Stay informed 2013 technology SEC comment letter trends
Stay informed
2013 technology
SEC comment letter
Technology institute
December 2013
Highlights of SEC
comment letters issued
to companies in the
technology sector
This publication has been prepared for general information on matters of interest only, and does not constitute professional advice on facts and circumstances specific to any
person or entity.
You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the
accuracy or completeness of the information contained in this publication. The information contained in this material was not intended or written to be used, and cannot be used, for purposes
of avoiding penalties or sanctions imposed by any government or other regulatory body. PricewaterhouseCoopers LLP, its members, employees, and agents shall not be responsible for any loss
sustained by any person or entity who relies on this publication.
The content of this publication is based on information available as of June 30, 2013. Accordingly, certain aspects of this publication may be superseded as new guidance or interpretations
emerge. Financial statement preparers and other users of this publication are therefore cautioned to stay abreast of and carefully evaluate subsequent authoritative and interpretive guidance
that is issued.
Message from Cory Starr
1. Revenue recognition10
2. Management’s discussion and analysis14
3. Executive compensation disclosures
4. Goodwill and intangible assets20
5. Income taxes22
6. Commitments and contingencies24
7. Segments26
8. Business combinations
9. Other notable trends28
About PwC’s Technology Institute
Stay informed | 2013 technology SEC comment letter trends
Message from Cory Starr
To our clients and friends:
Year-end is just around the corner
and most of you are now preparing
for the 2013 reporting season. The
economic recovery in the United States
and overseas continued at a slow pace
over the past year. Changes in the
regulatory environment, including
recent developments at the SEC, continue
to bring about uncertainties and put
additional pressures on registrants.
High-quality financial reporting, as
well as transparency in communicating
with investors and other stakeholders, is
increasingly important.
We are pleased to introduce this
publication, which focuses on trends
in SEC staff comment letters specific to
companies in the technology sector. We
have analyzed over 2,000 comments
issued from July 1, 2012 to June 30,
2013 to companies in the following
subsectors: computers and networking,
semiconductors, and software and
internet. While some comments are
subsector specific, others are applicable to
all companies in the technology space.
We hope that a better understanding
of these trends, along with specific
examples of comments, will provide you
with helpful insights and aid in your
production of high-quality annual reports
for investors and other stakeholders.
Please don’t hesitate to reach out to your
engagement teams and the PwC contacts
listed here to discuss this information in
more detail. We look forward to working
with you in 2014.
Best regards,
Cory Starr
US Technology
Assurance Leader
Stay informed | 2013 technology SEC comment letter trends
Social media, mobile computing, the
cloud, the use of Big Data, and other
emerging technologies continue to
change the way many companies do
business. More than ever, companies
are connecting with their customers
through social media by tapping
into their likes and dislikes, creating
intimate experiences, rapidly evolving
their products and fine-tuning their
marketing efforts.
And now, social media outlets such as Facebook and
Twitter have become new communication platforms for the
Securities and Exchange Commission (SEC) to monitor.
In April 2013, the SEC announced that companies may
use social media to disseminate material information so
long as investors are alerted, know where to turn to for the
latest news on the company, and are not restricted from
accessing such information. This reminds us of nearly
half a decade ago, when the SEC concluded that posting
important information for investors on company websites
was permitted. We may start to see more companies using
social media to engage with their investors in the same
way they have been using social media to connect with
their customers.
There is no denying it: The volume of information that
is readily available is exploding. Analyzing Big Data is
extremely important for companies to remain competitive
and, for technology companies, this means using Big Data
to benefit from the ability to quickly analyze sales and
customer reactions and to identify patterns and trends
to successfully deliver on customer needs. Big Data is the
combination of inputs from unstructured social media
and input from structured sources of information, such
as a company’s sales results, that together provide a
comprehensive flow of information from which entities
derive value.1 Analyzing Big Data is not only important to
companies; recently, the SEC noted that they are leveraging
technology to identify fraudulent activities, such as insider
trading or other unusual securities transactions. The SEC
staff have also embraced the Big Data phenomenon by
introducing the Accounting Quality Model (AQM), a new
software tool that is currently in development and is based
on econometric regression. Using AQM, the SEC staff will
be able to identify inconsistencies and anomalies, and
otherwise filter the enormous amount of information, and
many years of past enforcement data, which would allow
them to target accounting practices and disclosures that
have a higher risk of noncompliance.
We also see business leaders recognizing the powerful use
of the cloud to lower IT costs and reduce infrastructure
complexities within the organization to drive overall
business growth and flexibility. Cloud computing has
evolved from experimental to mainstream. Adoption of the
cloud is expected to skyrocket during this decade: Forrester
Research forecasts that the global market for cloud
computing services will soar from $40.7 billion in 2011 to
more than $241 billion in 2020. We have seen tremendous
growth in the software-as-a-service (SaaS) business model
in the technology industry, and that has attracted its share
of revenue recognition comments from the staff.
Virtually all companies are at risk of cyberattacks. With
the widespread use of social media, collection and use of
data, and storing information in the cloud, threats to data
security and privacy are more significant than ever and
need to be managed responsibly. Many big-name companies
have made headlines after experiencing potentially severe
breaches, and hackers have moved the stock markets by
billions of dollars in just minutes, putting companies at
risk for both financial and reputational damage. Investors
must be informed of the relevant risk factors and whether
companies have the proper infrastructure in place to tackle
these business risks.
1. PwC, Technology Institute, “The new digital ecosystem reality: nine trends
rewriting the rules of business,” September 2013.
Stay informed | 2013 technology SEC comment letter trends
Figure 2. Volume of comments by subsector
Lastly, the conflict minerals rule, mandated by the DoddFrank Act, is something that companies should be preparing
for now. Most registrants will need to file their first Form
SD by May 31, 2014, less than six months from now. Given
the potentially extensive reporting requirements, most
companies will need a considerable amount of time to
gather the necessary data to fully comply with the rule.
Some may view the rule as a compliance exercise, while
others may view it as an opportunity to strengthen their
supply chains and brands.2
Figure 1. Overall
volume of comments
Our review of the most recent
comment letter trends for
technology companies, as
presented in this publication,
indicates a continued focus in
the areas of revenue recognition
(multiple element arrangements
and software continue to
dominate this area, but online
gaming has become a frequent
topic), income taxes, impairment
of goodwill, and commitments
and contingencies.
The SEC staff continue to give considerable attention
to executive compensation disclosures and recently
issued a proposal on CEO pay-ratio disclosures. We also
continue to see inquiries from the staff into companies
that maintain a one-segment reporting structure, and
those that aggregate operating segments into reportable
segments. For management’s discussion and analysis, the
usual suspects include providing the “whys” behind the
results of operations, more transparent and robust liquidity
disclosures that move away from simply repeating the
activities from the cash flow statement, and giving greater
prominence to the equivalent GAAP measures when using
non-GAAP measures.
Computers and networking
Software and internet
While the absolute number of comments grew considerably,
this increase seems to be driven mainly by the number of
companies reviewed (see Figure 4). When analyzing the
average number of comments by registrant, we observed an
overall decrease, which was consistent among all subsectors
other than computers and networking (see Figure 3).
Figure 3. Average number of comments by subsector
and networking
Software and
Figure 4. Number of companies reviewed
and networking
2013 saw a 27% increase in SEC comments received by
technology companies (see Figure 1).
Each subsector experienced an increase in the absolute
number of comments received, with computers and
networking showing the largest increase (see Figure 2).
and networking
2. PwC, “10Minutes on conflict minerals,” May 2013.
As shown in Figure 5 below, the main areas of focus by the
staff did not change significantly from 2012 to 2013. On the
following pages, we dive deeper into each of the key trends.
Figure 5. Comments by topic
Management’s discussion and analysis
Revenue recognition
Executive compensation disclosures
This comment letter trends study was based on an
analysis of comments posted on the SEC’s EDGAR
website from July 1, 2012 to June 30, 2013 related
to technology companies (domestic and foreign
registrants reporting under US GAAP) specific to their
periodic filings on forms 10-K, 10-Q, 20-F, 8-K and
6-K. For comparative purposes, we have also analyzed
comments posted on the SEC’s EDGAR website from
July 1, 2011 to June 30, 2012. Each subsector includes
the following SIC codes:
• Software and internet—7370, 7371, 7372,
7373, 7374, and 7389
Goodwill and intangible assets
• Computers and networking—3570, 3571, 3572,
3576, 3577, 3578, 3661, 3663, 3669, 3812,
3825, 3861, 4899, 5045, and 5065
Income taxes
• Semiconductors—3670, 3672, 3674, and 3679
Commitments and contingencies
Certain registrants may be involved in multiple
technology subsectors. For consistency of evaluation,
the analysis was based solely on the SIC codes indicated
on the SEC’s EDGAR website for each registrant and the
aforementioned allocations.
Business combinations
Other notable trends
Stay informed | 2013 technology SEC comment letter trends
1. Revenue
Revenue recognition in the technology
sector can be quite complex. During
the past year, revenue recognitionrelated comments accounted for 9%
of all comments received. We have
summarized the main trends below.
Multiple-element arrangements
Technology companies often provide multiple products or
services to their customers as part of a single arrangement.
These deliverables may include software, hardware and
services; can be delivered upfront or over a period of time;
and may be labeled “free.” It can sometimes be challenging
to determine the most appropriate technical guidance to
apply, given the complexities of the arrangements. New
guidance for arrangements with multiple deliverables
became effective for arrangements entered into or modified
in fiscal years beginning on or after June 15, 2010.
