CorpFin Issues Sample Letter to Companies Focused on XBRL Disclosures

Reporting

On September 7, 2023, CorpFin issued a Sample Letter to Companies addressing several XBRL issues.  In the letter the staff states:

“The Commission has noted that investors and market participants have gained experience with XBRL and Inline XBRL and that there is increased evidence that data in these formats is useful to investors.”

The example comments in the letter address a broad variety of issues, including failing to include inline XBRL, inconsistencies in the common shares outstanding numbers between the cover page and balance sheet, and using inconsistent tags for particular financial statement line items from period to period.

You can review all the example comments in the Sample Letter.

As a reminder, you can find all the sample letters issued by CorpFin, along with other important disclosure guidance, here.

As always, your thoughts and comments are welcome!

More C&DIs From CorpFin – Form F-SR

Reporting

On August 30, 2023, CorpFin issued three Exchange Act Form C&DIs addressing questions arising from the new Form F-SR, which will be used by foreign private issuers (FPIs) to report share repurchases.  Form F-SR is the first formal quarterly reporting requirement for FPIs.  You can read more about these reporting requirements in the Share Repurchase Disclosure Modernization Final Rule, related Fact Sheet and Small Entity Compliance Guide.  The details of Form F-SR are on page 200 of the Final Rule.

The C&DIs address questions that arise about Form F-SR for a period where no repurchases are made and whether a Form F-SR is required for the fourth quarter of a fiscal year.

Section 113. Form F-SR

Question 113.01

Question: Is a Form F-SR required to be filed if, during the covered fiscal quarter, the foreign private issuer or affiliated purchaser did not repurchase any of its equity securities registered under Exchange Act Section 12?

Answer: No, a Form F-SR is not required to be filed under these circumstances. Note, however, there is no de minimis exception to the Form F-SR filing requirement; even the repurchase of a very small number of equity securities would trigger a Form F-SR filing. [August 30, 2023]

Question 113.02

Question: A foreign private issuer or affiliated purchaser did not conduct any repurchases that would trigger the requirement to file a Form F-SR. Is a Form F-SR nevertheless required solely to check the box under “Registrant Purchases of Equity Securities” section of Form F-SR for the covered purchases or sales of securities by a director or member of senior management who would be identified pursuant to Item 1 of Form 20-F?

Answer: No. [August 30, 2023]

Question 113.03

Question: Is a Form F-SR required to be filed for the final quarter of the fiscal year?

Answer: Yes, if a foreign private issuer or affiliated purchaser engaged in repurchases during the final quarter of the fiscal year, then a Form F-SR would be required for that final quarter and must be filed within 45 days after the end of the quarter. Foreign private issuers are not permitted to wait to report the repurchases during the final quarter of the fiscal year in the Form 20-F for that fiscal year. See Exchange Act Release No. 34-97424 (May 3, 2023) at fn. 185. [August 30, 2023]

As always, your thoughts and comments are welcome!

FASB Projects Progressing

Hot Topic, Reporting

In this post from May 2023, we overviewed four FASB projects that will likely require significant implementation efforts.  These coming new standards will require new disclosures that will involve system and reporting complexities.  The four projects are:

    • Segment Reporting,
    • Improvements to Income Tax Disclosures,
    • Disaggregation – Income Statement Expenses, and
    • Accounting for and Disclosure of Crypto Assets.

Each of the projects has progressed to the Proposed ASU stage.  Segment reporting, income tax disclosures and crypto asset accounting and disclosure are all in the final standard process.  Below are summaries and links to the most recent developments for each project.

Segment Reporting

The FASB’s Technical Agenda indicates that a Final ASU for segment reporting is expected during the third quarter of 2023.  While this project does not change the operating segment definition, it will increase disclosures about segments.  As you can read in this Project Update and the related Proposed ASU, the project will introduce a new disclosure principle focused on “significant” expenses that would be used to determine which expense categories should be disclosed for individual segments.  It also would require disclosure of “other segment items” and apply these same requirements to companies that report a single segment.  There are several comment letters related to the Proposed ASU, including this thoughtful letter from a group of University of Denver accounting students that includes a discussion about the Proposed ASU’s use of the term “significant.”

