrants are frequently asked to provide supplemental information and additional disclosures about goodwill impairment testing. In addition to frequently requesting that registrants provide more robust disclosures in MD&A about the critical accounting estimates for assessing goodwill impairment, the SEC staff recently has requested supplemental information and additional disclosures in MD&A to better understand the timing of any impairment charges and the performance of any interim impairment tests. When a registrant has recognized goodwill impairment, the SEC staff often comments that the registrant needs to provide the “full story” about why an impairment charge was taken in a specific period, including identifying the particular events and any related changes in assumptions that may have triggered the charge. This comment is common when a registrant has recognized goodwill impairment for a reporting unit regardless of whether it was previously disclosed as being at risk for impairment. Recent SEC staff comments also have focused on disclosures in MD&A about registrants’ interim impairment tests. Such comments include requesting that registrants disclose the results of any interim impairment test (e.g., if the unit passed the interim test, disclose that fact), regardless of whether an impairment charge was taken. The SEC staff also requests disclosure of the facts and circumstances that drove the need to perform an interim goodwill impairment test. Example SEC staff comment letter: Timing of goodwill impairment In significant detail, please explain to us all of the factors that changed between the time you performed step 1 of the impairment test in the second fiscal quarter and when you performed the impairment test in the end of the subsequent fiscal quarter such that you were required to record a $25 million impairment charge. In your response, please provide us with the following information at both impairment test dates: (1) the carrying and fair values and; (2) a comparison of the different assumptions that you used in the determination of the fair value of the reporting unit. SEC Comments and Trends Media and entertainment supplement December 2013 11 Goodwill Supplemental information on qualitative impairment assessments ASU 2011-08 was effective in 2012 and allowed registrants to perform a qualitative assessment of goodwill in their annual goodwill impairment tests in certain circumstances. As a result, when a registrant has performed a qualitative impairment assessment, the SEC staff has requested that the registrant provide supplemental information and expand disclosures about the positive and negative events and circumstances it evaluated in concluding that it is not more likely than not that goodwill is impaired. Example SEC staff comment letter: Supplemental information on qualitative assessment Please tell us more about the qualitative analysis performed as of [annual assessment date], including the specific qualitative factors considered. Tell us whether you performed a step one analysis subsequent to your qualitative assessment and if so, describe the results. Additionally, tell us what consideration was given to more clearly disclosing the steps and analyses actually performed as of the most recent assessment. EY resources • Compendium of significant accounting and reporting issues — 2012 AICPA National Conference on Current SEC and PCAOB Developments (SCORE No. CC0364), 10 December 2012 • Financial reporting developments — Intangibles — Goodwill and other (SCORE No. BB1499), revised November 2013 SEC Comments and Trends Media and entertainment supplement December 2013 12 Intangible assets Intangible assets Background and summary of issues noted The SEC staff frequently requests that registrants provide the following in their intangible-asset disclosures: • Information about intangible assets recognized as part of a business combination • Explanation of how the useful lives were determined and the factors leading to the amortization method selected • Supplemental information on how indefinite-lived intangible assets were assessed for impairment After reviewing this information, the SEC staff often asks registrants to enhance their intangible asset disclosures. Analysis of recent trends Intangible assets recognized in a business combination ASC 805 requires a registrant to determine the fair value of identifiable assets acquired and liabilities assumed (with certain limited exceptions), including intangible assets that (1) arise from contractual or other legal rights or (2) are separable. The SEC staff frequently challenges whether additional intangible assets should have been recognized in a business combination. The SEC staff’s comments focus on the value assigned to specific identifiable intangible assets, as well as the significant estimates and assumptions used in calculating fair value measurements and the subsequent accounting for such recognized intangibles. Specifically, the SEC staff requests that registrants discuss in MD&A the valuation method and principal assumptions they used to determine the fair value of each major class of intangible assets acquired. Supplemental information on impairment analysis An indefinite-lived intangible asset should be tested for impairment annually, or more frequently (in accordance with ASC 350) if events or changes in circumstances indicate that the asset might be impaired. The SEC staff frequently requests