Since the two clawback related check boxes were added to the Form 10-K cover page, there has been a fair amount of confusion concerning when companies should check the boxes. The wording for the check boxes involves interpreting phrases such as “the correction of an error” and a “required recovery analysis”:
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
While the staff made some comments about the check boxes in public forums, including PLI’s The SEC Speaks conference, there was no formal instruction about how to complete these two check boxes. On April 11, 2025, the staff addressed this situation with new Compliance and Disclosure Interpretations to provide clarity about when and how to use the check boxes.
Question 104.20 addresses the first check box concerning the correction of an error:
Question 104.20
Question: When a listed issuer reports a change to its previously issued financial statements in an annual report, how should the issuer determine whether “the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements” for purposes of determining whether the check box indicating such correction of an error should be marked on the cover of its annual report?
Answer: The listed issuer should look to the guidance under the generally accepted accounting principles applicable to its financial statements in determining whether the change represents the correction of an error. When the financial statements of the registrant included in the filing have been revised to reflect the correction of an error to previously issued financial statements, regardless of whether those restatements are required or not, the listed issuer must mark the check box.
A required restatement includes (1) an accounting restatement to correct an error in previously issued financial statements that is material to those financial statements (commonly referred to as a “Big R” restatement) and (2) an accounting restatement to correct an error that is immaterial to those financial statements but would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period (commonly referred to as a “little r” restatement).
The correction of an immaterial prior period error that is recorded in the current year (commonly referred to as an “out-of-period adjustment”) does not require the listed issuer to mark the check box because the previously issued financial statements are not revised. [April 11, 2025]
Question 104.21 addresses the second check box concerning a required recovery analysis:
Question 104.21
Question: In 20X4, a listed issuer reports a “Big R” restatement to the 20X3 financial statements in an amendment to its 20X3 annual report and marks the check box on the cover to indicate that the financial statements reflect the correction of an error to previously issued financial statements. After applying its recovery policy pursuant to Exchange Act Rule 10D-1(b), the listed issuer determines that no recovery of erroneously awarded compensation is required.
Is the listed issuer also required to mark the check box on the cover of the amended 20X3 annual report to indicate that the restatement “required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period” pursuant to Exchange Act Rule 10D-1(b) and explain in that amended report why application of the recovery policy resulted in no recovery?
Answer: Yes, the listed issuer must mark the check box indicating that the restatement required the recovery analysis. This would include circumstances when:
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- no incentive-based compensation was received by any executive officers at all during the relevant time frame, or
- incentive-based compensation was received by an issuer’s executive officers during the relevant time frame, but that incentive-based compensation was not based on a financial reporting measure impacted by the restatement.
Further, the listed issuer should briefly explain why application of its recovery policy resulted in no recovery. [April 11, 2025]
The remaining C&DIs address issues including whether the boxes should be checked in years after the restatement and the restatement of interim periods. One other C&DI addresses a SPAC issue related to co-registrant reporting.
As always, your thoughts and comments are welcome!