All posts by George Wilson

Human Capital Resources Disclosure Examples

Thanks to the hard work and research skills of Abril Chavira, Director of Financial Reporting at ASGN Inc., here are a number of examples from recent Form 10-K’s of human capital resources disclosures.

While this post is very long, we thought you would find these examples valuable and wanted to include the full text.  Feel free to skim or use the included links.

Dolby Laboratories (YE 10/3/2020)

https://www.sec.gov/Archives/edgar/data/0001308547/000162828020016459/dlb-20200925.htm

HUMAN CAPITAL RESOURCES

As of September 25, 2020, we had 2,289 employees worldwide, of whom 1,037 employees were based outside of the U.S. None of our employees are subject to a collective bargaining agreement. Through our long operating history and experience with technological innovation, we appreciate the importance of retention, growth and development of our employees. We believe we offer competitive compensation (including salary, incentive bonus, and equity) and benefits packages in each of our locations around the globe. Further, from professional development opportunities to leadership training, we have development programs and on-demand opportunities to cultivate talent throughout the Company. We are also focused on understanding our diversity and inclusion strengths and opportunities and executing on a strategy to support further progress. We have created Employee Networks that are aligned around dimensions of diversity, such as gender, ethnicity, sexual orientation or other shared attributes, which we believe help build community and enable opportunities for development. We continue to focus on building a pipeline for talent to create more opportunities for workplace diversity and to support greater representation within the Company.

 

 

SONOS (YE 10/3/2020)

https://www.sec.gov/Archives/edgar/data/0001314727/000131472720000052/sono-20201003.htm

Human Capital

Sonos is dedicated to creating the ultimate listening experience for our customers, and our employees are critical to achieving this mission. In order to continue to design innovative experiences and products, and compete and succeed in our highly competitive and rapidly evolving market, it is crucial that we continue to attract and retain experienced employees. As part of these efforts, we strive to offer a competitive compensation and benefits program, foster a community where everyone feels included and empowered to do to their best work, and give employees the opportunity to give back to their communities and make a social impact.

As of October 3, 2020, we had 1,427 full-time employees. Of our full-time employees, 999 were in the United States and 428 were in our international locations. Other than our employees in France and the Netherlands, none of our employees are represented by a labor union or covered by a collective bargaining agreement.

Compensation and Benefits Program. Our compensation program is designed to attract and reward talented individuals who possess the skills necessary to support our business objectives, assist in the achievement of our strategic goals and create long-term value for our stockholders. We provide employees with compensation packages that include base salary, annual incentive bonuses, and long-term equity awards (“RSUs”) tied to the value of our stock price. We believe that a compensation program with both short-term and long-term awards provides fair and competitive compensation and aligns employee and stockholder interests, including by incentivizing business and individual performance (pay for performance), motivating based on long-term company performance and integrating compensation with our business plans. In addition to cash and equity compensation, we also offer employees benefits such as life and health (medical, dental & vision) insurance, paid time off, paid parental leave, and a 401(k) plan.

Diversity and Inclusion. We believe that an equitable and inclusive environment with diverse teams produces more creative solutions, results in better, more innovative products and services and is crucial to our efforts to attract and retain key talent. We have set a goal of 50% of new U.S. hires coming from underrepresented groups. We are focused on this goal and on building an inclusive culture through a variety of diversity and inclusion initiatives, including related to internal promotions and hiring practices. Our employee resource groups (“ERGs”) also help to build an inclusive culture through company events, participation in our recruitment efforts, and input into our hiring strategies.

Community Involvement. We aim to give back to the communities where we live and work, and believe that this commitment helps in our efforts to attract and retain employees. We offer employees the opportunity to give back both through our Sonos Soundwaves program, which partners with leading non-profits, and our Sonos Cares program, which offers employees paid volunteer time each year.

For more information on our diversity and inclusion and community involvement initiatives, please see our Corporate Responsibility report which is available at www.sonos.com.

 

Starbucks 10-K (YE 9/27/2020)

https://www.sec.gov/Archives/edgar/data/0000829224/000082922420000078/sbux-20200927.htm

Human Capital Management

As a company, Starbucks mission is not only to deliver outstanding financial results by offering exceptional and unique products and services, but to also create a strong connection with the communities where we operate. We believe the strength of our workforce is one of the significant contributors to our success as a global brand that leads with purpose. This is largely attributed to our partners (employees) who strive every day to create a welcoming and inclusive environment for our customers. Therefore, one of our core strategies is to invest in and support our partners to differentiate our brand, products and services in the competitive specialty coffee market, including the following areas of focus:

Oversight and Management

We recognize the diversity of customers, partners and communities, and believe in creating an inclusive and equitable environment that represents a broad spectrum of backgrounds and cultures. Working under these principles, our Partner Resources Organization is tasked with managing employment-related matters, including recruiting and hiring, onboarding and training, compensation planning, performance management and professional development. Our Board of Directors and Board committees provide oversight on certain human capital matters, including our Inclusion and Diversity programs and initiatives. As noted in its charter, our Compensation and Management Development Committee is responsible for periodically reviewing Starbucks partner resource programs and initiatives, including healthcare and other benefits, as well as our management development and succession planning practices and strategies. Our Audit and Compliance Committee works closely with the Risk Management Committee, led by Starbucks cfo and general counsel, to monitor current and emerging labor and human capital management risks and to mitigate exposure to those risks. Furthermore, our Nominating and Corporate Governance Committee annually evaluates the effectiveness of our social responsibility policies, goals and programs, which also include partner-related issues. These reports and recommendations to the Board and its committees are part of the broader framework that guides how Starbucks should attract, retain and develop a workforce that aligns with our values and strategies.

