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Disclosure Modernization and Simplification: Post #2 – Cover Page Changes

As we overviewed in this post the SEC’s Disclosure Modernization and Simplification final rule changes a number of items in Forms 10-K, 10-Q and 8-K.  This post starts at the beginning, with changes to the cover page of each of these reports.

As a brief reminder, most of the changes in this final rule are effective 30 days after  publication in the Federal Register.  The Final Rule was published in the Federal Register on April 2, 2019, so the effective date for most of the rule is May 2, 2019.  Two of the changes have different effective dates, the changes to confidential treatment and certain other details surrounding exhibits,  which we will discuss in a later post, and the requirement to add iXBRL tags to cover pages, which is discussed in this post.

The three changes to Forms 10-K, 10-Q and 8-K cover pages are:

  1. The cover pages of Forms 10-K, 10-Q and 8-K now include the filer’s ticker symbol, and the cover pages of all the forms will have consistent information about the national exchange or principal U.S. market for the company’s securities and title of each class of securities.
  1. Cover pages for Forms 10-K, 10-Q and 8-K must now be tagged with inline XBRL.
  1. On Form 10-K’s cover page the S-K 405 Section 16 delinquency reporting checkbox is removed, along with a related instruction in Item 10 of form 10-K.

(Note: Parts of this rule also apply to Forms 20-F and 40-F, which are included in the discussion below.)

1. Consistent Disclosure of Ticker Symbol, Exchange and Class of Securities on Cover Pages

This change seems fairly innocuous, and in fact it really is.  The addition of a company’s ticker symbol to the cover pages of Forms 10-K, 10-Q and 8-K (as well as Forms 20-F and 40-F) is not discussed in any detail in the final rule. As a matter of common sense in a world with so many on-line sources for stock price information this is essentially a nice convenience.  This change follows consistently with last August’s final rule that requires disclosure of a company’s ticker symbol in Form 10-K Item 5.

The other part of this disclosure does not change Form 10-K where information about the exchange or principal U.S. market for the company’s securities and the title of each class of securities is already included.  The new rule adds this information to the cover pages of Forms 10-Q and 8-K (as well as Forms 20-F and 40-F).  Adding this information provides for consistency, particularly when all of this information will be tagged with iXBRL tags.  This change should make gathering data electronically simpler and help assure consistency in how data is gathered.

To make both the above changes the final rule adds this box to Forms 10-K, 10-Q, 8-K, 20-F and 40-F:


As the final rule was published in the Federal Register on April 2, 2019 and this part is effective on May 2, 2019, this provision will technically be effective for Forms 10-Q and 10-K filed after May 2, 2019,  Given the short time frame between the effective date and the due dates for first quarter 10-Q’s it is possible the SEC may grant a bit of a grace period as they did with the 10-Q requirement in last summer’s Disclosure Update and Simplification rule.  (You can review C&DI Question 105.09 as a reminder.)  Best to stay tuned!

2. Inline XBRL Tagging on Cover Pages for Forms 10-K, 10-Q and 8-K.

The SEC’s Inline XBRL (iXBRL) rule adopted on June 28, 2018, requires companies to implement inline XBRL on the following schedule:

IXBRL Transition

If you have not seen a live iXBRL filing, you could check out this example, where you can also try the SEC’s inline XBRL viewer.  You can also check out Dell Technologies and Adobe for more examples.  (As a side note, later in April we will do another post about this change with some hopefully helpful tips.)

Existing requirements in Reg S-T and the EDGAR Filer Manual include tagging of certain information on the cover pages of Form 10-K and 10-Q, known as document and entity identifier elements.  This existing tagging requirement includes form type, company name, filer size, and public float.  This is of course only part of the information on the cover pages of these forms.

The Disclosure Modernization and Simplification final rule expands this requirement to include more information and applies it to more forms. The new rule requires all of the information on the cover pages of Forms 10-K, 10-Q, 8-K, 20-F, and 40-F to be tagged in Inline XBRL.  This will be done following the guidance in the EDGAR Filing Manual.

Tagged information will now include the exchange on which the company’s securities are registered and the state (or jurisdiction) of incorporation.

The tagging will be done following the requirements in the EDGAR Filer Manual and is added via new Regulation S-T Rule 406 and a new exhibit, Item 601(b)(104) to Regulation S-K.  (The rule also adds new section 104 to the “Instructions as to Exhibits” of Form 20-F, and new paragraph B.17 to the “General Instructions” of Form 40-F to add this requirement to those forms also.)

