The SEC’s Most Wanted

What does the regulator most want to see in future financial filings? Recent comment letters suggest that the Securities and Exchange Commission has a keen interest in goodwill impairments, fair-value measurements, and credit-risk disclosures.

In recent comment letters to its registrants, the SEC staff asked about the timing of the impairment tests and what type of thinking went into the process, which prompted companies to promise to do better with their disclosures about these evaluations next time.

For example, CFO Dominic Romeo had to defend Idex Corp.’s goodwill impairment testing after an SEC staffer inquired about the manufacturer’s annual analysis. In a March letter, the regulator requested more information about why none of the company’s 14 reporting units were impaired in the final months of 2008.

In his five-page response, which explained how the company’s financial projections play a role in how it assesses impairments and which reporting units needed a second round of testing, Romeo promised to share more information about Idex’s accounting policy in future annual filings. The company did not respond to CFO.com’s request for further comment.

Romeo’s letter was one of many recently published to the Edgar database — the SEC does not release the comment letters publicly until the back-and-forth correspondence with companies is complete — that touched upon goodwill impairments. In other letters, the SEC asked companies to explain how they analyzed the difference between a reporting unit’s market capitalization and its book value, the facts and circumstances that led to an impairment, and why they believe they’ve met the disclosure requirements under FAS 142, the goodwill accounting rule.

Companies that paid attention to speeches made by SEC staffers late last year couldn’t have been too surprised by the topics brought up in subsequent comment letters. The staff generally gives the public a head’s up on many of the issues they will focus on in the coming year. For instance, John White, former head of the SEC’s corporate finance division, put the largest U.S. financial institutions on notice last October, announcing that their annual reports would be reviewed. Staffers also pledged to pay particular attention to how companies meet disclosure requirements related to uncertainties, liquidity, and credit risks.

The SEC does not review every financial filing it receives but is expected, under the Sarbanes-Oxley Act, to look at one filing from each public company at least once every three years. The commission may pay particular attention to certain types of companies at any given time, as well as firms with the largest market caps or the most volatile stock prices.

 

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