We regularly conduct anonymous surveys to seek feedback from our retail and non-retail partners on a variety of topics, including but not limited to, confidence in company leadership, competitiveness of our compensation and benefits package, career growth opportunities and improvements on how we could make our company an employer of choice. The results are shared with our partners and reviewed by senior leadership, who analyze areas of progress or deterioration and prioritize actions and activities in response to this feedback to drive meaningful improvements in partner engagement. Our management and cross-functional teams also work closely to evaluate human capital management issues such as partner retention, workplace safety, harassment and bullying, as well as to implement measures to mitigate these risks.

Total Rewards

We have demonstrated a history of investing in our workforce by offering competitive salaries and wages. To foster a stronger sense of ownership and align the interests of partners with shareholders, restricted stock units are provided to eligible non-executive partners under our broad-based stock incentive programs. Furthermore, we offer comprehensive, locally relevant and innovative benefits to all eligible partners. In the U.S, our largest and most mature market, these include, among other benefits:

  • Comprehensive health insurance coverage is offered to partners working an average of 20 hours or more each week.
  • 100% tuition coverage is provided to partners who earn a bachelor’s degree online at Arizona State University through the Starbucks College Achievement Program.
  • Parental leaves are provided to all new parents for birth, adoption or foster placement.
  • A Partner and Family Sick Time program is provided and allows partners to accrue paid sick time based on hours worked and use that time for themselves or family members in need of care.
  • Care@Work benefit provides partners with subsidized child, adult or senior care planning services. This benefit includes up to 20 days of subsidized backup care services through the end of fiscal 2021, in light of the COVID-19 pandemic.
  • We view mental health as a fundamental part of our humanity and implemented a comprehensive suite of related programs and benefits in fiscal 2020. These include Headspace, an online application that enables guided mediation, Lyra, which provides mental health coaching, and Starbucks Mental Health Fundamental Training, created in partnership with National Council for Behavioral Health, which offers ongoing training to help partners recognize and respond to signs of mental health and substance use issues.

Outside of the U.S., we have provided other innovative benefits to help address market-specific needs, such as providing interest-free loans to our U.K. partners to help cover rental deposits, mental health services in Canada, and in China, a monthly housing subsidy for full-time Starbucks baristas and shift supervisors, as well as comprehensive health insurance coverage for parents of partners.

Role-based Support

To help our partners succeed in their roles, we emphasize continuous training and development opportunities. These include, but are not limited to, safety and security protocols, updates on new products and service offerings and deployment of technologies. Training provided through our Pour Over sessions include a wide variety of topics such as achievable goal setting, giving and receiving constructive feedback and effective engagement with customers and communities. To help further promote an inclusive culture and to better serve our customers, we encourage U.S.-based partners to enroll in the To Be Welcoming courses we created in partnership with Arizona State University to address different forms of bias and discrimination.

Pay Equity

To be an employer of choice and maintain the strength of our workforce, we consistently assess the current business environment and labor market to refine our compensation and benefits programs and other resources available to our partners.

We previously achieved and currently maintain 100 percent pay equity in the U.S. for women and men and people of all races for partners performing similar work. We have also achieved gender pay equity in China and Canada, two of our largest markets outside of the U.S., and we made a commitment to achieve gender pay equity in all company-operated markets.

As of September 27, 2020, Starbucks employed approximately 349,000 people worldwide. In the U.S., Starbucks employed approximately 228,000 people, with approximately 220,000 in company-operated stores and the remainder in corporate support, store development, roasting, manufacturing, warehousing and distribution operations. Approximately 121,000 employees were employed outside of the U.S., with approximately 118,000 in company-operated stores and the remainder in regional support operations. The number of Starbucks partners represented by unions is not significant. We believe our efforts in managing our workforce have been effective, evidenced by a strong Starbucks culture and a good relationship between the company and our partners.

Tetra-Tech 10-K (YE 9/27/2020)

https://www.sec.gov/Archives/edgar/data/0000831641/000083164120000154/ttek-20200927.htm#ibf1504f097a64deeb2b062f259aa7472_76

Human Capital Management

Employees. At fiscal 2020 year-end, we had approximately 20,000 staff worldwide. A large percentage of our employees have technical and professional backgrounds and undergraduate and/or advanced degrees, including the employees of recently acquired companies. Our professional staff includes archaeologists, architects, biologists, chemical engineers, chemists, civil engineers, data scientists, computer scientists, economists, electrical engineers, environmental engineers, environmental scientists, geologists, hydrogeologists, mechanical engineers, oceanographers, project managers and toxicologists. We consider the current relationships with our employees to be favorable. We are not aware of any employment circumstances that are likely to disrupt work at any of our facilities. See Part I, Item 1A, “Risk Factors” for a discussion of the risks related to the loss of key personnel or our inability to attract and retain qualified personnel.

Diversity and Inclusion. Tetra Tech brings together engineers and technical specialists from all backgrounds to solve our clients’ most challenging problems. Our Diversity and Inclusion Policy guides the Board of Directors, management, associates, subcontractors, and partners in developing an inclusive culture. Our Diversity and Inclusion Council monitors Tetra Tech’s diversity and inclusion practices and makes recommendations to the Board of Directors and Chief Executive Officer for any changes or improvements to our program.

Tetra Tech values diversity and inclusion and undertakes various efforts throughout its operations to promote these initiatives. Our current efforts are focused on three primary areas:

  • Safe work environment.We provide training to all associates to improve their understanding of behaviors that can be perceived as discriminatory, exclusionary, and/or harassing, and provide safe avenues for associates to report such behaviors.
  • Equal employment opportunity.Tetra Tech ensures that our practices and processes attract a diverse range of candidate, and that candidates are recruited, hired, assigned, developed, and promoted based on merit and their alignment to our values.
  • Learning and development opportunities.To support our associates in reaching their full potential, Tetra Tech offers a wide range of internal and external learning and development opportunities. Education assistance is offered to financially support associates who seek to expand their knowledge and skill base.

