F-pages

MD&ARisk Factors

Business Section

Major Sections for filings (10Q / 10K)

Business Section

F-Pages

MD&A (Management Discussion and Analysis)

Risk Factors

Risk Factors

“Though, in reviewing the incidents of my administration, I am unconscious of internal error, I am nevertheless, too sensible of my defects not to think it probable that I may have committed many errors.”

George Washington’s Farewell Address, 1796

Risk factors do not provide immunityfrom lawsuits.

Review question #1 (Required for CPE)Which Of the following is NOT a typical section of the 10K for most filers?

A. Risk Factors

B. Management Discussion and Analysis

C. Yearly detailed budget for the company

D. F-pages

Review question #1 (Required for CPE)Which Of the following is NOT a typical section of the 10K for most filers?

A. Risk Factors

B. Management Discussion and Analysis

C. Yearly detailed budget for the company

D. F-pages

A. Virtually all filers must include the risk factor section in their 10K. (Incorrect)

B. Management Discussion and Analysis is always included in the 10K. (Incorrect)

C. A detailed company budget is almost never included in the 10K filing. (Correct)

D. The Payroll Department will have minimal involvement in the SEC Reporting Process. (Incorrect)

Review question #2 (Required for CPE)Which Of the following sections is a critical component of the Management Discussion and Analysis?

A. the results of operations

B. the full statement of operations

C. the opinion from the independent auditor

D. the full consolidated statement of cash flows

Review question #2 (Required for CPE)Which of the following sections is a critical component of the Management Discussion and Analysis?

A. the results of operations

B. the full statement of operations

C. the opinion from the independent auditor

D. the full consolidated statement of cash flows

A. The results of operations section is one of the most scrutinized section of the entire 10Q/10K filing, and it is included in the Management Discussion and Analysis. (Correct)

B. The full statement of operations is maintained in the f-pages. (Incorrect)

C. The opinion page is immediately before the financial statements in the 10K. (Incorrect)

D. The full consolidated statement of cash flows is maintained in the f-pages. (Incorrect)

Quarter Has Ended But the GL is Not Closed

Quarter Has Ended But the GL is Not Closed■ Send out non-accounting sections

to individuals outside of accounting– Competitive information that

needs to be updated– Regulatory information– Legal information

■ Disclosure checklist– Provided by your auditor– Or, if acceptable, EY provides a

free version of a disclosure checklist for both 10-Ks and 10-Qs.

– http://www.ey.com/gl/en/issues/ifrs/ifrs-disclosure-checklists

GL is closed

■ It’s go time!

■ Update consolidation file and drop numbers into the financial statements.

■ Update the rest of the footnotes.

■ Then I shift to the MD&A to update the results of operations and the liquidity and capital resources sections.

Results of Operations■ Explain the change in all

material lines presented on the income statement.

Writing Results of Operations

Unacceptable

The Company’s research and development expense increased as a result of more products being developed.

Acceptable

The $2.3 million increase in research and development was due to a $2.2 million increase in compensation related costs for the XYZ Project, $900,000 due to increased supplies as a result of higher commodity costs, partially offset by a $600,000 decrease in costs related to the discontinuation of the ABC Project.

Tips – Results of Operations

■ Try to vary word choice as much as possible while keeping the sentences congruent

■ When explaining an overall increase ($2.3 million above) the subcomponents should explain the material components, but they do not need to add up to the overall increase exactly. In the example on the previous slide, the explanations vary from the true variance by -.2. This is OK, as long as you have explained all of the significant fluctuations.

■ If you have material fluctuations going both ways (like the $900,000 and the $600,000 above) you must call out both of them.

Tips – Results of Operations (continued)■ Don’t take it personally when others provide significant rewrites of your wording.

This is one of the most looked at sections in the entire 10Q/10K, so everyone needs to be in agreement on what it says.

■ Be as concise as possible.

■ It’s actually a good time to be a perfectionist.

Tips – Results of Operations (continued)■ Proofread and rewrite this section multiple times yourself before you provide it to

others for their review.

