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Stay informed2014 SEC commentletter trends

Automotive

Current developments in

SEC reporting

November 2014

To Our Clients and Friends:

As 2014 draws near to an end, we know many of you are turning your attention to thepreparation of your year-end financial statements. With the continued uncertainties inthe economic and regulatory environment, this is a great time to refresh yourunderstanding of the SEC staff’s areas of focus when it comes to preparing high qualityannual reports.

We have prepared this publication to assist you with identifying and understanding theSEC’s recent areas of focus specific to the automotive sector. The topic areassummarized in this publication are based on comment letters issued by the SEC staff toautomotive companies and published between October 1, 2013 and September 30, 2014.We have provided relevant examples of recent comments in these topic areas to aid youin ensuring that your disclosures are robust and consistent with relevant accounting andreporting guidance and recent reporting trends. In some instances, we have includedrelevant examples from other industries but which may be applicable to automotivecompanies.

We hope you find this summary to be a useful reference tool, and we look forward toworking with you through this financial reporting season. Please do not hesitate to reachout to your engagement team or a PwC contact to discuss the information contained inthis publication.

Sincerely,

Richard HannaGlobal Automotive Leader

Sharad P. JainGlobal Automotive Assurance Leader

Contents

SEC developments...............................................................................................................................................................2

Overview ..............................................................................................................................................................................3

Management’s discussion and analysis..............................................................................................................................4

Segments ..............................................................................................................................................................................7

Impairments ........................................................................................................................................................................9

Income taxes .......................................................................................................................................................................11

Contingencies .................................................................................................................................................................... 13

Internal controls and procedures ..................................................................................................................................... 15

Operations in locations identified as state sponsors of terrorism .................................................................................. 16

Non-GAAP measures......................................................................................................................................................... 17

Compliance ........................................................................................................................................................................ 19

Other trends...................................................................................................................................................................... 20

About PwC’s Automotive Practice .................................................................................................................................... 21

Appendix ............................................................................................................................................................................22

1 Stay informed| SEC comment letter trends | Automotive


SEC developments

2014 was a busy year at the SEC. Although there wereonly a few changes in senior personnel (compared to2013 when several high profile staff positions werefilled and three Commissioners, including a newChair, were appointed), one notable change was theappointment of Jim Schnurr as the SEC's ChiefAccountant. Schnurr joined the SEC staff in Octoberand will play a major role in shaping the SEC'sagenda at a time when accounting, auditing, andfinancial reporting are key areas of focus. This focusreflects a common understanding that transparent,accurate, and reliable financial reporting forms thefoundation of trust which allows our capital marketsto function properly and provides the transparencyand confidence investors need when makingdecisions.

Following through on initiatives started in 2013, 2014has seen a high level of activity in the SEC'senforcement program, with renewed attention onfinancial fraud, issuer disclosure, and gatekeepers.The Enforcement Division's Financial Reporting andAudit Task Force—a small group of experiencedattorneys and accountants charged with developingstate-of-the art tools to better identify financial fraudand incubating cases to be handled by other groups—is one example of how the SEC has increased itsfocus. The Task Force monitors high-risk areas,analyzes industry performance trends, reviewsrestatements, revisions, and class action filings aswell as academic research. It is also working on theSEC's Accounting Quality Model—sometimesreferred to as Robocop—which is being developed touse data analytics to assess the degree to which acompany's financial reporting appears noticeablydifferent from its peers. The Task Force was verybusy during 2014 with even more activity expected in2015.

The SEC staff has continued to focus on internalcontrol over financial reporting, with more attentionon how companies evaluate deficiencies relating toimmaterial financial statement errors. The SEC staffsignaled its intention to increase its focus in this areain late 2013, and this has led to more frequentcomments and questions in 2014, with more likely tocome in 2015.

Recognizing that full and fair disclosure is a centralgoal of the U.S. securities laws and is critical to thefulfillment of the SEC's core mission, during 2014 theSEC launched a "Disclosure Effectiveness" initiative.Through this initiative, the SEC is looking for ways toupdate and modernize its disclosure system and toeliminate duplicative or overlapping requirements,while continuing to provide material information.Trying "to put better disclosure into the hands ofinvestors," the SEC staff is taking a fresh look at thequestion: what information do investors need tomake informed decisions? In addition to looking atthe specific disclosures companies provide, the SECstaff is also looking closely at how disclosures areprovided, particularly in light of advances intechnology and changes in how information isconsumed. For instance, the SEC staff might explorea “company file” approach through which investorswould access company-specific information on theSEC's website through tabs such as “Businessinformation,” “Financial information,” “Governanceinformation,” and “Executive compensation,” insteadof searching for that same information by combingthrough a reverse chronological list of filings. TheSEC staff has been clear that reducing disclosure isnot the objective of this important project (indeed,they have said that updating the requirements maywell result in additional disclosures), but they haveindicated that they believe the initiative can reducecosts and burdens on companies.

Even before any rule changes are adopted (orproposed), companies already have the ability toimprove the quality and relevance of their disclosuresby reducing redundancy, removing out-of-date,unnecessary information, and refining disclosures tofocus on those issues which are truly applicable andmaterial. The SEC staff has been encouragingcompanies to experiment with the presentation of theinformation in their filings with the objective ofimproving the transparency, quality, and relevance oftheir disclosures.

John A. MaySEC Services Leader


Overview

Last year, the global automotive industry experiencedan unusual period of uniform geographic growth.During 2014, however, regional cycles are back, aspolitical, social, and economic instability has led toautomotive sector losses within three of the fourBRIC markets while the U.S. and EU remain on thepath to recovery. These shifts have led to a re-orientation towards individual markets and arenewed focus on product development.

The automotive sector faces a range of factorsparticular to their individual country marketconditions. Even the countries with most pronouncedgrowth in recent years are now experiencing a degreeof contraction, including Brazil (-8.9%), Russia (-7.2%), India (-0.8%), Thailand (-23%), and Argentina(-34.3%).

The three largest automotive production regions ofthe world are still enjoying growth that is keeping theglobal topline afloat, including NAFTA (+5.1% or 823thousand units), Europe (+6.7% or 1.1 million units),and China (+10.1% or 1.9 million units).

Accommodating this growth has become a strategicchallenge for automotive manufacturers and theirsuppliers within these regions. These large assemblymarkets are also the most dominant in terms of sales,where transaction prices remain high. The lure ofadditional profit through extended retail and servicenetworks, and aftermarket/accessories opportunitieshighlight the need for sector participants to focus onboth emerging areas as well as mature, establishedmarkets.

Domestically, a continued stream of recalls continuesto dominate automotive headlines in North America;however, sales remain undeterred in the U.S.Monthly sales figures continue to outperform analystexpectations such that 2014 annual total sales (ifachieved) could represent the best year for U.S. salessince 2006.

Meanwhile, increasingly connected consumers arechanging the way automakers approach sales andmarketing and underscoring the need for a focus onproduct. Market share is no longer primarily based

on brand loyalty, but also factors in quality,innovation, and overall appeal. The bottom line isthat, even with ever-shifting preferences, automakersneed to offer high-quality products tailored to suitconsumer tastes. In that respect, the industry maynot have changed so much after all.

