Disclosure Simplification Four – Wither the S-K 201(d) Table?

From its inception, this table required by S-K Item 201(d) has created confusion:

201Table

The table is clearly included in S-K Item 201.  The instructions to Item 5 in Form 10-K clearly require that the information required by S-K item 201 should be included in Item 5.  Here is a relevant excerpt:

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

(a)  Furnish the information required by Item 201 of Regulation S-K (17 CFR 229.201) …….

The problem the SEC created when they first required this table was that they also added the table to the instructions for Item 12 in Form 10-K:

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Furnish the information required by Item 201(d) of Regulation S-K (§ 229.201(d) of this chapter) and Item 403 of Regulation S-K (§ 229.403 of this chapter).

This created what turned out to be enough confusion about where to place the table (Item 5 or Item 12) in Form 10-K that the American Bar Association asked the SEC to clarify the situation.  The SEC did this, issuing first a letter to the ABAand then a Compliance and Disclosure Interpretation stating the table should be in Item 12, not Item 5.  (It would appear they sort of forgot to update the instructions to Item 5…)

Here is the relevant C&DI:

Question 106.01

Question: Is the Item 201(d) disclosure required in Part II of Form 10-K, given that Item 5 of Form 10-K indicates that the registrant is required to furnish the information required under Item 201, or should the Item 201(d) disclosure be included (or incorporated by reference) in Part III of Form 10-K given that Item 12 indicates that the registrant is required to furnish the information required under Item 201(d)?

Answer: The Item 201(d) disclosure should be included in Part III, Item 12 of Form 10-K. An issuer may rely on General Instruction G.3 to Form 10-K to incorporate by reference the Item 201(d) disclosure from its proxy statement or information statement, even if the issuer did not submit a compensation plan for security holder action at its annual meeting of security holders. SeeAmerican Bar Association (Jan. 30, 2004). [Mar. 13, 2007]

This table was also required in Schedule 14A for the proxy statement.

When the SEC finalized its Disclosure Update and Simplification rule in August, they recognized that most of the information required by the table is now in the notes to the financial statements.  In addition, one of the key disclosures in the table, plans approved by shareholders and plans not approved by shareholders, is much less relevant today as the major security exchanges now require essentially all plans to be approved by shareholders.

Because of this the SEC has made two changes for this table. 

First, they have deleted the requirement for the table in the proxy statement by deleting this language from Schedule 14A, as you can find on page A152 of the SEC’s Demonstration Version of the rule:

Item 10. Compensation Plans.

***

(c) Information regarding plans and other arrangements not subject to security holder action. Furnish the information required by Item 201(d) of Regulation S-K (§229.201(d) of this chapter).

The instruction to this rule was also deleted.

And, just to make this even more detailed, theDisclosure Update and Simplification rule also removes the requirement to disclosure this table from Item 12 in Form 10-K(see page A 184 of the demonstration version):

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Furnish the information required by Item 201(d) of Regulation S-K (§229.201(d) of this chapter) and byItem 403 of Regulation S-K (§229.403 of this chapter).

The bottom line:  the table should now be included in Item 5 in Form 10-K. 

 This is also one of the issues the SEC asked the FASB to address and so more could come later in the notes to the financial statements.

As always, your thoughts and comments are welcome!

Disclosure Update and Simplification – The Details Continue! Post Number Three – Item 5 – Form 10-K Changes

As we blogged on August 21, September 26, and October 3and October 4, the SEC’s 314-page Final Ruledealing with “Disclosure Update and Simplification” makes a myriad of fairly detailed updates to Regulations S-X and S-K, as well as many of the Forms and other rules.

As you may have heard (and can read in this post),the new rule was published in the Federal Register on October 4, 2018.  This means the changes in the new rule are effective for filings made on or after November 5, 2018.  The one caveat to this effective date, as you may have heard, is for the addition to changes in shareholders’ equity information to Form 10-Q, where the SEC issued a C&DIindicating “the staff would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments.”

You can read about all the related details for the new 10-Q requirement to present changes in shareholders’ equity in this post.

Just in case you have not seen it, the SEC published what they are calling a “demonstration version” with the final rule that shows all the changes to Regulation S-K, S-X, the Instructions to the Forms and other related guidance. 