Improvements to Income Tax Disclosures

According to the FASB’s Technical Agenda, a Final ASU for this project is projected to be issued in the fourth quarter of 2023.  As described in the related Project Update, this new standard will not change accounting for income taxes but will require new disclosures focusing on two areas, the effective rate reconciliation and taxes paid.  You can read the March 15, 2023, Proposed ASU and related comment lettersfor more background, including this interesting comment letter from the Global Reporting Initiative.  The due date for comment letters was May 30, 2023.  Disclosures that may present significant challenges, particularly for companies that operate in multiple jurisdictions, include:

    • A proposed breakdown in the effective rate reconciliation addressing eight specific categories and related qualitative disclosure, and
    • Details of taxes paid including disaggregated information about taxes paid by jurisdiction.

Disaggregation – Income Statement  Expenses

On July 31, 2023, the FASB issued a Proposed ASU for this project.  Comments are due by October 30, 2023.  As you can read in the Project Update, the proposal would require significant incremental disclosures about certain types of expenses, including:

    • Inventory and manufacturing expense,
    • Employee compensation,
    • Depreciation,
    • Intangible asset amortization, and
    • Depreciation, depletion, and amortization recognized as part of oil- and gas-producing activities.

Additional disaggregated information about inventory and manufacturing costs would also be disclosed.  The Proposed ASU includes several examples of the proposed expense disclosures.

Accounting for and Disclosure of Crypto Assets

According to the FASB’s Technical Agenda, a Final ASU for this project is projected to be issued in the fourth quarter of 2023.  While this project may not affect as many companies as the three discussed above, it does create accounting guidance for certain crypto assets where there was no formal guidance before.  It would require that crypto assets, as defined by the Board, would be accounted for at fair value with unrealized gains and losses recognized in income.  This would be a major change from the existing indefinite lived intangible asset accounting model currently applied to such assets.  You can read more in this March 23, 2023, Proposed ASU and this Tentative Board Decisions document.  The comment period for the Proposed ASU ended on June 6, 2023, and you can read comment letters here, including this interesting letter from MicroStrategy, a large holder of bitcoin.

As always, your thoughts and comments are welcome!

New Insider Trading Plan C&DIs and a Tip for Keeping Up with CorpFin Developments

Hot Topic, Reporting

In our workshops we discuss the various avenues through which CorpFin provides reporting and filing guidance.  Perhaps more importantly, we also review how to keep current with new guidance.  One very helpful tool is the “What’s New” section of CorpFin’s homepage (located on right side of page).

While this “What’s New” box looks like a heading for the column below, it is actually a link to this helpful webpage where CorpFin usually announces new guidance:

As you can see, on August 25, 2023, CorpFin issued several new C&DIs related to the recent Insider Trading Arrangements Final Rule.  The new C&DIs, among other things, clarify that the new check box on Form 4 to indicate that a trade was conducted pursuant to a plan does not apply to plans adopted before the Final Rule’s effective date, and that the cooling-off period provision related to “[t]wo business days following the disclosure of the issuer’s financial results in a Form 10-Q or Form 10-K for the completed fiscal quarter in which the plan was adopted” does not include the date of filing.

As always, your thoughts and comments are welcome!

Focus on SEC Comments – Don’t Forget Long-Term Liquidity and Capital Resources Disclosures

Comment of the Week, Reporting

On April 8, 2021, King Pubco, Inc. filed a Form S-4 in connection with a fairly complex de-SPACing transaction.  The substance of this transaction was that a SPAC, Cerberus Telecom Acquisition Corp., was merging with an operating company, Maple Holdings.  In the S-4, the operating subsidiary of Maple Holdings is described as:

“..one of the largest global enabler of IoT, providing mission-critical CaaS (or simply referred to as “Connectivity” for reporting purposes) and IoT Solutions and Analytics (both collectively referred to as “IoT Solutions” for reporting purposes) to enterprise customers across five key industry verticals, comprising (i) Connected Health, (ii) Fleet Management, (iii) Asset Monitoring, (iv) Communications Services and (v) Industrial IoT (or “IIoT”).”

The MD&A for Maple Holdings included this language concerning expected liquidity and capital resources needs:

Future Liquidity and Capital Resource Requirements 

We believe that our existing cash and cash equivalents along with expected cash flows from operating activities and additional funds available under our Revolving Credit Facility, will be sufficient over the next 12 months to provide working capital, cover interest payments on our debt facilities and fund growth initiatives, potential acquisitions, and capital expenditures.

