1. business and industrial
2. company
3. earnings

SEC Comment Letter
Examples
Income Taxes
January 2014
Contents
Introduction1
SEC Staff Remarks at Recent AICPA Conferences2
Examples of SEC Comments4
Business Combinations4
Deferred Taxes4
Disclosures 4
Foreign Impact on the Effective Tax Rate and Other Reporting Issues5
Intraperiod Tax Allocation6
Tax Credits7
Tax Holiday7
Tax Rate Reconcilation7
Uncertain Tax Positions7
Undistributed Earnings of Foreign Subsidiaries8
Valuation Allowance10
Appendix A: SEC Staff Review Process15
Appendix B: Leading Practices for Managing Unresolved SEC Comment Letters16
Appendix C: Tips for Searching the SEC’s Database for Comment Letters
17
Appendix D: Glossary of Standards and Other Literature
22
Appendix E: Abbreviations
23
ii
Introduction
Under the Sarbanes-Oxley Act of 2002, the SEC must review every registrant’s periodic filings at least once every three years. The
SEC staff’s comments on the disclosures in those filings and registrants’ responses to them are posted on the SEC’s Web site and
provide valuable insight into the SEC staff’s comment themes. Registrants can incorporate a review of the comments into their
financial reporting process to help improve their financial statements and disclosures.
Accounting for income taxes continues to be one of the SEC’s top areas of focus in its reviews of registrant’s periodic filings.
This edition of SEC Comment Letter Examples — Income Taxes contains extracts of SEC staff comments on topics including a
registrant’s assessment of the realizability of deferred tax assets (DTAs), undistributed earnings of foreign subsidiaries, foreign
impact on the effective tax rate, uncertain tax positions, and income tax accounting disclosures.
The extracts in this publication have been reproduced from comments published on the SEC’s Web site that were issued between
January 1, 2012, and June 30, 2013. Dollar amounts and information identifying registrants or their businesses have been
redacted from the comments.
The comments are organized by topic, as follows:
Topic
Example
Comments
Topic
Example
Comments
Business Combinations
1
Tax Holiday
1
Deferred Taxes
3
Tax Rate Reconciliation
6
Disclosures
12
Uncertain Tax Positions
4
Foreign Impact on the Effective Tax Rate and
Other Reporting Issues
13
Undistributed Earnings of Foreign Subsidiaries 16
Intraperiod Tax Allocation
2
Valuation Allowance
Tax Credits
2
24
For a discussion of SEC comment letters on additional topics, see the following Deloitte publications:
•
SEC Comment Letters — Including Industry Insights: Constructing Clear Disclosures, Seventh Edition (December 2013).
•
SEC Comment Letters on Foreign Private Issuers Using IFRSs — A Closer Look, Third Edition (March 2012).
For examples of SEC income tax comments from earlier years, see:
•
SEC Comment Letter Examples — Income Taxes (September 2012).
•
SEC Comment Letter Examples — Income Taxes (August 2011).
Appendix A describes the SEC staff’s review and comment letter process, Appendix B outlines leading practices for managing
unresolved SEC comment letters, and Appendix C provides helpful tips on searching the SEC’s database for comment letters.
We hope that you find this publication a valuable tool for improving your disclosures. We welcome your feedback. Please send us
your thoughts and suggestions.
1
SEC Staff Remarks at Recent AICPA Conferences
When reporting on income tax matters, registrants may want to consider the remarks discussed below, which were made by SEC
staff members at recent AICPA Conferences.1
Frequent Areas of Comment — Income Taxes
At the 2012 AICPA Conference, Mark Shannon, associate chief accountant in the SEC’s Division of Corporation Finance, reiterated
remarks made by the SEC staff at the 2011 AICPA Conference about assessing the realizability of DTAs. The staff had noted that it
would have difficulty agreeing with a registrant’s assertion that losses incurred during the economic downturn are aberrations but
that it would base its conclusions on a registrant’s specific facts and circumstances. Mr. Shannon also reminded registrants that
in assessing the realizability of DTAs, they should consider cumulative losses in recent years to be significant negative evidence
and that to avoid recognizing a valuation allowance, they would need to overcome such evidence with significant objective and
verifiable positive evidence. He explained that although under U.S. GAAP it is theoretically possible to do so, overcoming negative
evidence presented by cumulative losses is difficult.
Mr. Shannon also noted that because many registrants have begun returning to profitability, they are considering whether they
should reverse a previously recognized valuation allowance. He indicated that factors for registrants to consider in making this
determination would include:
•
The magnitude and duration of past losses.
•
The magnitude and duration of current profitability.
•
Changes in the above two factors that drove losses in the past and those currently driving profitability.
He also indicated that registrants should bear in mind that the goal of the assessment is to determine whether sufficient positive
evidence outweighs existing negative evidence. He emphasized the importance of evidence that is objectively verifiable and noted
that it carries more weight than evidence that is not.
At the 2012 AICPA Conference, Nili Shah, deputy chief accountant in the SEC’s Division of Corporation Finance, explained that
in performing their analysis, registrants should (1) assess the sustainability of profits in the current economic environment and
(2) consider their track record of accurately forecasting future financial results. She noted that any doubt about sustainability of
profitability in a period of economic uncertainty may give rise to evidence that is less objectively verifiable. Likewise, an entity’s
poor track record of accurately forecasting future results would also result in future profit projections that are less objectively
verifiable. Thus, such evidence would carry less weight in a valuation allowance assessment.
Ms. Shah also pointed out that registrants’ disclosures should include a discussion of the factors or reasons that led to a reversal
of a valuation allowance that effectively answers the question “Why now?” Such disclosures would include a comprehensive
analysis of all available positive and negative evidence and how the entity weighed each piece of evidence in its assessment.
She also reminded registrants that the same disclosures would be expected when there is significant negative evidence and a
registrant concludes that a valuation allowance is necessary.
In addition, at the 2013 AICPA Conference, the SEC staff discussed registrants’ income tax disclosures, primarily disclosures about
(1) the reconciliation of statutory tax rates to effective tax rates (the “tax rate reconciliation”), (2) valuation allowances, and
(3) registrants’ assertions that foreign earnings are indefinitely reinvested.
The SEC staff noted the following issues with registrants’ tax rate reconciliation disclosures:
•
Labels related to reconciling items were unclear, and disclosures about material reconciling items did not adequately
describe the underlying nature of these items.
•
For material reconciling items related to foreign tax jurisdictions, registrants did not disclose in MD&A (1) each material
foreign jurisdiction and its tax rate and (2) how each jurisdiction affects the amount in the tax rate reconciliation.
At the annual AICPA National Conference on Current SEC and PCAOB Developments (the “AICPA Conference”) each December, regulators and standard setters give preparers updates
on recent accounting, auditing, and SEC rules as well as a look inside their areas of focus for the reporting season ahead. Each year, Deloitte prepares a comprehensive Heads Up
newsletter covering remarks made at the conference.
1
2
•
Registrants have inappropriately aggregated material reconciling items. The SEC staff reminded registrants that
Regulation S-X requires separate-line-item disclosure for reconciling items whose amount is greater than 5 percent of the
amount calculated by multiplying the pretax income by the statutory tax rate.
•
Amounts reflected in the tax rate reconciliation were inconsistent with related amounts disclosed elsewhere in a
registrant’s filing.
•
Corrections of errors were inappropriately reflected as changes in estimates.
In remarks related to registrants’ disclosures about valuation allowances on DTAs, the SEC staff discouraged registrants from
providing “boilerplate disclosures” in the critical accounting estimates section of MD&A and instead recommended that they
discuss registrant-specific factors (e.g., limitations on their ability to use net operating losses and foreign tax credits). The SEC
staff also stated that it has asked registrants to disclose the impact of each source of taxable income on their ability to realize
a DTA, including the relative magnitude of each source of taxable income. In addition, the staff recommended that registrants
consider disclosing the material negative evidence they evaluated, since such disclosures could provide investors with information
about uncertainties related to a registrant’s ability to recover a DTA.