In this post we focus on changes to S-K Item 201, which is included in Item 5 of Form 10-K.  Here is the list of changes from the final rule:

Amend § 229.201 by:

a. Revising paragraph (a)(1)(i);

b. Removing paragraph (a)(1)(ii), redesignating paragraph (a)(1)(iii) as paragraph (a)(1)(ii), revising newly redesignated paragraph (a)(1)(ii) and adding new paragraph (a)(1)(iii);

c. Removing paragraphs (a)(1)(iv) and (v);

d. Removing and reserving paragraphs (a)(2)(i) and (c)(1) and Instruction 1 to the Instructions to Item 201;

e. Redesignating Instructions 1 through 5 to Item 201 consecutively as Instruction 1 to Item 201, Instruction 2 to Item 201, Instruction 3 to Item 201, Instruction 4 to Item 201 and Instruction 5 to Item 201; and

f. Revising newly redesignated Instruction 2 to Item 201.

To help you get started making changes for your next Form 10-K and 10-Q, here are the details:

  1. For the first change, paragraph (a)(1)(i), which requires information about stock trading, will now read:

(i) Identify the principal United States market(s) and the corresponding trading symbol(s) for each class of the registrant’s common equity. In the case of foreign registrants, also identify the principal foreign public trading market(s), if any, and the corresponding trading symbol(s) for each class of the registrant’s common equity.

The changes in this paragraph are:

1. The addition of disclosure of your ticker symbol

2. The removal of a requirement to make disclosures where there is no established trading market, which has been moved to new (a)(2)(ii)

  1. The paragraph that has been deleted, (a)(1)(ii), was the requirement to disclose stock price information by quarter for the last two years:

(ii) If the principal United States market for such common equity is an exchange, state the high and low sales prices for the equity for each full quarterly period within the two most recent fiscal years and any subsequent interim period for which financial statements are included, or are required to be included by Article 3-01 through 3-04 of Regulation S-X (§210.3-01 through 3-04 of this chapter), or Article 8-02 through 8-03 of Regulation S-X (§210.8-02 through 8-03 of this chapter) in the case of smaller reporting companies, as reported in the consolidated transaction reporting system or, if not so reported, as reported on the principal exchange market for such equity.

The change here is that disclosure of stock price by quarter for the last two years is no longer required.

 

  1. The new paragraph (a)(1)(ii) now reads:

(ii) If the principal United States market for such common equity is not an exchange, indicate, as applicable, that any over-the-counter market quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

The change here is that disclosure of stock price, or absent a market, bid price information for the last two years by quarter is no longer required, similar to the change in number 2 above.

 

  1. The new paragraph (a)(1)(iii) now reads:

  (iii) Where there is no established public trading market for a class of common equity, furnish a statement to that effect and, if applicable, state the range of high and low bid information for each full quarterly period within the two most recent fiscal years and any subsequent interim period for which financial statements are included, or are required to be included by 17 CFR 210.3-01 through 210.3-20 (Article 3 of Regulation S-X), indicating the source of such quotations. Reference to quotations shall be qualified by appropriate explanation. For purposes of this Item the existence of limited or sporadic quotations should not of itself be deemed to constitute an “established public trading market.”

This new paragraph essentially continues the old disclosure requirements for situations where a company’s stock does not have an “established public trading market”

  1. The next change is the removal of these two paragraphs, (a)(1)(iv) and (a)(1)(iv):

(iv) Where a foreign registrant has identified a principal established foreign trading market for its common equity pursuant to paragraph (a)(1) of this Item, also provide market price information comparable, to the extent practicable, to that required for the principal United States market, including the source of such information. Such prices shall be stated in the currency in which they are quoted. The registrant may translate such prices into United States currency at the currency exchange rate in effect on the date the price disclosed was reported on the foreign exchange. If the primary United States market for the registrant’s common equity trades using American Depositary Receipts, the United States prices disclosed shall be on that basis.

(v) If the information called for by this Item is being presented in a registration statement filed pursuant to the Securities Act or a proxy or information statement filed pursuant to the Exchange Act, the document also shall include price information as of the latest practicable date, and, in the case of securities to be issued in connection with an acquisition, business combination or other reorganization, as of the date immediately prior to the public announcement of such transaction.

This change removes the requirement for stock price information for companies whose stock trades on a non-US exchange, similar to the change for stock traded on US exchanges, as well as certain stock price information in registration statements.

