Preparing for Year-End 2018: Number Five – Are Market Risk Disclosures Getting More Scrutiny?

One area where companies have not received many SEC comments – and, in all honesty, we don’t like to think about much – is market risk disclosures in Item 7A of Form 10-K and Part 1 – Item 3 in Form 10-Q.  In this time of more volatile markets this forward-looking disclosure about the extent of risk is becoming more important.

We have recently seen three comment letters with questions about market risk disclosures.  In a June 27, 2018 letter the only comment the company received was this market risk question:

Item 7A. Quantitative and Qualitative Disclosures about Market Risk, page 60

  1. Please tell us how you determined it was unnecessary to provide quantitative disclosures about foreign currency exchange risk. Please refer to Item 305 of Regulation S-K.

Another June 27, 2018 letter contained this comment:

Form 10-K for the Fiscal Year Ended December 31, 2017

Market Risks, page K-29

We note that you are exposed to market risk related to the fluctuations of interest rates on your fixed and floating-rate debt instruments, i.e. interest rate risk. Please revise your future filings to disclose the interest rate risk with respect to your fixed rate debt instruments using one of the three disclosure alternatives as prescribed under Item 305(a) of Regulation S-K.

In an August 29, 2018 letter a company received this market risk comment:

  1. We note that you are exposed to the following market risks: interest rate risk related to your debt instruments, foreign currency exchange rate risk related to your construction contracts denominated in euros, and fuel price risk related to your operations. Please revise your future filings to disclose for all market risks the quantitative information for the preceding fiscal year along with the reasons for material changes in amounts from the preceding year. Refer to 305(a)(3) and Instruction 3(F) to Item 305(a) of Regulation S-K.

Market risk disclosures as required by Regulation S-K Item 305 are one of the more complex and least understood disclosures required in periodic reports.  Part of the issue with these disclosures is that they are entirely forward looking and are designed to help investors understand how much a future price or rate change could affect the business.  This post from 2015walks though the objectives of the disclosure and breaks down the S-K Item 305 requirements.

While there is not a lot of public discussion about market risk, in this time of more volatile markets it is not unexpected that it should get more emphasis.  We would suggest taking a fresh look at your disclosures to be sure they are on-point.

As always, your thoughts and comments are welcome!

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