The SEC staff also reminded conference participants about the disclosures a registrant is required to provide when it asserts that
foreign earnings are indefinitely reinvested. These disclosures include (1) the amount of the unrecognized deferred tax liability or
(2) a statement that estimating an unrecognized tax liability is not practicable. They also include the amounts and descriptions
of the related temporary differences and the events that will cause those differences to become taxable. In addition, the staff
indicated that it evaluates such an assertion by taking into account registrants’ potential liquidity needs and the availability of
funds in U.S. and foreign jurisdictions.
Comment Letter Themes — Foreign Private Issuers
At recent AICPA conferences, Jill Davis, associate chief accountant in the SEC’s Division of Corporation Finance, discussed
comments frequently made by the staff in its reviews of the financial statements of foreign private issuers. She noted that the
staff’s comments were similar to those for domestic registrants and continued to be based on the economics of transactions
rather than the underlying U.S. GAAP. Comments about income taxes focused mainly on rate reconciliations and the nature of
items disclosed as well as on the completeness and adequacy of disclosures required by IAS 122 particularly regarding the amount
of unrecognized DTAs.
2
See Appendix D for the titles of citations used in this publication.
3
Examples of SEC Comments
Business Combinations
•
We note your reconciliation of the bargain purchase gain on page [X]. It is unclear from your disclosure how you
calculated the $[X] million adjustment to your deferred tax asset related to this acquisition. Please revise future filings, as
applicable, to disclose in more detail the purpose of this adjustment and how it was calculated.
Deferred Taxes
•
We note your disclosure on page [X], where you state, “The Company provides deferred taxes for the outside basis
difference for its investment in partnerships.” We also note that you have a deferred tax liability of $[X] for investments
in partnerships. In this regard, please tell us about your investment in partnerships and how you determined the deferred
tax liability.
•
Please enhance your disclosure to provide more detail of the deferred tax assets and liabilities reversed as a result of your
REIT election. In your disclosure include a table of the asset and liabilities being reversed by type. Additionally, we note
your disclosure that the actual reversal will vary depending on the assets with the [taxable REIT subsidiaries (TRSs)] at the
time of conversion. Please provide additional information regarding the current estimate of the assets within the TRSs,
the basis for management’s estimate, a range of possible changes and their effects on the pro forma adjustment.
•
Please tell us why you do not appear to have a deferred tax asset related to inventory costs expensed prior to FDA
approval as it appears unlikely that inventory costs for commercial products can be deducted for income tax purposes
prior to their sale or destruction.
Disclosures
•
Please disclose why income taxes paid disclosed on the statement of cash flows is significantly lower than current
income tax expense in each year.
•
Please tell us your consideration of disclosing the amount of income tax expense or benefit allocated to each component
of comprehensive income, including reclassifications adjustments. Refer to ASC 220-10-45-12. Please also tell us how
you determine the amounts of income tax expense or benefit allocated to items of other comprehensive income and
why your allocation policy complies with ASC 740-20-45-14.
•
Please tell us what consideration you gave to providing disclosures regarding your Deferred Tax Liability pursuant to ASC
740-30-50-2(c).
•
Tell us your consideration for disclosing the expiration dates of operating losses and tax credit carryforwards pursuant
to ASC 740-10-50-3-a. Please provide us with your proposed disclosure, as applicable. In this regard, you disclose that a
portion of your tax loss carryforwards started expiring during 2013, but it is not clear if it is a significant portion and, if
not, when the remaining loss carryforwards expire.
•
We note that you recorded a discrete tax benefit of approximately $[X] million from the write-off of the historical tax
basis of an investment. Please tell us more about this tax benefit, the circumstances surrounding it and refer to any
authoritative guidance you relied upon when determining your accounting. As part of your response, please tell us how
you concluded that your current disclosures sufficiently explain the nature of this discrete tax benefit.
•
Please provide draft disclosure, to be included in future filings, of the components of income (loss) before income tax
expense as either domestic or foreign for the periods presented pursuant to Rule 4-08(h) of Regulation S-X.
•
Please revise the notes to the financial statements to disclose the classification of interest and penalties within the
income statement in accordance with ASC 740-10-45-25.
•
In future filings, please provide the required tax rate reconciliation.
•
Tell us why you do not disaggregate deferred income tax expense into U.S. federal and State/foreign. Refer to Rule
4-08(h) of Regulation S-X.
4
•
We note from your disclosure on page [X] that you file income tax returns in foreign jurisdictions. Tell us what
consideration you gave to including a description of the tax years that remain subject to examination by each major tax
jurisdictions. We refer you to FASB ASC 740-10-50-15(e).
•
We note from the table at the top of page [X] components of your income tax provision include federal, state and
foreign amounts. In this regard, please tell us and revise your footnote to disclose the components of income (loss)
before income tax expense (benefit) as either domestic or foreign pursuant to Rule 4-08(h) of Regulation S-X.
•
Please revise to present all disclosures required by FASB ASC 740-10-50-9 and FASB ASC 740-10-50-12. Specifically,
please provide the current and deferred tax provision for each period an income statement is presented, and provide
a reconciliation using percentages or dollar amounts of the reported amount of income tax expense attributable to
continuing operations for the year to the amount of income tax expense that would result from applying domestic
federal statutory tax rates to pretax income from continuing operations.
Foreign Impact on the Effective Tax Rate and Other Reporting Issues
•
Note [X] on page [X], discloses service revenues by geographic regions of [Continent A] and [Continent B] which seem to
be contributing disproportionately to Domestic and Foreign income (loss) before income taxes, as disclosed in Note [X]
on page [X]. Please explain to us the basis for the disproportion and the related tax rate effects of the “impact of foreign
operations” disclosed in the statutory rate reconciliation on page [X].
•
In the rate reconciliation, please describe to us, with a view toward clarified disclosure in future filings, the principal
components of the item “Tax effect from foreign subsidiaries.”
•
We note the significance to your operating results of the benefit from foreign income taxed at other than U.S. rates as
disclosed on the income tax provision reconciliation on page [X]. We also see the low effective tax rate on your foreign
earnings from the tabular disclosure on page [X]. In light of the significant impact of lower taxes on foreign earnings
to your operating results, please consider describing the relationship between foreign pre-tax income and the foreign
effective tax rate in greater detail. It appears as though separately discussing the foreign effective income tax rate is
important information material to an understanding of your results of operations. We refer you to Item 303(a)(3)(i) of
Regulation S-K and Section III.B of SEC Release 33-8350. Tell us how you intend on applying this comment.
•
We note the impact your foreign operations have had on your effective income tax rate. Please provide us with a
breakdown of the components included in the “foreign taxes” line item in your effective tax rate reconciliation for each
period presented, and tell us what consideration was given to providing further quantitative breakdown of this line item
in your disclosure. Please refer to Rule 4-08(h)(2) of Regulation S-X.
•
We note that you identify “Foreign taxes” as a material item in your effective income tax reconciliation table on page
[X]. Please tell us the nature of the items that make up this reconciling item. If this line item represents more than just
differences in tax rates between domestic and foreign jurisdictions, please ensure that you separately disclose any items
meeting the materiality thresholds in Rule 4-08(h) of Regulation S-X. To the extent that the difference is attributable to
significant rate differentials, please disclose the countries that give rise to such a difference and tell us and disclose in
MD&A the reasons for any disproportionate relationships among pretax foreign and domestic earnings and foreign and
domestic tax rates. It appears, for example, that your foreign effective tax rate was approximately [X]% in fiscal 2009 but
only approximately [X]% in fiscal 2011.
•
We note the significance to your operating results of the foreign tax rate differential as disclosed on the income tax
provision reconciliation on page [X]. We also see the low effective tax rate on your foreign earnings from the tabular
disclosure on page [X]. In light of the increasingly significant impact of lower taxes on foreign earnings to your operating
results, please consider describing the relationship between foreign pre-tax income and the foreign effective tax rate
in greater detail in future filings. It appears as though separately discussing the foreign effective income tax rate is
important information material to an understanding of your results of operations. We refer you to Item 303(a)(3)(i) of
Regulation S-K and Section III.B of SEC Release 33-8350. Tell us how you plan to address this comment.