Under this guidance, a company is required to allocate
arrangement consideration among deliverables using its
best estimate of selling price (BESP) when vendor-specific
objective evidence (VSOE) or third-party evidence (TPE)
of the selling price is not available. Allocating arrangement
consideration using the residual method is no longer
permitted. Registrants’ critical accounting estimates and
judgments related to multiple-element arrangements
continue to be among the most common revenue-related
comments in the technology sector. They include questions
about determining the appropriate units of accounting and
the valuation techniques and assumptions used to arrive at
their respective values, as well as the periods over which
revenue should be recognized.
We note that you offer a vast array of products and
business services to your clients. Tell us your
consideration of disclosing whether the significant
deliverables in your arrangements qualify as separate units of
accounting, and the reasons that they do not qualify as
separate units of accounting, if applicable. In addition, your
disclosures should discuss the significant factors, inputs,
assumptions and methods used to determine the selling price
(whether vendor-specific objective evidence, third-party
evidence, or estimated selling price) of the significant
deliverables. We refer you to the guidance in
ASC 605-25-50-2.
Please describe how you account for optional services
when these services are included in a multiple element
arrangement. In this regard, tell us whether these services are
separable from the other elements of your arrangement and if
so, describe how you considered ASC 605-25-30-2. Also,
please tell us what consideration you gave to revising your
disclosure in future filings to describe your accounting for
arrangements that include optional services.
Your disclosure regarding multiple-element arrangements
addresses determination of selling price for maintenance
and support, but it does not clearly address determination of
selling price for product sales or other services such as
installation and training. Please tell us what consideration was
given to providing a discussion of the significant factors,
inputs, assumptions, and methods used to determine selling
price (whether vendor-specific objective evidence, third-party
evidence, or estimated selling price) for all significant
deliverables. Please refer to ASC 605-25-50-2.
Your disclosure indicates that you recognize the entire
consideration associated with your multiple element
arrangements ratably over the term of the related agreement
or the customer life. Please provide additional details
regarding the types of arrangements that result in recognition
over the customer life rather than the term of the agreement
and how you estimate customer life.
We note that you determine vendor-specific objective
evidence (VSOE) of fair value of your professional
services based upon average standalone selling price for those
services. Please provide additional details regarding your
analysis including how average standalone selling price
impacts your analysis, the volume and range of standalone
sales used to establish VSOE and how you account for
standalone sales that are outside of your range.
We further note that you determine VSOE of fair value of your
core services based upon the overage rate. Please tell us how
you concluded that the overage rates were substantive. In this
regard, describe the volume and range of standalone sales
used to establish VSOE, whether your customers consistently
purchase one unit of service based on the contractual overage
rates and whether the overage rates are consistent with
the rates used to establish the monthly, quarterly or annual
commitments in the contracts.
We note that you have vendor-specific objective evidence
(VSOE) of fair value of your core services based upon
the overage rate. However, we further note that the unit
price charged for your core services on a standalone basis,
presumably your overage rate, can fluctuate significantly
due to volume and geography. Given your statement that
consistent pricing of standalone transactions cannot be used
to determine fair value, please tell us how you concluded that
your overage rates were substantive.
Software revenue recognition
Software licensing arrangements and related questions
regarding revenue recognition continue to present
challenges to the preparers of financial statements. The
primary accounting guidance is included in Accounting
Standards Codification (ASC) 985-605, Software-Revenue
Recognition. The FASB’s updated guidance in Accounting
Standards Update (ASU) 2009-14 impacted how companies
account for arrangements that include software elements.
The SEC staff’s comments have been focused on the
following areas:
More-than-incidental considerations: Determining
whether a software element is more than incidental to the
overall arrangement is a matter of judgment. The staff’s
comments in this area have asked for an explanation of how
the software and hardware components function together
and for more transparent disclosure of the company’s
accounting policy.
Please tell us more about your arrangements that include
hardware including the nature of the hardware sold and how
your software functions with the hardware. In this regard, please
tell us whether these arrangements include software that is
more-than-incidental to the hardware. See Accounting Standards
Update No. 2009-14. To the extent you have such arrangements,
please tell us how you account for these arrangements and how
your current disclosures address these arrangements.
VSOE: For arrangements determined to fall under software
revenue recognition guidance, registrants must use VSOE to
allocate the consideration among the multiple elements in
an arrangement. The staff frequently challenge companies
about how they are able to determine VSOE and will request
enhanced disclosure to that effect in the financial statements.
With respect to your multi-element software arrangements, please tell us whether you have established
vendor-specific objective evidence (VSOE) of fair value for
each element. To the extent applicable, please describe, in
detail, your methodology for establishing VSOE of maintenance and professional services. If VSOE of maintenance is
based on stated renewal rates, please tell us how you determined the renewal rates are substantive. In this regard, please
provide the range of renewal rates and tell us what percentage
of your customers actually renews at such rates. Alternatively,
if VSOE is based on stand-alone sales, provide the volume and
range of standalone sales used to establish VSOE. We further
note that you offer two levels of support. Please tell us how the
pricing of any premium support affects the allocation of
revenue in your multiple-element arrangements.
Stay informed | 2013 technology SEC comment letter trends
(SaaS): Software-as-a-service arrangements, where the
company hosts software for customers instead of selling
term licenses, are becoming increasingly popular in the
software space. The distinguishing characteristic of SaaS
arrangements is the customer’s inability to take possession
of the software. The staff have raised questions about
whether revenue should be recognized upfront or over
a period of time. In the latter case, comments focus on
the appropriate period: the term of the contract or the
estimated term of the customer relationship more broadly.
We note your disclosure describes your hosting services.
Please describe your accounting policy and provide
additional details regarding your hosting arrangements
including whether your customers have the right to take
possession of the software. Refer to ASC 985-605-55-119
through 125. We further note that your multiple element
arrangements may include hosting services as well as professional services, which may include implementation services.
Please also describe your accounting policy for arrangements
that include both hosting services and implementation services.
Revenue recognition in a virtual environment
Online gaming has been a rapidly growing segment of the
technology industry. In the past, game developers mostly
sold term licenses to game software. That trend is changing,
as more and more games are being played online in a hosted
software environment. The revenue recognition models
registrants are using are changing as well. One of the key
challenges in this area is accounting for virtual goods and
virtual currency, which was highlighted by the SEC staff
during the 2012 AICPA National Conference on Current
SEC and PCAOB Developments.
The staff emphasized that they expect companies to provide
clear and transparent disclosure about their accounting
policies for recognizing revenue from the sale of virtual
goods, including critical assumptions used. Companies
should be clear about whether they recognize revenue from
the sale of virtual goods (for example, premium features)
and currency over the life of the virtual goods, the average
life of the gamer, or the term of the game itself, and how
the chosen term best reflects the consumption of the virtual
benefit. Additionally, the staff have asked registrants to
more clearly disclose the nature of premium features and
how these features are being consumed by the gamers.
Another area of frequent comment is the accounting for
unused prepaid cards and online points, especially in
situations where the registrant is a platform provider and no
longer has the game license.
Your disclosures indicate that you recognize revenue from
the sale of virtual currency and other virtual items ratably
over the estimated average playing period of paying users.
Please clarify the significant assumptions and judgments that
you consider in determining the estimated average playing
period. Tell us the average playing period of paying players for
each period presented. Explain whether there have been any
changes made to the estimated average playing period. In
addition, describe the estimates and assumptions that you
consider in differentiating between revenues attributable to
durable and consumable virtual goods.
10 Please describe the nature of the premium features
referenced in this note. In this regard, tell us and disclose
in future filings whether these features are virtual services,
“consumable” virtual items and the “permanent” virtual items
discussed in your critical accounting policy. For virtual
services and consumable virtual items, please tell us if the
consumed items provide any ongoing effects, or provide users
with any ongoing benefits, after being consumed, and how
you considered these factors in determining the timing of
revenue recognition for these items; tell us the amount of
online game revenue generated from: 1) virtual services, 2)
consumable virtual items, and 3) permanent virtual items for
each period presented, and what consideration you have given
to disclosing these amounts; and tell us the weighted average
life of for your permanent virtual items, and what
consideration you have given to disclosing this life, including
any changes in the estimated life and the impact on revenue
for all periods presented.
11 We note from your current disclosures that revenue from
prepaid game cards and prepaid online points applicable
to your online game services are recognized over the
estimated life of the premium features or as the premium
features are consumed. Please tell us how you account for
un-activated game cards or unused online points. As
applicable, describe the methodologies and assumptions used
to determine breakage and when you recognize such
revenues. Also, tell us the amount of breakage recognized
from your online game services for each of the periods
presented and if material, tell us your consideration to disclose
your accounting for such revenues.
Other trends related to revenue recognition
Reseller arrangements: In addition to selling directly
to end customers, registrants also sell their products
through resellers, distributors, and channel partners. Such
arrangements are typical for semiconductor companies
that sell their products not only to original equipment
manufacturers (OEMs) but also to electronic contract
manufacturers (ECMs) and distributors. Revenue may be
recognized either upon the initial sale (“sell-in” model) or
it may be deferred until the distributor resells the product
to the end customer (“sell-through” model). The decision to
use the “sell-in” model or the “sell-through” model depends
on whether the selling price is fixed or determinable at the
time of sale and whether collectability is reasonably assured.
