How to recognize ‘individually tailored’ disclosures

By Ken Tysiac

SEC officials provided some clarity Tuesday on what constitutes "individually tailored" accounting, which is a fairly new concept in non-GAAP reporting that the commission views as a rules violation.

In 2016, the SEC updated its Compliance & Disclosure Interpretations to say that non-GAAP measures that substitute individually tailored revenue recognition and measurement methods for those of GAAP could violate SEC rules. Other measures that use individually tailored recognition and measurement methods for financial statement line items other than revenue may also violate SEC rules, according to the interpretation.

Since then, there has been confusion over the meaning of "individually tailored" in accounting.

"I know that's an area where we get a lot of questions from our clients," Steven Jacobs, a partner at EY, said Monday at the AICPA Conference on Current SEC and PCAOB Developments. "And to be honest, we have a really hard time answering them."

Patrick Gilmore, a deputy chief accountant with the SEC, on Tuesday at the AICPA conference provided questions that accounting staff members should consider in their evaluation of whether accounting is "individually tailored":

  • Does the adjustment shift GAAP from an accrual basis of accounting to a cash or modified basis of accounting? For example, Gilmore said using cash receipts or billings as a proxy for revenue for a subscription-based business that recognizes revenue over time would provide a profitability measure that would be determined on a mixed basis of accounting and would be an individually tailored accounting principle.
  • Does the adjustment add in transactions that are also reportable in the company's financial statements? As an example, Gilmore said adjusting from the guidance for determining whether a company is a principal or an agent could result in presenting transactions that don't qualify as your own under GAAP and may be an individually tailored accounting principle.
  • Does the adjustment reflect parts, but not all, of an accounting concept? For example, Gilmore said adjusting income tax effects for cash taxes but not for temporary or permanent differences may be an individually tailored accounting principle.
  • Does the adjustment render the measure inconsistent with the economics of a transaction or an agreement? As an example, Gilmore cited some companies that earn revenue from operating leases, but also from sales-type leases or financing leases. "They will adjust revenue for the sales-type or financing leases as if they were operating leases, thus ignoring some of the economics of the lease agreements that they have," he said.

Meanwhile, other key disclosures that may require special focus from companies revolve around cybersecurity, Brexit, and the London interbank offered rate (Libor), an SEC official said Tuesday.

The SEC published new requirements for cybersecurity disclosures in February.

"We were reminding people that that function that is going on in the IT department needs to be brought up to the disclosure staff and considered for timely disclosure," said William Hinman, director of the SEC's Division of Corporation Finance.

Hinman said it also makes sense for companies to consider their insider trading policies to make sure that their officers and directors haven't traded their shares before a significant cyber breach was disclosed to the public.

Line item disclosure requirements on board oversight of risks that may be material also apply to cybersecurity, Hinman said.

"We're not dictating anything about what the board has to do or that the membership of the board has to have a cyber [expert]," Hinman said. "We're just asking for a description of how is the board monitoring this area, particularly if it's of material importance to the company."

Although many companies have provided thoughtful disclosures about the risks that Brexit poses to their business, a few have been less forthcoming, Hinman said.

"Especially in the financial sector, people have already taken steps to prepare and to deal with the post-Brexit world," Hinman said. "We think the risk factors and the disclosures should reflect that. To the extent you're having these discussions internally and you have some things that are potentially material to investors, we would like to see investors have the benefit of that insight."

Libor is a benchmark rate that is tied to a huge number of financial products, and it is scheduled to be phased out by British regulators. Replacement rates are under development, and Hinman said the SEC would like to see disclosures on the effect of Libor's expiration.

"We're just looking for companies to share with investors the kinds of things they are thinking about as they anticipate Libor going away," he said. "Whether you're a corporate issuer that has floating rate bonds, or whether you're a financial institution where a lot of your products are still geared to Libor, we'd like to see more detailed disclosures there."

Ken Tysiac ( is the JofA's editorial director.


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