Chapter 6 — SEC Reporting Considerations
Chapter 6 — SEC Reporting Considerations
6.1 Overview
ASC 280 requires an entity to disclose quantitative and qualitative information
about each reportable segment (see Chapter 4) as well as to provide entity-wide disclosures about products
and services and geographical operations regardless of how the entity is organized
(see Chapter 5). Segments as
defined by ASC 280 also provide a basis for an SEC registrant’s required disclosures
in the business and MD&A sections of the registrant’s filing.
Key Takeaways
- Segments as defined by ASC 280 provide the basis for disclosures in the business and MD&A sections of a registrant’s filing.
- Registrants should carefully consider the reporting implications of retrospective changes in reportable segments.
6.2 Disclosures Within the Business Section
Regulation S-K, Item 101(c),
requires a registrant to provide a narrative description of “the business done and intended
to be done by the registrant and its subsidiaries, focusing upon the registrant’s dominant
segment or each reportable segment about which financial information is presented in the
financial statements.” As indicated in Regulation S-K, Item 101, disclosures may include,
but are not limited to, those related to the topics listed below if they are “material to an
understanding of the registrant’s business taken as a whole.”
Topic
|
SEC Regulation S-K
|
Description
|
---|---|---|
Sales
|
Item 101(c)(1)(i)
|
“Revenue-generating activities, products and/or services, and
any dependence on revenue-generating activities, key products, services, product
families or customers, including governmental customers.”
|
Markets
|
Item 101(c)(1)(ii)
|
“Status of development efforts for new or enhanced products,
trends in market demand and competitive conditions.”
|
Resources
|
Item 101(c)(1)(iii)
|
“Resources material to a registrant's business, such as:
(A) Sources and availability of raw materials; and
(B) The duration and effect of all patents, trademarks,
licenses, franchises, and concessions held.”
|
Government contracts
|
Item 101(c)(1)(iv)
|
“A description of any material portion of the business that
may be subject to renegotiation of profits or termination of contracts or
subcontracts at the election of the Government.”
|
Seasonality
|
Item 101(c)(1)(v)
|
“The extent to which the business of the segment is or may be
seasonal.”
|
In addition, Regulation S-K,
Item 101(c)(2), states that the following matters
should be discussed “with respect to, and to the
extent material to an understanding of, the
registrant's business taken as a whole, except
that, if the information is material to a
particular segment, [the registrant] should
additionally identify that segment”:
Topic
|
SEC Regulation S-K
|
Description
|
---|---|---|
Government regulation
|
Item 101(c)(2)(i)
|
“The material effects that compliance with government
regulations, including environmental regulations, may have upon the capital
expenditures, earnings and competitive position of the registrant and its
subsidiaries, including the estimated capital expenditures for environmental
control facilities for the current fiscal year and any other material subsequent
period.”
|
Human capital
|
Item 101(c)(2)(ii)
|
“A description of the registrant's human capital resources,
including the number of persons employed by the registrant, and any human
capital measures or objectives that the registrant focuses on in managing the
business (such as, depending on the nature of the registrant's business and
workforce, measures or objectives that address the development, attraction and
retention of personnel).”
|
6.3 MD&A of Financial Condition and Results of Operations (SEC Regulation S-K, Item 303)
SEC Regulation S-K, Item 303(b), provides guidance on MD&A of financial
condition and results of operations. It states, in part:
Where in the registrant's judgment a discussion of segment
information and/or of other subdivisions (e.g., geographic areas, product
lines) of the registrant's business would be necessary to an understanding
of such business, the discussion must focus on each relevant reportable
segment and/or other subdivision of the business and on the registrant as a
whole.
To meet the objective of this guidance, a registrant will often provide
disclosures that are consistent with those of its reportable segments.
Paragraph
9220.3 of the SEC Financial Reporting Manual (FRM) states:
In order to comply with the requirement to discuss
significant components of revenue and expenses, registrants will often
provide a discussion along segmental lines (as determined under SFAS 131
[ASC 280]). Segment analysis is usually necessary to enable a reader to
understand the consolidated amounts, but it should not result in repetitive
disclosure that lengthens MD&A unnecessarily, or obscures salient
information. The discussion and analysis of segments may be integrated with
the discussion of the consolidated amounts to avoid unnecessary duplication.