New S-T Item 406 now provides this requirement:

232.406 Cover Page XBRL Data Tagging.

Electronic filers submitting Forms 10-K (§ 249.310 of this chapter), 10-Q (§ 249.308a of this chapter), 8-K (§ 249.308 of this chapter), 20-F (§ 249.220f of this chapter) or 40-F
(§ 249.240f of this chapter) who are required to submit Interactive Data Files (§ 232.11) in Inline XBRL format in accordance with this Regulation S-T must tag in Inline XBRL electronic format, in the manner provided by the EDGAR Filer Manual, all of the information provided by the electronic filer that is required on the cover page of these forms.

In the final rule as a rational for this change the SEC says:

By increasing the capacity for automation of the data gathering process, we believe these amendments will further enhance investors’ use of interactive data to identify, count, sort, compare, and analyze registrants and their disclosures.   For example, an investor will be able to more readily and accurately identify registrants that are listed on a specific exchange and that identified themselves as well known seasoned issuers in their last annual report. Similarly, the Inline XBRL tagging of the new ticker symbol disclosure requirement will make it easier to relate/link a specific security to the underlying registrant. In addition, the amendments will allow the Commission to make enhancements to the EDGAR system to enable investors to search for filings with these specific criteria.

And, these changes will also benefit the Commission staff:

The new filing requirements will also be of benefit to the Commission, as the Commission and its staff will be able to more readily sort and analyze filings to, among other things, improve data and analysis for rulemaking initiatives.

As a last note, this change will be effective for a company at the same time the Inline XBRL requirement becomes effective for that company, as outlined in the table at the beginning of this section.

3. Elimination of the Form 10-K S-K Item 405 Checkbox

This last cover page change applies only to Form 10-K.  In our workshops we have always cautioned participants to be very careful with the complexly worded S-K Item 405 checkbox related to disclosure of delinquent Section 16 filers.  While there was a separate instruction about this checkbox in the Item 10 instructions, it was not clear that the box should be checked if all reports were filed on time, and the box was frequently incorrect.

Given all the other reporting surrounding delinquent Section 16 filings and the disclosure of this information in proxy statements and Form 10-K, page 219 of the rule contains the change to Form 10-K for this checkbox:

Removing the second sentence of Instruction (G)(4) under “General Instructions”, the checkbox that relates to disclosure under Item 405, and the instruction to Item 10; and

The first part of this change referring to Instruction (G)(4) is a “clean-up” change related to incorporation by reference and will be discussed in a later post.  The second section – “the checkbox that relates to disclosure under Item 405, and the instruction to Item 10” – is the regulatory guidance that removes the troublesome checkbox.  This language is now gone from the cover page:

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [ ]

And, this instruction has also been removed from Item 10:


Checking the box provided on the cover page of this Form to indicate that Item 405 disclosure of delinquent Form 3, 4, or 5 filers is not contained herein is intended to facilitate Form processing and review. Failure to provide such indication will not create liability for violation of the federal securities laws. The space should be checked only if there is no disclosure in this Form of reporting person delinquencies in response to Item 405 and the registrant, at the time of filing the Form 10-K, has reviewed the information necessary to ascertain, and has determined that, Item 405 disclosure is not expected to be contained in Part III of the Form 10-K or incorporated by reference.

While the final rule does not include a lot of discussion about this change, this is a welcome simplification!

As a final note, we will dive into details about changes to the required disclosures about delinquent Section 16 filers in a later post.

This starts the details of implementing the Disclosure Modification and Simplification final rule. Our next post will explore the changes to the guidance for risk factor disclosure.

As always, your thoughts and comments are welcome!

The Details and Implementation Steps for Disclosure Modernization and Simplification

Here is a brief video overview of this post, hope you find it interesting!

As you have likely heard on March 20, 2019, the SEC adopted a final rule for “Disclosure Modernization and Simplification” as part of its responsibilities under the FAST Act.  This new rule makes a number of detailed changes to reports on Form 10-K, 10-Q and, to a lesser extent, Form 8-K.  The rule also makes several broad changes in areas such as incorporation by reference, obtaining confidential treatment and iXBRL tagging.

