This article is an update to the author’s auditing column covering the same material in the proposal stage, published in the August 2018 issue of The CPA Journal, “Overcoming Disclosure Overload and Achieving Greater Disclosure Effectiveness: A Status Report” (http://bit.ly/2EvwL5A). A recent SEC release (Release 33-10532, http://bit.ly/2EyGVCz) adds a few new disclosure requirements, but principally affords issuers with relief from the burdens of disclosure overload and opportunities to make their filings more readable. This article is intended only to alert readers to the principal provisions of the release, not as a complete analysis of the amendments. The final release is largely consistent with the October 2017 SEC proposal (discussed in and supported by the article cited above), but with some minor omissions. The principal new requirement for Form 10-Q filings is for additional disclosure with respect to changes in shareholders’ equity accounts.
Changes in 10-Q Reporting and Other Regulation S-X Requirements
Among the many changes to the SEC’s Regulations S-X and S-K contained in its 314-page release, “Disclosure Update and Simplification,” issued in August 2018 and intended to eliminate certain technical disclosure requirements that are redundant, duplicative, overlapping, outdated, or superseded, is an expansion of certain current requirements regarding interim financial information to be included in Form 10-Q (but not for registration statements) by all categories of issuers.
Once these changes are effective, Regulation S-X will require reconciliations of changes in each line item caption in equity from beginning to ending balances for each period for which an income statement is required to be filed (i.e., for both the year-to-date and quarterly periods and the comparable prior periods). These reconciliations will be required in 10-Q filings for periods beginning after November 4, 2018.
The form of acceptable presentations, whether in a table in the notes or a separate statement of shareholders’ equity, may include either of the following:
- A single presentation that reconciles all line item components and the total of shareholders’ equity from the prior year-end to the balances and subtotals at the end of the first quarter and for subsequent periods at the end of each succeeding quarter with comparative reconciliations for the prior year periods, or
- Two presentations that reconcile those components and the total separately 1) for the year-to-date period and comparable prior year period, and 2) for the current quarterly period and comparable period.
Other revisions to Regulation S-X are intended to reconcile certain provisions related to the presentation of consolidated and combined financial statements with GAAP and to remove or reduce certain redundant provisions for substantially similar disclosures to those otherwise required by the SEC or under GAAP or IFRS.
Other Key Disclosure Changes Affecting Most Issuers
Below is a brief summary of selected other key amendments made to the SEC’s disclosure requirements applicable to periodic reports and registration statements, most of which afford issuers with relief from the burdens of disclosure overload and opportunities to make their filings more readable. Issuers are encouraged to seek advice from securities counsel to help them take advantage of these and other opportunities and to assure compliance with the new requirements.
Segment financial information.
Item 101 of Regulation S-K will no longer require financial information about segments, since such information is already covered by GAAP and management’s discussion and analysis (MD&A) of financial condition and results of operations.
Research and development expenditures.
Research and development (R&D) expenditures, which are required by GAAP, will no longer need to be disclosed in the “Business” section of financial reports. Discussion of R&D in the MD&A will still be expected in the context of any material trends, if applicable.
Financial information about geographic areas, such as revenues from external customers in the issuer’s country of domicile and foreign countries, will no longer be required in the “Business” section, since such information is covered by GAAP. When material and appropriate to an understanding of the business, however, elements of income from certain geographic areas should continue to be discussed in the MD&A. Similarly, material risks attendant to foreign operations and any dependence of one or more of the registrant’s segments upon such foreign operations should be included in the MD&A, but may be omitted from the “Business” section.
Issuers with common equity traded in an established trading market will no longer need to disclose high and low trading prices for each quarter of the last two full fiscal years and interim periods, given that such information is easily accessible. Trading symbols for securities, however, must continue to accompany identification of principal trading markets for equity securities, along with the principal foreign public trading market for foreign issuers. If applicable, issuers with common equity that is not traded on an exchange are required to state that any over-the-counter quotations reflect inter-dealer prices and may not necessarily represent actual transactions.
Only the notes to the financial statements will now be required to include 1) dividend history (for issuers subject to amended Rule 3-04 of Regulation S-X) and 2) any restrictions on ability to pay dividends [for issuers subject to amended Rule 4-08(e)(3) of Regulation S-X]. Nevertheless, even though not expressly required, this author would encourage issuers to consider mentioning material restrictions on dividends in the MD&A (in addition to, and possibly in reference to, its discussion in the notes to the financial statements) within its discussion of debt covenants.
A recent SEC release affords issuers with relief from the burdens of disclosure overload and opportunities to make their filings more readable.
Ratio of earnings to fixed charges.
There will no longer be a requirement to present historical and pro forma ratios of earnings to fixed charges or a related exhibit when registering debt securities or preferred stock, since GAAP already covers disclosure of the components commonly used to calculate these ratios.
If an issuer has an Internet address, disclosure will be mandatory (no longer simply encouraged), and issuers are cautioned to 1) be cognizant of the SEC’s guidance about liability for website disclosures and 2) include appropriate disclosure in filings stating that information on company websites is not incorporated into such filings.
Public reference access.
Although a minor item, registration statements will no longer need to state that SEC filings are available for access in the public reference room at the SEC’s headquarters or disclose its physical address and phone number. Given the availability of information on the Internet and continued enhancements to the SEC’s Edgar system, the need for physical review has become obsolete.