Newly Adopted Rules Simplify Disclosure Requirements
In the third quarter of 2018, the SEC issued a release adopting amendments to Regulations S-K and S-X and changing certain disclosure forms. The release indicates the changes are effective November 5, 2018, and it addresses disclosure requirements that “have become redundant, duplicative, overlapping, outdated or superseded, in light of other SEC disclosure requirements, U.S. Generally Accepted Accounting Principles (“GAAP”), or changes in the information environment.”
All SEC filings after November 5, 2018, must comply with the rules now in effect.
The SEC indicated the simplification of disclosure requirements is intended to ease the disclosure process and facilitate the communication of information to investors, “without significantly altering the total mix of information provided to investors.”
The Amendments eliminate certain:
- Redundant and duplicative requirements that require substantially similar disclosures as GAAP, International Financial Reporting Standards (IFRS), or other Commission disclosure requirements.
- Overlapping requirements that are related to, but not the same as GAAP, IFRS, or other Commission disclosure requirements.
- Outdated requirements that became obsolete as a result of the passage of time or changes in the regulatory, business, or technological environment.
- Superseded requirements that are inconsistent with recent legislation, more recently updated Commission disclosure requirements or more recently updated GAAP.
Specific changes in the release include the following:
Description of Business Section
- Segments. Elimination of the requirements, in SEC Regulation S-K, Item 101(b), for the Description of Business section of a filing to include (1) disclosures of segment financial information, (2) a restatement of prior periods when reportable segments change, and (3) a discussion of interim segment performance that may not be indicative of current or future operations. The SEC made this change because the guidance in GAAP and SEC Regulation S-K, Item 303(b), on Management Discussion & Analysis (“MD&A”) of interim periods require similar disclosures.
- Geographic Area. The final rule eliminates the requirements in SEC Regulation S-K, Item 101(d) that currently mandate disclosure of financial information by geographic area in the Description of Business section of a filing. This change was made to eliminate disclosures that duplicate those required under GAAP. However, the final rule amends the disclosure requirements in SEC Regulation S-K, Item 303(a), on trends and uncertainties discussed in MD&A to add an explicit reference to “geographic areas.” The disclosure in MD&A, in combination with the disclosures about risk factors required under SEC Regulation S-K, Item 503(c), will provide information necessary for investors to understand the risks associated with geographic areas.
- Seasonality. Elimination of Instruction 5 to Item 303(b) of Regulation S-K, which required a discussion of any seasonal aspects of an issuer’s business where the effect is material. The SEC explained that GAAP, in conjunction with the remainder of Item 303, already requires disclosures in interim reports that provide similar information to the disclosures required by Instruction 5 to Item 303(b). Additionally, the SEC noted that, even without Instruction 5, Item 303’s requirements would still “elicit disclosure of forward-looking information in interim reports to the extent that the effects of seasonality may become material.” Nevertheless, the seasonality disclosure requirements of annual reports stemming from Item 101(c) (1) (v) are being maintained, given concerns that GAAP may not elicit disclosure regarding the extent to which the business of an issuer or its segment is or may be seasonal during the fourth quarter.
- Research and Development. Removal of the requirements under Items 101(c) (1) (xi) and 101(h) (4) (x) of Regulation S-K to include the amount spent on research and development activities in the business sections of periodic reports and prospectuses. The SEC explained that GAAP already requires the disclosure of similar information in the notes to the financial statements and any material information would be required in Management Discussion & Analysis. Market price information. SEC Regulation S-K, Item 201(a) (1), currently requires disclosure of the high and low trading prices of an entity’s common stock for specified quarterly periods, among other market information. Under Item 201(a) (1) as amended by the final rule, a registrant will instead need to disclose the ticker symbol of its common equity or include other disclosures if that information is not available.
Ratio of earnings to fixed charges
Removal of the requirement to disclose the historical and pro forma ratio of earnings to fixed charges and the related exhibit by deleting SEC Regulation S-K, Items 503(d) and 601(b)(12), respectively. The SEC eliminated this requirement because many of the components are already reasonably available in a registrant’s financial statements and eliminating the ratio would not significantly affect the information available to investors. The SEC commented that other ratios, such as the interest coverage ratio, the debt-service coverage ratio, and other variations of the ratio of earnings to fixed charges can be calculated from information readily available in the financial statements and accomplish similar objectives as the ratio of earnings to fixed charges.
