Before anyone gets excited and tries to pack away 2020 for good, there’s a bit of looking back left to do for public companies, as 10-K reporting becomes due. The forthcoming filing requirements have a twist this year: The Securities and Exchange Commission recently adopted amendments to modernize, simplify and enhance its disclosure requirements. These changes aim to make disclosures more “meaningful” while also simplifying compliance obligations for SEC registrants.
Highlights of the SEC’s Disclosure Changes
The latest changes took the SEC more than a hundred pages to spell out, so we’re not going to cover every detail here. Instead, here’s a brief summary of some of the more significant amendments, to get you going in the work ahead. (Effective dates vary, but you may want to early-adopt some of the later ones.)
First, we’ll go over some changes made to Regulation S-K that are effective for filings made on or after Nov. 9, 2020 (see the finalized rule changes here). The idea was to make the disclosure process less prescriptive and more principles-based. So, rather than focusing on “bright line” requirements of what time frames and topics to include, you are now required to give thought to what would be meaningful to an investor—in terms of determining the period involved and what information is material to share.
Item 101—Description of Business. Some of the more substantial 10-K reporting changes can be found in how you describe your business. Thinking about what is material to investors might take some time, and coordination with your disclosure committee, so it’s best to get started if you haven’t already.
Some things to think about: Have you been including information that is not really material to your story? Were you leaving out information about your products, services, and major customers that you should be discussing—such as dependencies on key products or customers, trends in market demands, competitive landscape, new product development, and so on?
You also need to discuss your human capital, and not just the number of people employed. Address what human capital measures your company uses to manage this area of the business, such as objectives around developing, attracting, and retaining employees.
Item 103—Legal Proceedings. To minimize duplicative disclosures, companies are now allowed to cross-reference or hyperlink to legal disclosures elsewhere in the document. Also new are changes to the disclosure thresholds for environmental proceedings in which the government is involved.
Item 105—Risk Factors. Cluing investors in on the most significant factors that make an investment speculative or risky will likely take some time to update under the latest SEC guidance. This discussion should be “concise and organized logically,” with each risk factor listed under a sub-caption and described. Also explain how the risk affects the company.
But don’t try to list every possible risk known to man—the SEC discourages disclosure of generic risks that could apply to any company. They also want the information to be easy to follow. If the risk factor disclosures exceed 15 pages, you’ll need to put together a quick summary (no longer than two pages) of significant risks in bullet form.
Updating MD&A Requirements
In another round of SEC filing rule amendments (see the finalized changes here), the SEC focused on modernizing MD&A requirements, to eliminate the five-year selected financial information disclosure and update Regulation S-K quarterly information disclosures.
These changes are effective Feb. 10, 2021, but companies are not required to implement them immediately—instead, each company will have a “mandatory compliance date” of its fiscal year that ends on or after Aug. 9, 2021. However, companies have the option to comply with the new rules any time after the effective date (early implementation is on an S-K item-by-item basis).
Item 301—Selected Financial Data. This change is simple—the SEC removed the requirement to disclose five years of selected financial data.
Item 302—Quarterly Information. A fairly straight-forward change, this amendment lets companies omit quarterly information from a 10-K filing as long as it has not been materially, retrospectively changed. When there are material retrospective changes, you will need to explain the reasons for the changes and disclose summarized financial information for each affected quarterly period and the fourth quarter in the affected year.
Item 303—Management’s Discussion and Analysis. These extensive revisions to MD&A clarify that the objective of the MD&A is to discuss material information to enable investors to understand the business from management’s perspective. Companies should provide analysis of historical financial operations as well as forward-looking perspectives.
Companies must also provide a discussion of the underlying reason for material changes in financial statement line items from period to period, both in quantitative and qualitative terms.
Other 10-K reporting updates:
- Liquidity and capital resources: The requirements for liquidity and capital resources have been combined—companies need to address their ability to generate and obtain adequate cash to meet their requirements, for both the short term and long term, and discuss their material cash requirements, the general purpose of those requirements, and the anticipated source of funds to meet those needs. Companies should discuss their known contractual obligations, as well as known trends, commitments and uncertainties that are likely to impact the company’s liquidity in a material way.
- Off-balance sheet arrangements: Rather than designating these transactions to a prescribed section, companies are now required to include discussion about material off-balance sheet arrangements throughout the MD&A.
- Critical accounting estimates: Companies are required to disclose quantitative and qualitative information to help investors understand the impact of uncertainty of accounting estimates on their financial condition or operating results. Also address why the estimate is subject to uncertainty, and to the extent the estimate is material and the information is reasonably available, how much the estimate has changed over the period, and the sensitivity of the reported amount to methods, assumptions and estimates analysis.
Feeling overwhelmed? This list doesn’t even cover all the changes, and is intended to get companies thinking about how they’ll approach updating their own disclosures. Make the process easier to take on by relying on finance and accounting experts who understand all the latest SEC filing rules and can get your company through the latest compliance requirements. Contact us today to get started.