A Look at Top SEC Comment Letter Issues in 2018

The number of SEC comment letters has been declining for nine consecutive years. During the first nine months of 2018, 2,174 letters were filed1 (831 CORRESPs and 1,343 UPLOADs) – a decrease of 40% from the 3,629 letters that were filed during the first nine months of 2017.

Each year, we look at the most common issues raised in SEC comment letters; the table below shows ten of the top issues discussed in comment letters over the past three years. It is important to note that, in many cases, more than one issue is mentioned.

Major topics in 2018 were similar to what we have seen in 2016 and 2017, with MD&A, non-GAAP, and fair value comments at the top of the list. There are, however, some new trends that have emerged.


Non-GAAP comment letters declined as an absolute number and as a percentage of all comment letters, which is consistent with our expectations. In the past year, the SEC indicated that the massive non-GAAP campaign achieved its target and many companies “self-corrected”. Yet, it is important to note that, based on the analysis of comment letters, non-GAAP issues are still on the radar, though reviews appear to be more targeted. Notably, as highlighted in our recent blog, the number and percentage of non-GAAP comment letters declined in 2018 but still remain above the 2015 level. The most occurring non-GAAP comments focused on presentation of non-GAAP measurements with undue prominence, presentation of non-GAAP measurements on a “net of tax” basis, and presentation of measures that use individually tailored recognition and measurement methods.

1. You include adjustments to arrive at net operating profit that appear to remove your operating lease rent expense under GAAP and replace it with estimated depreciation, as if these leases had met the criteria for capital leases or you had purchased the properties … It appears that these adjustments may substitute individually-tailored recognition and measurement methods for those of GAAP. Please remove these adjustments from your non-GAAP measure or tell us how you considered the guidance in Question 100.04 of the Non-GAAP Financial Measures Compliance and Disclosure Interpretations updated on April 4, 2018 and concluded that these adjustments were appropriate.

Revenue Recognition

The uptick in revenue recognition comments was also expected, as many of the revenue comments requested clarification regarding the adoption of ASC 606, which became effective on January 1, 2018 for companies with a calendar year end. As mentioned in a recent article by Compliance Week, the SEC has indicated the staff plans to take a hard look at the first annual reports under the new standard, with a focus on material issues.

So far, more than 90 companies have received comment letters related to the adoption of ASC 606. Comments, such as the one below, are in line with what we’ve seen for early adopters. Common questions include disaggregation of revenue streams, remaining performance obligation, and certain provisions of ASC 340.

2. We note your disclosure regarding three performance obligations under your franchise agreements. It appears that you have concluded that these items are not distinct and therefore are not separate performance obligations given your conclusion that they are highly interrelated. Please revise your disclosure to clarify your conclusions. Reference 606-10-25-22.

Failure to provide required ASC 606 disclosure may have an impact on the conclusion of disclosure controls effectiveness and require an amended filing. For example:

3. Please revise your disclosure to provide your accounting policy on revenue recognition as a result of your implementation of FASB ASC 606. Please refer to the guidance in FASB ASC 606-10-50 and Article 10 of Regulation S-X.

4. Please revise your disclosure to provide your conclusion on the effectiveness or ineffectiveness of your Disclosure Controls and Procedures. In addition, please provide a detailed discussion on how the non-disclosure of your revenue recognition policy in the Form 10-Q affected your conclusion.

Income Taxes

There was a slight decline in the amount of comments regarding income taxes since last year. Out of the 51 companies that received a letter in relation to taxes so far this year, 12 received comments that referenced the Tax Cuts and Jobs Act (TCJA).

1. Please clarify your disclosure on page 75 that the US Federal tax reform impact was almost entirely offset by the valuation allowances line item in your effective tax rate schedule. In that regard, it appears based on your effective tax rate reconciliation that the US Federal tax reform impacted your tax rate by (1,166%) while the change in valuation allowances impacted your tax rate by 675%. To the extent that other material drivers such as the corporate reorganization are also impacting your effective tax rate in FY 2017 and also impacting your change in valuation allowances, then clarify this fact and expand your disclosures to more fully describe the impact your corporate reorganization had on your effective tax rate.

Response: In response to the Staff’s comment, in future filings, the Company will provide expanded disclosures of the impact of drivers on the effective tax rate, as well as the impact to the valuation allowances. In future 10-K filings, we plan to provide additional detail regarding the impact on the effective tax rate of significant items that caused changes in the valuation allowance within the table that reconciles the statutory rate to the effective tax rate.

Some comments discussed the impact of the Tax Reform in the context of the non-GAAP presentation. Here is an example:

We note that you presented an annual effective tax rate for 2017 that excludes the one-time charges associated with the Tax Cuts and Jobs Act but you did not identify the measure as non-GAAP or include any of the disclosures required by Item 10(e)(i) of Regulation S-K. Please revise your presentation in future filings to fully comply with that guidance.

Response: We acknowledge the Staff’s comments and will revise our presentation to eliminate the use of this non-GAAP measure in future filings.

Terrorist Nation Sponsor Reporting

The amount of SEC comments regarding terrorist nation sponsor reporting was higher as a percentage of all letters in 2018. However, if you look at the three-year trend, the number of letters remained consistent. Comments addressing this issue are similar to the example below.

On pages 5 and 9, you identify Samsung as a large customer. Samsung reportedly sells its products in Syria and Sudan, countries which are designated by the State Department as state sponsors of terrorism and are subject to U.S. sanctions and/or export controls. You do not provide disclosure about those countries in your Form 10-K. Please describe to us the nature and extent of any past, current, and anticipated contacts with Syria and Sudan, including with their governments, whether through subsidiaries, distributors, customers, or other direct or indirect arrangements.

Segment Reporting

Lastly, the number of comments involving segment reporting experienced a decline in 2018. Overall, the comments involving segment reporting remained similar to what we discussed in 2017.

Generally speaking, we expect 2018’s trends to continue into 2019.

Be sure to check out Deloitte’s A Roadmap to SEC Comment Letter Considerations, Including Industry Insights, EY’s SEC Comments and Trends – September 2018, and PwC’s SEC Comment Letter Trends for further analysis of SEC comment letters.

For more information on the top issues in comment letters, please contact us at info@auditanalytics.com or call (508) 476-7007.

1. Comment letters reviewed through 10-K, 10-Q, and 8-K as of November 15, 2018. One important thing to remember is that comment letters are normally released only 20 days after the resolution of all the comments, so the numbers of letters and number of registrants may change for the mentioned periods. Based on historical experience, for about 10% of the comments dissemination days is more than 90 days after the filing date of the letter.