“Sell-in” arrangements typically include no or very limited
price adjustments and price protection. Under “sellthrough” arrangements, on the other hand, companies
allow for significant return rights, price protection, and
adjustments subsequent to the initial product shipment. As
semiconductor companies face rapid product obsolescence
and declining prices over the product life cycle, returns and
pricing adjustment uncertainties increase, making it more
challenging for companies to produce reliable estimates.
In their comments, the staff have requested registrants to
disclose material arrangements with resellers, including
the nature and extent of return rights and price protection
privileges, and how these arrangements impact companies’
revenue recognition policies.
12 Please help us understand the timing of revenue
recognition and the related incentives for sales to and by
your third-party affiliates and independent dealers. In that
regard, please provide us the following information: the
timing of recording equipment revenue from the sale of
devices to third-party affiliates; a summary of any incentives,
such as point-of-sale discounts and dealer commissions, you
provide the affiliate associated with the device or related
service contract and whether the incentive is related to the
sale of the device or service contract; the impact of each
incentive on revenue recognition timing; the basis for
determining when an incentive is offered; the timing of
recognizing the cost of each incentive associated with the
devices and the service contracts; whether the company is able
to reasonably estimate the cost of the incentive at the time of
the company’s sale to the affiliate; and the basis in U.S. GAAP
underlying your policy. To the extent equipment revenue and
the related incentives are not recorded in the same period,
please provide your basis in U.S. GAAP for your policy.
Gross vs. net: Companies in the technology sector may
act as intermediaries between other companies and
end customers. For example, they could be fulfilling
obligations to deliver IT equipment and parts, selling
internet media services on behalf of another company, or
hosting game software on their platform. In these cases,
companies should determine whether to present revenue
on the gross or net basis, which requires analysis of the
arrangement using criteria listed in ASC 605-45. The
analysis is aimed at determining whether the company
acts as a principal or an agent in the arrangement with
the end customer. Staff comments frequently request
registrants’ detailed analysis of the factors listed in the
authoritative guidance and, while the ultimate conclusion
is an area of significant management judgment, greater
emphasis is placed on who is the primary obligor, who has
the ability to set prices, and who bears inventory risk.
13 We note your disclosure that revenues from sale of IT
equipment to end users are recorded on net basis because
the Company is not a primary obligor, does not take inventory
risk and does not have latitude to establish pricing or supplier
selection with respect to IT equipment and software delivered
to end users pursuant to the guidance in ASC 605-45. We also
note your disclosure that the cost of revenues for system
integration consists of third-party hardware and software
purchased for your clients. Based on this disclosure, it appears
that you are recording third-party hardware and software
sales for system integration on a gross basis. Clarify whether
you recognize revenue for sales of third-party hardware and
software under your system integration arrangements on a
gross or net basis and provide the reasons for your
conclusions. In your response, tell us how you considered each
of the factors presented in paragraphs 3-18 in ASC 605-45 in
determining your revenue recognition policy for
these arrangements.
14 You disclose that revenue for digital marketing media
sales is recorded based on the gross amount billed to the
client as revenue when key indicators suggest the company
acts as a principal. Please update us as to the amount of
revenue recognized on a gross basis for digital marketing
media sales for each period presented, if any. To the extent
revenue recognized on a gross basis is material, please explain
how you considered each of the factors presented in ASC
605-45 and determined that gross accounting
was appropriate.
Stay informed | 2013 technology SEC comment letter trends
2. Management’s discussion
and analysis
Management’s discussion and
analysis (MD&A) of financial
condition and results of operations is
a critical component of registrants’
communications with investors.
Its primary objectives are to enable investors to see
the company “through the eyes of management,” to
provide context in which financial information should be
analyzed, and to provide information about the quality
and variability of a company’s earnings and cash flows.
Required disclosures are set forth in Item 303 of Regulation
S-K and include a discussion of the registrant’s results of
operations, liquidity, capital resources, off-balance sheet
arrangements and contractual obligations. The SEC states
in its interpretive guidance that it is seeking to “elicit MD&A
that not only meets the technical disclosure requirements
but generally is informative and transparent,” adding that
“[the analysis] should not consist of generic or boilerplate
disclosure, but rather should reflect facts and circumstances
specific to each individual registrant.” Therefore, staff
comments on MD&A are often not a matter of compliance
or non-compliance with the rules, but rather suggestions to
improve the clarity and transparency of disclosures.
Among all topics addressed in comment letters, MD&A
continues to be the most common, representing 24% of
all comments made by the staff to technology companies
during the past year. MD&A comments break down into the
areas shown in Figure 6.
Results of operations
One of the general themes in MD&A comments is to not
simply repeat information contained in the financial
statements or elsewhere in the filing, but to provide an
analysis of the financial results for the period and the
“whys” behind the fluctuations.
Discussing known trends and key metrics: The staff has
consistently asked registrants to disclose known trends
affecting the business. Examples include loss of a customer,
Figure 6. Breakdown of MD&A comments by area, %
Results of operations
Liquidity and capital resources
Non-GAAP measures
Critical accounting policies
development of new software which might increase future
revenues or reduce costs, entering a new market, or an
acquisition that is expected to impact operating results. In
addition, they encourage the discussion of key operating
metrics used by management, coupled with an analysis of
the relationship between such metrics and GAAP results.
We note your disclosure of your long term strategic plan.
To the extent this plan represents a known trend, please
provide us with additional details about its expected impact
on your results. For example, we note from your earnings call
that you plan to decrease your focus on traditional subsidy
markets, including rooftop applications and that you intend to
focus on utility-scale solar plants. Please also confirm that in
future filings, you will include such disclosure.
We note your disclosures where you indicate that due to
consolidations in the advertising industry, the bigger
agencies may demand larger sales rebates in the future, which
could reduce the Company’s revenue growth. Considering the
significance of the rebates to total advertising revenue, tell us
how you considered including a discussion in your Operating
Results disclosures with regards to these pricing adjustments
and the effects they have had on your revenues for each period
presented. In this regard, it appears that your current
disclosures do not provide investors much insight into the
trends and uncertainties of these rebates and their impact on
your revenues. We refer you to SEC Release 33-8350.
Please describe further the key metrics that impact your
business. In this regard, tell us your consideration to
disclose, for example, the average number of users, the
number of paying players, the average revenue per player,
and/or the average period that a player typically plays the
game and include a discussion that correlates these metrics to
changes in your results of operations. It appears that this
would be important information to the users of your financial
statements since users are a critical component of your
business. In addition, please clarify whether there are any
other operational statistics and usage patterns monitored by
the company which affect your results of operations. We refer
you to Section III.B of SEC Release 33-8350 for guidance.
Fluctuation drivers: Many comments seek to improve
companies’ description of fluctuations, including
quantifying the impact of changes due to price, volume,
acquisitions and exchange rates, among others. The staff
has asked companies to describe the specific factors driving
such changes, and to quantify each factor separately, even if
they net down to an insignificant change overall.
provide investors with a quantified analysis and sufficient
insight into the reasons for changes in your results, as
discussed in section III.B.4 of SEC Interpretive Release No.
33-8350. Please revise future filings to provide a clear and
quantified discussion of the underlying material factors that
impacted your results of operations for the periods presented
in this Form 10-K. Provide us with a sample of your proposed
revised disclosure. Refer to Item 303(A)(3) of Regulation S-K.
Consistency of information: The SEC often reviews
other public information for consistency with the
information included in a registrant’s periodic filings.
When management discusses events or trends on earnings
calls, social media channels or the company’s website,
the staff have raised questions about why such events are
not also addressed in the MD&A. For example, if in an
earnings release management talked about their efforts to
create a best-selling web game or plans to explore growth
opportunities in the mobile game sector, these events and
their impact on future results are expected to be disclosed
in the MD&A.
The transcript of your earnings conference call for the
third quarter of 2012 mentions that “there are often
quarterly fluctuations in geographic performance.” With a
view to material disclosure in your next Form 10-K filing,
please tell us whether your business is seasonal and if it is,
what consideration you gave to providing the disclosure
required by Item 101(c)(1)(v) of Regulation S-K.
Further to the above, we note throughout your
management’s discussion and analysis that you attribute
changes in your revenue to (i) the acquisition of ABC
Corporation, (ii) volume changes and (iii) pricing changes.
These explanations appear to be overly general and do not
Stay informed | 2013 technology SEC comment letter trends
Liquidity and capital resources
In the current environment of economic uncertainty in
the United States and worldwide, it is not surprising that
the SEC staff frequently focus their review and comments
on liquidity disclosures. The staff expect registrants to
provide transparent and robust discussion of liquidity
and capital resources to enable investors to understand
the company’s ability to generate cash and to meet its
obligations as they come due.
Disclosure of events impacting liquidity: The staff have
asked registrants to discuss known trends, events, or uncertainties that are reasonably likely to impact future liquidity.
Such events could include entry into material commitments,
loss of customers or contracts, treasury stock repurchase
programs, or plans for significant capital expenditures.
You state that you expect to spend approximately $60.3
million for new and existing facility expansion, new
hardware and software. We note from your fourth quarter
earnings call that your board has approved $150 million
capital outlay over three years, which will be used for a
residential training facility. Tell us whether you considered
discussing this capital outlay in your liquidity and capital
resources discussion. Also, consider providing quantitative
data regarding this capital outlay.
Debt agreements and related covenants: Comments
from the staff have requested expanded disclosure of the
material terms of debt agreements, including an indication
of compliance with financial covenants. In situations where
there has been or is projected to be a “close call” with
regard to covenant compliance, registrants should provide a
detailed description of the covenants, actual values for the
most recent reporting period, and some level of sensitivity
of the key financial components.