As part of Tetra Tech’s commitment to a culture of inclusion, in fiscal 2020 we launched our Global Resource Group (“ERG”) Program, which broadens and enhances company-wide interaction opportunities for our employees. Our ERG’s are open to all and involve activities for both employees whose background is the focus of the ERG and those who are supportive of the group (also known as allies). These global networks build on and coordinate with the many local networks that are already active throughout our operations and include groups focused on the experiences of Black, Latino, Women, Veterans, and LGBTQ employees.

Professional Development. Tetra Tech invests in the professional development of our associates. They are provided with training in leadership development, project management skills, and interpersonal skills development. Our focused programs are designed, taught, and facilitated by Tetra Tech leadership, consistent with our commitment to talent development. These programs include the following:

  • Tetra Tech Leadership Academy.Tetra Tech Leadership Academy develops our high-potential associates from around the world into outstanding business leaders. Instructors for this intensive, year-long program are executive management and operational leaders. Participants are immersed in all aspects of the operations of Tetra Tech and complete challenging, real-world assignments designed to hone their leadership and management skills.
  • Project Excellence Program. Tetra Tech develops Project Managers who are world class in their abilities and performance. The program is led by our Chief Engineer and involves extensive training on how to effectively manage all components of a project.
  • Fearless Entrepreneur Program. Tetra Tech develops into client-oriented, business-minded professionals who are driven to understand and meet the needs of our clients. Developing professionals are challenged and mentored through a process of building client relationships. Participants take part in group discussions in a classroom setting and then are required to implement learned strategies with actual and potential clients.
  • Tetra Tech Technology Transfer (T4) and ToolTalk Webcast Series. Tetra Tech holds webcasts to help associates around the world share technical resources and enhance their use of available internal tools and to provide better service to clients. Through the T4 and ToolTalk Webcast Series, Tetra Tech experts present and lead discussions about new technologies and programs, best practices, and opportunities for growth across our company.

By offering our associates meaningful work and career development, Tetra Tech is well positioned to continue its growth through recruitment, development, and retention of the best talent in the industry

 

 

 

The Walt Disney Company (YE 10/3/2020)

https://www.sec.gov/Archives/edgar/data/0001744489/000174448920000197/dis-20201003.htm

Human Capital

The Company’s key human capital management objectives are to attract, retain and develop the highest quality talent. To support these objectives, the Company’s human resources programs are designed to develop talent to prepare them for critical roles and leadership positions for the future; reward and support employees through competitive pay, benefit, and perquisite programs; enhance the Company’s culture through efforts aimed at making the workplace more engaging and inclusive; acquire talent and facilitate internal talent mobility to create a high-performing, diverse workforce; engage employees as brand ambassadors of the Company’s content, products and experiences; and evolve and invest in technology, tools, and resources to enable employees at work.

The Company employed approximately 203,000 people as of October 3, 2020. Our global workforce is comprised of approximately 80% full time and 20% part time employees, with nearly 1% of the part time population being seasonal employees. Of the total population as of October 3, 2020, approximately 155,000 of our employees worked in the Parks, Experiences and Products segment.

Some examples of key programs and initiatives that are focused to attract, develop and retain our diverse workforce include:

  • Diversity and inclusion (D&I). Our D&I objectives are to build teams that reflect the life experiences of our audiences, while employing and supporting a diverse array of voices in our creative and production content.

◦    Established six pillars that serve as the foundation for our D&I commitments – transparency, accountability, representation, content, community, and culture

◦    Created a pipeline of next-generation creative executives from underrepresented backgrounds through programs such as the Executive Incubator, Creative Talent Development and Inclusion (CTDI), and the Disney Launchpad: Shorts Incubator

◦Championed targeted development programs for underrepresented talent

◦Hosted a series of culture-changing, innovation and learning opportunities to spark dialogue among employees, leaders, Disney talent and external experts

◦Sponsored over 70 employee-led Business Employee Resource Groups (BERGs) that represent and support the diverse communities that make up our workforce. The BERGs facilitate networking and connections with peers, outreach and mentoring, leadership and skill development and cross-cultural business innovation

  • Health, wellness and family resources. Disney’s benefit offerings are designed to meet the varied and evolving needs of a diverse workforce across businesses and geographies. Because we want our employees and their families to thrive, this year, we enhanced the ways we help our employees care for themselves and their families, especially in response to COVID-19

◦Healthcare options for employees in Florida and Southern California, aimed at reducing out-of-pocket costs

◦Coverage of all COVID-19 testing and treatment under all Company medical plans at no cost to the employees and dependents

◦Child care programs for employees, including access to onsite/community centers, enhanced back-up care choices to include personal caregivers, child care referral assistance and center discounts, homework help and a variety of parenting educational resources

◦Free mental and behavioral health resources, including on-demand

  • Disney Aspire. We support the long-term career aspirations of our hourly employees through education and personal development. We pay tuition costs at a network of schools and aim to help our hourly employees put their career goals within reach by equipping them with degree programs, coaching and job skills designed for a rapidly changing workplace and workforce

◦Investment of $150 million in Aspire’s first five years to cover 100% of tuition, books and education fees

◦Access to a wide variety of degree, certificate, high school completion, college start, language learning and trades programs

◦Chosen fields of study do not have to be related to an employee’s current position, and employees do not have to stay at the Company upon completion of their studies

  • Talent Development. We prioritize and invest in creating opportunities to help employees grow and build their careers, through a multitude of training and development programs. These include online, instructor-led and on-the-job learning formats as well as executive talent and succession planning paired with an individualized development approach

Community & Social Impact. We are committed to providing comfort to those in need and inspiration and opportunity to those who want to improve their world. One primary way we do this is through our unique employee volunteer program – Disney VoluntEARS. Throughout the year, employees make a positive impact in their local communities and have found a multitude of special ways to continue volunteering during the pandemic

Due to the current climate, including COVID-19 impacts, and changing environment in which we are operating, the Company has generated efficiencies in its staffing, including limiting hiring to critical business roles, furloughs and reductions-in-force. As part of these actions, the employment of approximately 32,000 employees primarily at Parks, Experiences and Products will terminate in the first half of fiscal 2021. Additionally, as of October 3, 2020, approximately 37,000 employees who are not scheduled for employment termination were on furlough as a result of COVID-19’s impact on our businesses.