  1. The next paragraph removed, (a)(2)(i), is part of a 33Act registration statement requirement for disclosures about shares subject to option when a company in registration does not have a currently active public market. Company’s in this situation had to disclose the amount of shares:

(i) That is subject to outstanding options or warrants to purchase, or securities convertible into, common equity of the registrant;

Since this information is readily available in the financial statements, the S-K disclosure is removed.

  1. The next paragraph removed, (c)(1), is information about dividends, which is available in the financial statements, hence the elimination of this paragraph:

(1) State the frequency and amount of any cash dividends declared on each class of its common equity by the registrant for the two most recent fiscal years and any subsequent interim period for which financial statements are required to be presented by §210.3 of Regulation S-X. Where there are restrictions (including, where appropriate, restrictions on the ability of registrant’s subsidiaries to transfer funds to the registrant in the form of cash dividends, loans or advances) that currently materially limit the registrant’s ability to pay such dividends or that the registrant reasonably believes are likely to limit materially the future payment of dividends on the common equity so state and either (i) describe briefly (where appropriate quantify) such restrictions, or (ii) cross reference to the specific discussion of such restrictions in the Management’s Discussion and Analysis of financial condition and operating results prescribed by Item 303 of Regulation S-K (§229.303) and the description of such restrictions required by Regulation S-X in the registrant’s financial statements.

  1. The last changes made for S-K Item 201 are some adjustments to the instructions. First, Instruction 1 is removed as it is no longer relevant:

Registrants, the common equity of which is listed for trading on more than one securities exchange registered under the Exchange Act, are required to indicate each such exchange pursuant to paragraph (a)(1)(i) of this Item; such registrants, however, need only report one set of price quotations pursuant to paragraph (a)(1)(ii) of this Item; where available, these shall be the prices as reported in the consolidated transaction reporting system and, where the prices are not so reported, the prices on the most significant (in terms of volume) securities exchange for such shares

Next, Instruction 2 is revised to reference bid information:

Market prices and dividends Bid informationreported pursuant to this Item shall be adjusted to give retroactive effect to material changes resulting from stock dividends, stock splits and reverse stock splits

 

As we saw with the changes to Item 1, none of the changes here to Item 5 are earth shattering, but there is a fair amount of detail.

You might think this is enough for S-K Item 201, but there is actually another change that is kind of hidden in the other sections of the rule.  It turns out the table required by S-K Item 201(d) for equity compensation plans will move from Item 12 to Item 5 and no longer be required in the proxy statement.  Our next post will have all the details of that change.

As always, your thoughts and comments are welcome!

 

Another Reminder to Watch the Details with Enforcement Emphasis!

As we blogged back in June, attention to detail is an important part of successful SEC reporting.  Regulation S-X Article 10 is the source of another important SEC reporting detail. This part of S-X contains the interim financial statement requirements for Form 10-Q.

(A quick side note – as we discussed in our previous postthis is where the new requirement for information about changes in shareholders’ equity in Form 10-Qwas added by the Disclosure Update and Simplification rule.)

Article 10, as it has been updated by Disclosure Update and Simplification, includes this fairly simple language concerning the auditor’s review of the financial statements in Form 10-Q:

(d) Interim review by independent public accountant. Prior to filing, interim financial statements included in quarterly reports on Form 10-Q (17 CFR 249.308(a)) must be reviewed by an independent public accountant using applicable professional standards and procedures for conducting such reviews, as may be modified or supplemented by the Commission. If, in any filing, the company states that interim financial statements have been reviewed by an independent public accountant, a report of the accountant on the review must be filed with the interim financial statements.

The language we bolded and underlined in this excerpt was in this paragraph before and after the update. And it is a fairly simple thing to confirm with your auditor, via email or other vehicle, that they are done with the review before you file.

As you will see in this enforcement division press release, paying attention to this detail is important.  In what is apparently a kind of “sweep” action, five companies paid fines averaging $50,000 each for failing to observe this requirement.  It is also interesting to note the SEC and the PCAOB worked together on these actions.

As always, your thoughts and comments are welcome!

Disclosure Simplification News – The Effective Date!

The Disclosure Simplification and Update final rule has now been publishedin the Federal Register.  And BIG THANKS to Marvin Tagaban of Ropes and Gray for the heads -up!