We note that your credit facility and the Notes Purchase
Agreement contain financial covenants. Please revise
future filings to present, for your most significant and
restrictive covenants, actual ratios and other actual amounts
versus the minimum/maximum ratios/amounts permitted as
of each reporting date. Such a presentation may allow
investors to more easily understand your current status and
future ability to meet your covenants. See Sections I.D and
IV.C of the SEC Interpretive Release No. 33-8350.
Stranded cash: For companies with foreign operations, the
staff have focused on the registrant’s ability to repatriate
cash back to the United States in order to meet significant
upcoming obligations, such as debt repayments or
mandatory pension contributions. Comments focus on the
relationship between liquidity needs and the permanent
reinvestment assertion that registrants may have made,
which results in no deferred income tax liability provided
on foreign earnings. The staff have also asked companies to
quantify the amount of cash held overseas and the amount
of incremental deferred tax, if any, if cash were to be
repatriated. If it is not practicable to determine the amount
of deferred tax liability, disclosure of the reasons for such
conclusion is required.
We note that a significant amount of your revenues and
pre-tax income are from subsidiaries outside of the U.S.
Please tell us what consideration you have given to disclosing
the amount of cash and cash equivalents that are currently
held outside of the U.S. and the impact of repatriating the
undistributed earnings of foreign subsidiaries. In this regard,
we note that this disclosure would illustrate that some cash is
not presently available to fund domestic operations and
obligations without paying taxes upon their repatriation.
Please refer to Item 303(a)(1) of Regulation S-K and Section IV
of SEC Release 33-8350.
Cash flow analysis: One of the common deficiencies in
the liquidity analysis is to simply repeat the information
presented on the face of the statement of cash flows.
Instead, registrants need to disclose the underlying factors
driving the changes in operating, investing and financing
cash flows of the company.
Please refer to your disclosure regarding the net cash
provided by operating activities for the last three fiscal
years. We note that your analysis of these cash flows primarily
consists of quantification of net income, quantification of
certain non-cash expenses, and quantification of the net
change in operating assets and liabilities for each of the
respective years. However, you have not provided any further
analysis of the factors contributing to and/or reasons for the
material changes in the reported net cash provided by
operating activities. In this regard, we believe that you should
expand your disclosure to cite, quantify, and analyze the
specific items and/or factors that have contributed thereto.
Please note that references to (A) your results of operations
recorded on an accrual basis and (B) the changes in specific
working capital line items presented on your balance sheets
may not provide a sufficient basis for a reader to analyze the
change in the amount of cash provided by or used in operating
activities. Therefore, please consider whether it would be
appropriate to accompany any such references that may be
included in your expanded disclosure with additional
narrative disclosure that explains the reasons therefor. For
example, for purposes of your comparative analysis of cash
provided by operating activities for the last two fiscal years,
we believe that it would be appropriate for you to discuss (a)
the timing and nature of cash receipts that resulted in the
recognition of a significant deferred revenue balance at the
earlier year-end, (b) the subsequent recognition of the
deferred amounts as revenue, (c) the reasons why a
significantly smaller deferred revenue balance was reported at
the following year-end, and (d) the underlying reasons for any
material differences between the timing of cash receipts and
subsequent recognition for the comparable periods. For
further guidance, please refer to Section IV.B.1 of
“Interpretation: Commission Guidance Regarding
Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” which is available on our website
at Please
provide your proposed expanded disclosure as part of
your response.
Non-GAAP measures
Registrants often present certain quantitative measures
of past performance, financial position, or cash flows
that make various adjustments (inclusions or exclusions)
to GAAP measures reported in the financial statements.
Some of the non-GAAP measures frequently used by
technology companies in their earnings releases or
periodic filings with the SEC include EBITDA; adjusted
EBITDA (commonly reflecting the elimination of stockbased compensation expense, which is typically high for
companies in this sector); adjusted revenue (eliminating
acquisition accounting adjustments related to deferred
revenue); or free cash flow (often defined as operating
cash flow less capital expenditures). It is important to keep
in mind that these non-GAAP measures are not standard
or prescribed by US GAAP and may differ considerably
from one company to the next. Such non-GAAP financial
measures are permitted to be included in press releases,
periodic filings, and registration statements, as long as
they meet the requirements set out in Regulation G and
Item 10(e) of Regulation S-K. While the comments have
decreased over the years, we continue to see them in the
following areas:
Identification and reconciliation: The staff have
commented when non-GAAP financial measures have
not been clearly labeled as such or have not been clearly
reconciled to the most directly comparable GAAP measure.
Registrants should disclose why the non-GAAP measure
is useful to investors and detail the adjustments made to
the comparable GAAP measure. They should not label
adjustments as non-recurring, infrequent, or unusual when
similar events and transactions have occurred in the past
or are reasonably likely to occur in the future. Similarly, the
staff question when issuers call adjustments “non-cash” if
the underlying obligations may have to be settled in cash in
the future, or when they remove cash items from liquidityrelated non-GAAP measures.
10 We note the disclosure at the top of the first page of your
press release of net income and diluted earnings per share
excluding impairment and other one-time charges. Please be
advised these are non-GAAP measures and must comply with
Item 10(e) of Regulation S-K. If you wish to present these
measures in future filings, please identify these measures as
non-GAAP measures, provide a reconciliation to the most
comparable GAAP measure, disclose the reasons why you
believe these non-GAAP measures provide useful information
to investors and, if applicable, disclose how management uses
these non-GAAP measures. Furthermore, please be advised
that any per share non-GAAP performance measures should
be reconciled to GAAP earnings per share.
9 11 We note that you refer to the non-GAAP adjustments for
lease termination and contingent consideration as
“non-recurring.” Tell us how you considered the guidance in
Item 10(e)(1)(ii)(B) of Regulation S-K when referring to these
charges as non-recurring. In this regard, to the extent it is
reasonably likely you may incur similar charges in the next
two years, referring to such charges as non-recurring,
infrequent or unusual may not be appropriate. Please tell us
how your current disclosure complies with this guidance or
tell us how you intend to revise your disclosures in future
filings. In addition, it is unclear how your current proposed
Stay informed | 2013 technology SEC comment letter trends
disclosures describe that management uses this non-GAAP
information for internal budgeting and forecasting purposes.
Please revise to include this information in future filings
pursuant to Item 10(e)(1)(i)(D) of Regulation S-K.
Undue prominence: The staff have commented
consistently when non-GAAP measures are presented more
prominently than the directly comparable GAAP measures
in MD&A or in earnings releases. They also object to the
inclusion of a full non-GAAP statement of operations.
12 We believe that your earnings release gives undue
prominence to the presentation and discussion of
non-GAAP measures. For instance, we note your references to
Modified EBITDA in the introduction of the earnings release
without references to the corresponding comparable GAAP
measures. In addition, we note that you give undue
prominence to the presentation and discussion of the nonGAAP measure throughout the earnings release. Accordingly,
we believe that you should revise future earnings releases to
comply with the reporting requirements of Item 10(e) of
Regulation S-K. Refer to Instruction 2 to Item 2-02 of Form
8-K in this regard.
13 It appears that you are presenting the non-GAAP
information and the related reconciliation required by S-K
Item 10(e) in the form of an “adjusted” income statement.
Please tell us how your presentation considers the guidance
set forth in Compliance and Disclosure Interpretation 102.10.
Under the cited guidance, it is generally not appropriate to
present a non-GAAP income statement for purposes of
reconciling non-GAAP measures to the most directly
comparable GAAP measures.
Other MD&A comment trends:
Critical accounting estimates: Technology companies
use many estimates in the areas of revenue recognition
(particularly when a company enters into multiple-element
arrangements and allocates the arrangement consideration
using the best estimate of selling price); estimated useful
lives of tangible and intangible assets; fair values; and asset
impairments. Those estimates that are subject to a higher
degree of uncertainty and have the potential to impact
materially the registrant’s financial position and results of
operations must be disclosed and discussed by management
in MD&A. The staff often request that companies provide
more transparency with respect to how such estimates are
determined, including key assumptions and their volatility
and what impact changes to the estimates will have on the
financial statements. Comments often remind registrants to
avoid merely repeating accounting policy disclosures that
are included in the notes to the financial statements.
14 We note that network plant and equipment are
depreciated over various lives from 3 to 50 years, with a
weighted average life of approximately 11 years. Given the
significance of your network plant and equipment, please
consider expanding your disclosure to show the carrying
amount of each significant category or type of network plant
and equipment and the estimated useful life. Also describe the
method you used to estimate the useful life and the
uncertainties associated with the assumptions, or levels of
judgment utilized in the estimate. Please clarify why you
believe it is appropriate to use a life of more than 20 years for
some of these assets.
15 You include discussion of allowance for system removal
within the significant accounting policy section of your
footnotes, but you state that no allowance has been
established as of year-end, despite your growing number of
installed units. Please explain why you have not established an
allowance. Include discussion of any contractual obligations
with regard to removal of your systems.
Contractual obligations: Registrants must disclose their
known future contractual obligations as of the end of the
year. The disclosure is tabular and is meant to provide
a snapshot of the registrant’s committed future cash
requirements. When uncertainty exists as to the timing of
payments resulting from an obligation, companies should
disclose that information in the footnotes to the table. The
staff are primarily focused on ensuring the completeness
of the disclosure. Items most often omitted include future
interest payments, payments relating to unrecognized tax
benefits, and contingent purchase consideration.