As we did with the August 2018 Disclosure Update and Simplification rule, we are going to do a series of posts to help manage these details and implement this new rule.

To begin, in this post, to help see the big picture of the changes, we have a list of what is “modernized and simplified” item-by-item in Forms 10-K and 10-Q.

Next will be a series of posts that delve into the changes for each item.

Last, after the final rule with any corrections or updates is published in the Federal Register, we will post a comprehensive “cookbook” to provide step-by-step guidance to implement the changes.

To help organize our thoughts for implementation of this new rule, here is the item-by-item “big picture” summary of all the periodic reporting changers in the Disclosure Modernization and Simplification rule:

  1. Cover page changes

Both 10-Q and 10-K now include ticker symbol on the cover page.

Elimination of the S-K 405 Section 16 delinquency reporting check box.

Both 10-Q and 10-K cover pages must now be tagged for iXBRL (effective with the iXBRL rule).

  1. Item 1A – Risk Factors

Risk factor guidance has been moved from S-K Item 503(c) to new Item 105. The wording has been changed to remove examples.

  1. Item 2 – Properties

           S-K Item 102 has been changed to focus on material information about

  1. Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Regulation S-K Item 303 has been changed to allow companies that present three years of financial statements to omit the earliest year in MD&A discussion.

  1. Item 10. Directors, Executive Officers and Corporate Governance.

One minor change in S-K Item 401 to fix the instruction that permits omitting executive officer information from the proxy or other information statement if it is included in Part One of Form 10-K.

Another minor change to S-K Item 405 to change the title of the section for delinquent Section 16 filers to “Delinquent Section 16(a) Reports” and encourage omitting this title if there are no delinquencies to report.

  1. Item 11. Executive Compensation.

No changes (although there is one minor change to S-K Item 407(d) that may affect proxy disclosures, including some EGC disclosures).

  1. Item 15. Exhibits, Financial Statement Schedules.

Changes for incorporation by reference, redacting of information with potential competitive harm, potential exclusion of schedules for exhibits, omission of information that would violate personal privacy considerations and other changes such as moving disclosures such as a description of the registrant’s securities to an exhibit.

With the changes listed above, our detailed posts will also include discussion of other changes, such as:

The elimination of the 5-year time horizon for incorporation by reference from 34 Act reports that used to be in S-K Item 10(d).

Changes to Rule 12b-23 dealing with incorporation by reference to clarify that incorporation by reference into the financial statements is generally not allowed.

Several changes to S-K Item 501 and other prospectus related changes.

As a final note, most significant SEC rule changes end up with an acronym or nickname as we discuss them. Hence, last August’s Disclosure Update and Simplification rule became known as “Duster”.  So far, no consensus nickname for this new rule has emerged. If you have a suggestion put it in a response to this post!

As always, your thoughts, comments and nickname suggestions are welcome!

How to Pull the SEC’s Disclosure Update and Simplification Details All Together?

Over the last several weeks we have done a series of blog posts discussing changes from the SEC’s Disclosure Update and Simplification Final Rule on individual Form 10-K and 10-Q items.

To help folks implement the changes we compiled what we think are all the relevant portions of the Final Rule together with our step-by-step review of the changes into this PDF document, which you can use as you update your reports.  This link will bring you to a page with a link to the PDF.

We hope it helps in this process and feel free to share it with colleagues.

As always, your thoughts and comments are welcome!

Disclosure Update and Simplification – A Welcome Change for Debt Issuers

The SEC’s required disclosure of the ratio of earnings to fixed charges has been a sometimes overly complex disclosure of questionable use.  And, as the SEC noted on page 57 of the Disclosure Simplification and Update Final Rule:

“Other ratios that accomplish similar objectives include other variations of the ratio of earnings to fixed charges, the interest coverage ratio, and the debt-service coverage ratio, which can be calculated based on information readily available in the financial statements.”

The Disclosure Update and Simplification Rule eliminated this disclosure.

The starting point for the change is in Regulation S-K Item 503, where paragraph (d) and all the related instructions were eliminated:

(d) Ratio of earnings to fixed charges. If you register debt securities, show a ratio of earnings to fixed charges. If you register preference equity securities, show the ratio of combined fixed charges and preference dividends to earnings. Present the ratio for each of the last five fiscal years and the latest interim period for which financial statements are presented in the document. If you will use the proceeds from the sale of debt or preference securities to repay any of your outstanding debt or to retire other securities and the change in the ratio would be ten percent or greater, you must include a ratio showing the application of the proceeds, commonly referred to as the pro forma ratio.

