Disclosure Update and Simplification

Federal RegisterOct 4, 2018

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 229, 230, 239, 240, 249, and 274

[Release No. 33-10532; 34-83875; IC-33203; File No. S7-15-16]

RIN 3235-AL82

Disclosure Update and Simplification

AGENCY:

Securities and Exchange Commission.

ACTION:

Final rule.

SUMMARY:

We are adopting amendments to certain of our disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded, in light of other Commission disclosure requirements, U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), or changes in the information environment. We are also referring certain Commission disclosure requirements that overlap with, but require information incremental to, U.S. GAAP to the Financial Accounting Standards Board (“FASB”) for potential incorporation into U.S. GAAP. The amendments are intended to facilitate the disclosure of information to investors and simplify compliance without significantly altering the total mix of information provided to investors. These amendments are part of an initiative by the Division of Corporation Finance to review disclosure requirements applicable to issuers to consider ways to improve the requirements for the benefit of investors and issuers. We are also adopting these amendments as part of our efforts to implement title LXXII of the Fixing America's Surface Transportation Act.

DATES:

Effective on November 5, 2018.

FOR FURTHER INFORMATION CONTACT:

Ryan Milne, Associate Chief Accountant, at (202) 551-3400, Division of Corporation Finance; Alison Staloch, Chief Accountant, at (202) 551-6918, Division of Investment Management; Tim White, Senior Special Counsel, at (202) 551-5777, Division of Trading and Markets; Harriet Orol, Branch Chief, at (212) 336-9080, Office of Credit Ratings; Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

The Commission is adopting amendments to, or referring to the FASB:

Commission reference

CFR citation

(17 CFR)

Regulation S-X

Rule 1-02

§ 210.1-02.

Rule 2-01

§ 210.2-01.

Rule 2-02

§ 210.2-02.

Rule 3-01

§ 210.3-01.

Rule 3-02

§ 210.3-02.

Rule 3-03

§ 210.3-03.

Rule 3-04

§ 210.3-04.

Rule 3-05

§ 210.3-05.

Rule 3-12

§ 210.3-12.

Rule 3-14

§ 210.3-14.

Rule 3-15

§ 210.3-15.

Rule 3-17

§ 210.3-17.

Rule 3-20

§ 210.3-20.

Rule 3A-01

§ 210.3A-01.

Rule 3A-02

§ 210.3A-02.

Rule 3A-03

§ 210.3A-03.

Rule 3A-04

§ 210.3A-04.

Rule 4-01

§ 210.4-01.

Rule 4-07

§ 210.4-07.

Rule 4-08

§ 210.4-08.

Rule 4-10

§ 210.4-10.

Rule 5-02

§ 210.5-02.

Rule 5-03

§ 210.5-03.

Rule 5-04

§ 210.5-04.

Rule 6-03

§ 210.6-03.

Rule 6-04

§ 210.6-04.

Rule 6-07

§ 210.6-07.

Rule 6-09

§ 210.6-09.

Rule 6A-04

§ 210.6A-04.

Rule 6A-05

§ 210.6A-05.

Rule 7-03

§ 210.7-03.

Rule 7-04

§ 210.7-04.

Rule 7-05

§ 210.7-05.

Rule 8-01

§ 210.8-01.

Rule 8-02

§ 210.8-02.

Rule 8-03

§ 210.8-03.

Rule 8-04

§ 210.8-04.

Rule 8-05

§ 210.8-05.

Rule 8-06

§ 210.8-06.

Rule 9-03

§ 210.9-03.

Rule 9-04

§ 210.9-04.

Rule 9-05

§ 210.9-05.

Rule 9-06

§ 210.9-06.

Rule 10-01

§ 210.10-01.

Rule 11-02

§ 210.11-02.

Rule 11-03

§ 210.11-03.

Rule 12-16

§ 210.12-16.

Rule 12-17

§ 210.12-17.

Rule 12-18

§ 210.12-18.

Rule 12-21

§ 210.12-21.

Rule 12-22

§ 210.12-22.

Rule 12-23

§ 210.12-23.

Rule 12-24

§ 210.12-24.

Rule 12-27

§ 210.12-27.

