Thomson Reuters Tax & Accounting News

Featuring content from Checkpoint

Back to Thomson Reuters Tax & Accounting News

Subscribe below to the Checkpoint Daily Newsstand Email Newsletter

Accounting Firms in Comment Letters Ask for Minor Changes to Proposed Revisions to Disclosure Rules

Large accounting firms in comment letters to the SEC said they support the agency’s proposed simplification of some public company disclosure requirements in Regulation S-K, but they asked for slight changes before the agency finalizes the proposal. The proposed rules respond to the FAST Act, which required the SEC to scale back some disclosure requirements to lower the cost of compliance.

Large accounting firms in comment letters said they support the SEC’s proposal to simplify some public company disclosure requirements in Regulation S-K, but the firms asked for slight changes before the agency finalizes the proposal.

The firms were responding to Release No. 33-10425, FAST Act Modernization and Simplification of Regulation S-K, which the SEC issued in October 2017 to respond to the Section 72003 mandate in the Fixing America’s Surface Transportation (FAST) Act. The law directed the SEC to modernize and simplify the requirements in Reg S-K to lower the costs of compliance for companies. Reg S-K lays out the disclosure rules for public company registration statements and annual and quarterly reports. Comments are due by January 2, 2018.

In particular, accounting firms said they support letting companies discuss two of the most recent fiscal years in the management’s discussion and analysis (MD&A) section of a regulatory filing instead of the current three years. Companies would be able to omit the earlier of three years if it is not material for an investor to understand the company’s financial condition and results of operation and if it has been included in prior year Form 10-K. The proposed changes in Release No. 33-10425 would amend Item 303 of Reg S-K, which deals with the MD&A requirements as one of the more significant proposed rule changes.

The proposal “is consistent with the commission’s objectives to discourage repetition and reduce the disclosure of information that is not currently material to an investor,” PricewaterhouseCoopers LLP wrote on December 21. “The proposal is intended to simplify the mechanics of complying with the three-year requirement. It does not eliminate a registrant’s responsibility to consider whether its MD&A covering three years that is on file with the SEC satisfies the disclosure objectives of Regulation S-K Item 303.”

But PwC and two of the other accounting firms, Deloitte & Touche LLP and BDO USA LLP, which had submitted comment letters as of December 29 asked the SEC to let companies omit the earliest of the three years if the information was previously filed in any filing on the Electronic Data Gathering, Analysis, and Retrieval (EDGAR) filing system, not just Form 10-K.

They said the MD&A requirements in other forms like Form S-1, Form S-4, and Form 8-K are consistent with that for Form 10-K.

“If the information is already part of the total mix of information available to investors, it is not clear to us why the form on which that information appears is relevant,” BDO wrote on December 19. “If the commission is concerned that investors may not be able to find the discussion of the earliest period, it could consider requiring disclosure of where the information is provided.”

Deloitte and BDO also asked for clarification on the proposed phrase “material to an understanding of the registrant’s financial condition, changes in financial condition and results of operations” because it adds unnecessary ambiguity in deciding whether to omit the earliest of the three years.

“If the condition for omitting the discussion is challenging to apply in practice, registrants are apt to simply default to including the discussion,” BDO said.

Deloitte asked if the SEC intended the phrase to convey any special considerations beyond those companies normally consider in assessing the materiality of the information in a disclosure. If that is the case, the Big Four firm asked the commission to provide further guidance.

If the SEC did not intend for companies to do a different materiality evaluation, Deloitte asked the SEC to consider revising the instruction to be consistent with common references to materiality in Item 303 and just use “material” or “material to investors.”

KPMG asked the SEC to clarify how it expects companies to put the proposed Item 303 changes into practice and establish clear objectives for Reg S-K. The accounting firm also wants a better explanation of how information that is incorporated by reference from a previous regulatory filing and information available through a hypertext link tagged with the eXtensible Business Reporting Language (XBRL) should be examined by an auditor so as to ensure compliance with PCAOB standards.

The Center for Audit Quality (CAQ), an affiliate of the AICPA, said the SEC should eliminate the reference to materiality altogether because materiality is well defined in the federal securities laws and has always been a factor in disclosure.

“The materiality concept helps to ensure the information that is disclosed is tailored to the specific facts and circumstances of the registrant,” CAQ Executive Director Cynthia Fornelli wrote on December 18. “Having both materiality as the overarching principle and clearly stated disclosure objectives, it is unnecessary to embed any explicit materiality reference within the respective disclosure requirements.”

The CAQ also questioned the utility of proposing that companies use cross-referencing in documents filed with the SEC.

The commission has been allowing companies to incorporate previously filed information into their filings. It was previously limited to exhibits, but over time the SEC has increasingly permitted incorporation by reference in other contexts. The rules and instructions are found in various regulations, and the SEC proposes to consolidate and clarify them by amending Item 10(d) of Reg S-K.

“We are not aware of concerns from registrants regarding their use of financial statement disclosures to satisfy other SEC disclosure requirements. In our view, it is unlikely current practice would change as a result of this proposed amendment,” Fornelli wrote. “The forms do not need to be this explicit, and clarification and expansion of the rules or forms would be unnecessarily exhaustive and require continuous monitoring and maintenance.”

© 2018 Thomson Reuters/Tax & Accounting. All Rights Reserved.