The title of S-K Item 503 was also changed:

(Item 503) Prospectus summaryand risk factors, and ratio of earnings to fixed charges.

Along with these changes the SEC made other adjustments to eliminate this disclosure from the Exhibits in S-K Item 601 and from all the related forms (particularly Form 20-F) which had included this ratio.

As always, your thoughts and comments are welcome!

Filed Versus Furnished Redux

Way back in May of 2015 we postedabout the difference between documents that are furnished versus filed.  This important distinction came up in the post just before this onethat explores the impact of Disclosure Update and Simplification on the ARS.  So, to help us all recall what filed versus furnished is all about, here is a review.

Filed versus furnished is essentially a legal distinction. It does not impact how information appears on the EDGAR system (as they look the same) or other practical filing issues (as they are filed in EDGAR the same way). For example, an Item 2.02 Form 8-K is a “furnished” document, but an Item 2.01 Form 8-K is a “filed” document. To learn what is going on with this distinction, let’s explore:

What is the legal difference?

How to determine if a document is furnished or filed?


When a document is “filed” it is formally “filed” with the SEC to meet the disclosure requirements under the laws the SEC administers, principally the 1933 and 1934 Acts. This means a “filed” document is subject to the liability provisions of the Acts.  This is the principal difference between filed versus furnished.


When a document is furnished, generally to shareholders, it is not actually filed with the SEC under one of the Acts (even though it may be “filed” in the EDGAR system), so it is not subject to the liability provisions of the Acts.

This liability difference can be a substantial issue. For example, it is far easier to establish scienter in a 34 Act fraud case then in a non-34 Act fraud case. Generally, in a non-34 Act action, to establish scienter it must be shown that the accused deliberately set out to cause harm. In a 34 Act action, gross negligence or reckless disregard can establish scienter, a much lower level of proof.

Another difference – if something is furnished rather than filed, it cannot be incorporated by reference into later filings. In the shelf registration process this is very important as furnished documents are not incorporated by reference into the S-3 on the shelf, and hence do not expose the company to the strict liability standards of the 33 Act! And, if you do later incorporate a furnished document into a filed document, it loses its furnished status, usually not a good thing!

So, how do you tell if something is filed or furnished? When they appear on the EDGAR system they look exactly the same! As discussed earlier, it is really a legal distinction, so you go back to the legal sources, in particular, the instructions to the forms.

Here is an excerpt from the Form 8-K instructions:

  1. The information in a report furnished pursuant to Item 2.02 (Results of Operations and Financial Condition) or Item 7.01 (Regulation FD Disclosure) shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, unless the registrant specifically states that the information is to be considered “filed” under the Exchange Act or incorporates it by reference into a filing under the Securities Act or the Exchange Act.

So, this legal distinction is actually spelled out in the instructions.

As a concluding thought, the most commonly encountered furnished documents are:

The Annual Report to Shareholders
Form 8-K Item 2.02
Form 8-K Item 7.01

There are others, so when in doubt, consult the instructions!

As always, your thoughts and comments are welcome!

SEC Issues “Investigative Report” – Time to Build Cyber Threats Into ICFR

On October 16, 2018 the SEC issued a Report of Investigation dealing with cyber threats and ICFR.  These are unusual reports from the Division of Enforcement.  They generally result from a formal investigation that identifies a significant concern on the part of the SEC but in their judgment does not warrant enforcement against a company.

As an example, you might remember this Report of Investigation that dealt with the use of social media by Netflix’s CEO.

The new Report of Investigation deals with one of the current environment’s hot topics, cyber-crime, focusing specifically in email related frauds.  The SEC investigated frauds at nine companies, each of which was victimized in an email related cyber-attack.  In total the companies lost almost $100 million.

In light of all the surrounding facts and circumstances (the companies were the victims also), the SEC did not enforce against the companies.  But as this type of crime becomes more and more common, ICFR should change and evolve to be appropriately designed to protect assets from such cybercrimes.  In the words of the SEC:

 “these cyber-related threats of spoofed or manipulated electronic communications exist and should be considered when devising and maintaining a system of internal accounting controls as required by the federal securities laws”.

You can read the report here.

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 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 (

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 (

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!


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!


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.