This disclosure illustrates a frequent MD&A comment arising from the SEC’s November 2020 MD&A update.  It fails to address both short- and long-term liquidity and capital resources issues.  From S-K Item 303:

Liquidity and capital resources. Analyze the registrant’s ability to generate and obtain adequate amounts of cash to meet its requirements and its plans for cash in the short-term (i.e., the next 12 months from the most recent fiscal period end required to be presented) and separately in the long-term (i.e., beyond the next 12 months). The discussion should analyze material cash requirements from known contractual and other obligations. Such disclosures must specify the type of obligation and the relevant time period for the related cash requirements.

The result was this comment in a letter dated May 7, 2021:

    1. Please revise your discussion of future liquidity and capital resource requirements
      to analyze material long term cash requirements from known contractual and other obligations. Specify the type of obligation and the relevant period for the related cash requirements, discuss the anticipated source of funds needed to satisfy such obligations and any reasonably likely material changes in the mix and relative cost of such resources. Refer to Item 303(b)(1) of Regulation S-K. 

The issue of future liquidity can be important in de-SPACing transactions as SPAC shareholders may demand redemption of their investment in the SPAC, thus reducing the amount of cash raised in the de-SPACing process.

The company added this disclosure as they amended the Form S-4:

As of March 31, 2021, the Company has a total of $26.7 million of supplier and carrier-related purchase and lease commitments and a total of $3.2 million of scheduled debt principal payments for the year ended December 31, 2021.

Additionally, the Company has a total of $22.2 million of supplier and carrier-related purchase & lease commitments for the years ended December 31, 2022 through 2025. We also have scheduled debt payments of $3.2 million for the years ended December 31, 2022 through 2024, with all outstanding principal due on December 24, 2024.

From 2021 to 2025, KORE expects to fund supplier and carrier-related purchase & lease commitments – all of which are costs of operating the business – entirely from cash inflows from its customers. We currently expect that the excess cash flows after paying the abovementioned contractual commitments, as well as other costs of business, such as payroll, costs incurred on suppliers and carrier spend (which is not currently committed contractually in addition to the committed spend), interest and taxes – will be sufficient to meet outstanding debt principal payments from 2021 to 2023.

The outstanding principal on our term loan after a successful completion of our public offering will depend on the amount of the level of redemptions by CTAC shareholders. Depending on the level of such redemptions as well as the future growth of KORE’s business, and the working capital needed to fund such growth, the abovementioned excess of customer inflows with respect to the outflows from the abovementioned expenses of the business, may or may not be sufficient to pay off the final balloon payment on the outstanding principle on December 24, 2024. In the event, the outstanding principal is not fully paid off by December 24, 2024, when the balloon payment is due, KORE expects to refinance this debt. KORE may consider refinancing the debt well in advance of December 24, 2024 and may do so to take advantage of favorable credit markets, to reduce interest rates and to extend the maturity.

Notably, additional capital may be needed to fund future Mergers & Acquisitions. 

The message here is simple, remember to address both long- and short-term issues in the liquidity and capital resources discussion.

As always, your thoughts and comments are welcome!

The Enforcement Division’s Perks Focus Continues

Hot Topic

On June 20, 2023, the SEC Enforcement Division announced the latest in a continuing series of perks-focused enforcement cases.  This latest case involved Stanley Black and Decker, Inc. (SBD) and a former company officer, Jeffrey Ansell.

According to the SEC’s Order, SBD failed to disclose “at least $1.3 million” in perks paid to four named executive officers and one director.  These perks related primarily to the use of the company aircraft.

Ansell, who had been Executive Vice President of SBD and President of SBD’s Tools & Storage segment, “received undisclosed compensation that consisted, in part, of $280,000 in personal expenses he charged to the company,” according to the SEC Press Release.

In an example of how cooperation with the SEC can impact on the enforcement process, the SEC did not impose a civil penalty against SBD.  As you can read in the Order, SBD’s cooperation was extensive.  It included a special investigation by outside counsel under the oversight of a Special Committee of independent directors, prompt self-reporting, extensive cooperation with the Enforcement Division, and prompt remedial actions and public reporting of the misstatement.  In addition, based on the company’s self-reporting, cooperation, and remediation, the SEC did not bring any charges against the company because of Ansell’s conduct.

Gurbir S. Grewal, Director of the Enforcement Division, made this comment in the Press Release announcing the action:

“Today’s action not only reaffirms the Commission’s commitment to enforcing executive compensation disclosure rules, but also to incentivizing self-reporting and cooperation when entities and individuals discover violations of the federal securities laws.”