Rule 12-28

§ 210.12-28.

Rule 12-29

§ 210.12-29.

Regulation S-K

Item 10

§ 229.10.

Item 101

§ 229.101.

Item 201

§ 229.201.

Item 302

§ 229.302.

Item 303

§ 229.303.

Item 406

§ 229.406.

Item 503

§ 229.503.

Item 504

§ 229.504.

Item 508

§ 229.508.

Item 512

§ 229.512.

Item 601

§ 229.601.

Regulation M-A

Item 1010

§ 229.1010.

Regulation AB

Item 1118

§ 229.1118.

Securities Act of 1933 (Securities Act)

Rule 158

§ 230.158.

Rule 405

§ 230.405.

Rule 436

§ 230.436.

Form S-1

§ 239.11.

Form S-3

§ 239.13.

Form S-11

§ 239.18.

Form S-4

§ 239.25.

Form F-1

§ 239.31.

Form F-3

§ 239.33.

Form F-4

§ 239.34.

Form F-6

§ 239.36.

Form F-7

§ 239.37.

Form F-8

§ 239.38.

Form F-10

§ 239.40.

Form F-80

§ 239.41.

Form SF-1

§ 239.44.

Form SF-3

§ 239.45.

Form 1-A

§ 239.90.

Form 1-K

§ 239.91.

Form 1-SA

§ 239.92.

Securities Exchange Act of 1934 (Exchange Act)

Rule 3a51-1

§ 240.3a51-1.

Rule 10A-1

§ 240.10A-1.

Rule 12b-2

§ 240.12b-2.

Rule 12g-3

§ 240.12g-3.

Rule 13a-10

§ 240.13a-10.

Rule 13b2-2

§ 240.13b2-2.

Rule 15c3-1g

§ 240. 15c3-1g.

Rule 15d-2

§ 240.15d-2.

Rule 15d-10

§ 240.15d-10.

Rule 17a-5

§ 240.17a-5.

Rule 17a-12

§ 240.17a-12.

Rule 17g-3

§ 240.17g-3.

Rule 17h-1T

§ 240.17h-1T.

Form 10

§ 249.210.

Form 20-F

§ 249.220f.

Form 40-F

§ 249.240f.

Form 10-K

§ 249.310.

Form 11-K

§ 249.311.

Form 10-D

§ 249.312.

Form X-17A-5

§ 249.617.

Investment Company Act of 1940 (Investment Company Act)

Form N-8B-2

§ 274.12.

Securities Act and Investment Company Act:

Form N-5

§ 239.24 and 274.5.

Form N-1A

§ 239.15A and 274.11A.

Form N-2

§ 239.14 and 274.11a-1.

Form N-3

§ 239.17a and 274.11b.

Form N-4

§ 239.17b and 274.11c.

Form N-6

§ 239.17c and 274.11d.

I. Introduction and Background

17 CFR 210.10 through 210.12-29.

17 CFR 229.10 through 229.1208.

17 CFR 229.1000 through 229.1016.

17 CFR 229.1100 through 229.1125.

15 U.S.C. 77a

et seq.

15 U.S.C. 78a

et seq.

15 U.S.C. 80a

et seq.

A. Scope of Amendments

1. Issuers With Offerings Registered Under the Securities Act and Classes of Securities Registered Under the Exchange Act