As you can read in the link above, the effective date for the changes will be filings made on or after November 5, 2018.  So all the changes will be in effect for calendar year-end companies.

That said, don’t forget, for the addition of changes in shareholder equity information in Form 10-Q the SEC published a C&DI granting a bit of relief as we discussed in this post.

As always, your thoughts and comments are  welcome!

Disclosure Update and Simplification – The Details Continue! Post Number Two – Form 10-Q – Information About Changes in Shareholders’ Equity and Some Help From the SEC

As we blogged on August 21 and September 17, the SEC’s 314-page Final Ruledealing with “Disclosure Update and Simplification” makes a myriad of fairly detailed updates to Regulations S-X and S-K, as well as many of the Forms and other rules.

These changes are effective 30 days after publication in the Federal Register.  As of the date of this post, October 3, 2018, the final rule has not been published in the Federal Register.

This means that these changes may or may not be in effect for the period ended September 30, 2018. This would be true for both quarterly and annual periods.  If your filing has a due date more than 30 days after publication the new rule would apply, so stay tuned!

In this post we will go into the details of the much-discussed new requirement to add information about changes in shareholder’s equity to Form 10-Q.

In S-X Article 10, the source of the financial statement requirements in Form 10-Q, before this change, there was no requirement to provide information about changes in shareholder’sequity.  Many companies voluntarily provided this information, but it was not actually required.

There was a requirement to include this information with annual financial statements.  The source for this requirement was, and continues to be, Regulation S-X Rule 3-04, which after a minor update to include “comprehensive income” is:

  • 210.3-04 Changes in stockholders’ equity and noncontrolling interests.

An analysis of the changes in each caption of stockholders’ equity and noncontrolling interests presented in the balance sheets shall be given in a note or separate statement. This analysis shall be presented in the form of a reconciliation of the beginning balance to the ending balance for each period for which a statement of comprehensive income is required to be filed with all significant reconciling items described by appropriate captions with contributions from and distributions to owners shown separately. Also, state separately the adjustments to the balance at the beginning of the earliest period presented for items which were retroactively applied to periods prior to that period. With respect to any dividends, state the amount per shareand in the aggregate for each class of shares. Provide a separate schedule in the notes to the financial statements that shows the effects of any changes in the registrant’s ownership interest in a subsidiary on the equity attributable to the registrant.

In the Disclosure Update and Simplification Final Rule, the SEC made a subtle, almost sneaky change.  When updating and simplifying Regulation S-X, they added this short requirement to S-X Rule 10-01:

(7) Provide the information required by §210.3-04 for the current and comparative year-to-date periods, with subtotals for each interim period.

And, with that addition, we now have to include changes in shareholder’s equity information in Form 10-Q for the current quarter, the year to date and comparative prior year periods.  The information can be in a separate statement or a note.  As a side note, changes in non-controlling interest would be included also, just as they are in a full fiscal year presentation.

As a quick follow-up, the same requirement was added to S-X Article 8, the financial statement requirements for Smaller Reporting Companies, so SRC’s will also have to provide this information.

The timing of the change is up-in-the-air a bit because, as mentioned above, the final rule has not yet been published in the Federal Register.  And, as is the case with such rules, it would be effective for filings made after the effective date, meaning a third-quarter-end Form 10-Q may or may not be after this date when we finally know the date!

To reduce this confusion the staff issued a very helpful C&DI on September 25, 2018.  It says:

Question 105.09

Question: On August 17, 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. The amendments will become effective 30 days after publication in the Federal Register. Among the amendments is the requirement to present the changes in shareholders’ equity in the interim financial statements (either in a separate statement or footnote) in quarterly reports on Form 10-Q. Refer to Rules 8-03(a)(5) and 10-01(a)(7) of Regulation S-X. When are filers expected to comply with this new requirement?

Answer: The amendments are effective for all filings made 30 days after publication in the Federal Register. In light of the anticipated timing of effectiveness of the amendments and expected proximity of effectiveness to the filing date for most filers’ quarterly reports, the staff would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments. For example, assuming an effective date of October 25, a December 31 fiscal year-end filer could omit this disclosure from its September 30, 2018 Form 10-Q. Likewise, a June 30 fiscal year-end filer could omit this disclosure from its September 30, 2018 and December 31, 2018 Forms 10-Q; however, the staff would object if it did not provide the disclosures in its March 31, 2019 Form 10-Q. (Sept. 25, 2018)

As always, your thoughts and comments are welcome!