16 Please tell us what consideration was given to including
contingent consideration obligations and unrecognized
tax benefits within your contractual obligations table or in an
accompanying note. Please refer to Section IV.A of SEC
Release 33-8350 and footnote 46 thereto. For additional
guidance, please see Section C of SEC Release 33-9144.
3. Executive
Item 402 of Regulation S-K requires
extensive disclosures on executive
compensation for proxy statements,
Form 10-K filings, and registration
statements, the objective of which
is to provide users of financial
statements with robust and transparent
Comment letters issued by the staff have required registrants to disclose the specific performance targets and
thresholds that employees must achieve in order to earn
their compensation awards. Many registrants have claimed
“competitive harm” if such disclosures are made; however,
the staff remain skeptical, especially when such information is based on actual company results and the performance target is disclosed after the fiscal year has ended.
In your letter you committed to disclose the relevant
performance targets and threshold levels applicable to
your incentive program, so long as doing so would not cause
competitive harm. Please explain why you chose not to
disclose the performance targets and threshold levels
applicable to the awards granted during the fiscal year. If you
omitted this information because you believe disclosure would
cause competitive harm, provide in your response letter a
detailed analysis to support that conclusion for each material
performance measure. Please note that we generally do not
agree with the argument that disclosing a performance target
for the last fiscal year would cause a registrant competitive
harm when disclosure of the performance target will occur
after the fiscal year has ended and the target is a measurement
based on actual company results that have been disclosed. In
the alternative, confirm that you will disclose your material
performance targets and thresholds going forward, indicating
which material performance targets you intend to disclose for
executive compensation. For guidance, please refer to
Question 118.04 of the Division of Corporation Finance’s
Compliance and Disclosure Interpretations of Regulation S-K,
available on our website at
When registrants benchmark their executive
compensation against other companies, the SEC staff
regularly ask them to disclose the specific peer companies
used for benchmarking purposes, specify how the peer
group was established, how the pay for named executive
officers compared with the established benchmarks and
provide an explanation if actual compensation differs from
the targeted percentiles.
You state the size of the peer group varied for each of your
executive officer positions. In order to provide readers
with a clearer understanding of the role the comparative
companies played in the executive compensation decisionmaking process, in your response letter identify the specific
peer group companies used in setting the compensation of
each of the named executive officers. To the extent you use
different peer groups for different named executive officers, it
appears that in future filings you should identify the
constituents of each group together with the officer(s) whose
compensation was evaluated with respect to the particular
group. In addition, you should consider informing readers of
the factors considered in deciding which companies to include
in the peer group for each executive officer position.
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4. Goodwill and
intangible assets
It has been more than a year since GAAP
was revised to allow entities to evaluate
qualitative factors to determine whether
it is necessary to perform the two-step
quantitative goodwill test.
Registrants are not required to calculate fair value of a
reporting unit unless, based on the qualitative assessment,
it is more likely than not that its fair value is less than
its carrying value. Financial reporting of goodwill
impairment already involves considerable judgment, given
the amount of estimation and assumptions necessary to
determine whether a reporting unit has been impaired.
The qualitative assessment may require registrants to
apply even more judgment and the SEC staff have issued a
number of comment letters specifically asking registrants
to expand their disclosures of the qualitative factors
considered in assessing impairment. The same also goes
for indefinite-lived intangible assets. When registrants
are using the qualitative assessment option in the new
standard for testing indefinite-lived intangible assets for
impairment, the staff have requested information about
the factors considered in arriving at the conclusion that it
is not more likely than not that the asset is impaired.
For reporting units that are “at risk” of failing step one of
the goodwill impairment test, the staff have requested
registrants to include significant expanded disclosures:
the percentage by which fair value exceeds carrying
value as of the date of the most recent test, the amount of
goodwill allocated to the reporting unit, and a qualitative
discussion of assumptions used to determine fair value,
including the inherent uncertainties and potential events
and circumstances that could have a negative effect on the
reporting unit’s fair value.
If a reporting unit is at risk of failing step one of the
impairment test and a material impairment charge could
occur, please disclose the following: The percentage by which
fair value exceeded carrying value as of the date of the most
recent test; The amount of goodwill allocated to the reporting
unit; A description of the methods and key assumptions used
and how the key assumptions were determined; A discussion
of the degree of uncertainty associated with the key
assumptions. The discussion regarding uncertainty should
provide specifics to the extent possible (e.g., the valuation
model assumes recovery from a business downturn within a
defined period of time); and A description of potential events
and/or changes in circumstances that could reasonably be
expected to negatively affect the key assumptions.
The staff frequently challenge the timing of impairment
charges related to goodwill and indefinite-lived intangible
assets, particularly when they result from the annual
impairment test but factors and conditions may have
existed at an earlier time. A depressed stock price for an
extended period of time, a sustained decline in revenues
and operating income are just a few examples of situations
where the staff have challenged registrants on why they
did not conclude there were triggering events requiring an
interim impairment assessment.
We note that you adopted the guidance in ASC 2011-08
for your annual goodwill impairment test. Please confirm
that the company determined it was not more likely than not
that the fair values were less than the carrying values for each
reporting unit and tell us your consideration to include this
disclosure in future filings. Also, please consider expanding
your disclosures in future filings to include a more
comprehensive discussion regarding the qualitative factors
considered in assessing your goodwill for impairment.
It appears that you did not perform a two-step
impairment test for the period ended September 30.
While we note that the company generated positive net
income and completed a joint venture during this period, we
also note that the decline in your market capitalization was
not short-term and has continued subsequent to September
30. As there are several indicators listed in ASC 350-20-35-3C
that appear to be applicable to the company and considering
the decline in your market capitalization appears to be
other-than-temporary, please further explain how you
concluded from your qualitative assessment that it was not
more likely than not that the fair value of your three reporting
units was less than their carrying amount as of September 30.
We note that during the second quarter you performed an
interim goodwill impairment test as a result of your
continued depressed stock price and your market
capitalization relative to net book value. Please tell us whether
your reporting unit had an estimated fair value that was not
substantially in excess of the carrying value and was at
potential risk of failing step-one of your goodwill impairment
analysis and provide the percentage by which fair value
exceeded carrying value. We further note that your annual
goodwill impairment test completed in October appeared to
rely solely on a qualitative analysis. If you concluded that the
fair value of the reporting unit was not substantially in excess
of the carrying value and was at potential risk of failing
step-one please tell us how you concluded that it was
appropriate to only perform a qualitative analysis in October.
Registrants need to support their initial conclusions
regarding the estimated useful lives of intangible assets
using relevant factors, such as the expected use of the asset
by the entity; legal, regulatory or contractual provisions;
obsolescence, competition and other economic indicators,
among others. Companies need to re-evaluate such
estimates on an ongoing basis. We have seen a number
of comments from the staff questioning management’s
estimates of useful lives, particularly in the case of
indefinite-lived assets, as well as registrants’ processes for
periodically updating these estimates.
We note that your balance of indefinite-lived intangible
assets consists of trademarks and domain names. We have
the following comments: Please provide us a detailed listing of
your indefinite-lived intangible assets as of the year-end balance
sheet period. Please tell us why you believe these assets are
indefinite-lived. Refer to ASC 350-30-35-4 through 35-5 and
350-30-55. For each indefinite-lived intangible asset, please
describe to us in detail your process for evaluating the remaining
useful life in each reporting period after the acquisitions to
determine whether events and circumstances continue to
support an indefinite useful life. Refer to ASC 350-30-35-16.
We note that you have an amortization period of 2-15
years for customer relationships and a 15-25 year
amortization period for long-term service contracts. Please tell
how you determined these useful lives and why you believe
they are appropriate. In doing so, please provide your analysis
of the factors in ASC 350-30-35-3.
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5. Income taxes
As technology companies increase
their global footprint, questions related
to international taxation, such as
permanent reinvestment of foreign
earnings, the impact of different tax
rates, and tax holidays become more
Additionally, the prolonged global economic recession
continues to raise questions about realization of net
operating losses and other tax credits. The most notable
comment letter trends in the area of income taxes are:
Permanent reinvestment: If the company determines that
its foreign earnings will be permanently reinvested outside
of the United States, it does not have to record a deferred
income tax liability related to repatriating these earnings.
The staff has regularly asked registrants to provide support
and disclose in MD&A their considerations related to the
permanent reinvestment assertion, to quantify the amount
of undistributed earnings for which no tax liability has been
recorded, and to quantify the amount of the unrecognized
tax liability or disclose why it is not practicable.
You disclose that you have not provided deferred taxes on
future distributions of tax-exempt earnings as you have
not determined to pay any dividends in the future and those
earnings are considered to be permanently reinvested. Please
tell us the amount of such earnings and what consideration
was given to providing this quantitative disclosure in your
filing. Also, tell us your consideration to disclose the amount
of the unrecognized deferred tax liability related to such
earnings, if practicable, or a statement that determination is
not practicable. We refer you to ASC 740-30-50-2(b) and (c).
Please also revise your MD&A, as necessary, to discuss any
implications of your plans to permanently reinvest
international earnings on your liquidity. For example, to the
extent that you have material amounts of cash and cash
equivalents in foreign locations with lower tax rates and
repatriation of that cash would result in a significant tax
liability, you should revise your disclosures accordingly.
Impact of different tax rates on earnings: Comments
frequently ask registrants to disclose how foreign effective
tax rates differ from the domestic rate and analyze how the
results of operations are impacted by having proportionally
higher or lower earnings in jurisdictions with different
effective tax rates.