2. Issuers Offering Securities Under Regulation A

3. Issuers Regulated Under the Investment Company Act

4. Other Entities

B. Comments on Objective and Scope of the Proposing Release

C. FASB-Related Considerations

1. Role of the FASB

2. Interaction of Commission Disclosure Requirements and U.S. GAAP

3. Current FASB Projects Concerning the Application of U.S. GAAP

D. Disclosure Location Considerations

II. Redundant or Duplicative Requirements

A. Background

B. Redundant or Duplicative Disclosure Requirements With U.S. GAAP

1. Foreign Currencies

2. Other

C. Redundant or Duplicative Disclosure Requirements With Other Commission Requirements

1. Proposed Amendments

2. Comments on Proposed Amendments

3. Final Amendments

III. Overlapping Requirements

A. Background

B. Overlapping Requirements—Proposed Deletions

1. Overlapping Disclosure Requirements With U.S. GAAP

2. Other Overlapping Disclosure Requirements

3. Overlapping Disclosure Requirements With Both U.S. GAAP and Other Commission Disclosure Requirements

C. Overlapping Requirements—Proposed Integrations

1. Foreign Currency Restrictions

2. Restrictions on Dividends and Related Items

3. Geographic Areas

D. Overlapping Requirements—FASB Referrals

1. Discount on Shares

2. Income Tax Disclosures

3. Major Customers

4. Legal Proceedings

5. Other

IV. Outdated Requirements

A. Background

B. Disclosure Requirements Outdated Due to Passage of Time

C. Disclosure Requirements Outdated Due to Changes in the Regulatory, Business, or Technological Environment

1. Market Price Disclosure

2. Other

V. Superseded Requirements

A. Background

B. Disclosure Requirements Superseded by U.S. GAAP

1. Gains or Loss on Sale of Properties by REITS

2. Consolidation

3. Development Stage Companies

4. Insurance Companies

5. Extraordinary Items

6. Other

C. Disclosure Requirements Superseded by Other Commission Requirements

1. Auditing Standards

2. Other

D. Non-Existent or Incorrect References and Typographical Errors

VI. Other Matters

VII. Economic Analysis

A. Baseline and Affected Parties

B. Anticipated Benefits and Costs

1. Redundant or Duplicative Requirements

2. Overlapping Requirements

3. Outdated Requirements

4. Superseded Requirements

C. Anticipated Effects on Efficiency, Competition, and Capital Formation

D. Alternatives

VIII. Paperwork Reduction Act

A. Background

B. Summary of the Final Amendments

C. Summary of Comment Letters and Revisions to Proposals

D. Burden and Cost Estimates

1. Forms 10, 10-K, 10-Q, 20-F, and 1-SA

2. Forms S-1, S-3, S-4, S-11, SF-1, SF-3, F-1, F-3, F-4, and 1-A

IX. Final Regulatory Flexibility Act Analysis

A. Need for, and Objectives of, the Amendments

B. Significant Issues Raised by Public Comments

C. Small Entities Subject to the Amendments

D. Projected Reporting, Recordkeeping, and Other Compliance Requirements

E. Agency Action To Minimize Effect on Small Entities

X. Statutory Authority

I. Introduction and Background

On July 13, 2016, the Commission proposed amendments to certain disclosure requirements that have become redundant, duplicative, overlapping, outdated, or superseded, in light of other Commission disclosure requirements, U.S. GAAP, International Financial Reporting Standards (“IFRS”), or changes in the information environment.

The Commission also solicited comments on a number of disclosure requirements that overlap with, but require information incremental to, U.S. GAAP

to determine whether to retain, modify, eliminate, or refer them to the FASB for potential incorporation into U.S. GAAP.

Today we are adopting most of the proposed amendments substantially as proposed. In some cases, based on input from commenters, we are making modifications to the proposed amendments, and in other cases, we are not adopting the proposed amendments. In a few instances, we are adopting additional changes to our rules to make technical corrections and similar amendments identified in connection with this rulemaking. We believe the amendments will facilitate the disclosure of information to investors and simplify compliance without significantly altering the total mix of information provided to investors.

We also believe that by eliminating redundant, duplicative, overlapping, outdated, or superseded disclosure requirements we may improve investors' ability to make investment decisions more efficiently and reduce issuer compliance costs, which may encourage capital formation. These amendments are a result of the staff's ongoing evaluation of our disclosure requirements

and also are part of our efforts to implement title LXXII, section 72002(2) of the Fixing America's

Surface Transportation Act

(the “FAST Act”).

See Disclosure Update and Simplification

Release No. 33-10110 (July 13, 2016) [81 FR 51607 (Aug. 4, 2016)] (“Proposing Release”).

In this release, we refer to such requirements as “incremental” Commission disclosure requirements.

We refer to the proposed amendments and this additional comment solicitation collectively as “proposals.”

The Supreme Court has held that a fact is material if there is “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the `total mix' of information made available.”

See

TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976).

