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Full disclosure: The balance sheet · PwC's accounting podcast

• 0:00
  SPEAKER_01: Thought leadership from PWC's National Office Studios.
• 0:06
  SPEAKER_02: Welcome to PWC's Accounting Podcast Series.
• 0:10
  SPEAKER_02: I'm Heather Horn.
• 0:12
  SPEAKER_02: Today kicks off the first episode in our full disclosure summer series.
• 0:17
  SPEAKER_02: A show all about presentation and disclosure from the top of the financial statements down to the last footnote.
• 0:24
  SPEAKER_02: Stay tuned all summer to hear from some of my favorite podcast guests as we navigate the financial statements.
• 0:30
  SPEAKER_02: Today's topic, the balance sheet.
• 0:33
  SPEAKER_00: I can recall a number of conversations on elevators with preparers in the past.
• 0:40
  SPEAKER_00: I definitely liked having those conversations because I think they were frank and they were very uh straightforward.
• 0:45
  SPEAKER_00: And really, I'd like to be frank and straightforward here.
• 0:49
  SPEAKER_02: That's Kyle Moffitt, one of those voices you should already know, and PWC partner, and former Chief Accountant and Disclosure Program Director in the SEC's Division of Corporation Finance.
• 1:01
  SPEAKER_02: And with that, let's get started.
• 1:05
  SPEAKER_03: So, Kyle, thanks so much for joining me today to kick off the first episode of our summer series talking about the financial statements.
• 1:14
  SPEAKER_03: And in the series, we're going to take listeners through the financial statements from top to bottom.
• 1:20
  SPEAKER_03: But we thought today, since it's our first episode, we'd start with the true basics.
• 1:24
  SPEAKER_03: People can feel like for a few minutes they're back in accounting 101.
• 1:28
  SPEAKER_03: And hopefully this is all just a refresher.
• 1:31
  SPEAKER_03: So just to start things off, then I know obviously we have US GAP guidance, and you come from the SEC, where the SEC has its own guidance.
• 1:40
  SPEAKER_03: So again, true basics level set.
• 1:42
  SPEAKER_03: How does this all fit together?
• 1:44
  SPEAKER_00: So that's a great question, Heather.
• 1:47
  SPEAKER_00: I I think it's really important first to understand that GAAP always comes first.
• 1:51
  SPEAKER_00: GAP, of course, provides the baseline for the balance sheet presentation requirements.
• 1:56
  SPEAKER_00: And while it closely aligns with SEC regulations, such as uh Rule 502 of regulation SX, there are some incremental uh SEC disclosure requirements to keep in mind.
• 2:07
  SPEAKER_00: You know, and for the purpose of 502 of SX, um, you know, that does provide the line items and certain additional disclosures which should appear on the face of the balance sheets or or even in the notes.
• 2:18
  SPEAKER_00: And the other thing to keep in mind too is Article 4 of Regulation SX is clear that the financial statements must be prepared in accordance with GAAP.
• 2:27
  SPEAKER_00: So either US GAAP or IFRS.
• 2:30
  SPEAKER_00: So those are those are probably some things to keep in mind.
• 2:32
  SPEAKER_03: All right.
• 2:33
  SPEAKER_03: So then, Kyle, that's good baseline information.
• 2:36
  SPEAKER_03: Now, again, as we're thinking about the financial statements and start with true basics, and I know a question that seems simple on the surface, but I remember getting a lot when I was an audit partner is how many years of financial statements are required?
• 2:50
  SPEAKER_03: And let's start with public companies, but I'm gonna throw you a loop and ask you about private too.
• 2:54
  SPEAKER_03: But go ahead and start with public.
• 2:56
  SPEAKER_00: So generally, you're gonna see two years of balance sheets, three years of income statements, and three years of cash flow statements.
• 3:03
  SPEAKER_00: And um, with the statement of stockholders equity, um, that that is uh presented for each period that an income statement is presented.
• 3:10
  SPEAKER_00: So um so that that is actually included in Article III of Regulation SX.
• 3:16
  SPEAKER_00: There are some exceptions.
• 3:17
  SPEAKER_00: So um that that is something else to keep in mind is that you know emergent growth companies and smaller reporting companies do have some exceptions there.