Disclosure Update and Simplification – The Details Begin! Post Number One – Item 1 – Form 10-K Changes

As we blogged on August 21, the SEC has adopted a 314-page Final Rule dealing with “Disclosure Update and Simplification”.  The rule has a myriad of fairly detailed updates to Regulations S-X and S-K, as well as many of the Forms and other rules.  These changes are effective 30 days after publication in the Federal Register. As of the date of this post, September 26, 2018, the final rule has not been published in the Federal Register.

This means that these changes may or may not be in effect for the period ended September 30, 2018. This would be true for both quarterly and annual periods.  If your filing has a due date more than 30 days after publication the new rule would apply if the SEC uses its normal effective date procedures.  Given the many places this new Rule will affect periodic reports the CorpFin staff has already published one C&DI about the transition so far, which deals with the new requirement for changes in shareholders’ equity information in Form 10-Q.  We will post the details about that change in our next post.  The message is stay tuned!

In this next series of posts we will begin to focus a bit on how these changes will affect reporting. To begin at the beginning of your next Form 10-K, the final rule , on page 224, makes these changes to S-K Item 101, the description of the business in Item 1 of Form 10-K:

“Amend § 229.101 by:

1.  Removing and reserving paragraphs (b), (c)(1)(xi) and (d);

2.  Revising paragraphs (e) introductory text and (e)(2) and (e)(3);

3.   Removing and reserving paragraph (h)(4)(x); and

4.  Revising paragraph (h)(5)(iii)”

To help you get started making changes for your next Form 10-K and 10-Q, here are the details:

  1. First, by removing paragraph (b) the Final Rule removes the requirement for segment disclosures in Item 1. Most companies historically simply cross referenced to their financial statements for this requirement as it required the same information as GAAP.  The SEC eliminated this duplicative disclosure in the Final Rule.
  1. Along the same lines as paragraph (b), removing paragraph (d) eliminates the requirement for geographical information in Item 1. Most companies simply cross referenced to their financial statements for this requirement also, as it also required the same information as GAAP.  The SEC also eliminated this duplicative disclosure in the Final Rule.
  1. Paragraph (c)(1)(xi) is the requirement to disclose company sponsored and customer sponsored R&D expense.Since GAAP requires essentially the same disclosures, the SEC eliminated this duplicative disclosure of R&Din the Final Rule.
  1. The changes in paragraphs (e), (e)(2) and (e)(3) are about the posting of website information. The changes here are very detailed, but not dramatic in scope.  The only part of this change specifically attributable to Form 10-K is in the introductory paragraph (e) and in (e)(3).  Before this change the requirement to disclose your webpage and information about posting SEC reports only applied to accelerated and large accelerated filers.  With this change, the requirement to disclose your webpage now applies to all filers.  This is the old language in paragraph e(3), which is struck-through to emphasize it is superseded:

(3) You are encouraged to give your Internet address, if available, except that if you are an accelerated filer or a large accelerated filer filing your annual report on Form 10-K, you must disclose your Internet address, if you have one. 

The new language in paragraph (e)(3) is, which with the change in paragraph (e) now applies to all filers is:

(3) Disclose your Internet address, if you have one.

Paragraph e(4), which still only applies to accelerated and large accelerated filers and is not changed, is the requirement to make disclosures about website availability of your 34 Act periodic and current reports.

There is one other change worth noting in this section.  The old language in paragraph (e)(2), which applies to registration statements under the 33 Act, has finally been updated.  It used to read:

(2) That the public may read and copy any materials you file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE., Washington, DC 20549. State that the public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. If you are an electronic filer, state that the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC and state the address of that site (http://www.sec.gov).

It is now updated to read: (Finally!)

(2) State that the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC and state the address of that site (http://www.sec.gov).

Many companies have historically included this language in Form 10-K, so if you do you can update it.

  1. Paragraphs (h)(4)(x) and (h)(5)(iii) make the changes to eliminate the R&D disclosure and update the website information disclosure for smaller reporting companies.

As you can see, none of the changes are earth shattering, but there is a fair amount of detail.

This post and the next several posts will hopefully help you begin marking up your drafts for your next 10-Qs and 10-K.

As always, your thoughts and comments are welcome!