•
We note that international earnings taxed at varying rates are a significant part of your effective tax rate reconciliation.
Please identify for us the countries that you derive international earnings which have very low tax rates. To the extent
international earnings from these countries are material, please revise future periodic filings to disclose this information
and discuss the potential impact within your MD&A.
5
•
Please expand your disclosure to explain the impact on your effective income tax rates and obligations of having
earnings in countries where you have lower or higher statutory tax rates as well as the relationship between the foreign
and domestic effective tax rates. It appears that a separate discussion of foreign effective income tax rates would provide
more transparency in understanding your results of operations. In this regard, an overview of how effective tax rates may
be impacted by a mix of earnings among your domestic and foreign operations would appear useful to an investor. We
refer you to Item 303(a)(3)(i) of Regulation S-K and Section III.B of SEC Release No. 33-8350.
•
It appears that your effective tax rate has experienced significant volatility in recent years due to Non-U.S. earnings.
Please clarify and revise your disclosure to address the following:
o
The extent to which the Non-U.S. earnings line item within your tax rate reconciliation includes the impact on your
effective tax rate due to changes in enacted foreign tax rates, changes in your determination that certain unremitted
foreign earnings are reinvested indefinitely, and/or changes in the amount of foreign earnings derived from
jurisdictions with tax rates different than your U.S. statutory tax rate.
o
Given that [X]% of income from continuing operations in 2011 is related to Non-U.S. earnings (per your tabular
disclosure on page [X]), please tell us how you considered separately disclosing current and deferred tax provisions
for foreign jurisdictions by country (e.g., tax provisions for your major foreign tax jurisdictions that are disclosed on
page [X] including [Country A], [Country B], and [Country C]).
o
Finally, you disclose on page [X] of your Form 10-Q for the Quarterly Period Ended March 31, 2012 that the income
of certain foreign subsidiaries earned outside of the United States has previously been excluded from taxation in
the U.S. as a result of a provision of U.S. tax law that defers the imposition of tax on certain active financial services
income until such income is repatriated to the United States as a dividend and that this provision expired for taxable
years beginning on or after January 1, 2012. You also state that if this provision is extended again with respect
to such income earned during 2012, the impact could decrease your 2012 annual effective tax rate and have a
favorable impact on your net income. Please revise your disclosure in future filings to quantify the impact that the
expiration of this tax provision had on your effective tax rate for the first quarter of 2012.
•
You state that your consolidated income tax rate is a composite rate reflecting earnings (losses) and the applicable tax
rate in the various locations where you operate. Please tell us which foreign jurisdiction(s) had the most significant
impact on your effective tax rate for each period presented. To the extent that one or two countries have had a more
significant impact on your effective tax rate, then tell what consideration you have [given] to disclosing this information
and including a discussion regarding how potential changes in such countries’ operations may impact your results of
operations. We refer you to Item 303(a)(3)(i) of Regulation S-K and Section III.B of SEC Release 33-8350.
•
We note from page [X] that foreign pre-tax income has been decreasing whereas domestic pre-tax income has been
increasing. Please explain why in your response letter and in future filings.
•
We note from the disclosures provided on page [X] that taxes relating to foreign operations have increased for fiscal
2012 compared to 2011 and 2010 and, as a result, represent a significant portion of the total income tax provision
for the current year. Please tell us what factors contributed to the increase and provide us with a breakdown of the
components of this line item for each period presented.
•
Reference is made to the reconciliation of your effective tax rate to the statutory federal income tax rate and the
reconciling item related to the Foreign rate differential of [X]%. Given the significance of this reconciling item, please
explain to us in greater detail its nature and identify for us the countries for which this reconciling item relates.
Additionally, please tell us and disclose whether earnings from your continuing foreign operations are undistributed
and considered permanently reinvested for which no deferred U.S. income tax has been provided. If so, please revise
to disclose the amount of the unrecognized deferred tax liability, if practicable, and disclose the cumulative amount of
earnings of foreign subsidiaries for which U.S. income taxes have not been provided because they are considered to be
permanently reinvested. Refer to ASC 740-30-50. We may have further comment upon receipt of your response.
Intraperiod Tax Allocation
•
Please tell us how you and your subsidiaries determine the amounts of income tax expense or benefit allocated to
discontinued operations and items of other comprehensive income and why your allocation policy complies with ASC
740-20-45-14.
•
Please also tell what consideration you gave to your intra-period tax allocation in determining the reversal of your
valuation allowance in 2010. Refer to ASC 740-20-45.
6
Tax Credits
•
We note your disclosure on page [X] that the tax credit you utilized in 2011 will not be available in 2012. In future
filings, please discuss how the unavailability of the tax credit impacts your business and financial condition.
•
You disclose that in 2011 you were able to partially realize federal tax benefits from low income housing tax credit
funds. Please tell us all the relevant facts and circumstances related to these tax credits, explain how you were able to
realize the tax benefits considering your net loss for 2011, specifically tell us if you received a tax refund related to the
tax credits, quantify the amounts realized for each period presented and provide any relevant accounting guidance
supporting your treatment. Please revise future filings to quantify the benefits recognized for each period presented.
Tax Holiday
•
We note that in 2011, you had an increase in tax incentives in certain foreign jurisdictions and a reduced tax rate for
a subsidiary in [Country A]. We further note from disclosure in Note [X] that your tax incentives and holidays expire at
various dates through 2015. Considering the significance of the tax incentives and holidays to your net income, please
tell us what consideration was given to disclosing further details regarding each significant tax incentive and holiday and
the related expiration date. Please refer to Item 303(a)(3)(i) of Regulation S-K and Section III.B of SEC Release 33-8350.
Tax Rate Reconciliation
•
In future filings, please provide an analysis of the material factors impacting your effective tax rate for each period
presented. Please note that if multiple factors contributed to the fluctuation in your effective tax rate, quantification
of each factor should be provided. Please refer to Items 303(A)(3)(i) and 303(A)(3)(iii) of Regulation S-X and Sections
501.12.b.3. and 501.12.b.4. of the Financial Reporting Codification for guidance.
•
We note your disclosure that your consolidated effective tax rate in the first quarter of 2012 was lower than the
same period in 2011 primarily due to the reduction in the income tax benefit recognized in connection with the longlived assets impairment in the [A] segment due to the estimated lower tax rate for the year, and that the reduction is
projected to fully reverse over the balance in 2012. Please explain to us how the reduction in the recognized benefit will
reverse over the balance of year.
•
Please tell us the nature of each significant reconciling item in your reconciliation of income taxes computed at
the Federal statutory rate to the effective tax rate. We note that the ‘Other, net’ line item of ($[X]) million in the
reconciliation has an impact of approximately [X]% on your effective tax rate which may consist of multiple significant
reconciling items. Please refer to ASC 740-10-50-12 for required disclosure.
•
We note that you recorded a significant tax benefit during the quarter ended March 31, 2012 which reduced your
effective tax rate to [X]% for the quarter. We further note your disclosure that this tax benefit was related to certain
losses on the [20XX debt transaction] that were previously considered non-deductible. Please provide us with more
information on the nature of these expenses and what caused you to change your conclusion as to their tax deductibility
during the first quarter of 2012. As part of your response, please clarify whether the additional research performed
included consultation with the IRS about the deductibility of these items.
•
Regarding the tax rate reconciliation, explain in proposed disclosure to be included in future periodic reports why the
line item “effective tax rate adjustment” results in a reduction of $[X] million in 2012 as compared to an increase of $[X]
million in 2011. Explain why the effective tax rate in 2012 is a [X]% benefit on income before tax when your effective tax
(benefit) rates in 2011, 2010, and 2009 were [X]%, [X]%, and [X]%.