 

Meta Financial Group (YE 9/30/2020)

https://www.sec.gov/ix?doc=/Archives/edgar/data/907471/000090747120000190/cash-20200930.htm

Human Capital Resources

In order to continue to deliver on our mission of financial inclusion for all, it is crucial that we attract and retain talent who desire to enable financial equality through delivery of capable solutions, thoughtful innovation and equitable consumer options in the markets that we serve. To facilitate talent attraction and retention, we strive to make MetaBank an inclusive, safe and healthy workplace, with opportunities for our employees to grow and develop in their careers, supported by strong compensation, benefits, health and welfare programs.

Employee Profile

As of September 30, 2020, we had approximately 1,015 full time equivalent employees in locations across the United States. This represents a decrease of 171 employees or 14.42% from September 30, 2019 due primarily to the sale of the Community Bank division in February of 2020 in which employees aligned with our community bank operations and support transitioned to the acquirer of the Community Bank division, Central Bank.

As of September 30, 2020, approximately 56.6% of our current workforce is female, 43.4% male, and our average tenure is 6.07 years, an increase of 5.93% from an average tenure of 5.73 years as of September 30, 2019.

Total Rewards

As part of our compensation philosophy, we believe that we must offer and maintain market competitive total rewards programs for our employees in order to attract and retain superior talent. In addition to healthy base wages, additional programs include annual bonus opportunities, a Company augmented Employee Stock Ownership Plan, Company matched 401(k) Plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, family care resources, flexible work schedules, adoption assistance, and employee assistance programs.

Health and Safety

The success of our business is fundamentally connected to the well-being of our people. Accordingly, we are committed to the health, safety and wellness of our employees. We provide our employees and their families with access to a variety of flexible and convenient health and welfare programs, including benefits that support their physical and mental health by providing tools and resources to help them improve or maintain their health status; and that offer choice where possible so they can customize their benefits to meet their needs and the needs of their families. In response to the COVID-19 pandemic, we implemented significant operating environment changes that we determined were in the best interest of our employees, as well as the communities in which we operate, and which comply with government regulations. This includes having the vast majority of our employees work from home, while implementing additional safety measures for employees continuing critical on-site work.

Talent

A core tenet of our talent system is to both develop talent from within and supplement with external hires. This approach has yielded loyalty and commitment in our employee base which in turn grows our business, our products, and our customers, while adding new employees and external ideas supports a continuous improvement mindset and our goals of a diverse and inclusive workforce. We believe that our average tenure — 6.07 years as of the end of the fiscal year 2020 — reflects the engagement of our employees in this core talent system tenet.

Our talent acquisition team uses internal and external resources to recruit highly skilled and talented workers across the US, and we encourage employee referrals for open positions.

Our Performance Management framework includes monthly business and functional reviews and one on one, quarterly, forward looking, goal and employee development discussions, followed by annual opportunities for pay differentiation via overall performance distinction.

We strive to promote inclusion through our stated Company values and behaviors. With the support of our Board of Directors, we continue to explore additional diversity, equity, inclusion and belonging efforts via our three pillars of inclusion: candidates, employees, and marketplace. Our ongoing diversity and inclusion initiatives support our goal that everyone throughout the Company is engaged in creating an inclusive workplace, and we are focused on sourcing and hiring with fairness and equitable approaches, creating an environment where all of our employees can develop and thrive, and engaging and influencing suppliers, partners and associations in our marketplace

VISA Inc (YE 9/30/2020).  VISA filed their Proxy on 11/13/2020 and their 10-K on 12/1/2020, their Proxy as additional information on Human Capital.

10-K

https://www.sec.gov/Archives/edgar/data/0001403161/000140316120000070/v-20200930.htm

Proxy

https://www.sec.gov/Archives/edgar/data/1403161/000119312520301419/d75661dpre14a.htm

10-K:

Talent

Central to our long-term strategy is attracting, developing and retaining the best talent globally with the right skills to drive our success. In fiscal year 2020, the COVID-19 pandemic had a significant impact on our human capital management. A large majority of our workforce worked remotely throughout the second half of 2020, and we instituted safety protocols and procedures for the essential employees who continued to work on site. Visa committed that no employee layoffs would occur in calendar year 2020 related directly to COVID-19. Visa’s workforce grew in 2020 at a slower pace than prior years, increasing from approximately 19,500 employees in fiscal year 2019 to approximately 20,500 employees in fiscal year 2020. Voluntary workforce turnover (rolling 12-month attrition) was 6.3% in September 2020. At the end of fiscal year 2020, Visa’s global workforce was 59% male and 41% female, and women represented 34% of Visa’s leadership (defined as vice president level and above). In the U.S., ethnicity of our workforce was 38% White, 42% Asian, 11% Hispanic, 6% Black and 3% other. For our U.S. leadership, the breakdown was 63% White, 19% Asian, 12% Hispanic, 4% Black and 2% other.

Our culture is underpinned by our core values, including an unwavering commitment to inclusion and diversity. In 2020, we established goals to increase the number of employees from underrepresented groups at the vice president level and above in the U.S. by 50 percent in three years and to increase the number of employees from underrepresented groups in the U.S. by 50 percent in five years. Visa’s commitment to diversity recruiting includes partnering with a number of non-profit and community organizations to support and develop a diverse talent pipeline. For example, Visa established the Black Scholars and Job program, a $10 million fund to create a dedicated Visa scholarship assistance program over the next five years, specifically for college-bound Black students. Upon graduation, all recipients who have met their commitments will be guaranteed a full-time job with Visa. Visa is committed to pay equity, regardless of gender or race/ethnicity, and conducts pay equity analyses on an annual basis.

For additional information, please see the section titled “Talent and Human Capital Management” in Visa’s 2020 Proxy Statement.