The staff, under its Disclosure Effectiveness Initiative, is reviewing the disclosure requirements in Regulation S-K and Regulation S-X and is considering ways to improve the disclosure regime for the benefit of both companies and investors. The goal is to comprehensively review the requirements and make recommendations on how to update them to facilitate timely, material disclosure by companies and investors' access to that information.

Public Law 114-94.

The staff will review these amendments, including any impact on disclosure and capital formation, not later than five years after the effective date of the amendments, and report to the Commission.

A. Scope of Amendments

The amendments affect a variety of entities we regulate. Throughout this release, we refer to the affected entities as issuers. The requirements discussed may apply to entities other than issuers of securities or to subsets of such issuers and, thus, each requirement should be referenced for its specific scope. Entities other than issuers may include, for example, significant acquirees for which financial statements are required under Rule 3-05 of Regulation S-X, significant equity method investments for which financial statements are required under 17 CFR 210.3-09 (“Rule 3-09” of Regulation S-X), broker-dealers, investment advisers, and nationally recognized statistical rating organizations (“NRSROs”).

1. Issuers With Offerings Registered Under the Securities Act and Classes of Securities Registered Under the Exchange Act

The final rule amendments affect different categories of issuers differently. Our references to domestic issuers encompass large accelerated filers,

accelerated filers,

and non-accelerated filers,

as well as emerging growth companies

(“EGCs”) and smaller reporting companies

(“SRCs”). In this release, we have highlighted the Commission disclosure requirements that affect SRCs differently from non-SRCs. Our references to foreign private issuers

include issuers that may be large accelerated filers, accelerated filers, or non-accelerated filers, as well as EGCs.

Specifically:

Under Exchange Act Rule 12b-2 [17 CFR 240.12b-2], a large accelerated filer is an issuer with an aggregate worldwide market value of voting and non-voting common equity held by its non-affiliates of $700 million or more, as of the last business day of its most recently completed second fiscal quarter. In addition, the issuer needs to have been subject to reporting requirements for at least twelve calendar months, have filed at least one annual report, and not be eligible to use the requirements for smaller reporting companies for its annual and quarterly reports.

Under Exchange Act Rule 12b-2, an accelerated filer is an issuer with an aggregate worldwide market value of voting and non-voting common equity held by its non-affiliates of $75 million or more, but less than $700 million, as of the last business day of its most recently completed second fiscal quarter. In addition, the issuer needs to have been subject to reporting requirements for at least twelve calendar months, have filed at least one annual report, and not be eligible to use the requirements for smaller reporting companies for its annual and quarterly reports.

Although the term “non-accelerated filer” is not defined in Commission rules, we use it throughout this release to refer to a reporting company that does not meet the definition of either an “accelerated filer” or a “large accelerated filer” under Exchange Act Rule 12b-2.

An EGC is an issuer with less than $1.07 billion in total annual gross revenues during its most recently completed fiscal year. If an issuer qualifies as an EGC on the first day of its fiscal year, it maintains that status until the earliest of (1) the last day of the fiscal year of the issuer during which it has total annual gross revenues of $1.07 billion or more; (2) the last day of its fiscal year following the fifth anniversary of the first sale of its common equity securities pursuant to an effective registration statement; (3) the date on which the issuer has, during the previous 3-year period, issued more than $1.07 billion in non-convertible debt; or (4) the date on which the issuer is deemed to be a “large accelerated filer” (as defined in Exchange Act Rule 12b-2).

See

Rule 405 of Regulation C under the Securities Act and Rule 12b-2 of the Exchange Act.

An SRC is an issuer that had a public float of less than $75 million as of the last business day of its most recently completed second fiscal quarter or had annual revenues of less than $50 million during the most recently completed fiscal year for which audited financial statements are available.

See

Rule 405 of Regulation C, Rule 12b-2 of the Exchange Act, and Item 10(f) of Regulation S-K.

On June 28, 2018, the Commission adopted amendments to the SRC definition. Under the amended rules, a company with a public float of less than $250 million will qualify as a SRC. A company with no public float or with a public float of less than $700 million will qualify as a SRC if it had annual revenues of less than $100 million during its most recently completed fiscal year.