The discussion and analysis should be comprehensive. All components of the
registrant’s results of operations, including those that may not be
allocated to the segments in determining the segmental profit or loss (such
as certain corporate overhead items or income taxes for example) should be
discussed.
As outlined in footnote 28 of Section 501.06.a of the Codified Financial Reporting Releases, when a company presents a segment measure of profit or loss that is determined on a basis that differs from consolidated operating profit as defined by U.S. GAAP, the discussion of the registrant’s results of operations at the segment level may need to address the segment measure as well as the applicable reconciling items: “For example, if a material charge for restructuring or impairment relates to a specific segment, but is not included in management’s measure of the segment’s operating profit or loss, registrants would be expected to discuss in Management’s Discussion and Analysis the applicable portion of the charge, the segment to which it relates and the circumstances of its incurrence.”
Registrants that present three years of financial statements may
omit discussion of the earliest year of changes in financial condition and results
of operations if such discussion was already included in any of the registrants’
prior EDGAR filings that required such information. Registrants electing to omit
such discussion must disclose, in the current filing, the location of such
discussion in the prior filing. Registrants should consider the total mix of
available information, including the impact of any recastable events (e.g., a
retrospective accounting change such as a change in reportable segments) on the
prior-period MD&A, when determining whether to omit discussion of the earliest
year and the most appropriate form of presentation. If a registrant concludes that
it is necessary to discuss operations related to the earliest period presented, it
may limit the discussion to the information that has changed or has been determined
to be significant to its operations or financial condition.
In addition, the SEC has encouraged registrants to evaluate their
disclosures in MD&A about certain matters that the Commission has identified as
complex and evolving, such as the impacts of COVID-19, Russia’s invasion of Ukraine,
climate change, and cybersecurity risks. To improve the usefulness of their
disclosures, registrants may wish to identify the specific segments affected.
Further, Regulation S-K, Item 305, requires registrants to provide quantitative and
qualitative disclosures about market risks such as interest rates or commodity
prices. Registrants may also elect (but are not required) to present separate
quantitative disclosures for each different business segment. However, according to
an SEC staff Q&A1 on market risk disclosures, “the presentation should not prevent a reader from
understanding the aggregate market risk inherent in each . . . exposure” (e.g.,
interest rate, commodity price).
Footnotes
6.4 Consideration of SEC Guidance on Non-GAAP Measures
A registrant should also be mindful of the SEC’s guidance on non-GAAP measures applicable to the
financial information presented in its filing. Financial measures that a registrant must disclose under
U.S. GAAP are not considered non-GAAP measures under the SEC’s guidance. The most common
examples of such measures are related to segment financial information such as revenue, profit or
loss, and total assets for each reportable segment. (See the discussion in Section 4.2.1 of reporting considerations for entities with a single reportable segment and the discussion in Section 4.4 of the basis for
presentation of segment measures.) However, a registrant should ensure that reported amounts are
consistent with the measures required to be reported under ASC 280. Any aggregation of individual
segment amounts or other segment information voluntarily provided outside the footnotes (e.g., in
MD&A) would be within the scope of the SEC’s guidance on non-GAAP measures.
Also see Section
2.5 of Deloitte’s Roadmap Non-GAAP Financial Measures and Metrics
for further considerations.
6.5 Reporting Implications of Retrospective Changes in Reportable Segments
As noted in Section 4.9,
unless restatement is impracticable, an entity must restate prior-period segment
disclosures when there has been a change in the composition of its reportable
segments. Disclosure based on the new reportable segments should not ordinarily be
presented until financial statements for periods managed on the basis of the new
structure are presented in the normal course of filings. Accordingly, an SEC
registrant must consider the impact of the retrospective change on the historical
financial statements included in its Exchange Act reports (e.g., Forms 10-K and
10-Q) and in registration statements under the Securities Act (e.g., registration
statements on Form S-3) and other nonpublic offerings.
