Category Archives: 10-K/10-Q Tips

Three Tips to Avoid Low-Hanging Fruit on the MD&A SEC Comment Tree

10-K/10-Q Tips, Reporting

As we discussed in this blog post, creating change in MD&A is a complex process.  The number of stakeholders involved in drafting and reviewing MD&A creates logistical and tactical challenges.  Old and obsolete beliefs that disclosure changes will attract negative attention from the SEC create resistance that is difficult to overcome.  This is true even when the changes are to implement new requirements that will help companies avoid comments.

There are three areas of change from the SEC’s 2020 MD&A update that have become frequent comment areas, likely because companies have not changed their MD&A to implement these rule changes:

    • Critical accounting estimate disclosures
    • Quantitative and qualitative disclosures about material changes
    • Meaningfully addressing liquidity and capital resources

To help understand the issues in these disclosures, below are links to blog posts with example disclosures and related SEC comments.

This post presents an example comment and company response for critical accounting estimate disclosures.  While the example, particularly the revised disclosure, is lengthy, the lesson is simple.  Critical accounting estimates are not the same thing as accounting policies.  This is a simple comment to avoid.

This post presents an example comment and company response about providing quantitative and qualitative disclosures about material financial statement changes.  The Regulation S-K Item 303 guidance for this disclosure is very direct:

“Where the financial statements reflect material changes from period-to-period in one or more line items, including where material changes within a line item offset one another, describe the underlying reasons for these material changes in quantitative and qualitative terms.”

This post examines an example comment and company response focused on meaningfully addressing liquidity and capital resources disclosures.

Given the complexity and challenges in improving MD&A, one strategy companies can adopt is to make incremental change as they work on quarterly reports during the year.  This could help in working toward a reasonable implementation of these rule changes in their next year-end MD&A.

As always, your thoughts and comments are welcome!

A Few Form 10-K Tips and Reminders

10-K/10-Q Tips, Reporting

In the spirit of being helpful and at the risk of being a bit repetitive, this earlier blog post discusses a number of frequent Form 10-K errors to avoid and new areas to address.  Included are issues such as where to place the S-K Item 201(d) equity compensation plan information (Item 12) and making sure Item 6 is labeled “Reserved.”

Also, don’t forget to include the two new clawback related check boxes on your cover page.  You can read more in this post.

As always, your thoughts and comments are welcome!

Is Form 12b-25 Ever Required?

10-K/10-Q Tips, Reporting

Many companies have been grateful for the extension provided by Form 12b-25.  While the extension period is not long (five calendar days for a quarterly report and 15 calendar days for an annual report), so long as the delayed report is filed within this grace period a company does not lose its timely filer status.  Perhaps most importantly, it also retains its S-3 eligibility.

But what if a company knows that it will not be able to file its report within the extension period provided by Form 12b-25?  Should it still file a Form 12b-25?  Thanks to some research by Gary Brown, Partner at Nelson Mullins Riley & Scarborough LLP and SEC Institute workshop leader, we know the answer to this question is a resounding yes! 

This answer is found in a Compliance and Disclosure Interpretation:

Question 135.02

Question: Is a company required to file a Form 12b-25 even when it anticipates filing a periodic report after the Rule 12b-25 extension period. 

Answer: Yes. Under Rule 12b-25(a), a company must file a Form 12b-25 for a periodic report that is filed after the due date regardless of whether it anticipates filing the periodic report within the extension period. See Exchange Act Release No. 16718 (Apr. 2, 1980). If the company does not anticipate filing the periodic report within the extension period, it should not check the box in Part II of Form 12b-25. [September 30, 2008]

So, even when a company does not expect to be able to file the delayed report within the extension period, Form 12b-25 should still be filed.

Here a few quick notes about Form 12b-25:

Generally, Form 12b-25 is filed the day after the deadline for the periodic report.

This form appears on the EDGAR system as a form NT, either NT 10-K or NT 10-Q.

Lastly, as an important reminder, remember that Instruction II(a) and Part III of Form 12b-25 require disclosure of the reason the report cannot be filed on time:

PART III — NARRATIVE

State below in reasonable detail why Forms 10-K, 20-F, 11-K, 10-Q, 10-D, N-CEN, N-CSR, or the transition report or portion thereof, could not be filed within the prescribed time period.