See Amendments to Smaller Reporting Company Definition,

Release No. 33-10513 (Jun. 28, 2018) [83 FR 31992 (July 10, 2018)]. The rules will be effective September 10, 2018.

See

Rule 405 of Regulation C and Exchange Act Rule 3b-4(c) [17 CFR 240.3b-4(c)]. A foreign private issuer is any foreign issuer other than a foreign government, except for an issuer that has more than 50 percent of its outstanding voting securities held of record by U.S. residents and any of the following: a majority of its officers or directors are citizens or residents of the United States; more than 50 percent of its assets are located in the United States; or its business is principally administered in the United States.

Foreign private issuers may only use the scaled rules available to SRCs if they file on domestic forms under U.S. GAAP.

See

Rule 8-01 of Regulation S-X. The amendments affect these SRCs in the same ways as domestic SRC issuers.

• Amendments involving Regulation S-K relate to domestic issuers

and foreign private issuers that elect to file on forms used by domestic issuers.

Domestic issuers include foreign issuers that do not meet the definition of foreign private issuer.

• Amendments involving Regulation S-X generally relate to domestic issuers and foreign private issuers that report under U.S. GAAP or a comprehensive body of accounting principles other than U.S. GAAP or IFRS

with a reconciliation to U.S. GAAP.

Throughout this release, we refer to a comprehensive body of accounting principles other than U.S. GAAP or IFRS as “Another Comprehensive Body of Accounting Principles.”

Foreign private issuers that report under IFRS must comply with the IFRS requirements for the form and content of financial statements, rather than with the specific presentation and disclosure provisions in Articles 3A, 4, 5, 6, 6A, 7, 8, 9, 10, and certain parts of Article 3 of Regulation S-X. Where an amendment to Regulation S-X also affects foreign private issuers that report under IFRS, we discuss both U.S. GAAP and IFRS.

• Amendments involving Commission forms relate to either domestic issuers or foreign private issuers, depending on the form under discussion. For example, the amendments to the “F” series of forms

only affect foreign private issuers.

For example, these forms include Forms F-1, F-3, F-4, and 20-F.

Some of the amendments also affect asset-backed issuers.

“Asset-backed issuer” is defined in Item 1101(b) of Regulation AB [17 CFR 229.1101(b)].

See

the amendments regarding: (1) Invitations for competitive bids discussed in Section III.B.2, (2) available information discussed in Section IV.C.2, (3) matters submitted to a vote of security holders discussed in Section V.C.2, and (4) incorrect references in General Instruction J(1)(e) to Form 10-K discussed in Section V.D.

2. Issuers Offering Securities Under Regulation A

Some of the amendments affect Regulation A issuers, as follows:

See

Rules 251-263 of Regulation A [17 CFR 230.251-230.263]. Regulation A is an exemption from Securities Act registration for offerings by issuers that comply with the requirements of the exemption. A Tier 1 offering under Regulation A limits the sum of the aggregate offering price and the aggregate sales within 12 months before the start of the offering to $20 million, while a Tier 2 offering limits that sum to $50 million. Rule 251(a)(1) and (2) of Regulation A.

• Amendments involving Regulation S-K affect Regulation A issuers that provide narrative disclosure that follows Part I of Form S-1 or Part I of Form S-11 in Part II of Form 1-A.

• Amendments involving Rule 4-10, Rule 8-04, Rule 8-05, and Rule 8-06 of Regulation S-X affect all Regulation A issuers. Amendments involving Rule 8-03(a) of Regulation S-X affect Regulation A issuers that report under U.S. GAAP. Amendments involving the remaining rules in 17 CFR 210.8-01 through 210.8-08 (“Article 8” of Regulation S-X) affect only Regulation A issuers in a Tier 2 offering that report under U.S. GAAP. No other amendments involving Regulation S-X affect Regulation A issuers.

• Amendments involving Regulation A forms may affect issuers that report

under U.S. GAAP or Canadian issuers that report under IFRS.

Only U.S. and Canadian issuers may rely on Regulation A and use Form 1-A.

