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SEC Disclosure Updates & Simplifications: What You Need To Know

by Adam Olsen - February 2021 12 min read

It’s safe to say that dynamic is an appropriate word to describe the marketplace. In fact, markets are in a perpetual state of motion as they pivot to changing demands and information. That said, wouldn’t it make sense for the underlying rules and regulations governing public companies to be dynamic as well?

That’s why it’s so important for filers to stay current on changes to regulations from the folks at the Securities and Exchange Commission, the US GAAP accounting standards, and the other forces shaping their business. And the good news – that’s exactly what Embark is about to do.

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So building on our previous thoughts on SEC disclosure requirements and regulations – Form 10-K, Form 10-Q, Form S-1, other registration statements, EDGAR, and more! – let’s take a look at recent disclosure updates and simplifications from the SEC. Our goal is to make sure you’re up-to-speed on what you need to know on the regulatory front because, well, it’s what we do here at Embark, and we’re happy to do it.

 

Some Background on SEC Updates

The updates we’ve seen from the SEC in recent months weren’t exactly a surprise. As a matter of fact, they’re a part of an overall move to modernize reporting requirements and improve disclosure effectiveness by making them easier for investors to read and companies to prepare.

This push for modernization largely began with the JOBS Act, a critical piece of legislation that included an internal review of SEC regulations and requirements. That opened the floodgates a bit, making initiatives to update regulations a central focus of the SEC. And to be honest, it was a long time coming given how stale and outdated many SEC regulations had become over the years.

Further, the SEC is also using this modernization push as an opportunity to close many of the loose ends it has left open over the years. You know, the countless instances where it’s started to weigh in on a topic but never carried it through to the point where it’s codified and finds a home in the Federal Register.

Thus, we’re on our way toward relevant, updated, simplified rules and regulations that streamlines things for everyone involved. Not too shabby, huh? So now let’s dive into the two distinct waves of updates we saw in 2020.

 

August, 2020 SEC Regulation Updates

This first SEC disclosure update and simplification focused on some of the more qualitative items in Regulation S-K – the set of SEC rules that determine a company’s disclosure requirements under the Securities Act and Exchange Act. The SEC implemented these changes to streamline some of the existing disclosures for a business as well as introduce a new disclosure around human capital resources.

In its press release, the SEC stated that, given the fact that the previous updates occurred in the 1980s, significant changes in the marketplace since the days of acid-wash jeans and hair metal made these updates essential. The modern investor demands a more holistic, hyper-relevant view of an organization and its operations, a notion that the SEC took to heart with the following updates to Regulation S-K:

Regulation S-K, Item 101(a), General Business Disclosure

The biggest change in this item is an emphasis on concise, relevant information that isn’t repetitive or simply a rollover from period to period. Instead, a company complies by just referencing a previous filing rather than droning on and on. Therefore, this amendment allows companies to highlight current changes and pertinent, timely information. To quote the SEC, the amendment changes Item 101(a) by:

  • Making it largely principles-based, requiring disclosure of information material to an understanding of the general development of the business;
  • Replacing the previously prescribed five-year timeframe with a materiality framework; and
  • Permitting a registrant, in filings made after a registrant's initial filing, to provide only an update of the general development of the business focused on material developments that have occurred since its most recent full discussion of the development of its business, which will be incorporated by reference.

Regulation S-K, Item 101(c), Human Capital Resources Disclosure

There’s obviously been an appetite from stockholders for reporting that drives a better, more nuanced understanding of an issuer’s value from a human capital perspective. This includes descriptions of human capital resources, relevant measurements, and management’s objectives concerning human capital. These are all areas Item 101(c) now specifically targets by, according to the SEC:

  • Clarifying and expanding its principles-based approach, with a non-exclusive list of disclosure topic examples drawn in part from topics currently contained in Item 101(c);
  • Including, as a disclosure topic, a description of the registrant's human capital resources to the extent such disclosures would be material to an understanding of the registrant’s business; and
  • Refocusing the regulatory compliance disclosure requirement by including as a topic all material government regulations, not just environmental laws.

Regulation S-K, Item 103, Legal Proceedings Disclosure

Like the updates to general business disclosures, this amendment focuses on streamlining information flow and permitting companies to reference previous disclosures on legal proceedings instead of repeating existing ones. Item 103 also contains updated guidelines on materiality as well as thresholds regarding legal proceedings with government agencies. Again quoting the SEC, the amendment changes Item 103 by:

  • Expressly stating that the required information may be provided by hyperlink or cross-reference to legal proceedings disclosure located elsewhere in the document to avoid duplicative disclosure; and
  • Implementing a modified disclosure threshold for certain governmental environmental proceedings resulting in monetary sanctions that increases the existing quantitative threshold for disclosure of those proceedings from $100,000 to $300,000, but that also affords a registrant some flexibility by allowing the registrant, at its election, to select a different threshold that it determines is reasonably designed to result in disclosure of material environmental proceedings, provided that the threshold does not exceed the lesser of $1 million or one percent of the current assets of the registrant.

Regulation S-K, Item 105, Risk Factor Disclosure

The final change to Regulation S-K from the August 2020 amendments – and perhaps the most significant – pertains to risk factor disclosures. Traditionally, the SEC requires companies to disclose all relevant risk factors, an exercise that can be quite lengthy and in no way a light read.

According to the older rules, businesses had to disclose most significant risk factors. With this update, however, companies can now concentrate on material risk factors that could impact entities and their operations. To copy and paste the SEC’s own words once more, recent amendments change Item 105 by:

  • Requiring summary risk factor disclosure of no more than two pages if the risk factor section exceeds 15 pages;
  • Refining the principles-based approach of Item 105 by requiring disclosure of "material" risk factors; and
  • Requiring risk factors to be organized under relevant headings in addition to the subcaptions currently required, with any risk factors that may generally apply to an investment in securities disclosed at the end of the risk factor section under a separate caption.