•
We note from page [X] that you attribute one of the differences between your statutory federal income tax rate and
your effective income tax rate to a $[X] million change in your state tax rate in fiscal 2011. Please revise future filings to
explain material changes in your income taxes, including changes in your tax rates. Refer to FASB ASC 740-10-50-14.
Uncertain Tax Positions
•
Please tell us whether the disallowed deductions by the IRS from their formal Revenue Agents Report are included in
the uncertain tax position liability and if not, please explain why. Additionally, please disclose the amount of reasonably
possible loss in excess of the amount accrued for this particular matter. Refer to ASC 740-10-50-15d.
7
•
Please tell us more about the uncertain tax positions that are included as a reconciling item to the federal statutory
rate. As part of your response, please tell us what consideration you gave to providing disclosure of the nature of this
significant reconciling item as required by ASC 740-10-50-12.
•
Please revise to provide all unrecognized tax benefit related disclosures required by ASC 740-10-50-15, or tell us why you
believe that such disclosures are not required.
•
Please revise your income tax footnote to include a tabular reconciliation of the total amounts of unrecognized tax
benefits at the beginning and end of the annual reporting period presented and the total amount of unrecognized tax
benefits that, if recognized, would affect the effective tax rate pursuant to ASC 740-10-50-15A.
Undistributed Earnings of Foreign Subsidiaries
•
You repatriated $[X] million in 2010 and $[X] million in 2011 of foreign earnings to the U.S. In your Form 10-Q for the
period ended March 31, 2012, you also disclose your intention to repatriate current year foreign earnings in 2012. As of
December 31, 2011, you have not recognized deferred income taxes on $[X] million of undistributed earnings of your
international subsidiaries since such earnings are considered to be reinvested indefinitely. Please address the following:
o
Please disclose the total amount of undistributed earnings as of December 31, 2011 and March 31, 2012;
o
Please tell us whether you had previously considered the foreign earnings that were repatriated during 2010 and
2011 to be permanently reinvested. If so, please tell us at what point you determined that they would not be;
o
Please tell us the country from which these earnings were or will be repatriated as well as the facts and
circumstances that led you to determine it is necessary to repatriate these earnings; and
o
Please tell us how you concluded that the remaining $[X] million should be considered permanently reinvested in
light of your repatriation of amounts in previous years. Please address your specific plans for reinvestment for these
undistributed earnings that demonstrate remittance of the earnings would be postponed indefinitely.
Refer to paragraph ASC 740-30-25-17. Please also consider expanding your disclosures in periods that foreign earnings
are repatriated to clarify whether the repatriated earnings were previously considered to be permanently reinvested,
the facts and circumstances that led you to determine it was necessary to repatriate these earnings, and your basis for
concluding any remaining undistributed earnings at the same subsidiary are permanently reinvested.
•
Since your foreign operations appear to be significant, please disclose the following:
o
The amount of cash and short term investments held by foreign subsidiaries as compared to your total amount of
cash and short-term investments as of year end;
o
You would be required to accrue and pay taxes to repatriate these funds and you do not intend to repatriate them,
if true;
o
Quantify the amount of cash and short-term investments held by foreign subsidiaries where the funds are not
readily convertible into other foreign currencies, including U.S. dollars. Please also explain the implications of any
such restrictions upon your liquidity.
Refer to Item 303(a)(1) of Regulation S-K, SEC Release 33-8350 Section IV and Financial Reporting Codification
501.06.a.
•
Further, Please tell us the amount of cash held by foreign subsidiaries. If material, revise your liquidity section to disclose
(1) the amount of cash and short term investments held by foreign subsidiaries; (2) a statement that the company would
need to accrue and pay taxes if repatriated and; (3) a statement that the company does not intend to repatriate the
funds, if true.
•
Based upon disclosures contained elsewhere in your filing it appears you have significant foreign operations. We also
note that cash and cash equivalents of $[X] represent approximately [X]% of total assets as of December 31, 2011. In
this regard, please tell us and revise your liquidity section to disclose the following information:
(1) the amount of cash and short term investments held by foreign subsidiaries;
(2) a statement that the company would need to accrue and pay taxes if repatriated; and
(3) a statement that the company does not intend to repatriate the funds, if true.
8
•
Please revise your tax footnote to disclose the amount of undistributed earnings for foreign subsidiaries pursuant to the
disclosure requirements of ASC 740-30-50.
•
We see that you generate a significant amount of sales in foreign jurisdictions but do not see any related discussion of
cash held in foreign locations and unremitted foreign earnings, whether you repatriate any foreign earnings, or plan to
repatriate any foreign earnings for U. S. working capital needs, and the related tax impact. To the extent such amounts
could be considered material to an understanding of your liquidity and capital resources, please revise your future filings
to disclose the amounts of cash, cash equivalents and investment amounts held by your foreign subsidiaries that would
not be available for use in the United States without incurring U.S federal and state income tax consequences. Please
further provide a discussion of any known trends, demands or uncertainties as a result of your policy that are reasonably
likely to have a material effect on the business as a whole or that may be relevant to your financial flexibility. Refer to
Item 303(a) (1) of Regulation S-K, SEC Release 33-8350, and Financial Reporting Codification Section 501.03.a.
•
We note your disclosure that you have not recorded deferred taxes on book over tax outside basis differences related to
certain foreign subsidiaries because such basis differences are not expected to reverse in the foreseeable future and you
intend to reinvest indefinitely outside the U.S. Please revise the notes to the financial statements to disclose the amount
of undistributed earnings of your foreign subsidiaries as required by ASC 740-30-50.
•
We see that $[X] million of your $[X] million in cash on hand at June 30, 2012 is held by your foreign subsidiaries. Please
reconcile the statement that you do not intend to repatriate these funds with the subsequent statement that the funds
are available for general company use during the remainder of 2012. Please clarify in your response how you intend
to finance your operations without access to the funds held by foreign subsidiaries. We refer you to Item 303(a)(1) of
Regulation S-K and Section IV of SEC Release 33-8350.
•
We note your disclosure that undistributed profits of non-U.S. subsidiaries are considered indefinitely reinvested. Please
tell us the amount of undistributed profits of non-U.S. subsidiaries that are considered indefinitely reinvested and what
consideration was given to providing this quantitative disclosure in your filing. See ASC 740-30-50-2(b).
•
On page [X] of your June 30, 2012 Form 10-Q filed on July 30, 2012, you indicated that your current plans did not
demonstrate a need to repatriate cash held by your foreign subsidiaries. However, you disclose on page [X] that you
recognized $[X] million of income tax provisions for the repatriation of foreign earnings during the third quarter of 2012
which appears to be related to the proposed [Company A] acquisition. Please address the following:
o
Describe when you first began considering a strategic acquisition of [Company A] or any other company for which
you would require repatriation of undistributed foreign earnings to fund the transaction; and
o
Tell us how you believe that you complied with ASC 740-30-25-17 as of December 31, 2011 and each 2012
interim period to date. In particular, please describe the specific plans you had as of each of these dates for the
reinvestment of the undistributed foreign earnings.
•
Your disclosure indicates you recorded current foreign income tax expense. Please tell us whether deferred United States
income taxes have been recorded on your foreign subsidiary earnings. If you have not done so because you consider
your foreign subsidiary earnings permanently invested, please revise future filings to disclose the amounts and provide
the disclosures of paragraph 740-30-50-2 of the FASB Accounting Standards Codification, if material.
•
We note that you acquired [Company A] in April 2011 and their operations represented approximately [X]% of your
2011 sales. Further, we note on page [X] for your March 31, 2012 Form 10-Q that $[X] million of your cash and cash
equivalents balance is held in foreign countries. As such, please enhance your disclosure to discuss the fact that if the
foreign cash and cash equivalents are needed for your operations in the U.S., you would be required to accrue and pay
U.S. taxes to repatriate these funds but your intent is to permanently reinvest these foreign amounts outside the U.S.
and your current plans do not demonstrate a need to repatriate the foreign amounts to fund your U.S. operations, if
true. Refer to Item 303(a)(1) of Regulation S-K, SEC Release 33-8350 Section IV and Financial Reporting Codification
501.06.a.