See

Rule 251(b)(1) of Regulation A [17 CFR 230.251(b)(1)]. U.S. issuers must report under U.S. GAAP. Canadian issuers may report under U.S. GAAP or IFRS.

See

paragraph (a)(2) of Part F/S of Form 1-A, Item 7(b) of Form 1-K, and Item 3 of Form 1-SA.

In this release, we have highlighted the Commission disclosure requirements that affect Regulation A issuers.

Statements about the effect of an amendment on Regulation A issuers throughout this release reflect that the form and content requirements in Regulation S-X do not apply to Canadian Regulation A issuers that report under IFRS. Please refer to Section V.C.2.

3. Issuers Regulated Under the Investment Company Act

Certain amendments are applicable to issuers regulated under the Investment Company Act, as follows:

• Amendments involving Regulation S-K affect business development companies to which the regulation applies.

• Amendments involving Regulation S-X affect investment companies to which the regulation applies.

• Amendments involving Investment Company Act forms may affect investment companies, depending on the form in question.

4. Other Entities

Certain amendments also are applicable to registered broker-dealers, investment advisers, and NRSROs.

B. Comments on Objective and Scope of the Proposing Release

Many commenters were generally supportive of the objective of the release.

These commenters indicated that the proposed amendments would improve the effectiveness and usefulness of the information presented to investors while also decreasing the costs of preparing that information, which would also benefit investors. Some of these commenters also identified additional redundancies and overlapping disclosures that the Commission should address.

In addition, some commenters recommended that the Commission establish a process to address future redundant, overlapping, outdated, or superseded disclosures.

See, e.g.

letters from Center for Audit Quality (Oct. 3, 2016) (“CAQ”); CFA Institute (Dec. 7, 2016) (“CFA”); Financial Executives International (Oct. 27, 2016) (“FEI”); Shearman & Sterling LLP (Dec. 1, 2016) (“Shearman”); and U.S. Chamber of Commerce (Oct. 27, 2016) (“USCC”).

See, e.g.

letters from CAQ and Ernst & Young LLP (Oct. 31, 2016) (“E&Y”).

See, e.g.

letters from CAQ; CFA; Corporate Governance Coalition for Investor Value (Oct. 27, 2016) (“CGCIV”); FEI; and USCC.

Some commenters objected to the overall objective and scope of the release to the extent it could result in the elimination of any currently required disclosures.

These commenters stated that investors want more (not less) disclosures and provided examples, such as environmental, social, and governance disclosures.

Some commenters also expressed concern that, due to the proposed amendments' reliance on U.S. GAAP, and considering the FASB's standard-setting projects related to disclosure framework and materiality, information that is material under the current disclosure framework would no longer be provided to investors.

See, e.g.

letters from American Federation of Labor and Congress of Industrial Organizations (Oct. 31, 2016) and Americans for Financial Reform (“AFL-CIO and AFR”); Financial Accountability and Corporate Transparency Coalition (Oct. 3, 2016) (“FACT Coalition”); Public Citizen (Oct. 18, 2016) (“Public Citizen”); and Robert E. Rutkowski (Nov. 7, 2016) (“Rutkowski”).

Id.

See, e.g.

letters from AFL-CIO and AFR; California Public Employees' Retirement System (Nov. 2, 2016) (“CalPERS”); and Public Citizen.

See also

discussion in Section I.D below.

Several commenters also expressed concern about the timing of the proposal.

For example, some commenters were concerned that there was not sufficient time for the staff to consider the comments received on the Commission's earlier concept release on disclosures required by Regulation S-K

in determining its proposals because those comments were due the same month the proposal was issued.

Other commenters were concerned that the 60-day comment period specified in the Proposing Release did not provide an adequate amount of time to fully consider and provide thoughtful, comprehensive comments.

In response to these comments, the Commission extended the comment period by 30 days.

We also note that the topics discussed in the Regulation S-K Concept Release were generally broader in scope than the relatively more discrete changes set forth in the Proposing Release.

See, e.g.

letters from AFL-CIO and AFR; Domini Social Investments LLC (Nov. 1, 2016) (“Domini”); and Public Citizen.