This is also true of the topics most frequentlyidentified in SEC comment letters this year, whichare relatively consistent with those issued in prioryears. By far the highest volume of comments relatedto registrants’ discussion of results of operations,liquidity, and capital resources in the MD&A. Onearea with a noticeable increase in comments relatesto how companies assessed the significance ofinternal control deficiencies in situations wherepreviously issued financial statements were restatedor revised.

The full list of “hot topics” is below – based on theorder of descending frequency of appearance in thecomment letters analyzed for automotive companies.Many of these topics are not limited to automotivecompanies, but show consistency in the SEC staff’spriority areas across a variety of sectors. In someinstances we have included relevant samples fromother industries.

Management’s discussion and analysis

Segments

Impairments

Income taxes

Contingencies (recall and warranty reserves andlegal contingencies)

Internal controls and procedures

Operations in locations identified as statesponsors of terrorism

Non-GAAP measures

Compliance

Other trends (business combinations andindebtedness)


Management’s discussion andanalysis

Management’s Discussion and Analysis of FinancialCondition and Results of Operations (MD&A) is acritical component of registrants’ communicationswith investors and continued to be the top area forcomment by the SEC staff in 2014. The key objectivesof MD&A are to provide a narrative explanation ofthe financial statements that enables investors to seethe company through the eyes of management, tooffer context to the financial statements, and toprovide information that allows investors to assessthe likelihood that past results are indicative of futureperformance. We have found that the majority of SECstaff comments in this area are not aimed at meetingspecific technical requirements, but rather atenhancing the quality of disclosures to meet theseobjectives.

The requirements themselves are set forth in Item303 of Regulation S-K, which identifies fivecategories of disclosure in MD&A: liquidity, capitalresources, results of operations, off-balance-sheetarrangements, and contractual obligations.Additional guidance is also contained in FinancialReporting Release (FRR) 36 and FRR 72. Morerecently, following the release of its December 2013Report on Review of Disclosure Requirements inRegulation S-K mandated by the JOBS Act, the SEChas indicated that the Division of CorporationFinance will pursue a project to developrecommendations focused on improving andstreamlining disclosure requirements. This projectmay reduce the costs and burdens on companies andeliminate duplicative disclosures in MD&A, but mayalso identify opportunities to increase thetransparency of information, which could lead to newrequirements.

We have found that the majority of SEC staffcomments in this area are not aimed atmeeting specific technical requirements, butrather at enhancing the quality of disclosuresto meet these objectives.

In the meantime, recent comments issued by the SECstaff have reinforced the well-established MD&Aobjectives that disclosures should be: 1) transparentin providing relevant information, 2) tailored to the

company’s facts and circumstances, 3) consistentwith the financial statements and other publiccommunications, and 4) comprehensive inaddressing the many business risks that exist intoday’s economic environment. Results of operations,liquidity, and capital resources are the categories ofMD&A that have received the most attention in SECcomment letters relative to these objectives. We haveprovided relevant examples of comments issued ineach of these areas.

Results of operations

SEC staff comments have reminded registrants thatthe results of operations section should providereaders with a clear understanding of the significantcomponents of revenues and expenses and eventsthat have resulted in or are likely to cause a materialchange in the relationship between costs andrevenues.

The SEC staff has frequently issued commentsspecifying that MD&A should not simply repeatinformation provided elsewhere in the filing; rather,it should explain the underlying drivers behindchanges in the financial position, results ofoperations and cash flows of registrants. Increasingly,registrants are being challenged to quantify theimpacts that such factors have had, especially whenan account has been impacted by multiple factors.General observations on the population of SEC staffcomments include the following:

Disclosing known trends - The SEC staff hasasked registrants to disclose known trendsaffecting the business, in particular, disclosure ofevents that have occurred and how those eventswere a positive or negative indicator of futureperformance. Examples include loss of asignificant customer, development of newproducts that might impact future revenues orcosts, entering a new market, or an acquisitionthat is expected to impact operating results. Inaddition, they encourage a discussion of keyoperating metrics used by management, coupledwith an analysis of the relationship between suchmetrics and GAAP results.



Drivers behind fluctuations - Many commentsrelate to improving registrants’ disclosures ofsignificant fluctuations between periods,including pricing, volume, the impact ofacquisitions, and currency movements. The SECstaff has asked for more detailed descriptionsrelated to the specific factors driving suchfluctuations and for registrants to quantify eachfactor separately, even when they net to aninsignificant change overall.

Consistency of information - The SEC staffcontinues to review public information forconsistency with the information included in aregistrant’s periodic filings. When managementdiscusses events or trends on earnings calls,social media channels, or the company’s website,the SEC staff may question why such events arenot also addressed in MD&A.

Segment discussion - SEC staff comments havealso encouraged the use of a segment analysis ifsuch analysis would provide investors with amore in-depth understanding of the consolidatedresults. The segment analysis may be integratedwith the discussion of the consolidated results toavoid unnecessary duplication.

Sample comments

1. Given that a portion of pension costs is allocatedto cost of goods sold, quantify how much of yourpension costs are capitalized as part of inventoryat each balance sheet date. We note yourproposed revised disclosure included in yourresponse. Please revise your draft disclosure toinclude historical information so we may assessthe effect of pension costs on cost of goods sold ,selling, administrative and general expense andoperating income.

2. We note your disclosure that the results for thesegment improved by $XX million compared tothe prior year. We also note that you haveattributed this improvement to several factors. Inlight of the fact that this change in segment loss isattributable to several factors, please revise toquantify the impact of each of these factors onthis segments loss for the periods presented orprovide the actual cost figures necessary to putthese changes in proper context.

3. In future filings, please provide a more detailedanalysis of the factors that impact youroperations, including a complete discussion ofknown or anticipated trends that may continue tohave an impact. Your discussion and analysis isto provide investors with sufficient informationto understand the historical trends and theexpectations for the future as seen through theeyes of management. Refer to Section 501.04 ofthe Financial Reporting Codification and SECRelease 33-8350 for guidance.



Liquidity and capitalresourcesA key objective of the liquidity and capital resourcesdiscussion is to provide a clear picture of theregistrant’s ability to generate cash and to meetexisting known or reasonably likely future cashrequirements. The SEC staff expects companies todiscuss material cash requirements, sources and usesof cash, and material trends and uncertainties relatedto its ability to use capital resources to satisfy itsobligations. General observations on the populationof SEC staff comments include the following:

Disclosure of events impacting liquidity - TheSEC staff has asked registrants to discuss knowntrends, events, or uncertainties that arereasonably likely to impact future liquidity. Suchevents could include entry into materialcommitments, loss of customers or contracts,treasury stock repurchase programs, or plans forsignificant capital expenditures.

Debt agreements and related covenants -Comments from the SEC staff have requestedexpanded disclosure of the material terms of debtagreements, including an indication ofcompliance with financial covenants. Insituations where there has been or is projected tobe a violation with regard to covenantcompliance, registrants should provide a detaileddescription of the covenants, the target andactual covenant measures for the most recentreporting period, and an indication of thesensitivity of those measurements, if applicable.Other items potentially impacting the availabilityof credit should also be made clear, includinglimitations on the ability to draw on existing linesof credit, or other borrowing limitations.