•
You state that no withholding taxes are accrued with respect to the earnings of your subsidiaries arising outside the U.S.,
as it is the intention that all such earnings will remain reinvested indefinitely. Please provide us proposed disclosure to be
included in future periodic reports that complies with ASC 740-30-50-2 b. and c.
•
You state “It is not practical to determine the amount of the unrecognized deferred tax liability that would arise if these
earnings were remitted due to foreign tax credits and exclusions that may become available at the time of remittance.”
Please provide proposed revisions to your disclosure to be included in future periodic reports that complies with ASC
9
740-30-50-2c, which requires disclosure of the amount of unrecognized deferred tax liability, if practicable, or a
statement that determination is not practicable.
•
We note from the disclosure in the first paragraph on page [X] that you did not recognize a deferred tax liability for
permanently reinvested foreign earnings. Please tell us the cumulative amount of the temporary difference and how you
considered the disclosures required by FASB ASC 740-30-50-2.
•
We note that you have not recognized a deferred tax liability for temporary differences related to investments in foreign
subsidiaries that are essentially permanent in duration. In future filings please disclose the cumulative amount of the
temporary difference consistent with ASC 740-30-50-2(b) and discuss how you considered the disclosure required by
ASC 740-30-50-2(c).
Valuation Allowance
•
Given your recurring losses before income tax (expense) benefit, please discuss the nature of the U.S. deferred tax assets
which have not been offset by a valuation allowance and how you determined that these would be realized. Please also
address the following:
o
Please expand your discussion of the nature of the positive and negative evidence that you considered, how that
evidence was weighted, and how that evidence led you to determine it was not appropriate to record a valuation
allowance on the remaining deferred income tax assets;
o
Please disclose the amount of pre-tax income that you need to generate to realize the deferred tax assets;
o
Please include an explanation of the anticipated future trends included in your projections of future taxable income;
and
o
Please disclose that the deferred tax liabilities you are relying on in your assessment of the realizability of your
deferred tax assets will reverse in the same period and jurisdiction and are of the same character as the temporary
differences giving rise to the deferred tax assets.
Please show us in your supplemental response what the revisions in future filings will look like.
•
You disclose a deferred tax asset of $[X] million and a $[X] thousand valuation allowance related to capital loss
carryforwards at December 31, 2011. Please tell us in detail and revise future filings to explain how you determined
that your remaining deferred tax assets will more likely than not be realized. Specifically discuss the key facts and
circumstances including the nature of the positive and negative evidence you considered in making your determination.
Also discuss the sources of taxable income that you believe will be available to realize your deferred tax asset and to
the extent that you are relying upon tax planning strategies or the offset of deferred tax liabilities, disclose that fact and
provide a brief description of such strategies. Refer to guidance starting at ASC 740-10-30-16.
•
Please explain to us why it is appropriate to recognize a benefit in continuing operations of $[X] in the first quarter
of 2011 related to your Phase [X] clinical services business classified as a discontinued operation in the fourth quarter
of 2010. Tell us whether you rely at least in part on the guidance in ASC 740-10-45-20 and ASC 740-20-45-4, and
separately tell us why it was appropriate to record a full valuation allowance at December 31, 2010 for the deferred
tax assets recognized in 2010 when you reversed it in the next quarter. Please tell us what factors changed in the first
quarter of 2011 causing you to reverse this valuation allowance. Explain why this tax loss would more-likely-than-not
be benefitted as a worthless stock deduction in the first quarter of 2011 but not in the fourth quarter of 2010. Where
appropriate, reference for us the authoritative literature you relied upon to support your accounting.
•
You present Adjusted Financial Indicators for net income and basic and diluted earnings per share, which exclude the
effect of the release of valuation allowance on certain deferred tax assets. As these measures are non-GAAP, please
revise future filings to provide the disclosures required by Item 10(e)(1)(i) of Regulation S-K. Further, we note your
reference to the release of the deferred tax assets valuation allowance as a nonrecurring transaction. In future filings,
please remove this characterization, as it appears you have released deferred tax assets valuation allowance during
the last two fiscal years. Please refer to Item 10(e)(1)(ii)(b) of Regulation S-K for guidance. Please provide us with the
disclosures you intend to include in future filings. Refer to the Non-GAAP C&DI for additional information.
10
•
During the second quarter of 2011 you recognized a tax benefit of $[X] million related to the release of valuation
allowances. During the third and fourth quarter of 2011, you also decreased your valuation allowances by an additional
$[X] million. Given your income from continuing operations of $[X] million and net income of $[X] million for the year
ended December 31, 2011, your results of operations appear to have been significantly impacted by the release of these
valuations allowances. In this regard, please address the following:
o
Please provide us with a comprehensive explanation of the nature of the positive and negative evidence that you
considered, how that evidence was weighted, and how that evidence led you to determine it was appropriate to
release these valuation allowances pursuant to ASC 740 during the second quarter of 2011;
o
Please disclose the amount of pre-tax income that you need to generate to realize these deferred tax assets;
o
Please include an explanation of the anticipated future trends included in your projections of future taxable income;
o
Please disclose that the deferred tax liabilities you are relying on in your assessment of the realizability of your
deferred tax assets will reverse in the same period and jurisdiction and are of the same character as the temporary
differences giving rise to the deferred tax assets; and
o
Only the portion of valuation allowances attributable to future year’s income was released as a discrete event during
the second quarter of 2011. Of the total amount of valuation allowances that you determined were no longer
required during the second quarter of 2011, please confirm that the only valuation allowances not released during
the second quarter of 2011 were for those valuation allowances subsequently released in the third and fourth
quarters of 2011.
• You disclose that you had a tax benefit of $[X] million related to the release of a valuation allowance on your [Country
A] Operations. We note that had you not released the valuation your tax expense of $[X] million would have been [X]%
higher and net income would have decreased by [X]%. In future filings please provide a discussion of material changes
in your tax valuation and the underlying reasons. Refer to Section 501.04 of the Financial Reporting Codification for
guidance.
•
You indicate that you evaluated the deferred tax assets and determined on the basis of objective factors that the net
assets will be realized through future years’ taxable income. However, we note that you have generated losses from
United States jurisdictions over the past three years. In future filings, please revise your disclosure to provide a more
detailed explanation as to how you determined it is more likely than not that you will realize total deferred tax assets.
Please ensure your disclosure address each of the following points, as appropriate:
o
Disclose the amount of pre-tax income that needs to be generated to realize the deferred tax assets. Include an
explanation of the anticipated future trends included in your projections of future taxable income. Confirm to us
that the anticipated future trends included in your assessment of the realizability of your deferred tax assets are
the same anticipated future trends used in estimating the fair value of your reporting units for purposes of testing
goodwill for impairment and any other assessment of your tangible and intangible assets for impairment.
o
If you are relying on the reversal of your deferred tax liabilities, please disclose as such and confirm that the deferred
tax liabilities will reverse in the same period, are for the same jurisdiction, and are of the same character as the
temporary differences giving rise to the deferred tax assets.
o
If you are also relying on tax-planning strategies, please disclose the nature of your tax planning strategies, how
each strategy supports the realization of deferred tax assets, the amount of the shortfall that each strategy covers,
and any uncertainties, risks, or assumptions related to these tax-planning strategies.
Refer to paragraphs ASC 740-10-30-16 through 25 and Section 501.14 of the Financial Reporting Codification for
guidance.
•
The $[X] million reduction to your deferred tax asset valuation allowance represents a significant component of your
net income of $[X] million for the year ended September 30, 2012. Please enhance your disclosures in future filings to
explain in further detail your consideration of ASC 740-10-30-16 through 30-25 in determining that as of September 30,
2012, it was more likely than not that these deferred tax assets are realizable. Please address the following:
o
We note your discussion on pages [X] and [X] regarding the positive and negative evidence that you considered.