Thank you again Abril, and as always, your thoughts and comments are welcome!

Market Cap Versus Book Value – An SEC Comment Letter Sequence

One of the more complex issues companies deal with when performing goodwill impairment tests is what to do when a company’s market capitalization is less than its book value.  Does this mean an impairment automatically exists?  Is it an indicator of impairment?  How should this be dealt with in the impairment analysis?

Here is an SEC comment that raised this question for ArcelorMittal, a steel company:

We note the company’s net book value significantly exceeds its market capitalization. We also note this trend has persisted for a considerable period of time and the degree to which net book value exceeds market capitalization has substantially increased. Given that declines in market capitalization may indicate potential asset impairments, please explain if and how this factor has impacted your asset impairment assessments. Please more fully explain and address the following:

Explain how you determine your cash generating units for impairment testing of property, plant and equipment;

Explain how you determine and assess the reasonableness of the useful lives of property, plant and equipment;

Explain how you determine your groups of cash generating units for impairment testing of goodwill;

Since recoverable amounts appear to exceed market capitalization, explain how you determine the material assumptions underlying your impairment analyses and how you determine each material assumption is reasonable and supportable; and

Explain how you assess the reasonableness of your fair value estimates, including if and how you reconcile your fair value estimates to your market capitalization.

ArcelorMittal is a foreign private issuer and prepares its financial statements in accordance with IFRS as adopted by the IASB.  While the goodwill impairment test in IFRS is a bit different from the test under US GAAP, the company’s response is an interesting and thorough analysis of this issue.

The company’s response is too lengthy to include in this post so here is a link to the response.

Not to provide spoilers, but the next letter in the process is the SEC’s closing letter.

Thanks to Alyson Clabaugh of Intelligize for spotting this example, and as always, your thoughts and comments are welcome!

CorpFin to Accept SEC Electronic Signatures Before New Rule Effective Date

As we discussed in this post, on November 17, 2020, the SEC adopted a Final Rule — ­­­­­­­ “Electronic Signatures in Regulation S-T Rule 302.”

The Final Rule will not be effective until it is published in the Federal Register.  However, on November 20, 2020, CorpFin announced, “the staff will not recommend the Commission take enforcement action with respect to the requirements of Rule 302(b) in advance of such time provided that a signatory complies with all of the requirements of amended Rule 302(b).”

As always, your thoughts and comments are welcome!

CorpFin Updates Financial Reporting Manual

On November 18, 2020, CorpFin updated several areas in the FRM for recent changes made by the SEC, FASB and PCAOB.  There are some areas where updates are still in process.

The current update addresses:

  • New Smaller Reporting Company definition
  • Accelerated and Large Accelerated Filer definitions
  • Audit requirements for SPACs
  • Various SEC disclosure simplification and modernization rules
  • Various updates and changes related to FASB and PCAOB standards

Areas for future updates, including links to the related final rules, are:

Amendments to Financial Disclosures about Acquired and Disposed Businesses

Financial Disclosures about Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities

Qualifications of Accountants (Auditor Independence Requirements)

These new rules contain early transition provisions.  If you have questions when dealing with one of them, CorpFin recommends contacting the staff identified in each Final Rule.

As always, your thoughts and comments are welcome!

Smaller Reporting Companies – Business, Risk Factor and Legal Proceedings Modernization

In response to a reader comment about our recent posts delving into the SEC’s August 2020 modernization of business, risk factor and legal proceedings disclosures, this post explores the implications of these changes for smaller reporting companies or SRCs.

A review of the SRC definition and a list of SRC disclosure accommodations is included at the end of this post.  SRCs can use this system in an “à la carte” fashion, picking and choosing which disclosure accommodations they will use.

The impact of the SEC’s August 2020 Final Rule on SRCs is essentially the same as non-SRCs, with the differences described below.

Description of  Business

Consistent with the changes for non-SRCs, the requirements for how many periods to present and hyperlinking were updated for SRCs.  Notably, the prescriptive and detailed business description requirements for SRCs in S-K Item 101(h) were not changed.  They are included at the end of this post.

Number of Periods to Present

The old version of S-K Item 101(h) contained this language:

A smaller reporting company, as defined by §229.10(f)(1), may satisfy its obligations under this Item by describing the development of its business during the last three years.

This is replaced by a more principles-based requirement:

In describing developments under paragraphs (h)(1) through (3), information should be provided for the period of time that is material to an understanding of the general development of the business.

One note in this regard – remember the instructions to Form 10-K Item 1 limit this requirement to the period from the beginning of the year of the report:

Item 1. Business. 

Furnish the information required by Item 101 of Regulation S-K (§ 229.101 of this chapter) except that the discussion of the development of the registrant’s business need only include developments since the beginning of the fiscal year for which this report is filed.

Hyperlinking

The new S-K Item 101(h) also has this language about hyperlinking, which is consistent with the changes made for non-SRCs:

Notwithstanding the provisions of § 230.411(b) or § 240.12b-23(a) of this chapter as applicable, a smaller reporting company may only forgo providing a full discussion of the general development of its business for a filing other than an initial registration statement if it provides an update to the general development of its business disclosing all of the material developments that have occurred since the most recent registration statement or report that includes a full discussion of the general development of its business. In addition, the smaller reporting company must incorporate by reference, and include one active hyperlink to one registration statement or report that includes, the full discussion of the general development of the registrant’s business

 

Risk Factors

The August 2020 changes to risk factor disclosure did not include any special provisions for SRCs.  As a result, SRCs are subject to the new requirement to provide a risk factor summary if their risk factor disclosures are over 15 pages long.  This requirement is now in S-K Item 105(b):

(b) Concisely explain how each risk affects the registrant or the securities being offered. If the discussion is longer than 15 pages, include in the forepart of the prospectus or annual report, as applicable, a series of concise, bulleted or numbered statements that is no more than two pages summarizing the principal factors that make an investment in the registrant or offering speculative or risky.