Stranded cash - For companies with foreignoperations, the SEC staff has focused on theregistrant’s ability to permanently reinvest cashoutside the United States in light of significantupcoming obligations, such as debt repaymentsor mandatory pension contributions. Commentshave focused on the relationship betweenliquidity needs and the income tax assertionabout management’s intent and ability topermanently reinvest foreign earnings. The SEC

staff has also asked companies to quantify theamount of cash held overseas and the amount ofincremental deferred tax, if any, which would berecorded if cash were to be repatriated. This isalso a common topic in SEC staff commentsrelated to income taxes.

Cash flow analysis - One of the commoncriticisms in the liquidity analysis is the recitationof information readily found on the face of thestatement of cash flows. Instead, registrantsshould disclose the underlying factors drivingchanges in operating assets and liabilities and therelated cash flows.

Sample comments

1. We note your disclosure that the increase in cashprovided by operating activities was primarilyattributable to the increase in operating income.Please expand your discussion to disclose thematerial factors that impact the comparability ofoperating cash flows in terms of cash andquantify each factor indicated so that investorsmay understand the magnitude of each. Yourdiscussion should focus on factors that directlyaffect cash, and not merely refer to operatingincome, which is recorded on an accrual basis.Refer to Section IV.B.1 of "Interpretation:Commission Guidance Regarding Management'sDiscussion and Analysis of Financial Conditionand Results of Operations" available on ourwebsite at http://www.sec.gov/rules/interp/33-8350.htm for guidance.

2. Please tell us, and revise future filings to clarify,how you determined that the sources of liquidityyou note will be sufficient for the next 12 months,particularly in light of the significant debtobligations and payables due within 12 monthsand your existing source of cash. For example,have you historically extended and/or refinancedshort-term debt and, if so, do you believe you willbe able to continue to do so?

3. Given your foreign operations, please enhanceyour liquidity disclosures in future filings toquantify the amount of cash and cash equivalentsheld at foreign locations as of the end of the year,if material, and address the potential impact onyour liquidity of holding cash outside the US.


Segments

The purpose of segment disclosures is to provideinvestors with the ability to see the company throughthe eyes of management. In particular, it allowsinvestors to assess the financial performance of acompany at a disaggregated level.

Segment reporting continues to be a hot topic forcomment letters across all industries, including theautomotive industry. The most frequent commentsissued by the SEC staff have been on the properidentification of operating segments and theaggregation of operating segments into reportablesegments. It is not unusual for the SEC staff torequest documentation supporting the registrant’sidentification of operating segments.

The SEC staff has often asked issuers to submit theinformation given to the chief operating decisionmaker (CODM) to allow the SEC staff to considerwhether the information is consistent with theregistrant’s identification of its segments (particularlywhen a company reports only one segment). Suchrequests can include both the formal reportingpackage, as well as any other additional informationregularly provided to, or discussed with, the CODM.It is important to remember that the SEC staffreviews publicly available information for consistencybetween segment disclosures and the types of otherinformation provided to the public. For example, theSEC staff may evaluate communications fromcompanies’ earnings calls, press releases, investorpresentations, and on a company’s website to identifyinconsistencies.

The SEC staff has also challenged registrants toexplain how the operating segments meet the“economic similarities” criterion for purposes ofaggregation. Comment letters may requestinformation from registrants to demonstrate that theoperating segments exhibit similar long-termfinancial performance, sometimes requesting ananalysis of the historical gross margins for eachoperating segment.

It is not unusual for the SEC staff to requestdocumentation supporting the registrant’sidentification of operating segments.

The FASB and SEC have both supported the re-evaluation of segment reporting guidance givenchanges in technology and how information can beaccessed and used. Until and unless changes aremade, registrants should assess their segments basedon the existing guidance in ASC 280, and continuallyreassess their segment conclusions, especially whenthere is a change in the registrant’s business andmanagement reporting structure.

Sample comments

1. We note that for several years you have madepresentations at conferences in which youprovided charts that showed the breakout of afiscal year's sales by various product groups. Inthis regard, please provide the disclosurerequired by ASC 280-10-50-40.

2. We note that, during the second quarter, youchanged your segment presentation to reflect theway your Chief Executive Officer now evaluatesperformance and the way you are organizedinternally. You now report your activities in twobusiness segments. In this regard, please describeto us in your response the operating segmentsthat aggregate to the two new reportingsegments, and why these operating segmentsmeet the aggregation criteria set forth in FASBASC 280-10-50-11 and 12. Your response shouldbe supported with the reports reviewed by yourCODM, as well as any recent material changes toyour internal reporting structure.

3. Please explain how you determined yourreportable operating segments under FASB ASC280-10-50. We note from your disclosure that thecompany has five businesses. Discuss whethereach of these businesses is considered areportable operating segment.

Segments


4. We note your statement that you operate in fivebusiness segments. Please tell us and revise yourdisclosures in future filings to clarify whetherthese five business segments meet the definitionof operating segments, or if the five businesssegments are reportable segments that arecomprised of the aggregation of two or moreoperating segments. If you are aggregatingoperating segments into a reportable segment,please also expand your disclosures in futurefilings to disclose your operating segments thatare aggregated into the corresponding reportablesegment and confirm that all of the aggregatedsegments meet all six of the criteria discussed inASC 280-10-50-11. Please note that to the extentone or more aggregated operating segment hasdiverged from the reportable segments long-termfinancial performance for an isolated period,detailed disclosure of this divergence should have

been fully discussed and analyzed in youranalysis of your segment operating results inMD&A. Please refer to ASC 280-10-50-21.a. forguidance.


Impairments

The SEC staff continues to issue comments onregistrants’ considerations of disclosures surroundingcritical accounting estimates related to goodwill,indefinite-lived intangible assets, and long-lived assetimpairment testing.

Even where there is not an impairment beingrecognized, the SEC staff looks for disclosures thatallow an investor to assess the likelihood of a futurematerial impairment charge.

Goodwill

SEC staff comments during the 2014 comment lettercycle reflected themes similar to 2013 and 2012.Comments have requested additional details aboutimpairment tests and the related assumptions. Forreporting units whose fair values are not substantiallyin excess of their carrying amounts (“at risk”reporting units), the SEC staff has asked registrantsto disclose:

The percentage by which the fair value of thereporting unit exceeded its carrying value as ofthe date of the most recent quantitative analysis

The amount of goodwill allocated to the reportingunit

A description of the methods and keyassumptions used in the impairment assessmentand how they were determined

A discussion of the degree of uncertaintyassociated with key assumptions

A description of potential events andcircumstances that could have a negative effecton the reporting unit's fair value

This type of request is consistent with the guidanceoutlined in the Division of Corporation FinanceFinancial Reporting Manual Section 9510.3.

The SEC staff has also continued to challengewhether impairment charges were recognized in theappropriate period. In some instances, the SEC staffhas requested that registrants provide the currentperiod and historical impairment analyses,

accompanied by a comparison of key assumptionsunderlying each analysis with supporting evidencefor changes in those assumptions. Some registrantsalso received comments from the SEC staff when noimpairment charge was recorded during the annualassessment, but other publicly available dataindicated the presence of a negative trend that couldimpact the impairment assessment.