■ The auditors to not provide an opinion on any of the MD&A section, but the MD&A section must be consistent with the F-pages, for which the auditors are providing an opinion.

Review question #3 (Required for CPE)(Fill in the blank.) When writing the results of operations __________ .A. Companies generally provide

explanations of variances in the statement of cash flows

B. Companies explain the significant regulatory risks that the company faces

C. Companies discuss the significant fluctuations in the income statement lines

D. Non-resource extraction companies are required to disclose their mine safety issues

Review question #3 (Required for CPE)(Fill in the blank.) When writing the results of operations __________ .A. Companies generally provide

explanations of variances in the statement of cash flows

B. Companies explain the significant regulatory risks that the company faces

C. Companies discuss the significant fluctuations in the income statement lines

D. Non-resource extraction companies are required to disclose their mine safety issues

A. The results of operations sections does not explain the variances in the statement of cash flows. This is done in the liquidity and capital resources section. (Incorrect)

B. The regulatory risks for the company are disclosed in the risk factors section. (Incorrect)

C. The most important section of the results of operations is the explanation of the fluctuations in the income statement. (Correct)

D. The full consolidated statement of cash flows is maintained in the f-pages. (Incorrect)

Provide Guidance for the Current Year ended in MD&A

Jail Bait!

Overly optimistic projections about revenue increases or cost decreases can end up being excellent fuel for a future lawsuit.

Always preface future claims with “we believe,” “may,” “could”.

This will pull these statements into the “Safe Harbor” provisions, which provides a possible defense against lawsuits if these things do not materialize in future periods.

Liquidity and Capital Resources■ Explain the change in all

material lines presented on the statement of cash flows.

Uh oh Pizza Inn! I think you mean $0.7 million, right?

Whoops!

Liquidity and Capital Resources

It is actually pretty common to find companies regurgitate a fair amount statement of cash flows in this explanation in the liquidity and capital resources. However, significicant amounts on the statement of cash flows should be explained with a why.

Yah, AP went up by $10 million. But WHY did it go up?

Liquidity and Capital ResourcesConfusing little trap in these explanations.

The SEC guidance around this sections is somewhat vague, and says that the Company needs to explain the change in the current year relative to the prior year.If you set out to take a literal interpretation you are going to end up with some gobblygook like this.“Accounts payable increased by $450,000 in 2017 but it decreased by $600,000 in 2016, which represents a change in accounts payable of $1.1 million. However, accounts payable on the balance sheet changed by $1.5 million because…”This is impossible for anyone, besides the author, or possibly including the author, to follow.

Liquidity and Capital ResourcesSolution to confusing little trap in these explanations.

The better way to provide these explanations is to talk about the current year statement of cash flows in one paragraph. Then, copy and paste last year’s statement of cash flows explanation below it.This provides two huge benefits:1) It follows the SEC rules; and2) It provides a legible and meaningful

disclosure to the users of the financial statements.

Liquidity and Capital Resources

Where does our cash currently come from?

Where might cash come from in the future?

Review question #4 (Required for CPE)(Fill in the blank.) When writing the liquidity and capital resources section __________ .A. companies generally provide an

explanation of where cash currently comes from and where it may come from in the future

B. companies will present the operating leases that the company has

C. companies provide an explanation for regulatory changes

D. companies need to provide the names of all of their subsidiaries

Review question #4 (Required for CPE)(Fill in the blank.) When writing the liquidity and capital resources section __________ .A. companies generally provide an

explanation of where cash currently comes from and where it may come from in the future

B. companies will present the operating leases that the company has

C. companies provide an explanation for regulatory changes

D. companies need to provide the names of all of their subsidiaries

A. This is a primary component of the liquidity and capital resources section. (Correct)

B. Operating leases are disclosed in the f-pages and the commitments and contingencies section. (Incorrect)

C. An explanation of regulatory changes would generally be provided in the overview section. (Incorrect)

D. This is not required in the liquidity and capital resources section. (Incorrect)

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