Ansell paid a $75,000 civil money penalty.

Many perks enforcement cases find that companies do not use the appropriate definitions and processes to determine perks.  The SEC’s Order (with a bit of a call back to the Dow case), quotes the Adopting Releasethat enacted the current requirements for perks disclosure:

“…an item is not a perquisite or personal benefit,” and does not need to be reported, “if it is integrally and directly related to the performance of the executive’s duties. Otherwise, an item is a perquisite or personal benefit if it confers a direct or indirect benefit that has a personal aspect, without regard to whether it may be provided for some business reason or for the convenience of the company, unless it is generally available on a non-discriminatory basis to all employees.”

The SEC’s Order draws from the Adopting Release stating:

“…the concept of a benefit that is ‘integrally and directly related’ to job performance is a narrow one,” which “draws a critical distinction between an item that a company provides because the executive needs it to do the job, making it integrally and directly related to the performance of duties, and an item provided for some other reason, even where that other reason can involve both company benefit and personal benefit.”

Again, from the SEC’s Order, even where the company:

“…has determined that an expense is an ‘ordinary’ or ‘necessary’ business expense for tax or other purposes or that an expense is for the benefit or convenience of the company,” that determination “is not responsive to the inquiry as to whether the expense provides a perquisite or other personal benefit for disclosure purposes.” Indeed, “business purpose or convenience does not affect the characterization of an item as a perquisite or personal benefit where it is not integrally and directly related to the performance by the executive of his or her job.”

As always, your thoughts and comments are welcome!

Chief Accountant Warns Auditors about Crypto-Asset “Pseudo-Audits”

Reporting, SEC News

On July 27, 2023, SEC Chief Accountant Paul Munter issued a Statement titled “The Potential Pitfalls of Purported Crypto ‘Assurance’ Work.”  In the Statement, Dr. Munter notes:

“Certain crypto asset trading platforms, with others in the crypto industry, have marketed to investors their retention of third parties, sometimes accounting firms, to perform some sort of review of certain parts of their business, often presented as a purported ‘audit.’”

The Commission and PCAOB have addressed the risks such “reports” present to investors.  This Investor Alertand this PCAOB Investor Advisory contain cautions about “proof of reserve reports.”

Dr. Munter’s Statement is focused on issues auditors should address if they consider performing such work.  The Statement addresses three principal areas:

The Accounting Firm’s Potential Liability for Antifraud Violations

This section addresses how a crypto company’s potentially misleading description of the scope of work and the nature of the procedures performed could affect auditors.  Dr. Munter notes:

“…any person that knowingly or recklessly provides substantial assistance to another person in violation of a provision of the Securities Act or the Exchange Act, or of any rule or regulation issued thereunder, shall be deemed to be in violation of such provision to the same extent as the person to whom such assistance is provided.”

Auditor Independence

The Statement addresses how provisions of non-audit services related to crypto assets could affect auditor independence if the firm is later engaged to provide audit services.

Potential Liability Pursuant to Rule 102(e) of the Commission’s Rules of Practice

This last section of the Statement reminds auditors that if they engage in a single instance of highly unreasonable conduct or repeated instances of unreasonable conduct, both firms and individual auditors can be censured or suspended under SEC Rule of Practice 102(e).  Providing services in a situation where a crypto company misrepresents the nature of a report could violate this rule.

In its conclusion, along with a reminder of the importance of the auditor’s gatekeeper responsibilities, the Statement notes:

“Maintaining the public’s confidence is a serious responsibility, and it requires accountants to exercise integrity in their actions and activities. This includes ensuring that the accountants’ names or services are not being used to convey a false sense of legitimacy or to mislead investors.”

As always, your thoughts and comments are welcome.

SEC Adopts New Cybersecurity Rules

Hot Topic, Reporting

On July 26, 2023, the SEC adopted a Final Rule significantly expanding cybersecurity disclosure requirements.  The rule adds Item 1.05 to Form 8-K to disclose material cybersecurity incidents and new Item 106 to Regulation S-K to require annual disclosures about cybersecurity governance, risk management and strategy in Form 10-K.  Similar changes have been made to Forms 20-F and 6-K for Foreign Private Issuers.

The transition for the new Item 1.05 Form 8-K and related Form 6-K disclosures is the later of 90 days after the date of publication of the Final Rule in the Federal Register or December 18, 2023.  Smaller reporting companies have an additional 180 days for the Form 8-K changes.