(Attach extra Sheets if Needed)

This disclosure should be complete and accurate, as this SEC Enforcement Press Release against eight companies demonstrates.  These companies failed to appropriately disclose that the causes for their late filings were possible or anticipated financial statement restatements.

As always, your thoughts and comments are welcome!

An Example of a “Simple” Failure to Disclose Why Revenues Increased Costs – NVIDIA’s $5,500,000 Penalty

10-K/10-Q Tips, Reporting

Most MD&A enforcement cases focus on a complex issue, failure to disclose a known trend or uncertainty.  In these cases (e.g., Sony, SeaWorld and Under Armour), company management knows of something that is “reasonably likely” to materially affect financial performance in the future but does not disclose this information to investors in a timely manner.  This disclosure is probabilistic and subjective.

The issue in the SEC’s recent enforcement against NVIDIA was far simpler.  As detailed in this May 6, 2022, Press Release and the related SEC Order, NVIDIA Corporation failed to disclose the causal factors behind material increases in revenues in 2018.  This disclosure failure resulted in a $5,500,000 penalty.

The foundation for this case is in Regulation S-K Item 303, language that was formerly part of Financial Release 36 (No. 33-6835) and Financial Release 72 (No. 33-8350):

Where the financial statements reflect material changes from period-to-period in one or more line items, including where material changes within a line item offset one another, describe the underlying reasons for these material changes in quantitative and qualitative terms.

This disclosure, which is one of the main objectives of MD&A as articulated in S-K Item 303 and Financial Release 72, is to provide material information to help readers “ascertain that past performance is indicative of future performance.”

As you can read in the SEC Order, NVIDIA, which sells powerful computer chips know as graphics processing units (or GPUs), generated material increases in revenue in 2018.  Specifically, gaming GPU revenue increased 52% and 25% for the second and third quarters of 2018, respectively.  Company management knew that a significant part of this increase was because cryptominers were buying gaming chips, even though the company had built a separate product line for these customers.  The company was also aware that cryptomining is a very volatile business.

In its Form 10-Q for the second and third quarters for 2018, NVIDIA did not disclose that cryptomining was a significant factor in gaming revenue growth.

Not disclosing this information meant that investors did not have necessary information to “ascertain that past performance is indicative of future performance.”

The SEC Order also focuses on NVIDIA’s failure to maintain effective disclosure controls and procedures.

The CorpFin review process has consistently emphasized the requirement to disclose qualitative and quantitative information about the causal factors behind financial statement changes.  The voice of the Enforcement Division is now reinforcing this message: failure to disclose material information about causal factors behind financial statement changes can result in significant penalties.

As always, your thoughts and comments are welcome!

New Requirement to Tag Auditor Information

10-K/10-Q Tips, Reporting

On December 2, 2021, the SEC adopted a Final Rule implementing the requirements of the Holding Foreign Companies Accountable Act (HFCAA).  You can read more and find a link to the related Fact Sheet here. (Remember to include new Item 9C in your next 10-K!)

To implement the reporting required by the HFCAA the SEC must determine each reporting company’s auditor and the auditor’s location.  The Final Rule includes an addition to the “Document Entity and Information” section of the XBRL taxonomy for this information:

Consistent with these commenters’ suggestions, the final amendments include a new tagging requirement to facilitate the Commission’s accurate and efficient identification of Commission-Identified Issuers. To implement this requirement, in December 2021, the Document Entity and Information (“DEI”) taxonomy will be updated to include three additional data elements, applicable to annual report filings on Forms 10-K, 20-F, and 40-F that are submitted with XBRL presentations.  Those three data elements will identify the auditor (or auditors) who have provided opinions related to the financial statements presented in the registrant’s annual report, the location where the auditor’s report has been issued, and the PCAOB ID Number(s) of the audit firm(s) or branch(es) providing the opinion(s).

The update to the EDGAR filing manual was released on December 20, 2021.  All annual reports for periods ending on or after December 15, 2021, will require these new tags.

Details of the new tags are included in Volume II of the EDGAR Filer Manual.  Section 6.5.54 begins with this language:

Auditor Name, Location, and Firm ID

The name represents the plain text (not logo nor signature) name of the auditor; the location text represents the city along with either or both country, US state or Canadian province; the firm ID is the auditors’ Firm ID as assigned by the US PCAOB.

If the DEI namespace version used in the filing has those three standard elements, then the absence of any of the three facts will cause the filing to be suspended (see table in 6.5.21).