Effectives Dates for August, 2020 Updates

The August 2020 amendments were published in the Federal Register on October 8, 2020. Therefore, these amendments became effective on November 9, 2020, 30 days after publication in the Federal Register.

 

November, 2020 SEC Regulation Updates

The second wave of Regulation S-K amendments focused on more quantitative changes while, just like the previous round of updates, still streamlining required disclosures and making such information more concise for investors.

In some instances, this meant either completely eliminating certain requirements or, at the very least, drastically increasing efficiency. For instance, gone is the five years of selected financial data requirement that was always somewhere between a large annoyance and flat-out nightmare for many companies. So let’s take a look at the specific changes businesses can look forward to from the November, 2020 SEC regulation updates.

Regulation S-K, Item 301, Selected Financial Data

No need to belabor this one. As we said, it’s gone – and good riddance. Instead, companies need only to consider whether to include any material and relevant trend information for periods earlier than those presented in the financial statements when necessary.    

Regulation S-K, Item 302(a), Supplementary Financial Information

The biggie in this update is the elimination of the tabular presentation of selected quarterly financial data that companies formerly had to include for each quarter of the two most recent fiscal years and any subsequent interim period in their filings. Instead, a company must provide summarized financial information as outlined by Rule 1-02(bb) only when a material change has impacted comprehensive income.

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Regulation S-K, Item 303, Management's Discussion and Analysis (MD&A)

Lastly, the SEC updated Item 303 to modernize and streamline existing MD&A requirements. The changes introduce a more principle-based approach to the disclosures aimed at improving the quality and relevance of information for investors and other users of the financial statements.  .

Key changes by the SEC’s amendments to modernize, simplify, and streamline MD&A include:

  • Adding a new Item 303(a), Objective, to state the principal objectives of MD&A;
  • Amending current Item 303(a)(1) and (2) (amended Item 303(b)(1)) to modernize, enhance and clarify disclosure requirements for liquidity and capital resources;
  • Amending current Item 303(a)(3) (amended Item 303(b)(2)) to clarify, modernize and streamline disclosure requirements for results of operations;
  • Adding a new Item 303(b)(3), Critical accounting estimates, to clarify and codify Commission guidance on critical accounting estimates;
  • Replacing current Item 303(a)(4), Off-balance sheet arrangements, with an instruction to discuss such obligations in the broader context of MD&A;
  • Eliminating current Item 303(a)(5), Tabular disclosure of contractual obligations, in light of the amended disclosure requirements for liquidity and capital resources and certain overlap with information required in the financial statements; and
  • Amending current Item 303(b), Interim periods (amended Item 303(c)) to modernize, clarify and streamline the item and allow for flexibility in the comparison of interim periods to help registrants provide a more tailored and meaningful analysis relevant to their business cycles.

Also, note that the SEC adopted similar amendments to the disclosure requirements for foreign private issuers, including Form 20-F and Form 40-F.

Effective Dates for November, 2020 Updates

The amendments were published to the Federal Register on January 11, 2021. Therefore, the rule amendments become effective on February 10, 2021.

Companies must comply with the amended rules beginning with the fiscal year ending on or after August 9, 2021. For example, the year ending December 31, 2021 for calendar year-end companies.

For these amendments, early compliance as a whole or on an item-by-item basis, in filings made after February 10, 2021, is allowed if companies comply with an amended Item in its entirety.

 

Embark’s Take on the SEC’s Updates

Yes, between the two waves of updates, that’s a lot of information to absorb. But like most massive slabs of regulation text, certain parts stick out as being especially relevant. So on that note, these are a few points we see as significant to most companies.

Elimination Of Selected Financial Data, Item 301

The SEC noted that providing this data for years before those presented in the audited financial statements can create additional costs and complexity for companies. Also, the information included in the selected financial data is information already available in filings easily found on the SEC’s EDGAR system.

Reporting on Interim Periods in MD&A

The updates provide the option to discuss interim results in one of two ways:

  1. Compare the most recent quarter to the immediately preceding quarter
  2. Compare the most recent quarter to the same quarter of the prior year.

For instance, you can choose to compare quarterly reports from Q3 against Q2 of either this year or last year. This provides a lot more flexibility than previous regulations, where management can now decide which comparison is more relevant to the discussion rather than being forced to discuss things relative to the corresponding quarter in the most recent fiscal year.

Critical Accounting Estimates

Before these recent amendments, there really wasn’t any steadfast rule stating companies had to explicitly include disclosures concerning critical accounting estimates. Yes, there were – and are – some rules around material information on the implications of uncertainties, but that’s a far cry from the holistic, comprehensive details on true accounting estimates that investors prefer.

Now, a business must disclose critical accounting estimates and explain why it considers an estimate to be critical by discussing:

  • What’s the uncertainty in the estimate
  • How much the estimates have changed from period-to-period
  • How sensitive the estimate might be to changes in assumptions and models the company used to create the estimate

Granted, that’s not an especially in-depth look at the many nuances within the amendments, but certainly enough to give you a good head start. We advise you to take a closer look at the updates to Regulation S-K, what they might mean for your SEC filing, and start planning for them soon. Remember, as stated above, the August updates are already effective while companies must comply with the November updates starting with fiscal years ending on or after August 9, 2021. In other words, there isn’t a lot of time.

And finally, as always, if you happen to need guidance along the way, whether for SEC or financial reporting, accounting principles and technical accounting issues, transformation initiatives, and more, Embark is ready to go.

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