that registrants explain how indefinite-lived intangible assets are tested for impairment, including the valuation method and significant assumptions used to determine the estimated fair values of the assets. As with goodwill impairment, the SEC staff frequently challenges whether impairments of indefinite-lived intangibles should be recognized when the market capitalization or operating results of the registrant (or that of the relevant segment) have declined significantly. In addition, for intangible assets (e.g., broadcast licenses) that face risk of impairment, the SEC staff has asked M&E registrants to provide additional disclosure of the carrying amount of such assets and the percentage by which the fair value exceeds the carrying value (or whether the fair value equals the carrying value) as of the most recent impairment test date. Registrants should review intangible assets that are being amortized for impairment in accordance with ASC 360. They should consider the effects of current economic conditions on the assessment of intangible assets for impairment. SEC Comments and Trends Media and entertainment supplement December 2013 13 Intangible assets Qualitative impairment assessment ASU 2012-02, which was issued in July 2012 and is effective in 2013 for calendar year-end registrants, gives registrants the option to perform a qualitative assessment to test indefinite-lived intangible assets for impairment. The ASU does not require any new disclosures about such assessments, similar to qualitative assessments for testing goodwill for impairment. However, the adoption of its provisions could result in changes to a registrant’s critical accounting estimates and indefinite-lived intangible asset impairment testing policy disclosures in MD&A. For this reason, the use of the qualitative assessment may become an area of focus for the SEC staff in the future. Useful life determination and amortization method When determining the useful life of identifiable intangible assets, a registrant should consider the period over which the asset is expected to contribute directly or indirectly to its future cash flows. Registrants should consider all factors listed in ASC 350 and all other relevant information when determining the useful lives of intangible assets. The SEC staff may ask how a registrant has considered its own historical experience in renewing or extending similar arrangements (consistent with the intended use of the asset by the registrant), regardless of whether those arrangements have explicit renewal or extension provisions. A registrant should consider the useful life of an intangible asset to be indefinite only after considering all relevant facts and determining that there are no legal, regulatory, contractual, competitive, economic or other factors that limit the useful life of the intangible asset. The SEC staff routinely challenges assertions that intangible assets have an indefinite life and frequently asks registrants to disclose, when not otherwise provided, what factors were considered in making this determination. For certain international broadcast licenses, the SEC staff has challenged the use of an indefinite life and has requested that broadcasters explain (1) the procedures for obtaining the renewal of the license, (2) the conditions or requirements for renewal, (3) the circumstances that could result in the cancellation or non-renewal of a license and (4) historical experience with license renewals, including the number of licenses submitted for renewal in the last five years. Example SEC staff comment letter: Useful life determination We note that film production and distribution agreements represent a significant amount of your intangible assets, and their 20-year weighted-average amortization period is a lengthy period. As the determination of an amortization period used for this asset can materially impact results of operations, and we are unclear on how you determined this was an appropriate period in using its economic benefits, please provide us with significant support for your conclusion that film production and distribution agreements should be amortized over 20 years. SEC staff comment letters also continue to focus on the useful lives and amortization method of definitelived customer-related intangible assets (e.g., customer lists, customer contracts, customer relationship intangibles). The SEC staff frequently asks registrants to disclose how they determined the useful lives of these assets and challenges such useful lives when the underlying assumptions do not appear consistent with customer information disclosed in other areas of the filing. The SEC staff also challenges the amortization method chosen for these assets (e.g., straight-line versus accelerated) and often requests that registrants explain their key assumptions about the expected future cash flows from an acquired customer-related intangible asset to support their chosen amortization method. EY resources • Financial reporting developments — Intangibles — Goodwill and other (SCORE No. BB1499), revised November 2013 • Financial reporting developments — Business combinations — Accounting Standards Codification 805 (SCORE No. BB1616), revised November 2013 SEC Comments and Trends Media and entertainment supplement December 2013 14 EY | Assurance | Tax | Transactions | Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. 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