When an impairment charge is recognized,registrants should disclose in the footnotes the eventsthat gave rise to the impairment, such as changes inthe underlying business or environment, the amountof the impairment loss, and the method ofdetermining fair value of the reporting unit. Suchdisclosures should provide sufficient linkage toanswer the question of why the charge belongs in thecurrent period.

Sample comment

1. Please expand your disclosure to discuss thesignificant assumptions you use in your goodwillimpairment analysis. In addition, to the extentthat any of your reporting units have estimatedfair values that are not substantially in excess oftheir carrying values, and goodwill for yourreporting units, in the aggregate or individually,if impaired, could materially impact your resultsof operations or total shareholders' equity, pleaseidentify and provide the following disclosures foreach such reporting unit:

- The percentage by which fair value exceedscarrying value;

- A description of the material assumptionsthat drive estimated fair value;

- A discussion of any uncertainties associatedwith each key assumption; and

- A discussion of any potential events, trendsand/or circumstances that could have anegative effect on estimated fair value.

Impairments


Long-lived assetsThe SEC staff comments related to long-lived assetswere consistent with those presented for goodwilland other indefinite-lived intangible assets.Specifically, the SEC staff scrutinized the timing ofwhen impairment charges were recorded and thesufficiency of disclosures of valuation methodologies.

The SEC staff has also requested that registrantsprovide additional information about the level ofuncertainty and sensitivity of key assumptionsrelated to “at risk” assets or asset groups. In someinstances, the SEC staff requested details of theimpairment analysis and challenged registrants’conclusions relative to how registrants consideredeconomic challenges, operating losses at a specificsegment, or how they defined the lowest level ofidentifiable cash flows used to identify the assetgroup.

Long-lived assets are assessed for impairment undertwo models: (1) assets to be held and used, and (2)assets to be disposed of by sale.

Held and used assets should be tested forrecoverability whenever events or changes incircumstances indicate that the carrying amount ofthe asset or asset group may not be recoverable. Anasset group that satisfies all of the held for salecriteria under ASC 360, Property, Plant andEquipment should be measured at the lower of itscarrying amount or fair value less cost to sell.

Comments from the SEC staff have also focused onthe following areas:

The consideration of economic challenges,

operating losses at a specific segment and the

impairment of similar assets as a potential

triggering event

The adequacy of foreshadowing disclosures for

assets at risk of impairment, including the

percentage by which undiscounted cash flows

exceed carrying value

The timing of impairment charges

SEC staff scrutinized the timing of whenimpairment charges were recorded and thesufficiency of disclosures of valuationmethodologies.

Sample comments

1. We note that you recorded fixed assetimpairment charges of $XX million. Pleasedescribe to us in greater detail the specific fixedassets that were considered at risk for possibleimpairment and their carrying amount as a resultof this draft regulation and, if different, the fixedassets that were eventually impaired. Pleasedescribe for us the methodology used fordetermining the fair value of the fixed assets andthe significant assumptions inherent in thatmodel. Refer to FASB ASC 360-10-35 and 360-10-50.

2. We note your disclosure that the $XX milliondecrease in your revenue for the six monthsended June 30, 2013 was primarily due to a XX%decrease in the volume of shipments. We alsonote that substantially all of your sales are to onecustomer who has decreased its sales orders withyou starting in the second quarter of 2011 andcontinuing through the first quarter of 2013.Please tell us if this customer is included withinthe customer list intangible asset which has a netbook value of nearly $XX million as of June 30,2013. If so, please tell us how you considered ifthe decline in orders from this customerrepresents a significant adverse change incircumstances which could cause you to evaluatethe recoverability of this intangible asset forpossible impairment as of June 30, 2013. Pleaserefer to ASC 350-30-35-14, ASC 360-10-35-21and 35-22.


Income taxes

The accounting for income taxes, including therelated disclosure requirements, is often complex andinvolves significant judgment. SEC staff commentshave focused on disaggregation in the income taxprovision disclosures, additional detail related to thedetermination of valuation allowances, and thesufficiency and consistency of indefinite reinvestmentdisclosures.

Income tax provisiondisclosuresSEC staff comments frequently asked registrants toenhance their disclosure of how the results ofoperations are impacted by having proportionallyhigher or lower earnings in jurisdictions withdifferent tax rates and the extent to which foreigneffective tax rates differ from the domestic rate.

The SEC staff also issued comments when it wasunclear whether the registrant’s effective tax ratereconciliation included each item that exceeded fivepercent of income tax expense calculated using theapplicable statutory tax rate (as required by ASC 740-10-50-12 and Rule 4-08(h) of Regulation S-X).

Valuation allowancesThe SEC staff continued to scrutinize registrants’assessments of the realizability of deferred tax assets.These assessments involve significant judgment. Incomment letters, the SEC staff asked registrants toexplain the nature and weight of the positive andnegative evidence considered. When significantchanges occurred in the realizability of deferred taxassets, comments often asked registrants to explainthe circumstance that lead to the change in thevaluation allowance and to justify the timing of whenthe change was recorded. When changes incircumstances impacting the realizability of netdeferred tax assets can be foreseen, registrantsshould consider foreshadowing disclosures in periodspreceding the change.

Indefinite reinvestmentassertion and relatedliquidity disclosuresThe SEC staff has frequently asked registrants toexplain the factors supporting their indefinitereinvestment assertion, including a description oftheir plans for reinvestment in each foreignjurisdiction. In addition, the SEC staff has remindedregistrants that when an indefinite reinvestmentassertion was made, ASC 740-30-50 requiresdisclosure of the amount of the unrecognizeddeferred tax liability on undistributed earnings offoreign subsidiaries, or a statement that suchdetermination is not practicable.

As discussed in the MD&A section above, theinterplay between a registrant's indefinitereinvestment assertion and liquidity has continued tobe an area of SEC staff comment. Registrants havebeen asked to disclose the amount of cash and cashequivalents in jurisdictions with an indefinitereinvestment assertion, the potential tax consequenceof repatriation, and a description of events that maycause such foreign earnings to become taxable. TheSEC staff has indicated that highlighting the amountof cash that may not be available to fund domesticoperations or obligations without paying a significantamount of taxes upon repatriation is an importantelement of transparent liquidity disclosures.

The SEC staff may also request further information ordisclosure when a registrant asserts indefinitereinvestment for certain foreign jurisdictions, butalso discloses amounts repatriated from others.

The interplay between a registrant's indefinitereinvestment assertion and liquidity hascontinued to be an area of SEC staff comment.