• 3:24
  SPEAKER_00: And so um definitely need to reference the rules to figure out what exactly uh the company needs to present.
• 3:31
  SPEAKER_03: So, Kyle, you intrigued me with your reference to emergent growth companies and smaller reporting companies.
• 3:36
  SPEAKER_03: So can you at least give me some general thoughts on how they would think through these requirements?
• 3:42
  SPEAKER_00: If you're a smaller reporting company, uh you don't have to do as many periods, right?
• 3:46
  SPEAKER_00: And so you are you know definitely in the bucket of a couple of years.
• 3:50
  SPEAKER_00: Um you think about the income statement, two years.
• 3:53
  SPEAKER_00: If you think about like an even emerging growth company, um there there are fewer uh requirements.
• 3:59
  SPEAKER_00: Um and the point with emerging growth company obviously is that you know it's it's the IPO kind of on-ramp of companies can come in, um, they they have scaled reporting similar to what a smaller reporting company might have, and then over time it ramps up.
• 4:13
  SPEAKER_00: Um and then when you get to the point where you're no longer an EGC, then you're now, unless you're an SRC, you will then have to start presenting you know your two years balance sheet, three years income statement, and so on.
• 4:24
  SPEAKER_03: And then Kyle, that's helpful.
• 4:26
  SPEAKER_03: So then big picture, let's go back to all public companies.
• 4:30
  SPEAKER_03: How do the rules differ if you're a public company when you're looking at your interim reporting requirements?
• 4:36
  SPEAKER_00: So there are some differences.
• 4:38
  SPEAKER_00: Um ASC 270 uh and and of course Article 10 of Regulation SX, those are the two primary sources for presentation and disclosure requirements for interim reporting.
• 4:49
  SPEAKER_00: You know, ASC 270 provides minimum uh disclosure requirements for for all reporting entities uh that actually prepare interim financials, while Article 10 is applies solely to an SEC registrant.
• 5:02
  SPEAKER_00: Article 10 does require interim balance sheet as of the end of the most recent quarter, and then along with the preceding fiscal year end balance sheet.
• 5:10
  SPEAKER_00: There may be situations where a company may want to present uh an interim balance sheet for the comparable prior year's quarter, but I'd say in practice, I don't recall even seeing that approach in my reviews of filings.
• 5:24
  SPEAKER_00: Typically, it is the balance sheet for the interim period compared to the year-end balance sheet.
• 5:29
  SPEAKER_03: All right.
• 5:29
  SPEAKER_03: Well, if you were in the power and utilities industry, you would definitely be familiar with this because that is one industry where they frequently do.
• 5:37
  SPEAKER_03: But you're right, it's it's really only companies and only certain power and utility companies where they have seasonal activity.
• 5:43
  SPEAKER_03: All right, and then I promised the listeners, we talk a bit about private companies too.
• 5:48
  SPEAKER_03: And I know we see some diversity in practice.
• 5:50
  SPEAKER_03: And when I said I got questions, this is often where those questions come.
• 5:54
  SPEAKER_03: So, how should private companies be thinking about this?
• 5:58
  SPEAKER_00: So ASC 205 doesn't require but does encourage comparative statements for for all entities.
• 6:04
  SPEAKER_00: But but in the context of, let's say, offerings that are exempt from registration.
• 6:09
  SPEAKER_00: So, you know, an example would be a rule 144A offering.
• 6:13
  SPEAKER_00: You'll find that most companies do present full comparative financial statements.
• 6:17
  SPEAKER_00: So in those instances, you'd actually would see two balance sheets.
• 6:21
  SPEAKER_03: Right.
• 6:21
  SPEAKER_03: And then we won't get into it here, but there's also rules if you're if you're filing 305 financial statements, 309 financial statements.
• 6:29
  SPEAKER_03: So again, it's probably a most important reminder we can give is to make sure just you know why you're preparing these financial statements and make sure you're following whether it's bank covenants or SEC rules or anything else.
• 6:41
  SPEAKER_03: All right.
• 6:42
  SPEAKER_03: So with that then, Kyle, let's start to get into the actual financial statements.