 

 

A Third Quarter 10-Q Cover Page Check Box Tip – With the Graphics!

As some readers may have noticed, this is a corrected post.  I found there were a few tricks I did not know about including images in our posts, and fixed the images for this revised post.  I apologize for the confusion!

George

As we approach the last month of the third quarter (or whichever period you are in if you are not a calendar-year end company), the SEC has made many changes in the details of Forms 10-K and 10-Q.  Both the new smaller reporting company rulesand the recent final rule for Disclosure Update and Simplificationinclude several tactical changes.

One of the nitty-gritty changes deals with the check boxes on the cover pages of both Forms 10-K and 10-Q.

The cover page of Form 10-Q used to look like this:

Old 10K

Notice specifically the (Do not check if a smaller reporting company) note after Non-accelerated filer.  The new arrangement of the check boxes looks like this:

 

As you can see, before the changes for the new SRC rules, the instructions to the forms indicated that companies should only check one of the boxes.  However, as you look at the new check boxes above it is apparent that for many companies more than one box will apply.

Does this mean we should now consider checking more than one box?

The answer to this question is not directly apparent on the forms themselves.  Hidden away in footnote 131 of the final rule you will find this answer:

In conjunction with these amendments, we also are adopting technical revisions to Securities Act Forms S-1, S- 3, S-4, S-8, and S-11 and Exchange Act Forms 10, 10-Q and 10-K. These amendments modify the cover page of the specified forms to remove the parenthetical next to the “non-accelerated filer” definition that states “(Do not check if a smaller reporting company).” After these amendments, a registrant should check all applicable boxes on the cover page addressing, among other things, non-accelerated, accelerated, and large accelerated filer status, SRC status, and emerging growth company status.

Unfortunately, as is frequently the case, scarce resources at the SEC sometimes make the process of updating the forms on the SEC’s web page lag behind the actual regulatory changes.  As of today, August 31, 2018, the web page instructions for Form 10-Qhave not yet been updated. (Same for Form 10-K). So, you can use the references above as your support to change the cover page of your next Form 10-Q or Form 10-K.

As always, your thoughts and comments are welcome!

 

Are You Ready to be Simplified?

On August 17, 2018, the SEC approved a 314-page Final Ruleto implement many parts of their disclosure effectiveness and simplification initiatives.  Included in the many changes made by the rule are updates to:

Regulation S-X

Regulation S-K

The instructions to the Forms

The changes focus on:

Removing redundant and duplicative requirements that are substantially similar to disclosures required by GAAP, International Financial Reporting Standards (IFRS), or other Commission disclosure requirements,

Eliminating overlapping requirements, which are related to, but not the same as GAAP, IFRS, or other Commission disclosure requirements,

Deleting outdated requirements which have become obsolete as a result of the passage of time or changes in the regulatory, business, or technological environment, and

Updating and superseding requirements which are inconsistent with recent legislation, more recently updated Commission disclosure requirements, or more recently updated GAAP.

You can read the final rule and find the related press release here.

We will post more about the details of some of the changes soon.

As usual, your thoughts and comments are always welcome!

Ever Seen a Disclosure in Item 1B in Form 10-K?

Item 1B in Form 10-K is a very uncomfortable and very unusual disclosure:

Item 1B. Unresolved Staff Comments.

If the registrant is an accelerated filer or a large accelerated filer, as defined in Rule 12b-2 of the Exchange Act (§240.12b-2 of this chapter), or is a well-known seasoned issuer as defined in Rule 405 of the Securities Act (§230.405 of this chapter) and has received written comments from the Commission staff regarding its periodic or current reports under the Act not less than 180 days before the end of its fiscal year to which the annual report relates, and such comments remain unresolved, disclose the substance of any such unresolved comments that the registrant believes are material. Such disclosure may provide other information including the position of the registrant with respect to any such comment.

If a company receives material comments 180 days before year-end and they are still unresolved when the company files its annual report, the situation is bound to be complex and uncomfortable.

Our workshop leader group watches for examples of this disclosure to discuss in our workshops, but rarely do we see one.  Courtesy of one of our participants earlier this summer, here is a real-life example.