Income taxes


Sample comments

1. We note during this quarter that based uponqualitative and quantitative analysis of currentand expected domestic earnings, industry andmarket trends, and other contributing factorsresulted in a more than likely conclusion of beingable to realize a significant portion of your U.S.deferred tax assets. To that effect, your valuationallowance decreased by $XX million in thequarter. We also note from your disclosure thatyou have been able to sustain positive earningsdespite low demand for products and servicesthat has occurred in many of your markets duringthe current and previous three years and thatyour earnings have become positive on acumulative basis through this period. In thisregard, please reconcile your conclusion with thestatements made in your Form 10-K where youdisclose you had three years of cumulativedomestic losses for continuing operations and inthe last 2 years you recorded additional valuationallowances of $X million and $X million againstyour domestic deferred tax assets. You alsoindicate that having three years of cumulativelosses limits your ability to look to future taxableincome as a source for recovering your deferredtax assets. Please explain to us in detail thesignificant change in events that have occurredwhich allowed you to conclude in a relativelyshort timeframe that $XX million of deferredassets would be more than likely realizable. Aspart of your response, please provide us withyour detailed analysis of the positive and negativeevidence considered and the weight given toeach, commensurate withthe extent to which theevidence was objectivelyverifiable, in determiningthat the valuation allowancewas no longer needed. Wemay have further commentupon receipt of yourresponse.

2. We note from your disclosure that the companyhas not recognized a provision for United Statesincome taxes on $XX million of undistributedearnings of international subsidiaries because itis your intention to reinvest those earningsindefinitely and the determination ofunrecognized deferred U.S tax liability for theundistributed earnings of such subsidiaries is notpracticable. Please revise your discussion in theLiquidity and Capital Resources section of MD&Ato discuss the amount of cash held by yourforeign subsidiaries at the most recent balancesheet date, the fact that you would be required torecognize U.S. income taxes on such funds if theywere repatriated to the United States and astatement indicating that you have no currentplans to repatriate such funds.

3. We note that your effective tax rate has hadsignificant variability between periods presentedwith a continuing reference to changes in the mixof income in tax jurisdictions among otherfactors. In future filings, please expand upon thisdisclosure to provide investors with additionalinsight into the tax jurisdictions materiallyimpacting your effective tax rate for each periodpresented that includes quantified information.Please refer to Item 303(a)(3) of Regulation S-Kand Section 501.12.b. of the Financial ReportingCodification for guidance. Please provide us withthe disclosures that you would have included inyour first quarter of fiscal year 2014 Form 10-Qin response to this comment.


Contingencies

Recall and warrantyreservesThe recent volume of recalls has attracted publicattention and press coverage. Recall and warrantyreserves are areas that normally involve significantjudgment or estimates and may be subject to SECstaff comment. At the 2013 AICPA NationalConference on Current SEC and PCAOBDevelopments in December 2013, the SEC’s Divisionof Enforcement noted that significant reserves wereamong the focus areas for the newly created FinancialReporting and Auditing Task Force, which usestechnological tools and academic studies to identifypotential financial accounting fraud.

The SEC staff has asked questions concerning reservetrends over time, as well as increased disclosurerelated to current period changes or adjustments toprovisions. Registrants should ensure they haveappropriately considered the implications of theunderlying drivers of adjustments on the continuedappropriateness of the overall model used to estimatethe reserves. Current period adjustments could betaken as an indication that the liabilities andexpenses recognized in prior periods may have beenincomplete or inaccurate.

ASC 460 details the required footnote disclosuresrelating to warranties, which includes discussion ofthe nature of the warranty and how it arose. Inaddition, Regulation SK 303 (3) requires discussionin MD&A of any unusual or infrequent eventsmaterially affecting income, as well as known trendsor uncertainties that may reasonably be expected toimpact revenues or income.

Sample comments

1. Tell us why accrued warranty expense declinedfrom $XX million at the beginning of 2011 to$XX million at the end of 2013.

2. We note your disclosure that in 2013 yourecorded adjustments to pre-existingwarranties totaling $404 million, the sameamount as the Company recorded in fiscal2012. We further note, that these adjustmentswere recorded in each of the quarters during2013. In light of the significance of youradjustments to pre-existing warranties during2013, please explain to us in further detail, the

nature and specific timing of the events orchanges in facts or circumstances that resultedin the significant adjustments for changes inestimates for pre-existing warranties duringeach of the quarterly periods in 2013.

Legal contingenciesThe SEC staff continues to focus on ensuring thatregistrants comply with the guidance of ASC 450,Contingencies. Some registrants are resistant toproviding the required disclosures for fear that theymay divulge information that could adversely affectthe outcome of litigation. To that end, the SEC staffhas indicated that they will accept disclosure ofestimated exposure on an aggregated basis, ratherthan requiring separate disclosure for each individualmatter.

GAAP requires companies to record an accrual for aloss contingency when it is probable that a loss hasbeen incurred and the amount of the loss can bereasonably estimated. Even if the criteria for accrualhave not been met, disclosure may still be required ifthe loss is reasonably possible. For loss contingenciesthat meet the criteria for disclosure, registrantsshould disclose the nature of the contingency and anestimate of the possible loss or range of loss (or astatement that such estimate cannot be made).

To keep investors apprised of material developmentsassociated with the nature, timing, and amount of aloss contingency, such details should generally not bedisclosed for the first time in the period in which theyare recorded. The SEC staff has frequently evaluatedthe disclosures in periods prior to the period in whicha loss is recorded and commented on the lack ofadequate early-warning or foreshadowingdisclosures. Such comments often request additionalinformation to understand the triggering event forrecording the loss and whether such losses shouldhave been recorded in an earlier period. The SECstaff expects that loss contingency disclosures will beupdated regularly, both qualitatively andquantitatively, for developments in the relatedmatters and as more information becomes available.

Contingencies


Sample comments:

1. You state that, the Company is subject to variousclaims and legal actions arising in the ordinarycourse of business, none of which managementbelieves is likely to have a material adverse effecton the Company’s consolidated financialposition, results of operations or liquidity. Withreference to Question 2 of SAB Topic 5Y pleasenote that a statement that the contingency is notexpected to be material does not satisfy therequirements of FASB ASC Topic 450 if there isat least a reasonable possibility that a lossexceeding amounts already recognized may havebeen incurred and the amount of that additionalloss would be material to a decision to buy or sellthe registrants securities. In that case, theregistrant must either (a) disclose the estimatedadditional loss, or range of loss, that isreasonably possible, or (b) state that such anestimate cannot be made. In future filings, pleaserevise your disclosures accordingly.

2. In future filings, please revise your disclosure tostate if the legal proceedings and/orenvironmental matters are expected to bematerial to your cash flows in addition to yourfinancial condition and results of operations.Also, if there is at least a reasonable possibilitythat a loss exceeding amounts already recognizedmay have been incurred, please either disclose anestimate (or, if true, state that the estimate isimmaterial 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 ASC 450-20-50.


Internal controls and procedures

We have heard various members of the SEC staffsignal that internal control over financial reporting(ICFR) is an area of increasing interest. At the 2013AICPA National Conference on Current SEC andPCAOB Developments, several presenters noted thatas part of the comment letter process, the SEC staff islooking for potential indicators of materialweaknesses, such as corrections of an error ordisclosures regarding material changes in internalcontrols. Presenters also commented that the SECstaff may be interested in a registrant’s conclusionsregarding ICFR in instances where they do not agreewith a registrant’s conclusion on an accountingmatter. This focus on ICFR has continued to bementioned in the months since the conference, andwe expect it to be discussed again at the 2014conference. We have begun to see an increasingvolume of comments in this area. Registrants shouldcontinue to carefully evaluate the ICFR anddisclosure controls and procedures (DC&P)implications in responses to the SEC staff and thesufficiency of their disclosures, assessments, andcertifications. The SEC staff’s comments haveincreasingly challenged registrants’ conclusionsregarding the existence or severity of internal controldeficiencies.