• 6:47
  SPEAKER_03: And one of the areas that I think gets often overlooked, but is actually very key, and I think something users rely on quite heavily is the disclosure of uh significant accounting policies.
• 7:00
  SPEAKER_03: So if I'm a company and let's say I want to take a fresh look, how should I think about what's significant in this particular context?
• 7:08
  SPEAKER_00: Well, it's definitely an issue that, you know, look, it's subject to the judgment of management.
• 7:13
  SPEAKER_00: Um I'd say a good starting point uh would be to consider the materiality of the related account.
• 7:19
  SPEAKER_00: Um, but I also think that the users of the financial statements, um, you know, when you think of investors, analysts, or even other stakeholders, that you need to consider that as well.
• 7:29
  SPEAKER_00: I I guess generally speaking, I think we'd expect to see policies uh disclosed related to revenue and its related balances, the allocation of asset cost to current and future periods, um, you know, any instances where management uh had several acceptable alternatives uh for its accounting for a particular asset or liability.
• 7:47
  SPEAKER_00: Uh so an example would be in inventory when you use FIFO versus LIFO.
• 7:52
  SPEAKER_00: Um, so things like that.
• 7:54
  SPEAKER_00: A couple of other considerations would be if there are any principles that are specific to a particular industry, um, which is in the utility space, right?
• 8:02
  SPEAKER_00: The rate-regulated uh industry.
• 8:04
  SPEAKER_00: So those are things I think to keep in mind, and you'd want to highlight those in your accounting policies.
• 8:09
  SPEAKER_03: All right, that's helpful.
• 8:10
  SPEAKER_03: And the other reminder I'd give here is, and since it's summer, it's a good time for this, is I do think sometimes those disclosures can get a little stale because maybe companies keep adding new disclosures because of new accounting standards, but they may not ever or may not regularly take a look back and say, hey, are these all really still my most significant?
• 8:31
  SPEAKER_03: Is there something that's gotten bigger, something else that's gotten smaller?
• 8:34
  SPEAKER_03: So again, I think summertime is might be a good time to take a fresh look.
• 8:38
  SPEAKER_03: So, you know, if you're a calendar year and company, you probably don't want to be dealing with this in January.
• 8:42
  SPEAKER_00: So no, absolutely.
• 8:44
  SPEAKER_00: No, that's a great point.
• 8:45
  SPEAKER_00: I I think one of the things that while I was at the staff um reviewing filing is that that was an area with that the staff would always focus on.
• 8:52
  SPEAKER_00: They continue to do it.
• 8:53
  SPEAKER_00: And and so you always have to take a fresh look at, like you said, the significance of your balances that should drive your footnote disclosures, not including everything, you know, in this laundry list of information.
• 9:07
  SPEAKER_00: It should be your significant accounting policies.
• 9:09
  SPEAKER_03: All right, great reminder.
• 9:11
  SPEAKER_03: So then with that, I know we're just talking about uh significant accounting policies, but I think that's a perfect segue into, you know, we promised today's podcast to be focused on the balance sheet.
• 9:22
  SPEAKER_03: And one of the key concepts with the balance sheet is, of course, significant account balances.
• 9:27
  SPEAKER_03: So similar name, both significant, but obviously a lot different.
• 9:31
  SPEAKER_03: And so if I'm a company, again, taking a fresh look at my balance sheet, how do I know which line items should be individually disclosed?
• 9:40
  SPEAKER_00: So 502 of SX is clear about when balances should be broken out and presented separately.
• 9:47
  SPEAKER_00: You know, in other words, it's prescriptive.
• 9:49
  SPEAKER_00: Um not only does it list which assets should be presented in its own individual line items, such as cash and equivalence, marketable securities, accounts, and even those receivables, um, and even in inventories, it also requires that companies separately present you know any other current asset amounts or or um that would be greater than certain percentages.
• 10:10
  SPEAKER_00: And so we'll talk a bit about that um later.
• 10:13
  SPEAKER_00: Again, though, I I like to remind people to refer to the text of the SEC rule or the requirement itself as well as gap, right?
• 10:22
  SPEAKER_00: Like thinking about your starting point.
• 10:24
  SPEAKER_00: Your starting point is the text of the rules or the specific gap requirement and going from there before considering you know guidance from an accounting firm or referring to other companies' filings.
