Chapter 3 — Financial Statement Preparation and Disclosure Requirements

3.6 Regulation S-X

Regulation S-X contains many requirements related to providing specific disclosures on the face of the financial statements or in the footnotes thereto. Some of these requirements are broadly applicable, and some apply only to entities in certain industries. The most significant broadly applicable requirements are contained in Article 4, which addresses disclosures related to topics that include, but are not limited to, restrictions that limit the payment of dividends by the registrant, summarized financial information of subsidiaries not consolidated, income taxes, and related-party transactions.

Industry requirements may also apply. These requirements can affect both presentation (e.g., specific financial statement line items) and disclosures (e.g., requirements to include supplemental schedules). The following sections of Regulation S-X contain the bulk of the industry-specific requirements:

Article 4, “Rules of General Application” (includes specific requirements for oil- and gas-producing activities).
Article 5, “Commercial and Industrial Companies.”
Article 6, “Registered Investment Companies and Business Development Companies.”
Article 7, “Insurance Companies.”
Article 9, “Bank Holding Companies.”

By default, an entity is subject to the requirements for commercial and industrial companies in Article 5, unless another article applies. Under Article 5, a registrant must provide various line items and disclosures, when applicable, in its balance sheet and income statement. For example, under Article 5, Rule 5-03(b), an entity may be required to state separately, on the face of the income statement, revenues (and associated cost of revenues) related to (1) product sales, (2) rentals, (3) services, and (4) other revenue activities. A registrant must comply with these SEC requirements in addition to any GAAP requirements.

At the 2021 AICPA & CIMA Conference on Current SEC and PCAOB Developments, the SEC staff discussed income statement presentation and noted that as companies evolve, some business models may not clearly be subject to the SEC’s financial statement presentation requirements in Regulation S-X, Article 5, Article 7, or Article 9. Therefore, the staff has accepted income statement presentations in accordance with a hybrid of Article 5 and either Article 7 or Article 9 if such presentation is more appropriate given the registrant’s facts and circumstances. For example, the staff has not objected when a registrant in the financial technology industry with material lending activity presents its financial statements by applying a hybrid of Articles 5 and 9.

SRCs are eligible to apply the scaled requirements in Regulation S-X, Article 8, when preparing their financial statements. SRCs typically are not required to apply the disclosure provisions of Regulation S-X in their entirety unless Article 8 indicates otherwise. See Section 3.6.2 and Appendix B for more information about the disclosure requirements for SRCs.

3.6.1 Financial Statement Schedules

As discussed above, a registrant may need to include certain financial statement schedules in its initial registration statement in accordance with Regulation S-X. Regulation S-X, Article 12, covers the form and content requirements for these schedules. For example, a registrant under Regulation S-X, Article 5, may need to include Schedule II, “Valuation and Qualifying Accounts,” to illustrate, by major asset class, a rollforward of all valuation and qualifying accounts and reserves (e.g., allowances for bad debt, valuation allowance on deferred tax assets [DTAs]) for each period for which an income statement is presented. Inventory allowance is not typically considered a valuation and qualifying account because a write-down of inventory to the lower of cost or market at the close of a fiscal period creates a new cost basis that subsequently cannot be marked up on the basis of changes in underlying facts and circumstances in accordance with SAB Topic 5.BB.

While they may be presented separately, any required schedules are considered part of the financial statements and must be audited. Many registrants prefer to include the schedule information in the footnotes to the financial statements in lieu of furnishing separate schedules. A registrant also needs to provide any schedules applicable to predecessor entities in the registration statement. Financial statement schedules are not needed for financial statements that are required under Regulation S-X, Rule 3-05, for business acquisitions. However, when a registrant is required to provide financial statements for EMIs in accordance with Regulation S-X, Rule 3-09, the form and content of those financial statements must be in compliance with Regulation S-X, including the requirement to include financial statement schedules if applicable.

3.6.2 Article 8, “Financial Statements of Smaller Reporting Companies”

As explained in Section 1.5.2, SRCs may be eligible to apply scaled disclosure requirements. Regulation S-X, Article 8, addresses the scaled financial statement disclosure requirements for SRCs. SRCs are generally not required to apply the disclosure provisions of Regulation S-X in their entirety except when Article 8 specifically indicates otherwise. However, SRCs are expected to provide all information required by any applicable industry guides. Further, although Article 8 does not contain any explicit disclosure requirements that apply to the financial statement schedules described in Regulation S-X, Article 5, Topic 5 of the FRM provides disclosure guidance for SRCs. This guidance advises issuers to consider whether additional disclosure in MD&A may be appropriate if, for example, the restricted net assets of an SRC’s consolidated subsidiaries are a significant proportion of consolidated net assets and the amount and nature of those restrictions have a material impact on liquidity. See Appendix B for more information about the disclosure requirements for SRCs.

SRCs may also have additional time to adopt recently issued accounting standards that include the “two-bucket” framework. See Section 3.3 for more information.