By George Wilson
MD&A is consistently at or near the top of most frequent SEC comment areas. As we discussed in this post, one frequent comment area is robust disclosure of both quantitative and qualitative information about material changes in financial statement line items. This requirement is clear in Regulation S-K Item 303:
“Where the financial statements reflect material changes from period-to-period in one or more line items, including where material changes within a line item offset one another, describe the underlying reasons for these material changes in quantitative and qualitative terms.”
To illustrate this comment, here is a revenue disclosure from Rite Aid’s Form 10-K for its year-end February 26, 2022:
Revenues
Pharmacy Services segment revenues decreased $647.0 million in fiscal 2022 compared to fiscal 2021. The decrease in the fiscal 2022 revenues was primarily the result of a planned decrease in Elixir Insurance membership and a previously announced client loss due to industry consolidation.
The SEC staff issued this comment asking Rite Aid to provide more robust disclosure surrounding the change in revenue for this segment:
Management's Discussion and Analysis of Financial Condition and Results of Continuing Operations
Pharmacy Service Segment Results of Operations, Revenues, page 58
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We note “[t]he decrease in the fiscal 2022 revenues was primarily the result of a planned decrease in Elixir Insurance membership and a previously announced client loss due to industry consolidation.” We were not able to obtain an understanding of these events or their impact on your results from your disclosure. Please provide more robust disclosure surrounding these events or indicate where these events are previously disclosed within your document. Reference is made to Item 303 of Regulation S-K. (February 21, 2023)
The company’s response was simple and direct:
Although the Company believes that its existing disclosures are adequate, in light of the Staff’s comment, in future filings that reference this decrease, the Company will modify its disclosure to reflect the following:
Pharmacy Services segment revenues decreased $647.0 million in fiscal 2022 compared to fiscal 2021. Approximately $42 million of the decline was the result of a decrease in Elixir Insurance membership due to a change in the Company’s pricing structure. Approximately $500 million of the decline was the result of a loss of a large commercial client, which the Company had previously announced in June 2021.
This is an easily avoidable comment given that the requirement for both quantitative and qualitative discussion of the reason for material changes in lines items is clearly articulated in S-K Item 303.
As always, your thoughts and comments are welcome.
#SEC #Financial Reporting