• 10:36
  SPEAKER_00: Um, so you know it's not worth going into each and every example of the various percentages that are outlined in SX because there are many.
• 10:43
  SPEAKER_00: Um, and they differ based on the particular asset or liability in question.
• 10:47
  SPEAKER_00: And so one example that comes to mind is when you think about the aggregate amount of notes receivable, um, if it exceeds 10% of total receivables, you would need to separately present it.
• 10:59
  SPEAKER_00: Um, or even uh each class of intangible assets with amounts that are in excess of 5% of total assets, you'd want to separately present as well.
• 11:07
  SPEAKER_00: And just like the analysis of other current assets, separate presentation may be required for any other current liability balances which exceed 5% of total current liability.
• 11:19
  SPEAKER_00: So in addition to the items listed in 502, there may be other items that need to be presented if it exceeds certain thresholds.
• 11:26
  SPEAKER_03: All right.
• 11:26
  SPEAKER_03: And then if you are a private company, how do you think about this?
• 11:31
  SPEAKER_03: Because I know you know not everyone listening is going to be subject to these rules.
• 11:36
  SPEAKER_00: So if you're a private company, these thresholds don't apply.
• 11:39
  SPEAKER_00: Um, but I'd say if if you plan to go public or you plan to get acquired by a SPAC, um, you may want to start analyzing SX502 and of course, you know, GAP sooner than later.
• 11:51
  SPEAKER_03: And again, I would just emphasize from my own experience, I do think this is a great starting point, even for private companies, because it gives you some type of framework to think about.
• 12:00
  SPEAKER_03: And then the other reminder I give is that sometimes are specific requirements in uh GAP to disclose things.
• 12:08
  SPEAKER_03: And you touched on that, but I don't want that to get lost in the discussion.
• 12:11
  SPEAKER_03: Sometimes it'll say on the balance sheet, sometimes it'll say on the balance sheet or in the notes.
• 12:16
  SPEAKER_03: So again, I think knowing your account balances and really re-looking at the disclosure requirements is helpful here.
• 12:23
  SPEAKER_00: One other reminder, too, on just with respect to like long-term debt, you know, most reporting entities will actually separately present, you know, accrued interest, you know, because those balances typically are you know significant.
• 12:35
  SPEAKER_00: Um they also you know are gonna have a current portion of long-term debt, um, which is often required to be presented separately as a result of these thresholds.
• 12:43
  SPEAKER_00: So that that's those are some other things to keep in mind.
• 12:45
  SPEAKER_03: All right, very helpful.
• 12:46
  SPEAKER_03: So then how about from an interim reporting perspective, if I'm a public company, do I follow these same rules?
• 12:52
  SPEAKER_00: Well, you know, condensing of the balance sheet is permitted, but it's not required.
• 12:57
  SPEAKER_00: So for interims, it it does require the inclusion of only major captions.
• 13:02
  SPEAKER_00: Um and so, you know, where any major balance sheet caption is less than 10% of total assets and and the amount in the caption has not increased or decreased by more than 25% uh since the end of the preceding fiscal year, that caption may be combined with other.
• 13:19
  SPEAKER_00: So um, you know, but the important piece here is to remember to make sure that the balance sheet is labeled as condensed along with the other uh financial statements included in the filing.
• 13:30
  SPEAKER_03: And then if I wanted to take this approach, is there a practical way to go about calculating these thresholds?
• 13:35
  SPEAKER_00: So I think registrants really should start with their annual balance sheet and identify the line items that can be combined with other line items using those thresholds.
• 13:44
  SPEAKER_00: So the 10% of total assets, and then of course the 25% change since the preceding year.
• 13:50
  SPEAKER_00: Also, as a reminder, uh, you know, reporting entities are required to disclose the components of inventory um on an interim basis, even if the change from annual reporting is not significant.
• 14:00
  SPEAKER_00: So there's some nuances there.
• 14:01
  SPEAKER_00: And that's of course why it's important to always look to the rule, the text of the rule, uh, because that's going to drive your disclosures.
• 14:08
  SPEAKER_00: Um, I think most companies uh in practice present a condensed balance sheet for their interim periods.