SRC’s do have a disclosure accommodation for risk factors that was not changed by the August 2020 Final Rule.  The Instructions to Form 10-K Item 1A provide that SRCs do not have to disclose risk factors:

Item 1A. Risk Factors.

Set forth, under the caption “Risk Factors,” where appropriate, the risk factors described in Item 105 of Regulation S-K (§ 229.105 of this chapter) applicable to the registrant. Provide any discussion of risk factors in plain English in accordance with Rule 421(d) of the Securities Act of 1933 (§230.421(d) of this chapter). Smaller reporting companies are not required to provide the information required by this item.

Legal Proceedings

There are no SRC legal proceedings disclosure accommodations.  All the disclosure changes described in this post apply to both SRCs and non-SRCs.

As always, your thoughts and comments are welcome!

 

Here, for ease of reference are:

  • Definition of an SRC
  • SRC disclosure accommodations
  • S-K Item 101(h) description of business

 

Definition of an SRC

As a brief reminder, the definition of a small reporting company is in Regulation S-K Item 10(f):

(1) Definition of smaller reporting company. As used in this part, the term smaller reporting company means an issuer that is not an investment company, an asset-backed issuer (as defined in §229.1101), or a majority-owned subsidiary of a parent that is not a smaller reporting company and that:

(i) Had a public float of less than $250 million; or

(ii) Had annual revenues of less than $100 million and either:

(A) No public float; or

(B) A public float of less than $700 million.

This definition was adopted in this June 2018 Final Rule which increased the public float level from $75 million to $250 million and also added the provision that companies with less than $100 million in revenue and public float less than $700 million could use the SRC system.  This allowed tech and biotech companies that are in a “pre-revenue” stage to use the SRC reduced disclosure regimen.  In the final rule the SEC estimated that approximately 966 additional registrants would meet the new SRC definition.

SRC Disclosure Accommodations

You can find a list of the Regulation S-K disclosure accommodations for SRCs in S-K Item 10(f) and the financial statement requirements for SRCs in S-X Article 8.  SRC financial statements need only comply with US GAAP.  The additional requirements in Regulation S-X, with the exception of the auditor requirements in Article 2, do not apply to SRCs.

 

SRC Description of Business

The detailed requirements in S-K Item 101(h) for an SRC to address in the description of its business were not changed by the August 2020 Final Rule.  They include:

(1) Form and year of organization;

(2) Any bankruptcy, receivership or similar proceeding; and

(3) Any material reclassification, merger, consolidation, or purchase or sale of a significant amount of assets not in the ordinary course of business.

(4) Business of the smaller reporting company. Briefly describe the business and include, to the extent material to an understanding of the smaller reporting company:

(i) Principal products or services and their markets;

(ii) Distribution methods of the products or services;

(iii) Status of any publicly announced new product or service;

(iv) Competitive business conditions and the smaller reporting company’s competitive position in the industry and methods of competition;

(v) Sources and availability of raw materials and the names of principal suppliers;

(vi) Dependence on one or a few major customers;

(vii) Patents, trademarks, licenses, franchises, concessions, royalty agreements or labor contracts, including duration;

(viii) Need for any government approval of principal products or services. If government approval is necessary and the smaller reporting company has not yet received that approval, discuss the status of the approval within the government approval process;

(ix) Effect of existing or probable governmental regulations on the business;

(x) [Reserved]

(xi) Costs and effects of compliance with environmental laws (federal, state and local); and

(xii) Number of total employees and number of full-time employees.

Disclosure Modernization Continues – MD&A and Other Financial Disclosures

On November 19, 2020, the SEC adopted a Final Rule modernizing MD&A requirements, eliminating the five-year selected financial information disclosure, and updating the S-K Item 302 quarterly information disclosure.

The related press release includes this summary of the changes for MD&A:

  • Add a new Item 303(a), Objective, to state the principal objectives of MD&A;
  • Amend current Item 303(a)(1) and (2) (amended Item 303(b)(1)) to modernize, enhance and clarify disclosure requirements for liquidity and capital resources;
  • Amend current Item 303(a)(3) (amended Item 303(b)(2)) to clarify, modernize and streamline disclosure requirements for results of operations;
  • Add a new Item 303(b)(3), Critical accounting estimates, to clarify and codify Commission guidance on critical accounting estimates;
  • Replace current Item 303(a)(4), Off-balance sheet arrangements, with an instruction to discuss such obligations in the broader context of MD&A;
  • Eliminate current Item 303(a)(5), Tabular disclosure of contractual obligations, in light of the amended disclosure requirements for liquidity and capital resources and certain overlap with information required in the financial statements; and
  • Amend current Item 303(b), Interim periods (amended Item 303(c)) to modernize, clarify and streamline the item and allow for flexibility in the comparison of interim periods to help registrants provide a more tailored and meaningful analysis relevant to their business cycles.

The new rules have a multi-layered transition path.  They will be effective 30 days after publication in the Federal Register.  Companies will not be required to implement the new rules immediately after the effective date.  Instead, each company will have a “mandatory compliance date” of its fiscal year that ends on or after the date that is 210 days after the effective date.  However, companies have the option to comply with the new rules any time after the effective date.

A registration statement must comply with the new rules if it contains financial statements for a period on or after the “mandatory compliance date” for a company.

We will be posting details about all the changes in coming weeks.

As always, your thoughts and comments are welcome!

Two More Disclosure Modernization Steps

Along with the Commission’s Final Rule on August 26, 2020, modernizing disclosure requirements for the description of the business, risk factors and legal proceedings, the SEC recently made two other changes which are a bit narrower in scope but which we should be aware of in the reporting process.

First, in September, the Commission adopted a Final Rule updating the statistical disclosure requirements for banks and savings and loans.  This Final Rule eliminates Industry Guide 3 and replaces it with new, updated and modernized disclosures in Section 1400 of Regulation S-K.  The rule will be effective 30 days after publication in the Federal Register and will apply to fiscal years ending on or after December 15, 2021.  Affected financial institutions can implement the new disclosure requirements before the mandatory implementation date.  You can read more about the new rules in this press release.