If the DEI namespace version used in a filing does not have the three standard elements, the use of that DEI namespace version will cause the filing to be suspended. The filer will need to resubmit the filing with a DEI namespace version that has the three standard elements.

All three facts must also be visible in the sense defined by 5.2.5.14, and should be tagged where they normally appear, adjacent to the auditors’ opinion.

An interesting aspect of this change is that generally only information prepared by the company is tagged.  How information about the company’s auditor will be tagged by management is likely something companies should discuss with their auditors.

As always, your thoughts and comments are welcome.

A Few Form 10-K Tips and Reminders

10-K/10-Q Tips, Reporting

As year-end reporting ramps up, this post focuses on nine areas that are new or frequently mishandled in the annual reporting and proxy processes.  It will hopefully help:

            Deal with recent changes in Form 10-K and the proxy process, and

            Avoid frequent errors in 10-K form and content.

  1. What to do with old 10-K Item 6?

Anytime the SEC makes changes to the items or item numbers in Form 10-K there is confusion about handling these changes.  This is the case right now with old Item 6 – Selected Financial Data.

The first step to getting this change right is to review the most recent version of the Form 10-K Instructions at the SEC’s webpage.  There you will find Item 6 still included but with a different title:

            Item 6. [Reserved]

The second step is to remember that Exchange Act Rule 12b-13 requires that all item numbers in the instructions must be included in a report:

12b-13 Preparation of statement or report.

The statement or report shall contain the numbers and captions of all items of the appropriate form, but the text of the items may be omitted provided the answers thereto are so prepared as to indicate to the reader the coverage of the items without the necessity of his referring to the text of the items or instructions thereto. However, where any item requires information to be given in tabular form, it shall be given in substantially the tabular form specified in the item. All instructions, whether appearing under the items of the form or elsewhere therein, are to be omitted. Unless expressly provided otherwise, if any item is inapplicable or the answer thereto is in the negative, an appropriate statement to that effect shall be made.

Thus, the right approach is to include Item 6, but use the new title – [Reserved].

 

  1. Being Sure to Include New Item 9C.

Speaking of new Form 10-K Item numbers, earlier in 2021 the SEC added new Item 9C:

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

This disclosure is related to the Holding Foreign Companies Accountable Act.  You can read more in this blog post.  While this will not apply to many companies, as mentioned above, this new item should be included in your year-end 10-K.

 

  1. Double-Check Your Exhibit (4)(vi).

You might ask, “Is Exhibit (4)(vi) still an issue?”  Surprisingly, the answer is yes.  When the SEC’s Disclosure Modernization process added this exhibit to Form 10-K to include information about a company’s securities, an omission in the Final Rule language created confusion about the requirement.  You can read more in this post with all the details.  That confusion continues to today, so, to be clear, Form 10-K requires Exhibit (4)(vi), which should include the following from S-K Item 601:

(vi) For each class of securities that is registered under Section 12 of the Exchange Act, provide the information required by Item 202(a) through (d) and (f) of Regulation S-K
(§ 229.202 of this chapter).

Instruction 1 to paragraph (b)(4)(vi). A registrant is only required to provide the information called for by Item 601(b)(4)(vi) if it is filing an annual report under Exchange Act Section 13(a) or 15(d).

(Other instructions are omitted).

The required disclosures are found in S-K Item 202 – Description of registrants securities requirements.

 

  1. Place the S-K Item 201 Equity Compensation Plan Information in Item 12 or Your Proxy

Another common, although minor, error in many Form 10-K’s is including the S-K Item 201 Equity Compensation Plan Information in Item 5 rather than Item 12.  The 10-K instructions are a bit confusing because both Item 5 and Item 12 refer to this disclosure.  However, the staff has been clear in both a letter to the ABA and a Compliance and Disclosure Interpretation, that the table should be in Item 12 if it is included in Form 10-K.  You can read more details in this blog post.

 

  1. Consider Placing the Performance Graph in Your Annual Report to Shareholders

Another possible change some companies could consider is moving the performance graph required by S-K Item 201 to their annual report to shareholders or ARS.  The ARS is not filed information but is only furnished.  An instruction to S-K Item 201(e) makes it clear that this information is not required in Form 10-K:

  1. The information required by paragraph (e) of this Item need not be provided in any filings other than an annual report to security holders required by Exchange Act Rule 14a-3 (17 CFR 240.14a-3) or Exchange Act Rule 14c-3 (17 CFR 240.14c-3) that precedes or accompanies a registrant’s proxy or information statement relating to an annual meeting of security holders at which directors are to be elected (or special meeting or written consents in lieu of such meeting). Such information will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

You can read more in this blog post.