• 14:14
  SPEAKER_00: Although I, you know, I'd say in my experience of reviewing filings over the years, um, you don't typically find companies going from 30 line items in the balance sheet down to 10.
• 14:24
  SPEAKER_00: You typically see a handful of items condensed within the balance sheet uh for an interim period.
• 14:28
  SPEAKER_03: Oh, so that was going to be my question because it feels like in some cases it might be actually more work to be bouncing around between what you're doing for interim and what you're doing for your end.
• 14:39
  SPEAKER_00: I I think so.
• 14:40
  SPEAKER_00: And I think that's why you see companies, they they typically come up with an approach for a quarter and continue with subsequent quarters.
• 14:46
  SPEAKER_00: It's just a lot easier to deal with.
• 14:48
  SPEAKER_03: All right, Kyle.
• 14:48
  SPEAKER_03: So now we know how what we need to split out on our balance sheet, but I know another area where I often get questions is the difference between current and long-term.
• 14:58
  SPEAKER_03: So perhaps we could talk about first, is it required to show a classified balance sheet?
• 15:03
  SPEAKER_03: And then if you are showing a classified balance sheet, how do you think about that split?
• 15:07
  SPEAKER_00: So, yeah, I mean that's a great question.
• 15:09
  SPEAKER_00: You know, the the rules uh are clear.
• 15:11
  SPEAKER_00: You know, SX502 and ASC210 do require um that most reporting entities uh would present a classified balance sheet, you know, primarily because it it provides um the insight um for the user, um, enough information regarding the entity's working capital and liquidity.
• 15:29
  SPEAKER_00: Um and and GAP also provides further guidance on what's included in current assets and and then current liabilities.
• 15:36
  SPEAKER_00: And and the other thing, and I mentioned this before, is the FASB guidance and the SEC rules are aligned.
• 15:41
  SPEAKER_00: Um, and the categorization of current versus non-current is based on the reporting entity's operating cycle.
• 15:47
  SPEAKER_00: So generally speaking, one year or less is current, and and of course anything greater than one year is typically non-current.
• 15:54
  SPEAKER_03: All right.
• 15:54
  SPEAKER_03: And then Kyle, where I used to get the most questions is whether or not all balances have to be split between their current portion and their long-term portion.
• 16:04
  SPEAKER_03: Any general guidelines on that?
• 16:06
  SPEAKER_00: So that's a that's a good question.
• 16:08
  SPEAKER_00: Um, I'd say that you know that there are some you know assets as you think about PPE or even intangible assets, you know, those those asset classes are depreciated or amortized over a long period.
• 16:22
  SPEAKER_00: And so there is some portion, right, of the cost that's actually uh of that asset that's allocated to a specific period, so let's say an interim period.
• 16:30
  SPEAKER_00: So you're really not seeing, though, the full consumption of the asset in that period.
• 16:35
  SPEAKER_00: And so with respect to PPE and intangible assets, you're gonna see a long-term or or you know non-current classification.
• 16:42
  SPEAKER_03: All right, and definitely there's more.
• 16:44
  SPEAKER_03: So again, might help to look at the specific guidance for the balance that you're thinking of, but I think that's a good framework to think about.
• 16:50
  SPEAKER_03: And then, Kyle, as we're thinking about the overall balance sheet and in particular the classified balance sheet, are there different rules for different types of entities?
• 16:59
  SPEAKER_03: So if you're in a different industry, you may or may not need to do that?
• 17:02
  SPEAKER_00: So Article 5 uh requires the classified balance sheet and only article five.
• 17:08
  SPEAKER_00: Um, and so that applies to commercial uh entities essentially.
• 17:11
  SPEAKER_00: Um, but there are entities that are subject to other articles in SX.
• 17:16
  SPEAKER_00: Um, and so again, you know, refer to those specific requirements.
• 17:20
  SPEAKER_00: An example would be if you're an insurance company, um, if you're a bank holding company or even a business development company, um, those different SX articles would apply to you.
• 17:30
  SPEAKER_00: They they follow Article 5, so Article 6, 7, and so on.
• 17:34
  SPEAKER_00: Of course, you get to Article 8, and that applies to smaller reporting companies.
• 17:37
  SPEAKER_00: And so those are some things to keep in mind in preparing.
