ACC 690 Module 9 Milestone Three Example

Critical Accounting Estimates and Response to SEC Staff Comments

[Student Name]

Southern New Hampshire University

ACC 690: Advanced Topics in Financial Reporting

Milestone Three

[Instructor Name]

[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Critical Accounting Estimates and Response to SEC Staff Comments

Purpose

The SEC's 2020 amendments to MD&A require registrants to disclose critical accounting estimates: those made under GAAP that carry real uncertainty and have moved, or could plausibly move, the reported results by a material amount. For each, the company must explain why it is uncertain, how much it changed in the period and, where material and reasonably available, the sensitivity of the reported amounts to the methods, assumptions and estimates underlying it (Securities and Exchange Commission, 2020). This milestone drafts that section for the 2026 10-K and responds to a staff comment letter received on the 2025 filing.

Selecting the Critical Estimates

The company reviewed its significant estimates: hedge effectiveness, the VIE judgment, the clean fuel credit, inventory valuation, long-lived asset recoverability, the uncertain tax position on state apportionment and the useful lives of plants. Hedge effectiveness and the VIE conclusion are judgments rather than estimates with a range of outcomes. Useful lives and the state tax position are uncertain but not reasonably likely to have a material effect. Three estimates qualify.

Estimate One: The Clean Fuel Production Credit

The company recognized $21.6 million of credits for 2026 from the Iowa plant, based on an emissions score modeled under the Treasury's framework. The score depends on two inputs that are uncertain: the measured energy use per gallon, which varies with plant operations, and the amount of carbon captured and sequestered, which depends on the third-party pipeline's uptime. The recognized rate of $0.18 a gallon is below the modeled $0.20 to reflect that uncertainty. Each one-cent change in the per-gallon credit changes annual credits by about $1.2 million on 120 million qualifying gallons. The estimate changed during the year as the Treasury's model was updated in the third quarter, increasing the recognized rate from $0.16.

Estimate Two: Net Realizable Value of Ethanol Inventory

Finished ethanol inventory of about 15 million gallons is written down whenever expected selling prices less selling costs fall below cost, so its value depends on ethanol prices at year end and in the following weeks. Ethanol prices can move 10 to 20 cents a gallon within a month. A decline of 10 cents a gallon from year-end prices would require a write-down of about $1.5 million. The company wrote down inventory by $2.1 million in the first quarter of 2026 and recovered it in the second, illustrating the volatility.

Estimate Three: Recoverability of the Nebraska Plant

The Nebraska plant, the oldest of the three, has a carrying amount of $142 million. Lower margins in 2025 were a triggering event, and the company tested recoverability using undiscounted cash flows over its remaining 14-year life. The key assumption is an average crush margin of $0.18 a gallon, based on the futures curve for two years and the ten-year historical average thereafter. Undiscounted cash flows of $171 million exceed the carrying amount by about 20 percent. A reduction of about three cents in the assumed margin would eliminate that headroom and require measuring an impairment at fair value, which would likely be well below the carrying amount.

Sensitivity summary

Estimates Considered but Not Included

Two estimates were discussed with the audit committee and left out. The useful lives of the plants, 30 years for the newest and 25 for the oldest, affect depreciation, but a reasonably possible change of two or three years would move annual depreciation by less than $1 million, below the threshold for material effect. The uncertain tax position on state apportionment carries a reserve of $0.6 million, and the range of outcomes is narrow. Explaining these choices in the committee's minutes supports the judgment that only three estimates are critical and guards against the opposite problem the SEC staff also criticizes: long lists that bury the estimates that matter.

How the Estimates Interact

The three estimates are linked through crush margins. A period of low ethanol prices would reduce inventory values, lower the cash flows in the Nebraska recoverability test and, if production were curtailed, reduce gallons eligible for the credit. The disclosure therefore notes that a sustained margin decline would affect all three at once, so readers do not treat the sensitivities as independent.

The Staff's Comments

The staff's letter on the 2025 10-K raised two points. First, it asked the company to explain why excluding plant maintenance shutdown costs from adjusted EBITDA is appropriate, given that such costs appear to be normal, recurring cash operating expenses. Second, it asked the company to revise its critical accounting estimates to quantify the sensitivity of the Nebraska plant recoverability test.

Draft Response

Comment one: The company acknowledges the staff's comment. Upon further consideration, the company agrees that planned maintenance shutdowns are recurring operating costs of its plants and will no longer exclude them from adjusted EBITDA in future earnings releases and filings, beginning with the 2026 10-K, and will recast prior periods presented for comparability.

Comment two: The company will expand its critical accounting estimates disclosure in the 2026 10-K to quantify the headroom in the Nebraska plant recoverability test and the change in the crush margin assumption that would eliminate it, as shown in the draft above.

Cassell et al. (2013) found that comment letters with more issues cost more to resolve, which favors responses that close each issue cleanly rather than prolonging debate.

Readability

Li (2008) found that annual reports of firms with lower earnings tend to be harder to read, and Brown and Tucker (2011) found that MD&A sections often change little from year to year. The draft avoids both problems by leading each estimate with numbers and updating every figure for the year's events.

Conclusion

The critical estimates section now tells investors which three numbers are most uncertain, why, and how much they could move, and the response to the staff resolves both comments by changing future disclosure.

References

Brown, S. V., & Tucker, J. W. (2011). Large-sample evidence on firms' year-over-year MD&A modifications. Journal of Accounting Research, 49(2), 309-346. https://doi.org/10.1111/j.1475-679X.2010.00396.x

Cassell, C. A., Dreher, L. M., & Myers, L. A. (2013). Reviewing the SEC's review process: 10-K comment letters and the cost of remediation. The Accounting Review, 88(6), 1875-1908. https://doi.org/10.2308/accr-50538

Li, F. (2008). Annual report readability, current earnings, and earnings persistence. Journal of Accounting and Economics, 45(2-3), 221-247. https://doi.org/10.1016/j.jacceco.2008.02.003

Securities and Exchange Commission. (2020). Management's discussion and analysis, selected financial data, and supplementary financial information (Release No. 33-10890). Author.