While the SEC staff is likely to question why arestatement did not result in the reporting of amaterial weakness, we have also seen commentsabout the existence of material weaknesses whenerrors are corrected by means of revision ofcomparative financial statements.

Companies sometimes assess control deficiencieswith a priority focus on the Control Activitiescomponent of COSO. It is important to evaluate theimplications of control deficiencies on all COSOcomponents. The SEC staff has asked for additionalinformation about the company’s consideration ofspecific components within the COSO framework.

The SEC staff has also questioned registrants whenthere is no explicit conclusion about the effectivenessof DC&P or when management has concluded thatICFR is ineffective but DC&P is effective. Under Rule13a-15(b) of the Exchange Act, the registrant’s

management must evaluate the effectiveness ofDC&P as of the end of each fiscal quarter. Thisevaluation includes assessing the controls and otherprocedures designed to ensure that informationrequired to be disclosed by the registrant in its filingsis recorded, processed, summarized, and reportedwithin the time periods specified in the SEC’s rulesand forms. Although separately assessed, it isimportant to remember that there is substantialoverlap between the processes considered DC&P andthose considered part of IFCR. Nearly all of ICFRfalls within the scope of DC&P, whereas there areaspects of DC&P that extend beyond what isconsidered part of ICFR. As such, it is rare that amaterial weakness in ICFR would not also result inDC&P being considered ineffective.

Sample comments

1. It appears that your control structure failed, ineither design or execution, to prevent an errorfrom being detected before resulting in a materialrestatement. It remains unclear whether therewere no controls in place that would haveprevented such an error, or if the controls inplace failed. Please clarify. Further, because thecontrol failure resulted in a material restatement,it is unclear why you believe the related weaknessis not material. Please explain.

2. We continue to question your evaluation of thedeficiencies in ICFR and your determination thatit was not reasonably possible that a materialmisstatement of your financial statements wouldnot be prevented or detected on a timely basis asa result of certain control deficiencies.

3. Please describe in greater detail how youconsidered the numerous deficiencies inevaluating the monitoring and risk assessmentcomponents of COSO. Specifically, we continueto question whether one or more deficienciesexist in the risk assessment or monitoringcomponent and whether one or more suchunidentified deficiencies represent a materialweakness.


Operations in locations identifiedas state sponsors of terrorism

As companies continue to expand their operationsinternationally, some find themselves doing business,directly or indirectly, with countries that have beenidentified by the U.S. government as state sponsors ofterrorism. Countries in this category currentlycomprise Cuba, Iran, Sudan, and Syria. The U.S.government has imposed sanctions and embargoesrestricting commerce and trade with these countries.

The SEC staff regularly asks registrants, particularlyglobal organizations, to provide incrementaldisclosure about business activities that occur in orwith these countries. In addition, they have issuedcomment letters requesting that registrants discussqualitative and quantitative factors that a reasonableinvestor would regard as important in making aninvestment decision. Comments have requestedinformation or disclosures about:

The nature and extent of past, current, and anyanticipated operations in or with a countrydesignated as a state sponsor of terrorism

Any agreements, goods, services, technology, orsupport that registrants have provided for thereferenced countries or other contracts that theregistrant has had with the governments orentries controlled by the governments in thesecountries

Whether there are offices, facilities, equipment,ground services, sales agents, or other employeesin such countries

A quantitative discussion of revenues, assets, andliabilities associated with each of the referencedcountries

Sample comments

1. You stated in your letter that two authorized,independent dealers sold your vehicles inSyria, and one of your foreign subsidiaries soldparts to the dealers for vehicle repair in Syria.We note from your Middle East website thatyour regional office in Dubai continues to coveryour operations in Syria. You state on page XXof your Form 10-K that you operate in Africa, a

region that includes Sudan. Lastly, we notefrom the website of XX, with which you have aglobal strategic alliance, that it operates inCuba. As you know, Cuba, Sudan, and Syria aredesignated as state sponsors of terrorism bythe State Department and are subject to U.S.economic sanctions and export controls. YourForm 10-K does not include disclosureregarding contacts with Cuba, Sudan, or Syria.Please provide us with information regardingyour contacts with Cuba, Sudan, and Syriasince your referenced letter. Your responseshould describe any products, equipment,components, services, or support you haveprovided into Cuba, Sudan, and Syria, directlyor indirectly, since your referenced letter, aswell as any agreements, or other contacts youhave had with the governments of thosecountries or entities they control.

2. We are aware of publicly available informationindicating that commercial vehicles aremanufactured in Iran under license from yoursignificant customer for export to countriesincluding Sudan and Syria. Additionally, inyour 10-Q you describe how your net saleswere affected by certain events in LatinAmerica, a region that includes Cuba. Cuba,Sudan and Syria are designated by theDepartment of State as state sponsors ofterrorism, and are subject to U.S. economicsanctions and export controls. Please describeto us the nature and extent of your past,current, and anticipated contacts with Cuba,Sudan and Syria, if any, whether throughsubsidiaries, affiliates, distributors, customersor other direct or indirect arrangements. Yourresponse should describe any services,products, information or technology you haveprovided to Cuba, Sudan or Syria, directly orindirectly, and any agreements, commercialarrangements, or other contacts you have hadwith the governments of those countries orentities controlled by their governments.


Non-GAAP measures

Companies often supplement their GAAP financialreporting with non-GAAP information that isintended to provide additional insight into thefinancial performance of the business. A non-GAAPfinancial measure is a numerical measure that adjuststhe most directly comparable measure determined inaccordance with GAAP. Such measures providesupplemental information regarding a company’shistorical or future financial position, performance,cash flows, or liquidity. They generally conveychanges to the business that are organic separatefrom those that may be considered unusual,infrequent, or not representative of underlyingtrends. Common non-GAAP financial measures usedby automotive companies include earnings beforeinterest, taxes, depreciation and amortization(EBITDA), adjusted EBITDA, adjusted earnings oradjusted earnings per share, free cash flows, and netdebt.

A company has flexibility in which non-GAAPfinancial measures it chooses to report, if any, andhow it calculates such metrics, subject to certainprohibitions. Therefore, a limitation inherent in non-GAAP financial measures is that they are subjectiveand may not be comparable to similarly titled non-GAAP financial measures used by other companies,including peers.

When non-GAAP financial information is presentedin periodic reports filed with the SEC, registrants arerequired by Item 10(e) of Regulation S-K to include:

The reasons why management believes that thenon-GAAP measure is relevant to investors

The additional purposes, if any, for whichmanagement uses the non-GAAP measure

the most directly comparable GAAP financialmeasure with equal or greater prominence tofacilitate comparability among other registrants

A reconciliation to the comparable GAAPmeasure

Regulation G requires a similar reconciliationbetween the non-GAAP measure and the mostcomparable financial measure calculated inaccordance with GAAP, and is applicable to all publicdisclosures of non-GAAP measures.