6.5.1 Financial Statements and Other Affected Financial Information in Exchange Act Reports
If there has been a change in the composition of an entity’s reportable
segments, the entity must retrospectively restate its segment disclosures for
all prior periods presented when it first reports the change in reportable
segments. In addition, the entity should update other affected financial
information for prior periods (e.g., description of the business, MD&A2) to reflect the change in reportable segments.
If a registrant first reports a change in reportable segments in interim
financial statements in a Form 10-Q, the registrant is not immediately required
to retrospectively adjust the annual financial statements presented in the most
recent Form 10-K (annual pre-event financial statements) to reflect the change
in reportable segments. A registrant is generally not required to adjust the
annual pre-event financial statements to reflect the change in reportable
segments until they are comparatively presented with the annual financial
statements that report the change in reportable segments (generally in the
registrant’s next Form 10-K). However, see Section 6.5.2 for circumstances and types of
filings in which this requirement may be accelerated.
Example 6-1
In January 20X6, Company A, an SEC registrant with a calendar year-end, changed its management structure,
which resulted in a change in its reportable segments. When A files its Form 10-Q for the quarter ended March
31, 20X6, it must retrospectively restate its segment disclosures for the comparative interim period ended
March 31, 20X5. Company A must also update the business description and MD&A for the comparative interim
period ended March 31, 20X5, to reflect the changed segments. However, there is no immediate requirement
for A to retrospectively restate its segment disclosures for the annual financial statements presented in its
Form 10-K for the year ended December 31, 20X5.
6.5.2 Registration Statements and Other Nonpublic Offerings
The requirement to retrospectively revise the annual pre-event financial
statements and other affected financial information may be accelerated when the
pre-event financial statements are reissued, as discussed in ASC 855-10-25-4
(see Form S-3, Item 11(b)(ii)). Such reissuance may occur when a registrant (1)
files a new or amended registration statement, (2) files a Form S-8, (3) issues
a prospectus supplement to a currently effective registration statement (e.g.,
an existing Form S-3 that already is effective but upon which the registrant
wishes to draw down or issue securities), or (4) issues securities in a
nonpublic offering. The discussion below addresses these requirements in the
context of a change in reportable segments. A registrant may need to similarly
consider other retrospective changes, such as reporting a discontinued operation
under ASC 205-20 and certain accounting changes resulting from the adoption of a
newly issued standard. See Deloitte's Roadmap Impairments and Disposals of Long-Lived Assets and
Discontinued Operations for details.
6.5.2.1 New Registration Statements (Other Than Form S-8)
If a registrant files a new or amended registration statement3
before it files the Form 10-Q that first reports a
change in reportable segments, the registrant is not required (or
permitted)4 to file restated financial statements for prior periods to reflect the
change in reportable segments. However, the registrant should consult with
its legal counsel and independent accountants regarding the appropriate
disclosure to provide in the registration statement.
If a registrant files a new or amended registration statement after it files the Form 10-Q that first
reports a change in reportable segments, the registrant is generally required to file restated financial statements
that reflect the change in reportable segments for all periods presented. In addition, the registrant
should update other affected financial information (e.g., description of the business, MD&A) to reflect
the change in reportable segments. For new or amended registration statements that normally incorporate the financial statements by reference (e.g., Form S-3), the registrant may file restated
financial statements as well as other affected financial information that reflect the new segments on
Form 8-K; alternatively, the registrant can include the retrospectively adjusted financial statements
and related information in its registration statement. If the restated financial statements and other
information are filed on Form 8-K, that form will be incorporated by reference into the registration
statement and will update the affected sections of the registrant’s previously filed Exchange Act reports
(e.g., Form 10-K or Form 10-Q). Because they were not incorrect when filed, prior Exchange Act reports
should not be amended (i.e., the registrant should not file a Form 10-K/A or Form 10-Q/A). For more
information, see Topic 13 of the FRM.
To prepare itself for a potential registration statement, a registrant is permitted to file restated financial
statements and other affected financial information that reflect the new segments in a Form 8-K once
the change in reportable segments has been reported in a Form 10-Q. However, the registrant is not
required to do so until immediately before a registration statement is filed. If the registrant expects to
file a new registration statement, it may file the Form 8-K simultaneously with or any time after it files the
Form 10-Q that reports the change in reportable segments but before or simultaneously with the filing
of the new registration statement.