• 17:40
  SPEAKER_00: Now, if you're a smaller reporting company and you choose to comply with Article V, make sure you comply fully with it.
• 17:47
  SPEAKER_00: But again, you do have the option to comply with Article 8.
• 17:50
  SPEAKER_03: So then let's move on to another topic, which I think is probably the area where I got the most questions on balance sheet when I was a practicing audit partner, and that would be on offsetting.
• 18:00
  SPEAKER_03: And I know that this is a topic that can get very difficult.
• 18:05
  SPEAKER_03: And just again, by way of background for all of our listeners, this would be the offsetting of assets and liabilities on the balance sheet.
• 18:12
  SPEAKER_03: So, Kyle, can you remind us of the general rules for offsetting and then the criteria companies should be thinking about?
• 18:19
  SPEAKER_00: Sure.
• 18:19
  SPEAKER_00: Um, and I guess to kind of kick it off, though, I think it's important to keep in mind this is an area that the staff does spend a lot of time on.
• 18:27
  SPEAKER_00: They they definitely um will issue comments on this.
• 18:32
  SPEAKER_00: And so um it's important to really get it right.
• 18:35
  SPEAKER_00: Um, and so that that would probably be the first thing I'd say before getting into the four criteria you need to think about um when determining whether the right of set off actually exists.
• 18:45
  SPEAKER_00: And it may sound like I'm reading this because I actually have to read it to make sure I get it right.
• 18:49
  SPEAKER_00: Um so the first criteria would be each of two parties owes the other determinable amounts.
• 18:56
  SPEAKER_00: The second is the reporting party has the right to set off the amount owed with the amount owed by the other party.
• 19:03
  SPEAKER_00: Third is the reporting party intends to set off.
• 19:06
  SPEAKER_00: And then finally, the last is the right of set off is enforceable at law.
• 19:11
  SPEAKER_00: So three of those criteria are objective, but you know, you think about obviously an asset and liability should be offset under a legal right of set-off only when they represent amounts due to and from the same party, um which which seems you know pretty pretty straightforward and obvious.
• 19:28
  SPEAKER_00: Um but the one thing we we do recommend, and and this is we recommend it, but something that we at the staff, when I was at the staff, we used to think about a lot was did they ever consult with legal counsel to determine whether they had a legal right?
• 19:40
  SPEAKER_00: And so that's something that we generally would recommend that registrants discuss with with outside counsel.
• 19:46
  SPEAKER_03: So, Kyle, you mentioned this is something that staff is really focused on.
• 19:50
  SPEAKER_03: And are there sort of general trend of questions other than this legal counsel question?
• 19:55
  SPEAKER_00: So look, I mean, I think the judgment is you need to have a lot of judgment.
• 20:00
  SPEAKER_00: I think you know the intent of the reporting party is is key.
• 20:03
  SPEAKER_00: Um, and so I think that's kind of the piece to keep in mind.
• 20:07
  SPEAKER_00: Um I'd say the other the other factors would be you know historical precedent.
• 20:12
  SPEAKER_00: That's a good indicator of um in when evaluating the intent of the reporting party.
• 20:18
  SPEAKER_00: Um, you know, if you did it in the past and expect to do in the future, net reporting may be appropriate.
• 20:22
  SPEAKER_00: Generally, you know, a company cannot present an asset and liability on a net basis if they they don't actually intend uh to offset, even if all the criteria are met.
• 20:33
  SPEAKER_00: Um and of course, with with anything in accounting, um, unfortunately, there's a million exceptions.
• 20:39
  SPEAKER_00: And so I think about things like derivatives and share lending agreements, those come to mind as exceptions to kind of those rules.
• 20:46
  SPEAKER_03: All right.
• 20:46
  SPEAKER_03: And again, I think the reminder that you gave earlier, just making sure of what the legal rights of the parties are, and in particular, having audited at least one company in bankruptcy, I know from both sides it can get very, you know, it's very important to really understand what's going to happen if something happens to your counterparty.
• 21:03
  SPEAKER_03: Right.
• 21:04
  SPEAKER_03: So all right, so then Kyle, one other question that I had in looking at this, you mentioned derivatives.