Below are some of the circumstances that generatedcomment letters reviewed in our analysis:

Use of terminology that implies a non-GAAPmeasure is a standard measure, e.g., a measurethat includes adjustments to the standarddefinition of EBITDA should not be labeled"EBITDA"

Inappropriate use of a non-GAAP measure thatexcludes normal cash expenses necessary tooperate the business, e.g., advertising costs orsalaries

Presentation of non-GAAP liquidity measuresthat omit items which are cash-settled

Giving greater prominence to non-GAAP resultsover GAAP results

When evaluating whether and how to disclose non-GAAP measures, registrants should ensure that theyunderstand and adhere to the applicable rules.

Sample comments

1. We note from the press release furnished in yourreport on Form 8-K, that you have included areconciliation of your actual net income to youradjusted net income, a non-GAAP measure, thatis essentially in the form of a non-GAAP incomestatement. As outlined in Question 102.10 of theCompliance and Disclosure Interpretationsregarding Non-GAAP measures maintained onthe Commission’s website, it is generally notappropriate to present a full non-GAAP incomestatement for purposes of reconciling a non-GAAP measure to most comparable GAAPmeasure as it may attach undue prominence tothe non-GAAP information. Please confirm thatyou will revise to eliminate this presentation.Refer to the guidance outlined on theCommission’s website athttp://www.sec.gov/divisions/corpfin/guidance/nongaapinterp.htm.

2. We see that your Statement of Cash Flowspresents a measure of operating cash flows beforechanges in working capital. Please tell us why it isappropriate to present this measure on the faceof your Statement of Cash Flows. In this regard,tell us how presentation of the partial measure ofoperating cash flows is contemplated and

Non-GAAP measures


appropriate under FASB Codification Topic 230;and, how you determined that the measure is nota non-GAAP financial measure subject to theguidance from Item 10(e) of Regulation S-K.Please note that under the cited guidance, it isnot appropriate to present a non-GAAP financialmeasure on the face of the financial statements.

3. We note that your discussion and analysis foryour consolidated results of operations focuseson sales and adjusted operating profit andadjusted operating profit margin with nodiscussion and analysis of the U.S. GAAPoperating profit and margin. In future filings,please provide a discussion and analysis of U.S.GAAP consolidated profit measures beforeproviding an analysis of any non-GAAP profitmeasure. In this regard, we note that the adjustedoperating profit margin showed an improvingtrend; whereas, the U.S. GAAP operating profit

margin showed a declining trend that has not beexplained. Please refer to Item 10(e)(1)(i)(a) ofRegulation S-K for guidance S-X.


Compliance

Compliance with the instructions to Forms 10-K and10-Q, continue to garner comments from the SECstaff. Specifically, there are often errors in theinformation required to be included as exhibits,which include management’s certifications. Guidanceon the form and content of exhibits can be found inItem 601 of Regulation S-K.

Comments received in this category often relate to:

Improper dating of certifications

Omission of signatures from appropriate officers

Use of inappropriate language in certifications ofthe principle executive officer and principlefinancial officer

Omission of required exhibits and appendiceswithin the filing

While these comments do not typically requiresignificant effort to address, the resolution of thesecomments may require a registrant to file anamendment.

Sample comments

1. The certification refers to the Annual Reporton Form 10-K for the period ended June 30,2013 rather than September 30, 2013. Pleaseamend your Form 10-K to providecertifications which refer to the appropriateperiod. Please refile the Form 10-K in itsentirety and ensure that the certifications arecurrently dated and refer to the Form 10-K/A.In a similar manner, please amend your Form10-Q for the period ended December 31, 2013as the certification provided in Exhibit 32.1also appears to refer to the wrong period.

2. This report does not appear to have beensigned by a majority of your directors. Refer toGeneral Instruction D(2)(a) and (b) of Form10-K. Please advise.

3. We note that your 906 certifications furnishedpursuant to Rule 13a-14(b) of the Exchange Actwere both signed by your principal executiveofficer rather than by your principal executiveofficer and principal financial officer. Pleaseamend your filing to include currently signedand dated certifications that are signed by bothyour principal executive officer and principalfinancial officer. The amendment shouldinclude the entire filing with the propercertifications.

4. There are a number of exhibits listed in yourexhibit index for which it does not appear thatyou have included the document in the currentfiling or incorporated the document byreference to a previous filing. To the extent thatan exhibit is not relevant to your company,please delete the reference in the exhibit index.Please revise accordingly.


Other trends

Business CombinationsM&A activity is expected to continue to increase inthe automotive sector. As registrants preparedisclosures related to acquisitions, the guidance inASC 805, Business Combinations, specifically ASC805-10-50-1 through 7, should be carefullyconsidered. The acquisition-related accounting anddisclosure requirements can be complex, and canvary based on the nature of the transaction and thenature of the assets acquired and liabilities assumed.As companies continue to seek growth opportunitiesor other means of developing new technologies suchas fuel cells, through acquisitions, we expect that theSEC staff will continue to comment on variousacquisition accounting and disclosure items.

The SEC staff comments have focused on both theaccounting and disclosure requirements of ASC 805,Business Combinations with focus on anydeficiencies in the required disclosures, including:

Questions about how fair value was determinedand the key assumptions used

The reasons for significant adjustments to theinitial fair values recorded and the reasons whysuch information was not available at an earlierdate

How goodwill was allocated to reporting unitsand the interplay with the company’s operatingsegments disclosures

How the company evaluated whether theacquired set of assets and activities representedan asset or business

Sample comments

1. Please amend to show the pro forma revenuesand earnings (losses) of the combined entities asthough the business combinations that occurredduring 2013 had occurred as of the beginning of2012, or tell us if it is impracticable to providethis information and why, consistent with FASBASC 805-10-50-2(h)(3).

2. Please amend to disclose the method you used todetermine the acquisition-date fair value of yourcommon stock for each acquisition where theconsideration included the issuance of your

common stock consistent with FASB ASC 805-30-50-1(b)(4).

IndebtednessThe prolonged period of low interest rates has madedebt attractive, although the economic uncertainty inrecent years has increased the focus on transparentdisclosures of debt covenant compliance and relateddisclosures. The majority of SEC staff commentsrequest that registrants provide more detail onmaterial financial covenants and to explicitly statewhether they are compliant.

If registrants have obtained waivers related to non-compliance with debt covenants, then they need toconsider the requirements of Regulation S-K Item402 and ensure the details of such waivers aredisclosed, as well as a statement to the effect that thespecific debt covenants were not met.

Sample comments

1. For each class of debt, please ensure that youclearly disclose whether you were in compliancewith the covenants as of the reporting date.

2. We note that you received a waiver of events ofdefault for the qualified opinion in your financialstatements related to the going concern. In thisregard, please tell us the period of waiver andwhether you expect to regain compliance at thenext measurement date. Refer to ASC- 470-10-45-1.


About PwC’s Automotive PracticePwC’s automotive practice leverages its extensiveexperience in the industry to help companies solvecomplex business challenges with efficiency andquality. One of our practice’s key competitiveadvantages is Autofacts®, a team of automotiveindustry specialists dedicated to ongoing analysis ofsector trends.

