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

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

What is the legal difference?

How to determine if a document is furnished or filed?

Filed

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

Furnished

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

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

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

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

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

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

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

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

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

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

As always, your thoughts and comments are welcome!

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

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

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

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

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

You can read the report here.

As always, your thoughts and comments are welcome!

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

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

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

As always, your thoughts and comments are  welcome!

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

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

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

“Amend § 229.101 by:

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

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

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

4.  Revising paragraph (h)(5)(iii)”

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

1. First, by removing paragraph (b) the Final Rule removes the requirement for segment disclosures in Item 1. Most companies historically simply cross referenced to their financial statements for this requirement as it required the same information as GAAP.  The SEC eliminated this duplicative disclosure in the Final Rule.

2. Along the same lines as paragraph (b), removing paragraph (d) eliminates the requirement for geographical information in Item 1. Most companies simply cross referenced to their financial statements for this requirement also, as it also required the same information as GAAP.  The SEC also eliminated this duplicative disclosure in the Final Rule.

3. Paragraph (c)(1)(xi) is the requirement to disclose company sponsored and customer sponsored R&D expense.Since GAAP requires essentially the same disclosures, the SEC eliminated this duplicative disclosure of R&Din the Final Rule.

4. The changes in paragraphs (e), (e)(2) and (e)(3) are about the posting of website information. The changes here are very detailed, but not dramatic in scope.  The only part of this change specifically attributable to Form 10-K is in the introductory paragraph (e) and in (e)(3).  Before this change the requirement to disclose your webpage and information about posting SEC reports only applied to accelerated and large accelerated filers.  With this change, the requirement to disclose your webpage now applies to all filers.  This is the old language in paragraph e(3), which is struck-through to emphasize it is superseded:

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

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

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

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

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

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

It is now updated to read: (Finally!)

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

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

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

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

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

As always, your thoughts and comments are welcome!

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

Item 1B. Unresolved Staff Comments.

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

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

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

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

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

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

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

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

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

As always, your thoughts and comments are welcome.

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

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

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

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

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

2. We note your income tax rate reconciliation table showing the effective tax rate of (27%) in fiscal 2017, 567% in fiscal 2016 and 58% in fiscal 2015. However, you provide no discussion or insight in the footnotes or management’s discussion and analysis into the specific factors or circumstances that caused the significant changes in your effective tax rate. Please provide the following:

• a discussion of the specific facts or circumstances that resulted in this significant change per ASC 740-10-50-14;
• explain in detail the line item “changes in valuation allowance” which include state NOL and deferred tax true ups; and
• discuss whether you separately disclosed each line item meeting the materiality thresholds in Rule 4-08(h) of Regulation S-X.

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

Revenues, page 30

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

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

Now that we are past the July 4^thholiday (hope you had fun!)  and far enough past quarter-end close to be getting ready for reporting, here are a few things to be thinking about as we work on 10-Q’s or 10-K’s.

It was, in the SEC reporting world, a long time ago (but not in a galaxy far, far away), that the SEC issued its “revised” guidance about the use of non-GAAP measures.  (The updated May 2016 C&DI’s are here.) Even with the passage of time, there are still some pretty basic and some more complex problem areas that the SEC discovers in the comment process.  Here are a few example comments to use as reminders to make sure you are following the guidance in Reg Gand S-K Item 10(e), the two primary sources of SEC guidance in this area.

For this first comment, here is a part of S-K Item 10(e):

 (ii) A registrant must not:

……………

 (B) Adjust a non-GAAP performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual, when the nature of the charge or gain is such that it is reasonably likely to recur within two years or there was a similar charge or gain within the prior two years;

 Now, this requirement from S-K Item 10(e) applies to non-GAAP measures in filed documents, but it is augmented and expanded by this C&DI:

 Question 102.03

 Question: Item 10(e) of Regulation S-K prohibits adjusting a non-GAAP financial performance measure to eliminate or smooth items identified as non-recurring, infrequent or unusual when the nature of the charge or gain is such that it is reasonably likely to recur within two years or there was a similar charge or gain within the prior two years. Is this prohibition based on the description of the charge or gain, or is it based on the nature of the charge or gain?

Answer: The prohibition is based on the description of the charge or gain that is being adjusted. It would not be appropriate to state that a charge or gain is non-recurring, infrequent or unusual unless it meets the specified criteria. The fact that a registrant cannot describe a charge or gain as non-recurring, infrequent or unusual, however, does not mean that the registrant cannot adjust for that charge or gain. Registrants can make adjustments they believe are appropriate, subject to Regulation G and the other requirements of Item 10(e) of Regulation S-K. See Question 100.01. [May 17, 2016]

The C&DI mentioned at the end of 103.03 is:

Question 100.01

Question: Can certain adjustments, although not explicitly prohibited, result in a non-GAAP measure that is misleading?

Answer: Yes. Certain adjustments may violate Rule 100(b) of Regulation G because they cause the presentation of the non-GAAP measure to be misleading. For example, presenting a performance measure that excludes normal, recurring, cash operating expenses necessary to operate a registrant’s business could be misleading. [May 17, 2016]

These pieces of guidance build a framework that in any non-GAAP measure, if you say it is unusual or infrequent, it has to meet a logical definition of those terms.

These requirements are behind the following comment:

Non-GAAP Financial Measures

4. We note your disclosure under this section, describing certain adjustments to your non- GAAP measures, stating “these non-recurring items are excluded because, by their nature, they are not indicative of our business or economic trends.” However, it appears that several of these items have occurred in sequential years. Please refrain from referring to charges as non-recurring when such charges have occurred within the prior two years or are reasonably likely to recur within two years. You may refer to our Non- GAAP Financial Measures Compliance and Disclosure Interpretation (C&DI) 102.03 if you require further clarification or guidance.