Changes in stockholders’ equity for interim periods
Extension to the interim periods of the annual disclosure requirement in SEC Regulation S-X, Rule 3-04, for presenting (1) changes in stockholders’ equity and (2) the amount of dividends per share for each class of shares. An analysis of changes in stockholders’ equity is now required for the current and comparative year-to-date interim periods.
Deletion of the provisions in SEC Regulation S-X, Rules 8-03(a)(2) and 10-01(b)(2), that require the presentation of dividends per share on the face of the income statement for interim periods and movement of the required disclosure to the analysis of changes in stockholders’ equity. The amendment aims to conform SEC reporting to guidance in GAAP, which prohibits such disclosure on the face of the financial statements (although it permits such disclosure in the notes to the financial statements).
The final rule also removes the bright-line threshold in SEC Regulation S-X, Rule 4-08(e), which currently requires certain disclosures about dividend restrictions when the restricted net asset threshold of 25 percent of total net assets has been met. As amended by the final rule, the disclosure requirement in Rule 4-08(e) will apply when the information is material and won’t be based on a specified numerical threshold. This change should simplify the disclosure requirement and will potentially eliminate the disclosure for some registrants.
The SEC has deleted the requirements under Rules 8-03(b) (2) and 10-01(a) (5) of Regulation S-X to disclose material events subsequent to the end of the most recent fiscal year. The SEC explained these requirements were eliminated because they call for information that is already encompassed by additional disclosures required for compliance with GAAP and Regulation S-K.
References to the SEC’s Public Reference Room and company websites
Because of the widespread availability of the internet, the final rule deletes the requirement to refer investors to the SEC’s Public Reference Room and its physical address and phone number for information about a company. Instead, the SEC expanded the requirements to call for disclosure of the SEC’s internet address and a statement that electronic copies of SEC filings are available online. All issuers will now be required to include their internet addresses if one is maintained. Registrants also will be required to provide their website addresses. Companies are currently only “encouraged” to provide this information.
In conjunction with the amendments, the SEC adopted technical revisions to Securities Act Forms S–1, S–3, S–4, S–8, and S–11 and Exchange Act Forms 10, 10–Q and 10–K. These amendments modify the cover page of the specified forms to remove the parenthetical next to the ‘‘non-accelerated filer’’ definition that states ‘‘(Do not check if a smaller reporting company).’’ After the amendments, a registrant should check all applicable boxes on the cover page addressing, among other things, non-accelerated, accelerated, and large accelerated filer status, smaller reporting company status, and emerging growth company status. Also, all references to “posting” interactive data files on the registrant’s corporate website, if any, should be removed from one of the check box questions on the cover page.
eXtensible Business Reporting Language (XBRL) requirements
The final rule eliminated the requirements for reporting companies to post XBRL data on their corporate websites. The SEC explained that users of XBRL data typically sought out that data on the SEC’s EDGAR website rather than via the corporate websites of registrants. Thus, the SEC came to the conclusion that the rule requiring a registrant to post its XBRL data on its corporate website was no longer useful to data users.
The final rule requires registrants to eventually transition to Inline XBRL, based on the following phase-in schedule:
- Large Accelerated Filers: Inline XBRL shall be used for the first Form 10-Q filed for the fiscal period ending on or after June 15, 2019;
- Accelerated Filers: Inline XBRL shall be used for the first Form 10-Q filed for the fiscal period ending on or after June 15, 2020; and
- All Other Filers: Inline XBRL shall be used for the first Form 10-Q filed for the fiscal period ending on or after June 15, 2021.
According to the SEC’s press release announcing the final rule, this involves embedding XBRL data directly into the filing so that the disclosure document is both human-readable and machine-readable.
In addition to the amendments, the release describes disclosure items the SEC has referred to the Financial Accounting Standards Board (FASB) for further review, and for potential incorporation into GAAP or further amendments at a later date. The full list of changes are set forth in the release: https://www.sec.gov/rules/final/2018/33-10532.pdf
As a CEO, COO, CFO, General Counsel, or Investor Relations Director, you may have questions about how these new amendments will affect your company’s disclosures. Woods Rogers has a team of attorneys who handle securities offerings and other federal and state securities law issues, including private placements and initial public offerings.