PwC U.S. helps organizations and individuals createthe value they’re looking for. We’re a member of thePwC network of firms in 158 countries with morethan 180,000 people. We’re committed to deliveringquality in assurance, tax and advisory services. Tellus what matters to you and find out more by visitingus at www.pwc.com/US. Gain customized access toour insights by downloading our thought leadershipapp: PwC’s 365™ Advancing business thinking everyday.

For more information about this sector or PwC,please contact:

Richard Hanna

Global Automotive Leader

[email protected]

(313) 878-8754

Sharad JainGlobal Automotive Assurance [email protected](313) 594-3018

Scott SchuellerU.S. Automotive Quality [email protected](414) 213-9546

Larry DodykNational Professional Services Group andAutomotive [email protected](973) 236-7213

Visit our website at:www.pwc.com/gx/en/automotive/index.jhtml

AcknowledgmentsThe following PwC professionals contributed theirexperience and knowledge to produce this paper. Formore information about this publication, pleasecontact any of the following individuals:

Valerie [email protected](973) 236-5887

Simon BarlowSenior [email protected](973) 236-4964

Michael BallardSenior [email protected](973)-236-5049

Jennyfer BrunoSenior [email protected](973) 236-4347

http://www.pwc.com/gx/en/automotive/autofacts/index.jhtml

http://www.pwc.com/us/en/index.jhtml

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AppendixSEC Comment Letter Process

The SEC’s Division of Corporate Finance (CorpFin)has a long history of reviewing selected filings madeunder the Securities Act of 1933 and the SecuritiesExchange Act of 1934. The intent of the review is tomonitor and enhance compliance with applicabledisclosure and accounting requirements.

Until Sarbanes-Oxley, these reviews were periodicand not subject to specific intervals. Section 408 ofthe Sarbanes-Oxley Act requires the SEC to reviewthose who issue Exchange Act reports no lessfrequently than once every three years. A significantnumber of companies are selected more frequently.

CorpFin does not publicly disclose the criteria it usesto select companies and filings for review, but Section408 asks the SEC to consider the following selectioncriteria:

Issuers with material restatements offinancial results

Issuers that experience significant volatilityin their stock price as compared to otherissuers

Issuers with the largest market capitalization

Emerging companies with disparities in priceto earnings ratios

Issuers whose operations significantly affectany material sector of the economy

Any other factors that the SEC may considerrelevant

Once a company or filing is selected, the extent of thereview may be (1) a full cover-to-cover review, (2) areview of the financial statements and relateddisclosures (e.g., MD&A), or (3) a targeted review ofone or more specific items of disclosure. Theidentified reviewer concentrates on criticaldisclosures that appear to conflict with SEC rules orthe applicable accounting standards and ondisclosure that appears to be materially deficient inexplanation or clarity. They evaluate the disclosurefrom a potential investor’s perspective and askquestions that an investor might ask when readingthe document.

CorpFin performs its reviews through 12 AssistantDirector (AD) offices organized based on specializedindustry, accounting, and disclosure expertise. Anissuers AD assignment is shown in EDGAR followingthe basic company information that precedes the

company’s filing history. This organizationalstructure can sometimes explain why multiplecompanies in the same industry receive very similarcomments around the same time.

Responding to SEC Comment Letters

The SEC staff’s comments are based primarily on acompany’s disclosure and other public information,such as information on the company’s website, inpress releases, discussed on analysts calls, etc.(nonpublic information, such as whistleblower tipsand PCAOB inspection reports, can also be a sourceof comments). SEC staff comments reflect itsunderstanding of the applicable facts andcircumstances. In comments, the SEC staff mayrequest that a company provide additionalsupplemental information so the staff can betterunderstand the company’s disclosure, or may ask thatthe company provide additional or differentdisclosure in a future filing or change the accountingand/or revise the disclosure by filing an amendment.

When responding to the SEC staff, keep these bestpractices in mind:

Own the process—Companies shouldleverage the knowledge and experience oftheir auditors and SEC counsel, but it’simportant to maintain ownership. As withany project, there should be a clear ownerand project manager coordinating the inputfrom various sources and developing aresponse.

Don’t rush—Companies should evaluate howlong they believe it will take to respond.Although the letter from the SEC staff willrequest a response in 10 business days, it isacceptable for management (usually throughcounsel’s call to the SEC staff) to requestmore time if 10 days is not sufficient. Athoughtful and complete response is betterthan a quick reply.

Think about future filings—Companiesshould discuss letters received shortly beforeit is planning to file a registration statementwith its auditors and counsel to determine ifthere are any implications on the content andtiming of the registration statement.Questions about timing can also be discussedwith the SEC staff as well as the possibility ofan expedited review of the company’sresponse.

Appendix


Ask the SEC staff—Companies can call theSEC staff if they do not understand thecomment. The objective should not be for thecompany to explain their position, but to gainclarification when a comment or aspects ofthe comment is unclear.

Remember that comments become public—Comments become part of the public domainonce submitted and resolved. Comments andthe related responses are posted to the SEC’swebsite no earlier than 20 days after thereview is completed or the registrationstatement is declared effective. Even thosecomment letters related to Emerging GrowthCompanies that have filed confidentiallyeventually are made public. CorpFin willredact any information subject to a Rule 83confidential treatment request withoutevaluating the substance of that request.

Don’t rely solely on precedent—The use ofprevious comments and responses of othercompanies may be helpful in responding butshould not be the primary basis of theresponse. Each comment is based on specificfacts and circumstances and may involvedifferent levels of materiality. Accordingly,the reason the staff accepted a response forone company may not be applicable inanother situation. Make sure the response isappropriate based on the company’s specificfacts and applicable accounting literature.

Address the intent of the question—Consider,if possible, the objective of the SEC staffcomment. Sometimes providing a completeanswer that addresses the intent of thequestion can stave off future comments.

Provide planned disclosures—Manycomments will request additional disclosurein future filings. To ensure there is a meetingof the minds, provide the SEC staff with adraft of the applicable disclosure, even if thedata used is from a prior period. This willallow the SEC staff to assess whether thenarrative sufficiently addresses theircomment and may prevent future commentson the same disclosure.

The company or its representatives should feel free toinvolve the SEC’s Office of the Chief Accountant(OCA) (distinct from CorpFin’s Office of ChiefAccountant) at any stage in this process. Generally,OCA addresses questions concerning the applicationof GAAP while CorpFin resolves matters concerningthe age, form, and content of financial statementsrequired to be included in a filing.

Closing a Filing Review

When a company has resolved all SEC staffcomments on an Exchange Act registrationstatement, a periodic or current report, or apreliminary proxy statement, CorpFin provides thecompany with a letter to confirm that its review of thefiling is complete.

When a company has resolved all SEC staffcomments on a Securities Act registration statement,the company may request that the SEC declare theregistration statement effective so that it can proceedwith the transaction.

A more detailed discussion of the filing reviewprocess used by the Division of Corporate Financecan be found on the SEC’s website ashttp://www.sec.gov/divisions/corpfin/cffilingreview.htm

http://www.sec.gov/divisions/corpfin/cffilingreview.htm

http://www.sec.gov/divisions/corpfin/cffilingreview.htm

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