From BorgWarner’s Form 10-K for December 31, 2017:

Item 1B. Unresolved Staff Comments

The Company has received comment letters from the Staff of the SEC’s Division of Corporation Finance on May 11, June 23, August 23 and November 29, 2017 as part of its review of the Company’s Form 10-K for the year ended December 31, 2016. The Company responded to all of the letters – most recently on January 25, 2018. As of the date of this Form 10-K, the Staff has not confirmed to the Company that its review process is complete. The Company intends to continue working with the Staff in the event the Staff has any further comments.

The Staff’s comments related to the Company’s accounting for the $703.6 million asbestos related charge recorded in the December 31, 2016 Consolidated Financial Statements, as well as asbestos related insurance assets. These two matters are disclosed in Note 14, Contingencies in the 2017 and 2016 Notes to Financial Statements. The Staff’s comments are focused on whether all or a portion of the amounts recognized in the 2016 consolidated statement of operations should have been recognized in earlier periods.

The Company believes that its accounting for asbestos related matters is appropriate and in accordance with generally accepted accounting principles and it has addressed the Staff’s comments in full; however, it is possible that the Staff will have additional comments. If all or a portion of the asbestos related charge were to be reflected in periods prior to 2016, the impact would be a reduction in net earnings in periods prior to the year ended December 31, 2016 and a corresponding increase in earnings for the year ending December 31, 2016. There would be no impact to the December 31, 2016 Consolidated Balance Sheet or net cash provided by operating activities in the Consolidated Statements of Cash Flows for the three years ending December 31, 2016.

Few areas are more challenging then contingency disclosures, and as we discuss frequently, this is an area that the staff frequently comments on.

You can follow-up on the outcome of the situation in this 8-K.

As always, your thoughts and comments are welcome.

A Few MD&A Thoughts for Quarter or Year End

We have been posting in recent weeks about issues to be thoughtful about as we approach our next quarter or year-end.  MD&A is always an area for care and clear focus at period end.  In all our SEC reporting workshops we make the point that the SEC frequently comments on MD&A.  The themes of MD&A comments are generally deeper analysis of causal factors and quantification of the impact of factors on operations and liquidity and capital resources.

To really understand the comments, and to write MD&A effectively, it is always smart to review the objectives of MD&A disclosure.  Here is the articulation of these objectives from the 2003 Release FR 72:

.“The purpose of MD&A is not complicated. It is to provide readers information “necessary to an understanding of [a company’s] financial condition, changes in financial condition and results of operations.”2 The MD&A requirements are intended to satisfy three principal objectives:

  • to provide a narrative explanation of a company’s financial statements that enables investors to see the company through the eyes of management;
  • to enhance the overall financial disclosure and provide the context within which financial information should be analyzed; and
  • to provide information about the quality of, and potential variability of, a company’s earnings and cash flow, so that investors can ascertain the likelihood that past performance is indicative of future performance”

Here are a few example comments you can use in your thoughts about MD&A disclosures.  The first one is about taxes and relates to causal factors.

  1. We note your income tax rate reconciliation table showing the effective tax rate of (27%) in fiscal 2017, 567% in fiscal 2016 and 58% in fiscal 2015. However, you provide no discussion or insight in the footnotes or management’s discussion and analysis into the specific factors or circumstances that caused the significant changes in your effective tax rate. Please provide the following:
  • a discussion of the specific facts or circumstances that resulted in this significant change per ASC 740-10-50-14;
  • explain in detail the line item “changes in valuation allowance” which include state NOL and deferred tax true ups; and
  • discuss whether you separately disclosed each line item meeting the materiality thresholds in Rule 4-08(h) of Regulation S-X.

This second comment is about clearly explaining and quantifying what issues are behind change in revenues so that readers can understand why revenues changes and assess whether such changes are likely to continue to occur in the future.

Revenues, page 30

  1. We note that your revenue decreased by approximately $8.3 million from 2015 to
    2016. While we note from your disclosure that revenue decreased by approximately $14 million due to near completion of projects in your e-ID division, and it appears that those revenue losses were partially offset by revenue gains from other divisions, it is not clear how you have accounted for all material changes in your revenues for the periods presented. Please tell us what the numbers in the last sentence of this paragraph represent in terms of dollar amounts and show us how those revenue gains, combined with your revenue losses, account for all material changes in your revenue for the periods presented. In addition, revise future filings to clearly disclose and quantify the reasons underlying each material change in your revenues for the periods presented.

We hope these reminders help as you work towards quarter or year-end, and as always, your thoughts and comments are welcome!