Please disclose in more detail how this positive and negative evidence was weighted and how that evidence led you
11
to determine it was appropriate to reverse the valuation allowance during the quarter ended June 30, 2012. Please
discuss the significant estimates and assumptions used in your analysis, including the specific factors that changed
during fiscal 2012 and led you to determine the reversal was appropriate at this time;
o
Please discuss how you determined the amount of valuation allowance to reverse;
o
Please disclose the amount of pre-tax income you need to generate to realize these deferred tax assets. Include
an explanation of the anticipated future trends included in your projections of future taxable income. Confirm to
us that the anticipated future trends included in your assessment of the realizability of your deferred tax assets are
the same anticipated future trends used in estimating the fair value of your reporting units for purposes of testing
goodwill for impairment and any other assessment of your tangible and intangible assets for impairment; and
o
If you are also relying on tax-planning strategies, please disclose the nature of your tax planning strategies, how
each strategy supports the realization of deferred tax assets, the amount of the shortfall that each strategy covers,
and any uncertainties, risks, or assumptions related to these tax-planning strategies.
Please show us in your supplemental response what your revisions to future filings will look like.
•
We note your disclosure that “Management has already acknowledged in the Company’s financial statements that
management’s current ‘plan’ will not reap the tax benefits of a substantial majority of the NOL’s.” You also state that
the company’s management has estimated that the company will “not likely have enough taxable income to unlock
the full NOL value.” We note that the language in the referenced quarterly report cited in your footnote (related to the
first quoted portion of your disclosure) appears to provide an explanation for the valuation allowance the company has
placed on the NOLs. Please revise your disclosure to more closely follow the substance of the company’s disclosure.
•
We note your disclosures regarding the restatement of your financial statements for the six months ended December
31, 2011. You state that the original financial statements were prepared based on management’s determination of the
existence of certain net operating loss carryforwards in a foreign jurisdiction and that you have now determined that
the net operating loss carryforwards in the foreign jurisdiction became fully impaired during the three months ended
October 1, 2011. Please address the following: Clarify for us how the net operating loss carryforwards were reflected
in your financial statements as of July 2, 2011. In this regard, we note your disclosure on page [X] of the July 2, 2011
Form 10-K that other than $[X] million recorded relating to one foreign jurisdiction, “[you] have recorded a full valuation
allowance against [your] remaining foreign and domestic deferred tax assets as of July 2, 2011.”
•
You disclose that you reduced the deferred tax valuation allowance recorded during your acquisition of [Company A]
by $[X] at year end and recorded the reduction as a credit to income tax expense. Please explain to us all the relevant
facts and circumstances related to your decision to reduce the valuation allowance and how you determined that the
reduction should be recorded through income tax expense. Please tell us the accounting guidance that supports your
treatment. Specifically tell us how you considered the guidance in ASC 805-740-45-2 which indicates that a change that
occurs within the measurement period and results from new information about facts and circumstances that existed at
the acquisition date should be recorded through goodwill.
•
Please tell us the change in circumstances that enabled the release of $[X] million of certain valuation allowances
discussed on page [X], and why you believe that the associated tax assets are now more likely than not to be realized. In
so doing, tell us when the valuation allowance was established, the tax assets to which attributed and the circumstances
supporting the establishment of the allowance.
•
We note that as a result of your election to be treated as a corporation, you recorded a deferred tax asset and a onetime non-cash benefit of $[X] million on March 1, 2011 and on March 24, 2011 you recorded an additional deferred
tax asset of $[X] million. We further note that as of December 31, 2011 you determined that it was more likely than not
that the deferred tax assets would be realized and did not record a valuation allowance for the majority of this deferred
tax asset. Please tell us more about the factors that led you to conclude that no valuation allowance was needed as of
December 31, 2011, as well as the shift in circumstances that caused a change in judgment about the realizability of
the related deferred tax asset in the fiscal quarter ended June 30, 2012, which resulted in the recording of a valuation
allowance of $[X] million. Please describe all positive and negative evidence considered at both times.
•
We note your statement that you “expect that $[X] million of valuation allowance related to certain deferred tax assets
of one of our consolidated VIEs may be released in the first quarter of 2012 when the weight of all available evidence
will support full realization of the deferred tax assets.” We also note that you released the valuation allowance in the
12
first quarter of 2012 as predicted. In your critical accounting policies and estimates, please discuss specific variables and
evidence that affected the release of your valuation allowance. Provide disclosure that allows the reader to analyze your
assumptions, estimates, and judgments. Also, tell us in detail why you did not release the valuation allowance during the
year ended December 31, 2011. Provide us with your proposed disclosure.
•
We note your disclosure stating you expect that all of the deferred tax asset valuation allowance will be reversed during
the second quarter of 2012, except for the portion that is expected to offset the taxable income for the third and fourth
quarters of 2012. We also note from Note [X] of your Form 10-Q for the quarter ended March 31, 2012 that your fully
reserved deferred tax asset as of March 31, 2012 was $[X] million and that you had recorded a full valuation allowance
as you did not meet the required threshold of more likely than not for realizing the benefit of your deferred tax asset.
Given your net income before income taxes was $[X] million in 2011 and $[X] million during the quarter ended March
31, 2012, please provide us with the preliminary analysis you performed to determine it would be appropriate to reverse
your entire deferred tax asset valuation allowance during the second quarter of 2012, except for the portion that is
expected to offset the taxable income for the third and fourth quarters of 2012.
•
We note the significant deferred tax assets recorded at each balance sheet date. Please revise future filings to provide
a more detailed explanation of how you determined it is more likely than not that you will realize deferred tax assets.
Please ensure your disclosures address each of the following, as appropriate:
o
To the extent that you are relying on future pre-tax income, please disclose the amount of pre-tax income you need
to generate to realize your deferred tax assets. Please also include an explanation of the anticipated future trends
included in your projections of future taxable income.
o
If you are relying on the reversal of existing deductible temporary differences to support the realizability of your
deferred tax assets, please disclose that the deferred tax liabilities you are relying on are of the same character and
will reverse in both the same period and jurisdiction as the temporary differences giving rise to the deferred tax
assets.
o
If you are also relying on tax-planning strategies, please disclose the nature of your tax planning strategies, how
each strategy supports the realization of deferred tax assets, the amount of the shortfall that each strategy covers,
and any uncertainties, risks, or assumptions related to the tax-planning strategies.
Please provide us the disclosures you intend to include in future filings. Refer to ASC 740-10-30-16 through 30-25 and
Section 501.14 of the Financial Reporting Codification for guidance.
•
We note the $[X] million decrease in 2011 in your valuation allowance related to the realization of your net state
deferred tax assets. Please provide us your accounting analysis that details all of the relevant facts and circumstances, the
significant positive and negative evidence considered and how such evidence was weighted, and identifies the specific
accounting guidance that supports your decision to reverse a significant portion of the deferred tax asset valuation
allowance during 2011.
•
We note that you have reversed most of your income tax valuation allowance. Please discuss for us your evaluation of
whether it was more likely than not that you would generate sufficient future taxable income to realize your net deferred
tax assets. Describe how you weighted all of the evidence, both positive and negative, in reaching your conclusion to
reverse the valuation allowance. Further to the above, we note your disclosure here that “In order to reverse a valuation
allowance, U.S. GAAP guidance requires the Company to review the Company’s cumulative twelve-quarter income/loss.”
Please explain to us the U.S. GAAP requirement to which you are referring in this disclosure. Please also clarify how you
have weighted your cumulative twelve-quarter income/loss in your evaluation of whether to release any of the income
tax valuation allowance.