See

Business and Financial Disclosure Required by Regulation S-K, Release No. 33-10064 (Apr. 13, 2016) (“Regulation S-K Concept Release”) [81 FR 23915 (Apr. 22, 2016)]

See, e.g.

letters from AFL-CIO and AFR and FACT Coalition.

See, e.g.

letters from American Gas Association (Aug. 24, 2016) and Center for Audit Quality (Aug. 4, 2016).

See Extension of Comment Period for Disclosure Update and Simplification,

Release No. 33-10220 (September 23, 2016) [81 FR 66898 (Sept. 29, 2016)]

C. FASB-Related Considerations

1. Role of the FASB

The federal securities laws set forth the Commission's broad authority and responsibility to prescribe the methods to be followed in the preparation of accounts and the form and content of financial statements to be filed under those laws,

as well as its responsibility to ensure that investors are furnished with other information necessary for investment decisions.

To assist it in meeting this responsibility, the Commission historically has looked to private-sector standard-setting bodies to develop accounting principles and standards.

At the time of the FASB's formation in 1973, the Commission reexamined its policy and formally recognized pronouncements of the FASB that establish and amend accounting principles and standards as “authoritative” in the absence of any contrary determination by the Commission.

The Commission concluded at that time that the expertise and resources that the private sector could offer to the process of setting accounting standards would be beneficial to investors.

See, e.g.,

Sections 7 [15 U.S.C. 77g], 19(a) [15 U.S.C. 77s(a)] and Schedule A, Items (25) and (26) of the Securities Act [15 U.S.C. 77aa(25) and (26)]; Sections 3(b) [15 U.S.C. 78c(b)], 12(b) [17 CFR 78l(b)] and 13(b) [17 CFR 78m(b)] of the Exchange Act; and Sections 8 [15 U.S.C. 80a-8], 30(e) [15 U.S.C. 80a-29(e)], 31[15 U.S.C. 80a-30], and 38(a) [15 U.S.C. 80a-37(a)] of the Investment Company Act.

See Policy Statement: Reaffirming the Status of the FASB as a Designated Private-Sector Standard Setter,

Release No. 33-8221 (Apr. 25, 2003) [68 FR 23333 May 1, 2003],

(“2003 FASB Policy Statement”).

Id.

See

Accounting Series Release No. 150 (Dec. 20, 1973).

The Sarbanes-Oxley Act of 2002

(“Sarbanes-Oxley Act”) established criteria that must be met in order for the work product of an accounting standard-setting body to be recognized as “generally accepted” for purposes of the federal securities laws.

In accordance with these criteria, the Commission has designated the FASB as the private-sector accounting standard setter for U.S. financial reporting purposes.

As the designated private-

sector accounting standard setter in the United States, the FASB seeks to undertake a transparent, public standard-setting process.

As required under the securities laws, including the Sarbanes-Oxley Act, the Commission monitors the FASB's ongoing compliance with the expectations and views expressed in the 2003 FASB Policy Statement.

Public Law 107-204, 116 Stat. 745 (2002)

See

section 19 of the Securities Act [15 U.S.C. 77s].

Section 108 of the Sarbanes-Oxley Act amended section 19 of the Securities Act to provide that the Commission “may recognize, as `generally accepted' for purposes of the securities laws, any accounting principles established by a standard setting body that met certain criteria.” The Commission has determined that the FASB satisfies the criteria in section 19 and, accordingly, the FASB's financial accounting and reporting standards are recognized as “generally accepted”

for purposes of the federal securities laws.

See 2003 FASB Policy Statement.

See http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1351027215692. See

also pages 2 and 5 of the FASB Rules of Procedures, available at

http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176162391050.

The 2003 FASB Policy Statement describes the Commission's three key expectations for the FASB. First, the FASB shall consider, in adopting accounting principles, the extent to which international convergence on high quality accounting standards is necessary or appropriate in the public interest and for the protection of investors, including consideration of moving towards greater reliance on principles-based accounting standards whenever it is reasonable to do so. Second, the FASB shall take reasonable steps to continue to improve the timeliness with which it completes its projects, while satisfying appropriate public notice and comment requirements. Last, the FASB shall continue to be objective in its decision-making and to weigh carefully the views of its constituents and the expected benefits and perceived costs of each standard.