Please tell us your consideration of providing additional
disclosures regarding the domestic and foreign
components of pre-tax income, your domestic effective tax
rate as compared to your foreign effective tax rate, and the
significant impact on your overall effective income tax rates
and results of operations of having proportionally higher
earnings in countries where you have lower statutory tax
rates. It appears as though this information is very pertinent to
understanding your results of operations for each year and
may also warrant discussion under the Overview subheading.
Further, such disclosures seem more relevant in light of your
disclosure that the United States and Ireland are your two
major tax jurisdictions and considering recent fiscal problems
in Ireland which could impact the country’s tax policy. As
such, please tell us your consideration of disclosing possible
outcomes or implications on your operations as the Irish and
other various tax jurisdictions, as applicable, address these
conditions and other events. Please refer to Item 303(a)(3)(i)
of Regulation S-K and Section III.B of SEC Release 34-48960.
Deferred tax assets: The assessment of recoverability
of deferred tax assets involves significant management
judgment. In their comment letters, the SEC staff have
asked companies to explain and disclose in their filings
their considerations related to the recoverability of deferred
tax assets, including analysis of both positive and negative
evidence, especially when a prolonged history of losses
exists. Additionally, any time a company records or reverses
a valuation allowance against its deferred tax assets, they
should be prepared to respond to a challenge from the SEC
staff as it relates to the timing of the charge or reversal (i.e.,
why now or why not last quarter or year).
You disclose that during the fourth quarter, based on
positive evidence regarding past earnings and projected
future taxable income from operating activities, you
determined that it was more likely than not that you would
realize a portion of deferred tax assets outside the U.S. and
you recorded a tax benefit of $154 million associated with the
release of a valuation allowance on those deferred tax assets.
Please tell us the negative and positive evidence that you
considered in making this assessment. In particular, discuss
how in reaching your conclusion that it was more likely than
not that you would realize a portion of these deferred tax
assets you considered the fact that you had recorded a loss
from continuing operations before income taxes outside the
U.S. for two of the past three years. Please refer to ASC
740-10-30-16 through 30-25.
Other comments include providing (a) a more detailed
breakdown of the effective tax rate reconciling items
(i.e., showing all individual items greater than 5% of the
statutory tax rate); (b) more transparent disclosure of
unrecognized tax benefits; (c) quantitative disclosure of
aggregate and per share effect of tax holidays; and (d)
details of how registrants estimate the effective tax rate in
interim periods.
You indicate that you have realized tax advantages from
conducting activities in certain foreign low tax
jurisdictions. To the extent that the low foreign tax rates are
the result of relief from income taxes only for a specified
period, tell us what consideration you gave to disclosing the
aggregate dollar and per share effects of the tax holiday and
briefly describing the factual circumstances, including the
date on which the special tax status will terminate. Also tell us
what consideration you gave to disclosing and quantifying any
reasonably expected material impact on your liquidity, capital
resources and/or results of operations from the currently
known trends, events and uncertainties related to any such
tax holidays. Refer to SAB Topic 11C and Section III.B.3 of SEC
Release 33-8350.
Please describe the nature of the discrete items that are
impacting the estimated annual effective tax rate for the
interim reporting periods. Explain why these items are
discrete to an interim period. In addition, please explain why
you calculated your effective tax rate based on year-to-date
results as opposed to estimating your annual effective tax rate.
Please tell us the nature of each significant reconciling
item in your reconciliation of income taxes computed at
the Federal statutory tax rate to the effective tax rate. We note
that the `Other, net’ line item of ($839) million in the
reconciliation has an impact of approximately 7% on your
effective tax rate which may consist of multiple significant
reconciling items. Please refer to ASC 740-10-50-12 for
required disclosure.
Please tell us what consideration you gave to separately
disclosing decreases in the unrecognized tax benefits
relating to settlements with taxing authorities and reductions
as a result of a lapse of the applicable statute of limitations in
your reconciliation of unrecognized tax benefits disclosure.
Refer for ASC 740-10-50-15A.
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6. Commitments
and contingencies
Financial reporting of commitments
and contingencies remains a top focus
area of the SEC staff.
While the quality of disclosures has improved over the past
several years, some registrants continue to resist providing
the required disclosures for fear that they may divulge
information that could adversely affect the outcome of
litigation. To that end, the staff will accept disclosure of
estimated exposures on an aggregate basis rather than
requiring it separately for individual matters.
GAAP requires companies to record an accrual for a
contingency when it is probable that a loss has been
incurred and the amount of the loss can be reasonably
estimated. Even if the criteria for accrual have not been
met, disclosure may still be required if the loss is reasonably
possible. The disclosure should provide the nature of the
contingency and an estimate of the possible loss or range
of loss. It has been fairly common for the staff to request
the registrant to explain its estimation process or the
specific factors precluding a reasonable estimate at the
current reporting date. Additionally, the staff commonly
ask whether there was a reasonable possibility that a
loss exceeding amounts already recorded may have been
incurred and request that amounts materially greater than
the amounts accrued be disclosed.
When a loss is assessed as being probable, but no one
number within the estimated range of exposure is
considered a better estimate than any other number in
the range, the accounting guidance requires companies to
record the low end of the range.
In the spirit of keeping the investors apprised of significant
forward-looking information, the nature and amount of
a loss should generally not be disclosed for the first time
in the period in which it is recorded, but rather earlywarning disclosures should be provided as soon as they are
appropriate. As with goodwill impairments, the staff will
challenge registrants about whether such losses should have
been recorded in an earlier period and what the triggering
event was for such recognition (i.e., why now). In instances
when a loss has been settled, the staff is likely to review
prior filing disclosures and inquire as to whether those
disclosures were appropriate in light of the final outcome
and whether loss contingencies should have been recorded
or disclosed in earlier periods. The staff expect that loss
contingency disclosures are updated regularly, both
qualitatively and quantitatively, for developments in the
related matters.
If there is at least a reasonable possibility that a loss
exceeding amounts already recognized may have been
incurred, in your next periodic filing, please either disclose an
estimate (or, if true, state that the estimate is immaterial in
lieu of providing quantified amounts) of the additional loss or
range of loss, or state that such an estimate cannot be made.
Please refer to FASB ASC 450-20-50. If you conclude that you
cannot estimate the reasonably possible additional loss or
range of loss, please supplementally: (1) explain to us the
procedures you undertake on a quarterly basis to attempt to
develop a range of reasonably possible loss for disclosure and
(2) for each material matter, what specific factors are causing
the inability to estimate and when you expect those factors to
be alleviated. We recognize that there are a number of
uncertainties and potential outcomes associated with loss
contingencies. Nonetheless, an effort should be made to
develop estimates for purposes of disclosure, including
determining which of the potential outcomes are reasonably
possible and what the reasonably possible range of losses
would be for those reasonably possible outcomes. You may
provide your disclosures on an aggregated basis. Please
include your proposed disclosures in your response.
You state that you believe that you have “provided
sufficient chronology in Note 7 for the reader to understand that this is a December quarter-end event.” However, we
note that this disclosure only provides information commencing with the receipt of the show cause letter in November. It
appears that the concerns from the third party arose earlier
than that time though, as you state that you “did not sell to the
third party in the prior fiscal year and in the current year.”
Considering that the Company knew that it was not selling to
the third party in the prior fiscal year and in the current year,
please tell us why you concluded disclosure was not necessary
in the June 30 Form 10-K or September 30 Form 10-Q. Refer to
Item 303 of Regulation S-K. In this regard, please tell us when
you were notified that the third party would no longer take
deliveries of new units.
We note that on June 7 you entered into a preliminary
settlement agreement with respect to a state wage and
hour lawsuit that had been filed against the company earlier in
the year. Please tell us what consideration was given to the
disclosure requirements of ASC 450-20-50-4 for each period
during which this lawsuit was unresolved including periods
prior to the preliminary settlement. Additionally, please tell us
the following: the date the lawsuit was filed; the timing of the
settlement discussions; the estimated dollar amount of the
loss; and the status of the settlement.
We note that you entered into an agreement which
released you from and avoided certain potential litigation
but provided no other future benefits. We further note that
you recorded a loss related to this litigation. Please provide us
with a detailed timeline of the significant events pertaining to
this agreement including the dates any complaints were filed,
if any, as well as when you began entering into discussions
regarding this agreement. Please also tell us what consideration was given to the disclosure requirements of ASC
450-20-50-4 for each period during which this matter
was unresolved.
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7. Segments
The purpose of segment disclosures
is to provide investors the ability to
see the company through the eyes of
In particular, they allow investors to obtain information
about a company at a disaggregated level that is used by
the company’s chief operating decision maker (CODM)
to evaluate performance and make resource allocation
decisions. Often, the SEC staff have asked issuers to
provide the information given to the CODM and will
independently evaluate the appropriateness of the
registrant’s identification of its segments (particularly
when a company reports only one segment). This
frequently leads to questions about the aggregation of
operating segments into reportable segments. GAAP
allows registrants to aggregate operating segments into
reportable segments only if the segments have similar
economic characteristics (for example, long-term gross
margins) and are similar in a number of other areas.
We note that you have identified three operating segments
that you aggregate into one reportable segment. We
further note your disclosures whereby you describe how you
believe you meet the criteria to aggregate your three operating
segments into one reportable segment. Please provide us with
additional details regarding your analysis of whether the
operating segments exhibit similar economic characteristics.