• 21:10
  SPEAKER_03: And spoiler alert, we're going to have an episode about derivatives.
• 21:14
  SPEAKER_03: So we won't get into too much detail here.
• 21:16
  SPEAKER_03: But I know there's places like derivatives where there's special rules for people to think about on offsetting.
• 21:21
  SPEAKER_03: So any sort of general reminders?
• 21:23
  SPEAKER_00: So yeah, I mean, you know, the guidance does relate to presentation only, um, and the scope really doesn't extend to derecognition of assets and liabilities.
• 21:32
  SPEAKER_00: So as an example, you know, gross amounts should be included in disclosures and not present a net on the balance sheet when there is a derecognition of contractual right or an obligation.
• 21:43
  SPEAKER_00: Um, additionally, the the offsetting rules don't permit an entity to record or disclose uh that debt or a note payable has actually been extinguished uh through the presence of a debt service fund or similar collateral arrangement.
• 21:56
  SPEAKER_03: All right.
• 21:56
  SPEAKER_03: And then Kyle, I know on surface, balance sheets.
• 22:00
  SPEAKER_03: Seems so basic.
• 22:00
  SPEAKER_03: And we've definitely delved into some areas that are not so basic.
• 22:05
  SPEAKER_03: But any other reminders that either public or private companies should be thinking of as they're looking at their balance sheets?
• 22:11
  SPEAKER_00: Well, I mean, I think I think the first is, you know, that there is a difference.
• 22:15
  SPEAKER_00: Um, you know, so if if you're a private company, Reg SX does not apply.
• 22:19
  SPEAKER_00: Um, and so those quantitative thresholds uh for determining which balances need to be separately presented, uh, they're not going to apply to a private company.
• 22:27
  SPEAKER_00: Um, another reminder that there are SEC rules that address the classification of equity instruments with, let's say, redemption features that are not within the control of the issuer.
• 22:37
  SPEAKER_00: And those would require classification outside of permanent equity.
• 22:41
  SPEAKER_00: That's another area the staff is always focused on in issuing comments on.
• 22:45
  SPEAKER_00: And you'll often hear it referred to as temporary equity or even classified in the mezzanine.
• 22:50
  SPEAKER_00: Um again, the staff will comment on it.
• 22:53
  SPEAKER_00: They also look at related party disclosures.
• 22:55
  SPEAKER_00: Um, that is also an area of frequent comment, um, ensuring that those disclosures are clear on the face of the financial statements since that disclosure is required by SX.
• 23:06
  SPEAKER_00: Um and of course, there are some other things to think about, um, you know, VIEs, how should those be presented?
• 23:13
  SPEAKER_00: So, so definitely a lot to think about.
• 23:16
  SPEAKER_03: All right.
• 23:16
  SPEAKER_03: And then you mentioned at a high level SEC comments, but I know people always like to hear specifics.
• 23:21
  SPEAKER_03: So is there anything else from SEC comments or even any sample comments you have for us that uh restaurants can be thinking about?
• 23:29
  SPEAKER_00: We look back at some of the comments and really uh the the bulk, I mean, obviously a lot of comments on um historically, uh, you know, I can tell you probably over the last, you know, however many years, 20 years, um a lot of comments on you know, classification of let's say redeemable um equity um shares.
• 23:46
  SPEAKER_00: So that that that is something that pops to the top of the list all the time, especially in the context of an IPO.
• 23:51
  SPEAKER_00: Um I'd say the the other kind of areas would be the comments that that we've seen and continue to see, um, which I mentioned previously, which is you know, if there are huge amounts that are all combined into one line item, what are the components of that?
• 24:05
  SPEAKER_00: And to your point earlier, Heather, where you look to each period, you need to look at your balance sheet and your balances each period to then figure out what needs to be not only discussed or disclosed in the significant accounting policies, but also what needs to be presented separately.
• 24:20
  SPEAKER_00: So those are things that always need to be revisited every reporting period.
• 24:24
  SPEAKER_03: So then, Kyle, to wrap things up, we have a new final segment just for this series.
• 24:29
  SPEAKER_03: And I'm gonna be asking you for your elevator speech.
• 24:32
  SPEAKER_03: So assume you're back in an elevator with someone, you can have a lot of floors, but what would you tell them to focus on related to the balance sheet?
