By: Cydney Posner

At a PLI webcast yesterday, Meredith Cross reported on recent conversations she had had with the SEC staff regarding the SEC's expectations for restatements and amended filings in connection with option dating problems.

You may recall that, in a letter dated September 19, 2006, the SEC's Office of Chief Accountant had stated that, generally, "previously filed reports containing financial statements determined to be materially misstated require amendment. The staff understands that errors related to the issues addressed in this letter may affect several years of filings, and that companies may believe that amending all of the affected filings is unnecessary. Companies that propose to correct material errors without amending all previously filed reports should contact the staff of the Division of Corporation Finance." (See my email of September 20, 2006.)

According to Cross, however, the SEC has advised informally that, in the option dating context, companies that want to file a "comprehensive 10-K/A" and avoid filing amendments to correct errors in all previously filed reports may either, if they want a formal position upon which to rely, seek permission from the staff or forego advance staff approval and risk that the staff will object in the comment process. This is apparently still an evolving area, and written guidance is expected soon. Companies that would like to consult with the staff should contact the Chief Accountant's office in Corp Fin.

Cross stated that the SEC expects that companies restating financial statements as a result of options problems would file at least a comprehensive 10-K/A with extensive disclosure (in most cases, a 10-K/A for 12/31/05) and 10-Qs for the subsequent periods. The comprehensive 10-K/A would include:

  • Audited financial statements for three years
  • A line-by-line reconciliation in compliance with FAS 154
  • A thorough description in the footnotes of all adjustments
  • Footnotes to the tables with reconciliations
  • Footnote analysis of cumulative adjustments, with a catch-up to the earliest year presented, by type and year
  • Correction of the option expense paragraphs and pro forma expenses
  • Revised FAS 123 footnote with a reconciliation to the cumulative adjustment to retained earnings (staff may require this information to be audited and the panel expressed some confusion over the meaning of this requirement)
  • Comprehensive information using the Article 10 format for interim periods, including eight quarters and a line-by-line reconciliation
  • Extensive disclosure regarding the nature of the option problems, including judgments made, uncertainties and how addressed and the basis for subjective judgments (the panel believed that option issues could be addressed by group, but could not confirm that view)
  • Revised MD&A
  • An explanatory note at the beginning of the 10-K/A disclosing intent not to revise previous filings
  • Revision of S-K item re disclosure controls and internal controls, as appropriate, including remediation plans

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