This second example is based on the following C&DI:

 Question 102.11

 Question: How should income tax effects related to adjustments to arrive at a non-GAAP measure be calculated and presented?

 Answer: A registrant should provide income tax effects on its non-GAAP measures depending on the nature of the measures. If a measure is a liquidity measure that includes income taxes, it might be acceptable to adjust GAAP taxes to show taxes paid in cash. If a measure is a performance measure, the registrant should include current and deferred income tax expense commensurate with the non-GAAP measure of profitability. In addition, adjustments to arrive at a non-GAAP measure should not be presented “net of tax.” Rather, income taxes should be shown as a separate adjustment and clearly explained. [May 17, 2016]

Attention to this kind of detail is important.  This is a comment from a March 2018 comment letter:

5. Within the reconciliations of GAAP net income to non-GAAP adjusted net income attributable to XXXXXX and of related GAAP diluted earnings per share (EPS) to non- GAAP adjusted diluted EPS, you present a number of reconciling items net of income taxes. Please present such adjustments before tax and show the related income tax as a separate adjustment to comply with Non-GAAP Financial Measures C&DI 102.11.

last, here is an interesting comment about the intersection between the use of non-GAAP measures and operating segment disclosures.  The non-GAAP disclosure requirement involved is from S-K Item 10(e):

(i) The registrant must include the following in the filing:

………………

(C) A statement disclosing the reasons why the registrant’s management believes that presentation of the non-GAAP financial measure provides useful information to investors regarding the registrant’s financial condition and results of operations; and

That said, if a non-GAAP measure is used in evaluating segment performance then its disclosure is essentially required by GAAP and reconciliation is not required.  This company went one step beyond the segment disclosure requirements:

1. We note your presentation of Total Segment Adjusted EBITDA included as part of your tables which outline your sales and Segment Adjusted EBITDA for each of your reporting segments. You state on page 29 that Segment Adjusted EBITDA is a meaningful measure as it is used to assess business and operating performance of the segments, and for operational planning and decision-making purposes. However, it is unclear from your disclosures why management believes the presentation of Segment Adjusted EBITDA on a consolidated basisis useful to investors regarding your financial condition and results of operations. Please revise to disclose and to the extent material, include the additional purposes, if any, for which you use the non-GAAP measure in accordance with Item 10(e)(1)(i)(C)-(D) of Regulation S-K. Refer to the guidance outlined Question 104.04 of the C&DIs on the use of non-GAAP financial measures which can be found on the SEC’s website.

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

As we blogged about, the Center for Audit Quality’s SEC Regulations Committee’s quarterly meetings are a great resource for keeping up with emerging issues in SEC reporting. The minutes of these meetings provide insight into the SEC staff’s positions as these issues arise and evolve.

The Committee’s latest meeting was on March 13, 2018 and the meeting highlights discuss the following issues:

Financial reporting implications of tax reform legislation

Waivers of financial statements required by Rule 3-09 of Regulation S-X

New Accounting Standards

Use of most recent year-end financial statements in assessing Regulation
S-X, Rule 1-02(w) significance in an IPO

Audit requirements for pre-transaction periods following a reverse merger
involving two operating companies

Two of the discussion areas dealt with non-GAAP measure issues that we blogged about in March.  For tax reform discussions the staff provided this advice:

Some registrants may adjust for the impact of the Tax Cuts and Jobs Act (Tax Act) in their non-GAAP financial measures. Depending on the registrant’s specific facts and circumstances, certain adjustments for tax reform may be appropriate. The staff indicated that such adjustments, however, should be balanced (i.e., both revenue and expense impacts should be disclosed). For example, adjusting for only one impact, such as the adjustment of deferred taxes upon the change in corporate tax rates, but not other impacts, such as the deemed repatriation transition tax, would not be appropriate.

Some registrants may also include adjustments that attempt to depict a “normalized” tax rate (i.e., adjustments that apply the new tax rate to periods prior to enactment). The staff indicated that such adjustments to non-GAAP measures may not be appropriate as they may not reflect performance during the historical periods when the tax laws were different (for example, different tax strategies and changes in certain judgements or tax assertions).

And, when implementing the new revenue recognition standard, the staff provided the following:

The Committee and staff discussed the presentation of comparable prior periods under ASC 606 to facilitate MD&A, even if a company uses the modified retrospective transition method. If a registrant chooses to include supplemental MD&A disclosures for the comparable period(s) using ASC 606, the discussion should not be more prominent than the historical MD&A discussion and registrants should limit the discussion to only those items for which they are able to determine the impacts. For example, a registrant should not present a supplemental measure of gross profit or operating income adjusted for ASC 606 unless it is able to appropriately make adjustments to the impacted costs as well as the revenues. A full income statement, should not be presented. However, net income under ASC 606 for the prior periods may be discussed if a registrant is able to determine the impacts on all affected income statement line items.

In addition, a company adopting ASC 606 using the modified retrospective transition method is also permitted to present the 2018 results as determined pursuant to ASC 605 on a supplemental basis in MD&A. These disclosures should be comparable to those required to be included in the financial statement footnotes under ASC 250 and should only be included in the period of adoption (e.g. 2018 only). In addition, if a registrant chooses to include these disclosures in MD&A, prominence should be given to the ASC 606 results. Amounts determined using ASC 605 should only be discussed in a way that allows investors to understand changes for comparability purposes.

As always, your thoughts and comments are welcome!