•
We note your analysis supporting your conclusion that a valuation allowance is not necessary for net deferred tax assets
at December 31, 2011. It appears that you did not book a valuation allowance against net deferred tax assets at March
31, 2012 despite continued losses. Please provide us with your detailed analysis of how you assessed the realization of
your deferred tax assets under ASC 740-10-30 at each reported balance sheet date, including March 31, 2012. Also,
tell us how the results of the first quarter of 2012 compared with your projections since you asserted projected future
taxable income as positive evidence of the realizability of net deferred tax assets in your analysis at December 31, 2011.
•
We note you have presented approximately $[X] million in deferred tax assets at October 27, 2012. It also appears to
13
us that you have not recorded a valuation allowance for such assets. Considering you have experienced losses for each
quarter this fiscal year, please provide us with a detailed analysis of FASB ASC 740-10-30, including all the evidence you
considered in determining that it was more likely than not you would be able to realize the benefits of substantially all
of your deferred tax assets. In your response, please clarify for us how the forecasts used in your analysis at January 28,
2012 compared to your actual results for the year to date.
•
We note in the paragraph bridging pages [X] and [X] you cite certain recent positive developments as a basis for
concluding an additional amount of your deferred income tax assets were recoverable in 2011 “considering the more
likely than not standard.” In light of the company’s three consecutive years of taxable income and the developments
cited in your disclosure, it is unclear why you did not consider the entire balance of your deferred tax assets fully
recoverable in 2011. Please advise us and expand your disclosure here and within your income tax footnote to disclose
the specific negative evidence identified by management that outweighed the positive evidence, when concluding that
it is more likely that a portion of the deferred tax assets would not be realized.
•
Please provide us with a more comprehensive discussion and analysis of the specific positive and negative factors you
considered when determining that the US foreign tax credit carryforwards deferred tax asset is realizable as of December
31, 2012. In this regard, we note two significant negative factors: (a) your history of US foreign tax credit carryforward
expirations and (b) your decision to permanently reinvest unremitted foreign earnings during fiscal year 2011. Please
confirm to us that you will include disclosure in your March 2013 Form 10-Q that provides investors with all of the
material positive and negative factors that can impact the realization of these deferred tax assets. As part of your
response, please provide us with a schedule that demonstrates the anticipated utilization of the US foreign tax credit
carryforwards deferred tax asset as of December 31, 2012. For each year, the schedule should separately presented
each type of foreign source income net of apportioned expense (i.e., export sales, royalty income, Subpart F income,
et cetera) and the recharacterization of any domestic source income into foreign source income. We note your disclosure
on page [X] that you need to generate $[X] million of federal taxable income, but only $[X] million needs to be derived
from foreign source income to fully utilize the foreign tax credits before they expire. For each year, the schedule should
also include the assumed tax rate, the amount of taxable income, the amount of US foreign tax credit carryforwards that
will be realized, and the amount and dates the US foreign tax credit carryforwards expire.
•
We note the declining trends in sales and gross profit margins during the interim periods. Please revise future filings,
including your next Form 10-Q, to more fully address the following:
•
Explain the negative factors that resulted in you recording a tax valuation allowance during the quarter ended June
30, 2012.
We further note that the effective tax rate for fiscal 2011 was significantly impacted by an increase in your valuation
allowance, which resulted from the completion of your U.S. entity restructuring. Please explain further the entity
restructuring and describe how it impacted your effective tax rate. Also, to the extent you anticipate this restructuring
will continue to impact your future effective tax rates and results of operations; tell us whether you considered including
a discussion of this potential trend or uncertainty within your MD&A disclosures. We refer you to Section III.B.3 of SEC
Release No. 33-8350 and Item 303 of Regulation S-K.
14
Appendix A: SEC Staff Review Process
The SEC’s Division of Corporation Finance (the “Division”) selectively reviews filings made under the Securities Act of 1933
and the Securities Exchange Act of 1934. In January 2009, the SEC staff issued an overview that explains its filing review
and comment letter process.1 The overview aims to increase transparency in the review process and expresses the staff’s
willingness to discuss issues with registrants. For example, the overview indicates that the “[staff] views the comment process as
a dialogue with a company about its disclosure” and that a “company should not hesitate to request that the staff reconsider a
comment it has issued or reconsider a staff member’s view of the company’s response to a comment at any point in the filing
review process.”
The overview is divided into two main sections:
•
The Filing Review Process — This section explains that the Division comprises 12 offices staffed by experts in specialized
industries, accounting, and disclosures. The section includes background on the different types (required and selective)
and levels of review and covers the comment process, indicating that “[m]uch of the [staff’s] review [process] involves
reviewing the disclosure from a potential investor’s perspective and asking questions that an investor might ask when
reading the document.” The section also addresses how to respond to staff comments and close a filing review.
•
The Reconsideration Process — This section emphasizes that “staff members, at all levels, are available to discuss
disclosure and financial statement presentation matters with a company and its legal, accounting, and other advisors.”
In addressing a registrant’s potential request for the SEC staff to reconsider a staff member’s comment or view on a
registrant’s response, the staff emphasizes that registrants do not have to “follow a formal protocol.” However, the staff
explains where registrants should start and the steps involved in the normal course of the reconsideration process. The
staff also specifies contact information for each office for both accounting and financial disclosure matters and legal and
textual disclosure matters.
Registrants may involve the SEC’s Office of the Chief Accountant (OCA) during any stage of the review process. Unlike the
Division’s role, which is to address matters related to the age, form, and content of registrants’ financial statements that are
required to be filed, the OCA’s role is to address questions concerning a registrant’s application of GAAP. Guidance on consulting
with the OCA is available on the SEC’s Web site.
A registrant that receives an SEC comment letter should generally respond within the time frame indicated in the letter. See
Appendix B for more information about responding to SEC comment letters. The registrant should continue to respond to any
requests for more information until it receives a letter from the Division stating that the Division has no further comments. A
registrant that does not receive a completion letter within a reasonable amount of time after submitting a response letter should
call its SEC staff reviewer (named in the letter) to ask about the status of the review. If the review is complete, the registrant
should request a completion letter.
To increase the transparency of the Division’s review process, comment letters are made public, via the SEC’s Web site, no more
than 20 days after the review is completed. See Appendix C for tips on searching the SEC’s comment letter database.
1
An overview of the legal and regulatory policy offices is also available on the SEC’s Web site.
15
Appendix B: Leading Practices for Managing
Unresolved SEC Comment Letters
The leading practices below are intended to help registrants resolve any staff comment letters in a timely manner. Unresolved
comments may affect a registrant’s ability to issue financial statements and an auditor’s ability to issue the current-year audit
report. In addition, when responding to staff comment letters, registrants should be mindful of their responses because all
responses to staff comment letters are made publicly available and become part of a registrant’s “total mix of information” and
disclosure records (i.e., investors may read such responses similarly to how they interpret a registrant’s other filings and publicly
available information).1 A registrant should do the following:
•
Consider the impact the comment letter may have on its ability to issue the financial statements.
•
Consult with its SEC legal counsel about the impact the comment letter may have on the certifications contained in its
Form 10-K.
•
Consult with its auditors to discuss the impact the comment letter may have on their ability to issue the current-year
audit report.
•
Review the comment letter immediately and respond to the SEC staff reviewer (named in the letter) within the time
indicated in the comment letter (usually 10 business days). If possible, the registrant should not request an extension,
since this may delay resolution of the comment letter. However, in certain circumstances, the registrant should consider
requesting an extension to provide a more thorough and complete response that addresses all of the staff’s comments.
•
If the registrant does not fully understand any specific comment, the registrant should contact its SEC staff reviewer
quickly for clarification so that it can provide an appropriate response.
•
Include in the response a discussion of supporting authoritative accounting literature and references to the specific
paragraph(s) from the standard(s).
•
Because some comments may request disclosure in future filings, the registrant should consider including such disclosure
in the response letter to potentially eliminate additional requests from its SEC staff reviewer.
•
If an immaterial disclosure is requested, the registrant should consider explaining why the disclosure is immaterial instead
of including the immaterial disclosure in future filings.