• 24:40
  SPEAKER_00: So that actually is a very good question because I can recall a number of conversations on elevators with preparers in the past.
• 24:50
  SPEAKER_00: You typically um, you know, at a conference, um, you know, and and one of the things that you'd get on an elevator in New York City, and and of course you're on, you know, the 30th floor, and so you're gonna go all the way back down to the, you know, the you're riding the elevator the complete way down with them.
• 25:04
  SPEAKER_00: So the conversation tends to be a little longer.
• 25:06
  SPEAKER_00: Um, but but it is something that I definitely liked and enjoyed the having those conversations because I think they were frank and they were very uh straightforward.
• 25:14
  SPEAKER_00: Um so I'd be I'd like to be frank and straightforward here.
• 25:18
  SPEAKER_00: Perfect.
• 25:18
  SPEAKER_00: Companies need to think about the literature and the incremental SEC rules.
• 25:23
  SPEAKER_00: They need to look at the you know, whatever gap requires or I for S, and and they need to then think about SX and how that layers on, and that the other incremental rules to keep in mind as well.
• 25:34
  SPEAKER_00: Um again, refer to the text of the rules and the relevant standards.
• 25:38
  SPEAKER_00: Those are what drives what's required, not you know, benchmarking to other companies, although that may be helpful.
• 25:45
  SPEAKER_00: Um that's not that that's not the approach you should take when determining what you should be presenting.
• 25:49
  SPEAKER_00: Um and I'd say that the other would be to keep in mind the staff is going to focus on whether or not the financial statements present those significant account balances at the appropriate level.
• 26:00
  SPEAKER_00: And they definitely will issue comments on not only this, but also on offsetting and other topics that we've already mentioned.
• 26:07
  SPEAKER_03: All right, that's helpful.
• 26:08
  SPEAKER_03: And I'll add my own point, which is not to get complacent.
• 26:12
  SPEAKER_03: And this is something that's worth re-looking at each period or at a minimum, maybe each year end and once for those interim periods.
• 26:20
  SPEAKER_03: So definitely like that.
• 26:21
  SPEAKER_03: Now, Kyle, there's a question I want to ask you every time I see you, and I'm sure our listeners are wondering too.
• 26:28
  SPEAKER_03: So, what do you miss about working at the SEC?
• 26:32
  SPEAKER_03: Recognizing PwC is a fantastic place to work, but there must be something.
• 26:37
  SPEAKER_00: I would say the thing I miss the most is being in the know about all things regulatory and even things on the hill, like knowing what's going on behind the scenes.
• 26:49
  SPEAKER_00: It's it's more challenging for me today.
• 26:51
  SPEAKER_00: I don't have access to that information, the same level of access.
• 26:53
  SPEAKER_00: I'd say that's probably the biggest thing.
• 26:55
  SPEAKER_00: The other thing that I loved was at the SEC, weekends typically were off-limits.
• 27:01
  SPEAKER_00: So you kind of you had your five-day work weed and it might be long days, but you got to the weekend and you had your weekend.
• 27:06
  SPEAKER_00: So a little different uh being here, but I have to admit, love being here.
• 27:10
  SPEAKER_00: Great group of people.
• 27:11
  SPEAKER_00: So uh I couldn't be happier.
• 27:13
  SPEAKER_03: All right.
• 27:13
  SPEAKER_03: Well, glad to hear that because we are definitely glad to have you here, and I'm particularly glad to have you as a podcast guest.
• 27:19
  SPEAKER_03: So thanks again, Kyle.
• 27:21
  SPEAKER_00: Thank you.
• 27:22
  SPEAKER_02: That does it for today.
• 27:24
  SPEAKER_02: Join me back here every Tuesday and Thursday for new podcast episodes.
• 27:28
  SPEAKER_02: Next Tuesday, we're moving on to look at the income statement.
• 27:32
  SPEAKER_02: And if you're looking for more insights, check out the full podcast series at viewpoint.pwc.com, where you can also register for our upcoming CPE eligible second quarter webcast featuring special guest Paul Munter.
• 27:48
  SPEAKER_02: For PWC's National Office Studios, I'm Heather Horn.
• 27:53
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