In this regard, based on your response that the historical and
long-term forecasted average gross margin for each segment is
within a range of plus or minus ten percent of 62.4%, it
appears that the gross margin estimates for the segments
range from 56.2% to 68.6%. Therefore, the gross margin of
the highest performing segment is approximately 22% higher
than that of the lowest performing segment. Explain to us in
greater detail why you believe this reflects “similar economic
characteristics.” In order to assist our evaluation, please
provide us with a copy of the CODM package corresponding to
the 10-K.
We note that your Chief Operating Decision Maker
evaluates performance and makes decisions regarding
allocation of resources based on total company results and
therefore you have concluded that you operate in one
segment. However, we further note that remarks made in your
Results Earnings Call indicate that you have multiple
segments including A, B and C. Please tell us whether you
considered determining operating segments based on the
three segments described in your presentation. Refer to ASC
280-10-50-1 through 50-9.
The staff have sometimes challenged registrants’
determination of both their operating segments and their
reporting units used for purposes of goodwill impairment
testing. The incorrect identification of operating segments
could potentially result in a company avoiding a goodwill
impairment charge.
Please tell us whether you have aggregated operating
segments as defined in ASC 280-10-50, into reporting
units for purposes of conducting goodwill impairment testing.
We refer you to ASC 350-20-20 which defines a reporting unit
as an operating segment or one level below an operating
segment, thus precluding aggregation of operating segments
for purposes of determining reporting units. If you have not
aggregated operating segments into reporting units, please
clarify your disclosures accordingly. For example, your
disclosure seems to indicate you have identified three
operating segments, based on regions, which have been
aggregated into a reportable segment. Also, your disclosures
seem to indicate that goodwill is tested for impairment at the
level of the reportable segment, which appears to represent an
aggregation of operating segments.
The staff have also requested that registrants disclose the
amount of revenues for each product or service or each
group of similar products or services. The staff have been
skeptical when registrants have asserted that providing
such disclosures is impracticable, particularly when the
description of the company’s business elsewhere in the
filing includes discussion or quantification of different
revenue categories.
Please provide us with your consideration to disclose the
revenues from external customers for each service or
group of similar services, unless it is impracticable to do so
pursuant to ASC 280-10-50-40. If providing the information is
impracticable, that fact shall be disclosed. In this regard,
based upon review of your revenue recognition policy, it
appears you may have four types of services.
8. Business
The disclosure requirements for
business combinations are extensive.
They include details about the acquiree,
the purchase consideration and the fair
value of assets acquired and liabilities
assumed, among others.
The disclosures are designed to inform the reader about
the nature of the acquisition as well as its effects on the
financial statements of the acquirer.
The relevant disclosures outlined in ASC 805-10-50-2
through 50-7 should be provided for each material
business combination that occurs during the periods
presented. Revise to include these disclosures for
the acquisition.
Companies sometimes fail to provide the required pro
forma information in accordance with ASC 805 for
acquisitions that are material individually or in the
Please tell us why you have not presented pro forma
information for the acquisition. Given the significance of
the acquisition, we believe the pro forma disclosures required
by ASC 805-10-50-2.h should be provided in the notes to your
financial statements. Please revise or advise as appropriate.
It is also important for registrants not to overlook the
requirements of Item 9.01 of Form 8-K and Rule 3-05
of Regulation S-X for the filing of historical financial
statements of an acquiree and pro forma information in
accordance with Article 11 of Regulation S-X, when the
acquiree exceeds certain materiality thresholds. Failing to
file such financial statements within the specified period
following the completion of the acquisition may impact a
registrant’s eligibility to use certain Securities Act forms.
In the event that the company was required to file a report
on Form 8-K in connection with the acquisition, but failed
to do so, the report would not be considered to be filed on a
timely basis. As a result, please discuss and pre-clear with the
Office of Chief Counsel in the Division of Corporation Finance
any questions on the company’s eligibility to use Securities Act
Forms that are predicated on the current and timely filing of
the company’s current and periodic reports.
Stay informed | 2013 technology SEC comment letter trends
9. Other
notable trends
In addition to the areas highlighted so far, there were
several other notable trends in SEC comment letters.
Figure 7. Breakdown of other notable trends by topic, %
State sponsors of terrorism
Variable interest entities (VIEs)
Investments and fair value measurements
Controls and procedures
Risk factors
The SEC staff continue to raise compliance-related
questions. Among them are questions regarding
compliance with the various requirements of Regulation
S-X: guarantor financial information (S-X 3-10), separate
product and service revenue disclosure in the statement of
operations (S-X 5-03), and financial statement schedules
(S-X 5-04). The staff have asked registrants to file copies
of material agreements, inquired about the determination
of a registrant’s filing status, requested corrections to the
officer certifciations and raised questions about impact of
certain compliance issues on a registrant’s eligibility to use
certain Securities Act forms.
Guarantor disclosures: Over the last couple of years,
many technology companies accessed the debt markets,
which have provided an attractive cost of financing in this
environment of sustained, historically low interest rates.
A registered offering of guaranteed securities requires full
financial statements for the issuer of the securities and
each guarantor, unless one of the exemptions in Rule 3-10
of Regulation S-X applies. If eligible for the exemption, the
company may provide significantly reduced disclosures,
generally in the form of consolidating financial information.
We have seen an increased level of comments from the
staff relating to the application of Rule 3-10. One category
of comments is directed at identifying whether the specific
structure is eligible for relief. To be eligible, among other
criteria, the guarantors must be 100% owned by the parent
and the guarantee must be full and unconditional, subject
only to certain customary releases. The staff have asked
for details related to any provisions for releases in order
to evaluate whether they meet the limited exceptions
permitted under the rules. Another subset of comments has
been targeted at potential errors in the preparation of the
consolidating financial information; for example, the staff
have asked about the proper presentation of intercompany
balances on the balance sheet (grossing up receivables and
payables, presenting balances as current and long-term)
and the cash flow statement (depending on the nature of
the payments as loans, operating balances or dividends).
We note that you appear to be relying on the exception to
the general rule to file separate financial statements of
each guarantor subsidiary under Rule 3-10(f) of Regulation
S-X. Please confirm, and also disclose in future filings, that
each subsidiary guarantor is 100% owned and the guarantees
are joint and several. Refer to Rule 3-10(i)(8) of
Regulation S-X.
We note that the Notes are fully and unconditionally
guaranteed except for certain customary release
provisions. Please describe the release provisions and tell us
what consideration you gave to disclosing these provisions.
Disclosure of operations in locations
identified as state sponsors of terrorism
As technology companies expand their operations
internationally, some find themselves doing business,
directly or indirectly, with countries that have been listed
by the US government as state sponsors of terrorism:
Syria, Cuba, Iran, and Sudan. The SEC staff have asked
registrants to disclose quantitative and qualitative factors
that a reasonable investor would regard as important in
making an investment decision. These include the nature
and extent of contacts with the aforementioned countries
(directly or indirectly), including the amount of revenues
derived and assets associated with each country (without
any materiality threshold) and a description of equipment
and technology that the company has provided to these
countries. The comments are often triggered by a review of
the issuer’s website, which may contain references to one of
the countries designated as state sponsors of terrorism.
In addition, the Iran Threat Reduction and Syria Human
Rights Act of 2012 was signed into law last year, and as of
February 2013, issuers are required to provide disclosure
in their periodic reports if, during the reporting period,
they or any of their affiliates have knowingly engaged
in certain specified activities involving contacts with or
support for Iran. If such activity is reported in a periodic
report, the issuer is also required to file a separate form on
Variable interest entities
Accounting related to variable interest entities (VIEs)
is judgmental and complex. The SEC staff often request
that the variable interests and the specific terms of the
agreements are discussed more clearly in the filings.
Registrants may also be asked to disclose the assets and
liabilities of a consolidated VIE as well as the impact the
VIE has on the registrant’s operations. There is a fair
amount of focus on China VIE structures and whether
such structures allow registrants to establish control over
the VIE, in light of the existing government regulation in
that country.
Investments and fair value measurements
Investments and fair value measurements comments
include requests to disclose methods and key
assumptions used to determine fair values , transparent
disclosures with respect to credit quality of investments,
management’s consideration of temporary versus otherthan-temporary investment losses and detailed disclosures
about unobservable fair value measurements (Level 3),
such as reconciliation of beginning and ending values
for the period and sensitivity of fair values to changes
in assumptions.
Controls and procedures
Another area of common questions relates to internal
control over financial reporting (ICFR). The SEC staff
sometimes challenge registrants’ conclusions about
the effectiveness of ICFR, especially when material
errors in the financial statements have been identified.
Management must timely disclose material changes to
a company’s internal control environment in periodic
filings, which includes remediation of previously identified
material weaknesses during the period. The SEC staff
often look to information contained in current reports,
companies’ websites and other sources when raising
questions about changes in ICFR. There are also comments
with respect to disclosure controls and procedures
(DC&P), including lack of an explicit conclusion about
the effectiveness of DC&P and conclusion that DC&P is
effective when ICFR is ineffective.
Stay informed | 2013 technology SEC comment letter trends
Risk factors
When it comes to risk factors, the SEC staff insist on
risk factors being specific to the registrant as opposed
to generally applicable to the industry. Cybersecurity
has become an area of more frequent comments by the
staff in recent years given the rapidly growing volume of
sensitive information which is stored on computers that
are connected to the internet.