•
Maintain contact with its SEC staff reviewer and make the reviewer aware of the registrant’s required timing (on the
basis of its current-year filing deadlines).
•
If the registrant has not received a follow-up letter or been contacted within two weeks of filing the initial response
letter, the registrant should contact its SEC staff reviewer to determine the status of the comments. The registrant should
promptly address any follow-up questions.
•
If the registrant is uncertain about whether its review has been completed without further comments, it should ask the
SEC staff reviewer about the status of the review. If the review is complete, the registrant should ask the reviewer for a
completion letter.
Oral Comments
In limited circumstances, the SEC staff may provide oral comments to a registrant instead of a written comment letter. The
registrant should ask the SEC staff reviewer how he or she would like to receive the registrant’s response to the oral comments.
If the reviewer requests a response via EDGAR, a registrant should respond with a written letter. If the reviewer requests an oral
response or identifies no preference, a registrant should still, although it is not required to do so, consider responding to the
staff’s comments with a letter to formally document the registrant’s understanding of the staff’s comments and the discussions
held as well as the registrant’s response.
Disclosure Requirements
Under the Securities Offering Reform, large accelerated filers, accelerated filers, and well-known seasoned issuers must disclose in
their Forms 10-K the substance of any material unresolved SEC staff comments that were issued 180 or more days before the end
of the current fiscal year.
1
The SEC staff discussed this topic at the 2012 AICPA Conference. Refer to Deloitte’s December 11, 2012, Heads Up for more information.
16
Appendix C: Tips for Searching the SEC’s Database
for Comment Letters
The SEC adds comment letters (and responses from registrants) to its EDGAR database no earlier than 20 days after its review of a
filing is complete. Registrants can refer to such comments as part of their financial statement review process and to improve their
own accounting and overall disclosure.
Although the SEC has recently updated the EDGAR search engine to simplify searches of corporate filings, users may still wish to
use the “full-text” search feature to find the text of specific comment letters posted within the last four years and to generally
narrow their search results. The process of performing a full-text search is discussed below.
Full-Text Searching
To perform a full-text search, first go to the SEC’s home page (www.sec.gov) and click the “Search EDGAR for Company Filings”
image:
17
Then, click the “Full Text” link in the left sidebar on the “EDGAR l Company Filings” page:
On the “Full-Text Search” page, select “Advanced Search Page”:
18
This brings up the following form:
In the form, limit the search results to SEC comment letters by using the drop-down menu next to “In Form Type” and choosing
“UPLOAD” (or select “CORRESP” to include registrant responses as well).
Then, enter search terms in the “Search for Text” field. The documents found will contain at least one of the words entered as
well as variations of the key word(s). To search for specific phrases, enclose the phrase in quotation marks (e.g., “management’s
discussion and analysis”). Results will include documents that contain the quoted phrase as well as conceptually related phrases,
such as “managerial discussion & analysis.”
Enhancing Search Results
Searches can be further refined by using Boolean operators such as AND, OR, and NOT (capitalization of these terms is required).
For an operator to work effectively, a key word or phrase generally must be included before and after it (e.g., investments AND
temporary). Searches in which operators are used will produce results as follows:
•
AND — Documents will contain all terms connected (but not necessarily in the same sentence or paragraph) by the
AND operator. The terms can appear in any order in the document.
•
OR — Documents will contain any terms connected by the OR operator.
•
NOT — Documents will contain one term but not another term.
Using wildcards or the “nearness” feature can also enhance search results:
•
Wildcards — While Full-Text Search automatically finds certain variations of a key word within comment letters, a user
can ensure that all variations are considered by using a wildcard. An asterisk (*) is a wildcard that can be used in place
of missing character(s) of the key word(s) to find all comment letters that include a variation of the word indicated (e.g.,
impair* would search for impair, impaired, impairing, impairment, and impairs).
•
Nearness — Key words or phrases within a certain distance of each other can be searched by stipulating a range. The
range is determined by using the term “NEARn,” with “n” representing the maximum number of words in the range
(e.g., “impairment NEAR5 test” would find documents with impairment and test within five words of each other).
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Advanced search features can frequently be combined. For example, quotations used to find a specified phrase can be combined
with Boolean operators (e.g., investments AND “temporary decline”).
Note that numbers are ignored in searches. Thus, a search for “Final Rule 108” will only locate documents that contain the terms
“Final” and “Rule.” Searches can, however, be sorted by other criteria, such as dates, as discussed below.
Sorting by Dates and Other Specific Criteria
On the full-text search form, selections can also be made to limit results to a specified:
•
Company name.
•
Central index key (CIK).1
•
Standard industrial classification (SIC) code.2
•
Date range.
Note that clicking the SIC code in the list of search results will display a list of additional companies that have the same SIC code:
Controlling and Displaying Search Results
The Results Per Page drop-down list can be used to limit the number of search results that display. To open a comment letter,
click on the underlined title of the form to the right of the date. The comment letters will include any attachments or exhibits.
Example of the Benefits of Using Full-Text Search Features
Assume that a user is interested in SEC comments issued over the past two years that are related to results of operations in the
hotel industry. By searching for the words “results” and “operations” with “All Forms” selected and no dates specified, the user
would obtain over 8,000 results, many of which are not relevant.
However, if the user narrowed his or her search by (1) selecting the form type UPLOAD, (2) entering the search term “results of
operations” in quotation marks, (3) entering the industry code for the hotel/motel industry (SIC 7011), and (4) providing a date
range spanning the last two years, the number of results will be more relevant and manageable.
Additional Information
For more information about full-text searching, click the FAQ link on in the search form:
1
According to the SEC’s Web site, “a CIK is the unique number that the SEC’s computer system assigns to individuals and corporations who file disclosure documents with the SEC. All
new electronic and paper filers, foreign and domestic, receive a CIK number.”
2
A SIC code is an industry designation. Note that some of the SIC code descriptions are similar, so narrowing results by SIC code may not include certain issuers that are in a similar
industry yet have a different assigned SIC code.
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Appendix D: Glossary of Standards and
Other Literature
The standards and literature below were cited or linked to in this publication.
FASB Literature
See the FASB’s Web site for titles of FASB literature used in this publication.
International Standards
See Deloitte’s IAS Plus Web site for titles of international standards used in this publication.
SEC Guidance
Form 10-K, “General Form of Annual Report”
Form 10-Q, “Quarterly Reports”
Financial Reporting Codification Section 501, “Management’s Discussion and Analysis”
Financial Reporting Release 33-8350, Commission Guidance Regarding Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Regulation S-K, Item 303, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
Regulation S-K, Item 503, “Prospectus Summary, Risk Factors, and Ratio of Earnings to Fixed Charges”
Regulation S-X, Rule 4-08, “General Notes to Financial Statements”
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Appendix E: Abbreviations
Abbreviation
Description
AICPA
American Institute of Certified Public Accountants
AICPA Conference
The annual AICPA National Conference on Current SEC and
PCAOB Developments
ASC
FASB Accounting Standards Codification
C&DI
SEC Compliance and Disclosure Interpretation
CIK
central index key
DTA
deferred tax asset
EDGAR
SEC’s Electronic Data Gathering, Analysis, and Retrieval
system
FAQ
frequently asked questions
FASB
Financial Accounting Standards Board
FDA
Food and Drug Administration
GAAP
generally accepted accounting principles
IFRS
International Financial Accounting Standards
IRS
Internal Revenue Service
MD&A
Management’s Discussion and Analysis
NOL
net operating loss
OCA
SEC’s Office of the Chief Accountant
PCAOB
Public Company Accounting Oversight Board
REIT
real estate investment trust
SEC
Securities and Exchange Commission
SIC
standard industrial classification
TRS
taxable REIT subsidiary
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This publication is provided as an information service by the Accounting Standards and Communications Group of Deloitte & Touche LLP in collaboration with Deloitte Tax LLP and
has been updated as of January 2014. It does not address all possible fact patterns and the guidance is subject to change. Deloitte & Touche LLP is not, by means of this publication,
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