Second, on September 9, 2020, CorpFin amended Disclosure Guidance Topic 7 to provide new renewal options for companies with confidential treatment orders about to expire.  If a confidential treatment request was obtained under the pre-Disclosure Modernization guidance (which required SEC approval), and meets certain conditions, it may be renewed using the new confidential treatment request process in S-K Item 601.  This process does not require SEC pre-approval, but is subject to SEC review.

As always, your thoughts and comments are welcome!

More Modernization – Electronic Signatures!

On November 17, 2020, the SEC adopted a Final Rule  –  “Electronic Signatures in Regulation S-T Rule 302.”  As you can read in the accompanying Press Release, the SEC is modernizing its signature requirements to accept electronic signatures for many filings.

This change was, at least partially, in response to this rulemaking petition by a group of law firms representing hundreds of public companies.  The amendments “recognize the widespread use of electronic signatures and technological developments in the authentication and security of electronic signatures, as well as the continuing need to support remote workforces.”

The Final Rule makes changes to Regulation S-T and various forms for the Securities Act, Exchange Act and Investment Company Act.  Under the new rules, a signatory to an electronic filing who follows certain procedures will be able to use an electronic signature to sign a signature page or other “authentication document.”  The related procedures must meet specific requirements being added to the EDGAR Filer Manual.

The Final Rule will be effective when published in the Federal Register.

In a related change, the SEC is also amending its Rules of Practice to allow for filing and serving documents electronically.

As always, your thoughts and comments are welcome!

Judgments, Estimates and Uncertainties – Oh My!

Financial accounting and SEC reporting involve more judgments, estimates and uncertainties every quarter and year-end.  Challenges such as making the principles-based judgments for disclosing disaggregated revenues under ASC 606, estimating the appropriate discount rates to use for lease accounting in ASC 842, and determining the necessity of an MD&A know-trend disclosure about an uncertainty, are inescapable.

One of the scariest “oh my” moments we have as SEC reporting professionals is when actual results differ materially from our estimates and judgments.

Unfortunately, in the realm of SEC reporting we are sometimes – perhaps all the time – aware that when we deal with these challenges we are subject to SEC scrutiny.  The SEC Enforcement Division’s leadership has emphasized that they are “incredibly focused” on company disclosures.  Sometimes we are concerned that we are “darned if we do and darned if we don’t” when making challenging decisions about judgments, estimates and uncertainties.

At an October 2020 securities enforcement conference, Enforcement Division Associate Director Melissa Hodgman discussed how the Division approaches situations where companies miss an estimate or judgment.  In her remarks, Associate Director Hodgman told the audience that the Division will not assume wrongdoing if a company misses an estimate or judgment in an uncertain situation.  She stated that the staff will “trust good faith estimates” and does not view this as a “gotcha” game when a company misses an estimate or judgment.  Instead, the Division will focus on process and documentation.  They will try to ascertain that we have made reasoned and good faith judgments using a consistently applied process.  The staff has also repeatedly emphasized the importance of robust and clear documentation about why we did what we did.

NOTE:  You may find of interest, PLI’s Insecurities Podcast episode 23, “A GAAP in Your Financial Reporting,” where hosts Chris Ekimoff and Kurt Wolfe further summarize and discuss her remarks.

These remarks are consistent with those of Chief Accountant Sagar Teotia who has said on a number of occasions that well-thought-out applications of principles will not be second guessed.  This is an excerpt from a speech by Mr. Teotia on June 23, 2020:

Significant Estimates and Judgments; Reasonable Judgments

 As we noted in our April 2020 statement, in connection with their financial reporting responsibilities, many companies have been required to make significant judgments and estimates to address a variety of accounting and financial reporting matters.  As those who engage with us well know, OCA has consistently not objected to well-reasoned judgments that entities have made, and we will continue to apply this perspective.   Companies should ensure that significant judgments and estimates are disclosed in a manner that is understandable and useful to investors, and that the resulting financial reporting reflects and is consistent with the company’s specific facts and circumstances.

What both the Enforcement Division and the Chief Accountant are telling us is that when we miss on a challenging estimate or judgment we may be questioned by the staff.  To put ourselves in the best position possible to answer the staff’s questions we must be able to show that we consistently followed a well-thought-out process with complete and robust documentation.

As always, your thoughts and comments are welcome.

Disclosure Modernization Continues – Part Four

This is the fourth in a series of blog posts delving into the practical aspects of implementing the Regulation S-K changes in the SEC’s August 26, 2020 Final Rule that modernizes and updates three disclosure areas in Regulation S-K:

Item 101 – Description of business

Item 103 – Legal proceedings

Item 105 – Risk factors

The Final Rule was published in the Federal Register on October 8, 2020 and is effective for filings made on or after November 9, 2020, regardless of the accounting period-end of the financial statements included in a filing.

This post focuses on the risk factor disclosures required by S-K Item 105.  You can read discussions of the description of business and legal proceedings disclosure changes in the first, second and third posts in this series.  The changes discussed in this post for risk factor disclosures are effective for 10-Q’s and 10-K’s filed on or after November 9, 2020.

The overall theme of all these changes is to make disclosure requirements less prescriptive and more principles based with a focus on information that is material.  It has been over 30 years since there were any significant changes in these disclosure requirements, and it would be fair to say that the world and businesses have changed a lot over these 30 years.  It makes sense that these disclosures could stand some “modernization.

The Final Rule makes a number of changes in risk factor disclosures:

  1. In the first sentence of S-K Item 105 the word significant is changed to material.

Old version

Where appropriate, provide under the caption “Risk Factors” a discussion of the most significant factors that make an investment in the registrant or offering speculative or risky.

New version

Where appropriate, provide under the caption “Risk Factors” a discussion of the material factors that make an investment in the registrant or offering speculative or risky.