The transition for the new annual report disclosures on Form 10-K and Form 20-F is for fiscal years ending on or after December 15, 2023.

The new disclosures must be tagged with iXBRL beginning one year after the initial disclosure requirements.

New Form 8-K Item 1.05

Item 1.05 requires disclosure of a cybersecurity incident within four days of a company determining that a cybersecurity incident has occurred and is material.  General Instruction B.1. to Form 8-K now states:

A report pursuant to Item 1.05 is to be filed within four business days after the registrant determines that it has experienced a material cybersecurity incident.

Disclosure on Form 8-K may be delayed if the “United States Attorney General determines that immediate disclosure would pose a substantial risk to national security or public safety.”  In this case the U.S. Attorney general must notify the SEC in writing.

The instructions to Form S-3 have been amended to add the Item 1.05 Form 8-K to the list of 8-Ks where late filing does not affect Form S-3 eligibility.

The Instructions for the new Item are:

Item 1.05 Material Cybersecurity Incidents.

(a) If the registrant experiences a cybersecurity incident that is determined by the registrant to be material, describe the material aspects of the nature, scope, and timing of the incident, and the material impact or reasonably likely material impact on the registrant, including its financial condition and results of operations.

The instructions also state:

A registrant need not disclose specific or technical information about its planned response to the incident or its cybersecurity systems, related networks and devices, or potential system vulnerabilities in such detail as would impede the registrant’s response or remediation of the incident.

Similar changes are made to Form 6-K.

New Form 10-K Disclosures

Cybersecurity disclosures will be presented in new Item 1.C. in Part I of Form 10-K.  The following has been added to the instructions to the Form:

Part I
**** *
Item 1C. Cybersecurity.
(a) Furnish the information required by Item 106 of Regulation S-K (§ 229.106 of this chapter).

New S-K Item 106 defines various terms and requires disclosures in two main areas:

      • Risk management and strategy; and
      • Governance

Risk management and strategy disclosures include “processes, if any, for assessing, identifying, and managing material risks from cybersecurity threats.”  These disclosures should address whether cybersecurity risk management is integrated into the company’s overall risk management processes, information about the use of outside resources and how the company addresses cybersecurity risk in the use of third party service providers.

In an MD&A like requirement, risk management and strategy disclosures should also address whether cybersecurity risks “have materially affected or are reasonably likely to materially affect the registrant, including its business strategy, results of operations, or financial condition and if so, how.”

Governance disclosures should describe the board of directors’ oversight of cybersecurity risks The Final rule also states, “If applicable, identify any board committee or subcommittee responsible for the oversight of risks from cybersecurity threats and describe the processes by which the board or such committee is informed about such risks.”  Companies must also include details about management’s role in assessing and managing material cybersecurity risk.  Not included in the Final Rule was a provision in the proposed rule to address board expertise in the cybersecurity area.

You can read the entire text of new Item 106 and the related definitions on page 169 of the Final Rule.

Similar changes are made to Form 20-F in a new Item 16K.

As always, your thoughts and comments are welcome.

Cybersecurity Risk Rulemaking Moving Towards a Final Rule

Hot Topic, Reporting

On July 19, 2023, the SEC announced that they will hold an open meeting on July 26, 2023 to consider adopting final rules “to enhance and standardize disclosures regarding cybersecurity risk management, strategy, governance, and incidents by public companies that are subject to the reporting requirements of the Securities Exchange Act of 1934.”

The related Proposed Rule was published on March 9, 2022.

You can find more details in the meeting agenda and the information about the meeting webcast in the Sunshine Act Notice.

As always, your thoughts and comments are welcome.

CorpFin Issues Sample Letter to Companies Focused on China Specific Disclosures

Reporting

On July 17, 2023, CorpFin issued a Sample Letter to Companies focused on disclosure obligations for companies “based in or with a majority of their operations in the People’s Republic of China.”

The sample letter addresses three areas:

    • Disclosure obligations under the Holding Foreign Companies Accountable Act;
    • Disclosure about material “risks related to the role of the government of the People’s Republic of China (the PRC) in the operations of China-based Companies”; and
    • Disclosures related to material impacts of certain statutes, particularly the Uyghur Forced Labor Prevention Act.

You can find details regarding each of these areas as well as related example comments in the Sample Letter.

As always, your thoughts and comments are welcome.