Cybersecurity: Cybersecurity has become a real threat to
companies in many industries and with that development
comes increased scrutiny on whether registrants are
adequately disclosing the cybersecurity risk related
to their business. Where registrants have included a
generic risk factor related to cybersecurity, the staff have
prompted registrants to tailor such disclosures, particularly
when there have been actual cyber-incidents or attacks
experienced by the company. The staff have also been
skeptical when registrants do not include any cybersecurity
discussion in their risk factor disclosures, given that there
is such immense dependence on digital technologies in
business today. Expected disclosures are consistent with the
guidance provided by the Division of Corporation Finance
in CF Disclosure Guidance: Topic No. 2 and include, but
are not limited to, the cost of remediation related to actual
security breaches as well as the related loss of revenue,
the cost of building a cybersecurity program, the potential
impact on litigation costs, and reputational damages.
We note your disclosure that computer hacking or other
breaches of network or IT security that affects your
wireline and wireless networks could have a material adverse
effect on your operations. We also have read several reports of
various cyber attacks directed at the company. If, in fact, you
have experienced cyber attacks, security breaches or other
similar events in the past, beginning with your next Form
10-Q, please state that fact in order to provide the proper
context for your risk factor disclosure. Please refer to the
Division of Corporation Finance’s Disclosure Guidance Topic
No. 2 at
cfguidance-topic2.htm for additional information.
You disclose that your databases “may be” subject to
unauthorized access and if you experience a security
breach, the integrity of your databases “could be” affected.
You disclose that you have experienced a cyber incident where
a subset of a client’s customer data was exposed by an
unauthorized entry into your email system. In order to provide
the proper context in your risk factor disclosure, please
confirm that beginning with your next Form 10-Q, you will
expand your risk factor to clearly state that you have
experienced a cyber breach.
We note that none of your risk factors, or other sections of
your Form 10-K, specifically address any risks you may
face from cyber attacks, such as attempts by third parties to
gain access to your systems for purposes of acquiring your
confidential information or intellectual property, including
personally identifiable information that may be in your
possession, or to interrupt your systems or otherwise try to
cause harm to your business and operations. Given that other
companies in your industry have actually encountered such
risks and have disclosed that such risks may be material to
their business and operations, please tell us what
consideration you gave to including disclosure related to
cybersecurity risks or cyber incidents in your Form 10-K.
You state that certain countries in which you operate are, or
in the future may be, subject to international sanctions,
including those imposed by the United States. We are aware of
news reports indicating that you may provide services to
ETECSA in Cuba; that you may provide international voice
roaming services in Sudan and in Syria; and that your
Armenian subsidiary may operate one or more channels from
Armenia to Iran. Cuba, Iran, Sudan, and Syria are designated as
state sponsors of terrorism by the U.S. Department of State, and
are subject to U.S. economic sanctions and export controls. Your
Form 20-F does not include disclosure about operations in those
countries. Please describe to us the nature and extent of any past,
current, and anticipated contacts with Cuba, Iran, Sudan, and/
or Syria, whether through direct or indirect arrangements,
during the last three fiscal years and the subsequent interim
period. Your response should describe any products, equipment,
software, technology, information, support, and services you
have provided into Cuba, Iran, Sudan, and/or Syria, directly or
indirectly, and any agreements, arrangements, or other contacts
you have had with the governments of those countries or entities
they control.
Cash flows: Cash flow-related comments typically
center around (1) the classification of certain items in
the statement of cash flows as operating, investing, or
financing, and (2) the presentation of cash activity on
a net basis rather than gross. While the classification
of certain transactions is explicitly prescribed in the
authoritative accounting guidance, in many other cases,
transactions have to be analyzed in accordance with the
general principles in the standard. Cash flows are required
to be presented gross because that information is generally
more relevant to financial statement users, unless the
turnover is very quick (three months or less), in which case
net information would be sufficient.
We note from your disclosure that certain amounts
reported as “due to related parties” as well as a portion of
the change in this balance between reporting periods related
to advances from management for working capital. As those
advances do not appear to have been reflected in the
“Investing Activities” or “Financing Activities” sections of your
statement of cash flows, it appears that certain, if not all, of
these advances may have been reported within the “Operating
Activities” section of your statement of cash flows. If so,
explain to us why you believe that operating activities, rather
than financing, is the appropriate classification within the
statement of cash flows—particularly, as such advances would
appear to be equivalent to loans.
You present the cash receipts attributable to the collection
of outstanding notes receivables as “cash flows from
operating activities.” However, the notes receivables collected
appear to have arisen in connection with investing activities
(e.g., the dispotition of assets and the funding of a third party’s
capital expenditures), rather than the operations of your
business. As such, it appears appropriate to report cash received
from the collection of such receivables as “cash flows from
investing activities” in your statements of cash flows. Based
upon the observations noted above, please tell us why you
believe that your current classification of the collections on
notes receivables is appropriate. Alternatively, reclassify such
amounts to the investing activities section of your cash flow
statement. Please refer to both FASB ASC 230-10-45-12 and the
definition of “Investing Activities,” as provided in the glossary
to the Accounting Standards Codification, for further guidance.
Materiality: The SEC’s guidance on evaluating materiality
is included in SAB Topics 1.M and 1.N (previously SAB 99
and SAB 108). Materiality must be evaluated considering
both quantitative and qualitative factors. The quantitative
analysis should include the effects of the errors on each of
the company’s financial statements impacted (both annual
and interim) and related disclosures using both the iron
curtain and roll-over methods. However, registrants should
not assume that an error is not material simply because
it falls below a certain dollar or percentage threshold. A
qualitative analysis must also be performed to address
important considerations such as whether the error impacts
management’s compensation, whether it was intentional
or the result of a fraudulent act and, last but not least, if the
error impacts reported trends or analysts’ expectations.
The materiality analysis should be robust and balanced
(reflecting both positive and negative factors) and should
be contemporaneously documented, as the staff often ask
registrants to provide their materiality analysis.
You indicated in your prior response that revenues from
certain resale project contracts were incorrectly
recognized on a gross basis. Tell us what prior period(s) the
fourth quarter adjustment relates to and tell us the impact on
your GAAP financial statements for each period in which
revenues were overstated. Also, tell us whether similar
adjustments were recorded in any other periods and tell us
how you determined that correcting this error in the fourth
quarter was appropriate. In addition, please confirm that you
intend to disclose the nature of the fourth quarter adjustment
in future filings.
The staff also challenge registrants as to whether certain
adjustments, which may have been characterized as
reclassifications, are in fact errors. Similarly, when errors
are deemed by management to be immaterial and are
recorded in the period in which they were identified as
out-of-period adjustments, the staff have challenged that
conclusion and asked registrants to restate or revise their
previously issued financial statements. Disclosure of any
errors and related corrections is considered best practice,
as it provides transparent information to the users of the
financial statements.
10 Explain further the circumstances that result in the
over-accruals of project costs. Tell us to which
arrangements these cost adjustments relate. Tell us how often
you have recorded such adjustments during each of the last
three fiscal years and provide the amount of such adjustments.
Provide similar information as it relates to the prior fiscal year.
In addition, tell us if you consider these adjustments to be a
correction of an error and if not, why not.
11 Please clarify whether the discrete items noted in your
prior response was due to a change in judgment or
correction of an error. We refer you to ASC 740-10-25-15 and
35-2. In this regard, explain in greater detail the cause of the
inconsistencies in the positions taken in the tax reconciliation
and the tax return filed.
12 We have reviewed your response to prior comment, which
explained the items recognized during the three and nine
months ended September were attributed to a correction of an
error and not a change in judgment as defined by ASC 740-1025-15. Please explain what consideration you gave to disclosing
the items as immaterial errors under ASC 250-10. Tell us how
you evaluated the error based on estimated annual results for
the full fiscal year when the error was discovered. Further,
describe your materiality assessment of the errors [for the
annual period] in preparation for filing your Form 10-K.
Stay informed | 2013 technology SEC comment letter trends
PwC can help
If you would like to discuss how
these SEC comment letter trends
might impact your company, please
contact one of our practice leaders:
Cory Starr
US Technology Assurance Leader
408 817 1215
[email protected]
Mila Petrova
Partner, SEC Services
973 236 5601
[email protected]
Let’s talk
Please reach out to any of our technology
leaders to discuss this or other topics.
We’re here to help.
Tom Archer
US Technology Industry Leader
408 817 3836
[email protected]
Kayvan Shahabi
US Technology Advisory Leader
408 817 5724
[email protected]
Cory Starr
US Technology Assurance Leader
408 817 1215
[email protected]
Diane Baylor
US Technology Tax Leader
408 817 5005
[email protected]
The following PwC professionals contributed their
experience and knowledge to produce this paper.
Alyona Teeter
Senior Manager / SEC Services
973 236 7045
[email protected]
Jennifer Y Chen
Senior Manager / SEC Services
973 236 4735
[email protected]
Anil Persad
Senior Manager / SEC Services
973 236 5009
[email protected]
Special thanks
Special thanks to all the other resources in the National
Professional Services Group, Technology Sector, Marketing
and US Studio who contributed substantially to
the final editing, production and overall quality of this
technical publication.
About PwC’s
Technology Institute
The Technology Institute is PwC’s
global research network that
studies the business of technology
and the technology of business with
the purpose of creating thought
leadership that offers both factbased analysis and experiencebased perspectives. Technology
Institute insights and viewpoints
originate from active collaboration
between our professionals across
the globe and their first-hand
experiences working in and with
the technology industry. For
more information please contact
Tom Archer, US Technology
Industry Leader.
Stay informed | 2013 technology SEC comment letter trends
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