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. Article 12 covers the form and content
requirements for these schedules. For example, a registrant under 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 Rule 3-05 for business acquisitions. However, when a registrant
is required to provide financial statements for EMIs in accordance with 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 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. See Section 3.3 for more information.