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US Securities and Exchange Commission

SEC Unlikely to Issue Interpretive Guidance on Human Capital Management Disclosure

Thomson Reuters Tax & Accounting  

· 5 minute read

Thomson Reuters Tax & Accounting  

· 5 minute read

By Soyoung Ho

When the SEC in August adopted a new rule for public companies to provide information to investors about how it manages its workforce, the commission made the disclosure rule principles-based as opposed to making it a prescriptive requirement. And some have asked whether the agency would issue additional or interpretive guidance for companies to follow.

A senior official answered no but gave some disclosure tips during a financial reporting conference on November 11, 2020.

This is because it would defeat the purpose of principles-based disclosure rules: a company should disclose information if they believe it is material for investors in understanding the company’s business.

Materiality means companies should disclose information that a reasonable person would find important in the total mix of information in making a decision to buy or sell a particular company’s stock.

Lindsay McCord, Chief Accountant in the SEC’s Division of Corporation Finance (CorpFin) on November 11, 2020, said the commission wanted to avoid one-size-fits all requirements as well as check-the-list compliance exercises that would likely end up giving less meaningful information to analysts.

“Registrants each have different considerations regarding human capital resources; so, from a particular disclosure perspective, I think a principles-based approach rather than a prescriptive one gives companies the flexibility to tailor their disclosures to reflect their particular situation while considering materiality,” McCord said during Corporate Financial Reporting Insights (CFRI) Conference hosted virtually by the Financial Executives International (FEI). “I know that there has been a lot of Q&A, and today, and some of the questions are ‘are there going to be additional guidance related to human capital. Why isn’t there additional guidance?”

She said she wants company management to really think about the commission’s statement about a principles-based disclosure framework.

“If we were to put out more guidance, then the principles-based approach that we took and the flexibility we are providing U.S. registrants to provide the disclosures that’s important to your business and your investors, we may possibly limit that information if we were to put out additional guidance,” McCord said. “So, how company manages and plans for its human capital resources varies based on a number of factors. And we recognize that, and we want you to consider those factors in your disclosure.”

She was talking about the new rules in Release No. 33-10825Modernization of Regulation S-K Items 101, 103, and 105. The SEC added so-called human capital management (HCM) disclosure to Item 101 of Reg S-K. The rules became effective on November 9. (See SEC Adopts Disclosure Rule on Human Capital Management in the August 27, 2020, edition of Accounting & Compliance Alert.)

Disclosure Tips

Nevertheless, she offered some helpful tips for companies to consider when determining whether or what to disclose on HCM.

“Some factors to consider include the industry and jurisdictions in which a company operates; the general strategic posture of the company, including whether it’s vertically integrated; as well as any current macroeconomic and other conditions that affect human capital, such as national or global health matters,” McCord said. “As companies craft disclosures responsive to this new requirement, I encourage you to think about how management and the board use its human capital resources and provide tailored disclosures specific to the company’s facts and circumstances to the extent human capital is material to understanding the company’s business.”

Thus, if a company has a dialogue about human capital with its board of directors, provides metrics to the board, and shares certain information with the board, she said those should be considered in determining what to disclose.

In the meantime, a conference attendee asked how long the HCM disclosure should be.

“I can’t tell you the number of pages you need to disclose for it,” she said. “I can’t define for you what your disclosure needs to be because it’s principles-based.”

However, if companies have trouble figuring out the disclosures, McCord said they should reach out to CorpFin staff.

“You can always call the staff to have a discussion before filing 10-Ks,” she said. “We’ve had companies do that before. Again, we don’t have a preclearance process for human capital disclosures, but we are always happy to engage in dialogue.”


This article originally appeared in the November 13, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.

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