Example 6-2
Facts
Company A, an SEC registrant, files its Form 10-K for the year ended December 31, 20X5, on February 28,
20X6. In June 20X6, A changed its management structure, resulting in a change in its reportable segments.
Company A files its Form 10-Q for the quarter ended June 30, 20X6, on July 28, 20X6, and presents the change
in reportable segments for the interim periods presented.
Scenario 1
Company A files a new registration statement on September 15, 20X6. Company A must either (1) include
financial statements and other affected financial information that present the change in reportable segments
for all periods presented in A’s December 31, 20X5, Form 10-K or (2) incorporate by reference a previously
filed Form 8-K that contains financial statements and other affected financial information that present the
change in reportable segments for all periods presented in A’s December 31, 20X5, Form 10-K.
Scenario 2
Company A files a new registration statement on July 10, 20X6, instead of
September 15, 20X6, before it files the Form 10-Q
reporting the change in reportable segments. Company
A is not required (or permitted)5 to (1) include in its registration statement
restated financial statements that present the
change in reportable segments or (2) incorporate by
reference a Form 8-K containing restated financial
statements and other affected financial information
that present the change in reportable segments.
However, A should consult with its legal counsel and
independent accountants regarding the appropriate
disclosure to provide in the new registration
statement.
6.5.2.2 Form S-8
The requirements for a Form S-8 are addressed in Question 126.40 of the SEC staff’s C&DIs related to
Securities Act forms:
C&DIs — SEC Securities Act
Forms
Question:
After its Form 10-K is filed, a registrant has a
change in accounting principles (or changes in
segment presentation or discontinued operations),
which will cause the financial presentation in its
subsequent Form 10-Qs to differ from that in its
most recent Form 10-K. In this situation, Item
11(b)(ii) of Form S-3 would require the annual
audited financial statements filed in the Form 10-K
to be restated to reflect the change in accounting
principles (or changes in segment presentation or
discontinued operations). Would General Instruction
G.2 of Form S-8, which requires that “material
changes in the registrant’s affairs” be disclosed in
the registration statement, also require such
restatement?
Answer: Not
necessarily. Form S-8 does not contain express
language similar to Item 11(b)(ii) of Form S-3,
requiring the restatement of financial statements to
reflect specified events. The fact that financial
statements eventually will be retroactively restated
does not necessarily mean that there are “material
changes in the registrant’s affairs,” thereby
requiring the financial statements to be restated
for inclusion, or incorporation by reference, in a
Form S-8. In other words, financial statements for
which Item 11(b)(ii) of Form S-3 would require
restatement may not necessarily need to be restated
for incorporation by reference in a Form S-8. The
registrant is responsible for determining if there
has been a material change and, if so, the related
information that is required to be disclosed in a
Form S-8. Correspondingly, it is the auditor’s
responsibility to determine if it will issue a
consent to use of its report in a Form S-8 if there
has been a change in the financial statements in a
subsequent Form 10-Q and the financial statements in
the Form 10-K have not been retroactively
restated.
Accordingly, a registrant is generally not required to update its previously
issued financial statements in a new Form S-8 to reflect a change in
reportable segments unless it constitutes a “material change in the
registrant’s affairs.”
6.5.2.3 Prospectus Supplements to Registration Statements That Currently Are Effective
For currently effective registration statements (e.g., an existing Form S-3) upon which a registrant wishes
to draw down or issue securities, the registrant may use a prospectus supplement. Paragraph 13110.2
of the FRM indicates that “a prospectus supplement used to update a
delayed or continuous offering registered on Form S-3 (e.g., a shelf takedown) is not subject to the Item
11(b)(ii) updating requirements.” Rather, the prospectus must be updated “in accordance with S-K 512(a)
with respect to any fundamental change.”