This change is consistent with the overall goal of disclosure modernization to make requirements more principles based and to focus on material information.

  1. The disclosure reorganizes and slightly changes the details about presentation of risk factors.

Old version

This discussion must be concise and organized logically. ….. Explain how the risk affects the registrant or the securities being offered. Set forth each risk factor under a subcaption that adequately describes the risk.

New version

This discussion must be organized logically with relevant headings and each risk factor should be set forth under a subcaption that adequately describes the risk. …… Concisely explain how each risk affects the registrant or the securities being offered

  1. The new disclosure requirements acknowledge that companies frequently present “generic” risk factors, and requires that they be disclosed at the end of the risk factor section and include a specific heading.

Old version

Do not present risks that could apply generically to any registrant or any offering.

New version

The presentation of risks that could apply generically to any registrant or any offering is discouraged, but to the extent generic risk factors are presented, disclose them at the end of the risk factor section under the caption “General Risk Factors.”

  1. The new rule includes provisions for a “summary” if your risk factors are over 15 pages.

(b) Concisely explain how each risk affects the registrant or the securities being offered. If the discussion is longer than 15 pages, include in the forepart of the prospectus or annual report, as applicable, a series of concise, bulleted or numbered statements that is no more than two pages summarizing the principal factors that make an investment in the registrant or offering speculative or risky.

Here is an example of a risk factor summary from a KLA Corporation’s Form 10-Q for the quarter ended September 30, 2020:

ITEM 1A.    RISK FACTORS

A description of factors that could materially affect our business, financial condition or operating results is provided below.

Risk Factor Summary

The following summarizes the most material risks that make an investment in our securities risky or speculative. If any of the following risks occur or persist, our business, financial condition and results of operations could be materially harmed and the price of our common stock could significantly decline.

COVID-19 Pandemic Risks

  • our supply chain may be disrupted, customer demand for our products may decline or customer purchases may be pushed out if the COVID-19 pandemic persists;
  • we may not be able to meet customer demand and keep our workforce healthy if an outbreak should occur at one of our facilities and we are unable to contain it;
  • we may be unable to provide service to our customers in a timely manner or at all if travel restrictions persist, common carrier routes are canceled or quarantines are imposed; and
  • our facilities could be shut down for an extended period of time if an outbreak occurs in any of the jurisdictions where we manufacture our products.

General Commercial, Financial and Regulatory Risks

  • laws, regulations or other orders may limit our ability to sell our products to certain customers or to provide service on products previously sold to those customers;
  • we may be exposed to tariffs or similar trade impairments;
  • international sales may expose us to longer payment cycles or collection difficulties;
  • intellectual property disputes can be expensive and could result in an inability to sell our products in certain jurisdictions;
  • we may be unable to attract or retain key personnel;
  • reliance on third party service providers could result in disruptions if such third parties cannot perform services for us in a timely manner;
  • cybersecurity incidents could result in the loss of valuable information or assets or subject us to costly litigation;
  • we may face disruptions if we cannot access critical information in a timely manner due to system failures;
  • we may fail to successfully integrate our acquisitions;
  • natural disasters, acts of war or other catastrophic events could significantly disrupt our operations for lengthy periods of time;
  • we may fail to successfully hedge our exposure to currency and interest rate fluctuations;
  • we are subject to exposure from tax and regulatory compliance audits;
  • economic, political or other conditions in the jurisdictions where we earn profits can impact the tax laws and taxes we pay in those jurisdictions, subsequently impacting our effective tax rate, cash flows and results of operations; and
  • changes in accounting pronouncements and laws could have unforeseen effects.

Industry Risks

  • we may not be able to keep pace with technological changes in the industries in which we operate;
  • we have a highly concentrated customer base; and
  • prevailing local and global economic conditions may negatively affect the purchasing decisions of our customers.

Business Model and Capital Structure

  • we may not be able to maintain our technology advantage or protect our proprietary rights;
  • we may not be able to compete with new products introduced by our competitors;
  • we may not receive components necessary to build our products in a timely manner;
  • we may fail to operate our business in a manner consistent with our business plan;
  • we may not have sufficient financial resources to repay our indebtedness when it becomes due;
  • we may fail to comply with the covenants in our revolving credit facility, which could impair our ability to borrow needed funds under the facility, or require us to repay it sooner than we planned;
  • if our products fail to operate properly or contain defects or our customers are sued by third parties due to our products, we may be liable under indemnification provisions with our customers; and
  • we may incur significant restructuring charges or other asset impairment charges or inventory write-offs.

For a more complete discussion of the material risks facing our business, see below.

As always, your thoughts and comments are welcome!

For your reference, here is the new language of S-K Item 105 risk factors with the changes bolded:

(a) Where appropriate, provide under the caption “Risk Factors” a discussion of the material factors that make an investment in the registrant or offering speculative or risky. This discussion must be organized logically with relevant headings and each risk factor should be set forth under a subcaption that adequately describes the risk. The presentation of risks that could apply generically to any registrant or any offering is discouraged, but to the extent generic risk factors are presented, disclose them at the end of the risk factor section under the caption “General Risk Factors.”

(b) Concisely explain how each risk affects the registrant or the securities being offered. If the discussion is longer than 15 pages, include in the forepart of the prospectus or annual report, as applicable, a series of concise, bulleted or numbered statements that is no more than two pages summarizing the principal factors that make an investment in the registrant or offering speculative or risky. If the risk factor discussion is included in a registration statement, it must immediately follow the summary section required by § 229.503 (Item 503 of Regulation S-K). If you do not include a summary section, the risk factor section must immediately follow the cover page of the prospectus or the pricing information section that immediately follows the cover page. Pricing information means price and price-related information that you may omit from the prospectus in an effective registration statement based on Rule 430A (§ 230.430A of this chapter). The registrant must furnish this information in plain English. See § 230.421(d) of Regulation C of this chapter.