In our workshop discussions dealing with MD&A the disclosure of \u201cknown trends\u201d is always a complex topic.\u00a0 The idea of disclosing something that isn\u2019t hurting your business currently but might hurt it in future periods is rarely easy to deal with. \u00a0Regulation S-K Item 303 makes this a requirement though if it meets a \u201creasonably likely\u201d probability threshold:<\/p>\n
(3)\u00a0Results of operations.<\/p>\n
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(ii) Describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations. If the registrant knows of events that will cause a material change in the relationship between costs and revenues (such as known future increases in costs of labor or materials or price increases or inventory adjustments), the change in the relationship shall be disclosed.<\/p>\n
This clearly forward-looking disclosure means that if a company knows of something that is \u201creasonably likely\u201d to have an impact on the company in the future it should be disclosed to shareholders.\u00a0 Problems with this requirement almost always come to light when a company makes an announcement that surprises shareholders and it results in a drop in stock price.\u00a0This was exactly the case in August 2014, when SeaWorld filed their earnings release Form 8-K<\/a>for the second quarter of 2014.\u00a0 Tucked away in the discussion was this sentence:<\/p>\n \u201cIn addition, the Company believes attendance in the quarter was impacted by demand pressures related to recent media attention surrounding proposed legislation in the state of California.\u201d<\/p>\n When this announcement was made, SeaWorld\u2019s stock price fell from $28.15 to $18.90.\u00a0 This 33% fall in stock price decreased SeaWorld\u2019s market capitalization by approximately $830 million.\u00a0 The issue beneath this disclosure was the movie \u201cBlackfish\u201d and how the film had affected SeaWorld\u2019s business.<\/p>\n Two major questions arise from such an announcement:<\/p>\n When did SeaWorld\u2019s management know they had a problem?<\/p>\n Should SeaWorld\u2019s management have known the problem was material?<\/p>\n On September 18, 2018, the SEC announced in a press release<\/a>that the company and two of its officers had settled fraud charges for misleading investors about the impact of the documentary on the company\u2019s business.<\/p>\n Interestingly, as is true for almost all of these kinds of known trend cases, there was no involvement of the actual financial statements.\u00a0 The basis for the case was that forward-looking information that should have been included in the MD&A was withheld from investors.<\/p>\n As you can read in the complaint concerning the company and its former CEO<\/a>,the SEC enumerates the issues that underlie the enforcement.\u00a0Over a fairly lengthy period of time the company dealt with the impact of the film on its business by surveying customers and using other resources.\u00a0 It is clear that the company knew the film was having an impact.\u00a0 The company\u2019s data showed that customers were affected by the film.\u00a0 Management, however, asserted in public forums that the film had not affected attendance.<\/p>\n In the complaint (paragraph 37) the SEC makes this important point:<\/p>\n The complaint, starting at paragraph 11, also includes discussion of why management should have known the information was material, including this interesting observation related to the impact of a news article early in the series of events:<\/p>\n At the time of this article management was still asserting there was no impact from the movie.<\/p>\n The company and the CEO paid fines totaling more than $5 million.\u00a0 Another important aspect of the case is that the CEO actually sold stock during the period when the company knew there was a \u201cBlackfish effect.\u201d<\/p>\n As always, your thoughts and comments are welcome!<\/p>\n","protected":false},"excerpt":{"rendered":" In our workshop discussions dealing with MD&A the disclosure of \u201cknown trends\u201d is always a complex topic.\u00a0 The idea of disclosing something that isn\u2019t hurting your business currently but might hurt it in future periods is rarely easy to deal with. \u00a0Regulation S-K Item 303 makes this a requirement though if it meets a \u201creasonably … Continue reading Another MD&A Known Trend Disclosure and Materiality Lesson<\/span> \n
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