The issuance of a prospectus supplement does not constitute a reissuance of the
financial statements included or incorporated in the effective registration
statement. Management, in consultation with legal counsel, should determine
whether the retrospective presentation of a change in reportable segments
constitutes a fundamental change. (For more information, see SEC Regulation
S-K, Item 512(a).) If the registrant and its legal counsel determine that
the change in reportable segments is a fundamental change, restated
financial statements and other affected financial information should be
filed on Form 8-K or included in the amended registration statement, as
described above. If the registrant and its legal counsel determine that the
change in reportable segments is not a fundamental change, the financial
statements do not need to be restated, but the registrant should consult
with its legal counsel and independent accountants regarding the appropriate
disclosure to provide in the prospectus supplement. In addition, all
post-effective amendments are considered “new filings” and are subject to
the guidance discussed in Section 6.5.2.1.
6.5.2.4 Nonpublic Offerings by SEC Registrants
Financial statements subject to retrospective changes may also be included (i.e., reproduced) in or incorporated by reference into a nonpublic offering, such as a private placement in accordance with SEC Regulation D or Rule 144A of the Securities Act:
Financial statements included in a nonpublic offering — We believe that
entities are generally required under U.S. GAAP to restate the financial
statements to reflect the change in reportable segments for periods before
the change occurred. Accordingly, the considerations related to restating
the financial statements for a change in reportable segments would generally
be the same as those discussed in Section 6.5.2.1.
Financial statements incorporated by reference into a nonpublic offering
— We believe that the considerations related to restating the financial
statements for the change in reportable segments would be the same as those
discussed in Section
6.5.2.3.
6.5.2.5 Supplemental Disclosure
We have observed that at times, an entity may also wish to provide unaudited
supplemental disclosures about a change in reportable segments before filing
financial statements for periods managed on the basis of the new segment
structure. For example, an entity may change its reportable segments during
the first quarter but may also wish to provide unaudited supplemental
disclosure about the new segment structure for each quarter and annual
periods on a basis consistent with the new segment structure. While such
disclosure would not be required (or permitted)6 in its financial statements until the entity first reports financial
statements for periods managed on the basis of the new segment structure,
the entity may determine that such supplemental disclosure would inform
financial statement users of the change. Accordingly, we have observed that
an entity generally furnishes such unaudited supplemental disclosure through
a press release filed on Form 8-K or on the entity’s Web site, typically in
less detail than in the required disclosures under ASC 280 (i.e., the
unaudited supplemental disclosure does not have the same “look or feel” as
disclosures in a financial statement segment footnote addressing the
change).
6.5.3 Restatement of Prior Periods Because of a Change in Reportable Segments in a Spin-Off
As discussed above, the SEC staff has stated that disclosure based on a new
segment structure generally should not be presented until financial statements
for periods managed on the basis of the new segment structure are presented.
This guidance would also typically apply to a change in reportable segments as a
result of a spin-off. However, a registrant should consider all facts and
circumstances and is encouraged to consult with its legal counsel and
independent accountants.
6.5.4 “To-Be-Issued” Accountant’s Report in an Initial Public Offering
In anticipation of an initial public offering, an entity may
enter into retrospective changes (e.g., a change in reportable segments, a stock
split, the reporting of a discontinued operation under ASC 205-20, and certain
accounting changes resulting from the adoption of a newly issued standard). In
such limited circumstances, the entity may be able to present the transaction
retrospectively in its financial statements earlier than in the typical
reporting framework and include a “to-be-issued” accountant’s report on those
financial statements. A “to-be-issued” accountant’s report is a draft report in
the form that will be expressed when the registration statement is declared
effective by the SEC. An entity is required to comply with very specific
accounting, reporting, and audit requirements in this instance given that the
early disclosure based on such retrospective changes is not otherwise permitted
from an accounting perspective until the event is reported in the financial
statements. For a list of such requirements and further details, see Section 3.8 of Deloitte’s
Roadmap Initial Public
Offerings.
Footnotes
2
See Section 9830 of the FRM for
guidance on MD&A in registration statements.
3
SEC registrants that file a proxy statement with the
SEC should also refer to this guidance. For a Schedule TO (used to
file tender offers), see paragraph 14310.3 of the
FRM.
4
See the highlights of the June
23, 2009, CAQ SEC Regulations Committee joint meeting with the SEC
staff.
5
See footnote 4.
6
See footnote 4.