 

  1. Metric and Non-GAAP Reminders

SEC reviews continue to find many companies failing to follow some of the basic non-GAAP measure requirements of Regulation G and S-K Item 10(e).  Year-end is a great time to review Reg G, S-K Item 10(e) and the related Compliance and Disclosure Interpretations if you include non-GAAP measures in MD&A or other documents.

 

  1. MD&A Quantification

One of the significant changes to MD&A requirements in S-K Item 303 made by the SEC’s November 2020 MD&A Final Rule was the addition of this language:

Where the financial statements reflect material changes from period-to-period in one or more line items, including where material changes within a line item offset one another, describe the underlying reasons for these material changes in quantitative and qualitative terms.

In the last several years the staff has written countless comments requesting companies to discuss changes in both quantitative and qualitative terms.  Here is one example:

Please expand your results of operations discussion to quantify the impact of each factor identified as causing changes in results between periods. For example, we note that Mountain Reported EBITDA increased as a result of strong North American pass sales growth, strong growth in visitation and spending at western U.S. resorts, and recent acquisitions. Please quantify the impact of each factor attributing to the increase, here, and throughout your discussion, in accordance with Item 303(a)(3)(iii) of Regulation S-K and Section III.D of SEC Release No. 33-6835.

Vail Resorts, Inc., February 3, 2020

With this frequent comment topic now part of the regulatory guidance in S-K Item 303, it is likely a good idea to consider adding this kind of analysis to MD&A if it is not already included.

 

  1. Perks Disclosures

The SEC Enforcement Division continues to keep a watchful eye on how companies are disclosing perks.  As you can read in this post, enforcement cases focus on issues ranging from companies not using the right definition of perks to not disclosing all perks paid to officers.  It would be wise, in advance of developing information for the proxy, to review how your company computes and discloses perks.

 

  1. Shareholder Proposal Processes

As the Division of Corporation Finance announced on December 13, 2021, it has changed its policy and will now respond in writing to no-action requests regarding shareholder proposals.  This change should be incorporated into the planning schedule for proxy statements and annual meetings.

As always, your thoughts and comments are welcome!  If you have any tips you would like to add, feel free to put them in a comment.

Details, Details, Details in Inline XBRL

10-K/10-Q Tips, Reporting

As you have likely heard, in the wake of the SEC’s inline XBRL requirements becoming effective for large accelerated filers for periods after June 15, 2019, on August 20, 2019 the SEC issued several C&DI’s to help implement the new requirements. There was, interestingly, no formal announcement from the SEC about the new C&DI’s in the “What’s New” section of the SEC’s webpage.  Gary Brown, who co-teaches our “SEC Reporting and Practice Skills Workshop for Lawyers” program, and his colleagues at Nelson Mullins have put together a very helpful discussion of the C&DI’s, exploring the new requirements and their impact on tagging the cover pages of Forms 8-K, 10-K and 10-Q along with related questions about exhibits and other areas.

As a reminder, the phase-in for the requirement to use inline XBRL is:

IXBRL Transition

As always, your thoughts and comments are welcome!

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

10-K/10-Q Tips, Reporting

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

201Table

Well, the final version of the Disclosure Update and Simplification Rule created a bit more confusion for me.  As you can read in this November 6, 2018 post the original version of the  Final Rule made changes to where to put the table, but the “conformed and corrected” version published after publication in the Federal Register removed those changes.  So, no changes for the S-K Item 201(d) table!

We also updated our overall summary document you can find here.

As always, your thoughts and comments are welcome!

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

10-K/10-Q Tips

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

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

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

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

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

Amend § 229.201 by:

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

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

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

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

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

f. Revising newly redesignated Instruction 2 to Item 201.

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

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

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

The changes in this paragraph are:

1. The addition of disclosure of your ticker symbol

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

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

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

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

 

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Next, Instruction 2 is revised to reference bid information:

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

 

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

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

As always, your thoughts and comments are welcome!

 

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

10-K/10-Q Tips

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Question 105.09

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

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

As always, your thoughts and comments are welcome!