See https://www.sec.gov/rules/policy/33-8221.htm.

2. Interaction of Commission Disclosure Requirements and U.S. GAAP

a. Overview

Although the FASB functions as the designated private-sector accounting standard setter in the United States, some Commission rules contain accounting and disclosure requirements. In some cases, these Commission requirements mandate disclosures that the FASB later added to U.S. GAAP.

Other Commission disclosure requirements have been superseded by U.S. GAAP.

From time to time, the Commission has reviewed and amended its disclosure requirements to eliminate rules that became redundant, duplicative, or overlapping as the FASB updated U.S. GAAP.

In keeping with this historical practice, many of the amendments we are adopting revise or eliminate Commission disclosure requirements related to information that is addressed by more recently updated U.S. GAAP requirements.

See, e.g.,

Rule 4-08(h) of Regulation S-X, parts of which were subsequently incorporated into U.S. GAAP.

See, e.g.,

Rule 10-01(a)(7) of Regulation S-X, which refers to the disclosures required by ASC 915 on development stage entities, which the FASB has since eliminated.

See, e.g., General Revision of Regulation S-X,

Release No. 33-6233 (Sept. 2, 1980) [45 FR 63660 (Sept. 25, 1980)],

Phase One Recommendations of Task Force on Disclosure Simplification

Release No. 33-7300 (May 31, 1996) [61 FR 30397 (June 14, 1996)], and

Technical Amendments to Rules, Forms, Schedules, and Codification of Financial Reporting Policies,

Release No. 33-9026, (Apr. 15, 2009) [74 FR 18612 (Apr. 23, 2009)].

A number of Commission disclosure requirements require information that is incremental to U.S. GAAP rather than being duplicative or overlapping. In the Proposing Release, the Commission solicited comment on certain of these incremental Commission disclosure requirements to determine whether to retain, modify, eliminate, or refer them to the FASB for potential incorporation into U.S. GAAP.

b. Comments on Interaction of Commission Disclosure Requirements and U.S. GAAP

Several commenters generally supported the referral of certain Commission disclosure requirements to the FASB for potential incorporation into U.S. GAAP.

These commenters were supportive of a disclosure regime that can be consistently applied to all issuers and indicated that it is beneficial to limit the sources of financial disclosure requirements. In expressing support for a consistently applied disclosure regime, some of these commenters also indicated that having different financial reporting requirements

based on the size of the issuer may eliminate information that is material to investors and may make preparation of financial statements as well as analysis of various issuers' financial statements more difficult.

See, e.g.

letters from CAQ; CFA; Crowe Horwath LLP (Oct. 28, 2016); Grant Thornton LLP (Nov. 1, 2016) (“Grant”); and KPMG LLP (Oct. 19, 2016) (“KPMG”).

For example, Rules 8-03(b)(5) and 10-01(b)(7) of Regulation S-X both require disclosure of the effect of changes in reporting entities on net income and per share amounts in interim periods. However, Rule 10-01(b)(7) incrementally requires, for non-SRCs, disclosure of the effect on retained earnings.

See

letters from CAQ; CFA; Grant; and KPMG.

Some commenters expressed concern about placing more reliance on U.S. GAAP disclosure requirements without more formal Commission input or approval in the FASB standard-setting process.

One commenter expressed concern about relying on the FASB to develop or require financial disclosures that might be considered appropriate for issuers but not other entities that apply U.S. GAAP.

This commenter stated that such an approach could result in “unnecessarily costly” disclosure by entities that are not issuers.

See

letters from American Bankers Association (Sept. 15, 2016) (“ABA”); California State Teachers' Retirement System (Nov. 18, 2016) (“CalSTRS;”); R.G. Associates, Inc. (Nov. 2, 2016) (“R.G. Associates”); and Stephen P. Percoco. (Nov. 7, 2016).

See

letter from ABA. The FASB scopes financial accounting and reporting for companies by (1) public business entities (PBEs); (2) not-for-profit entities; and (3) all other entities. The definition of PBEs encompasses an entity that “(a) is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).” This definition is broader than entities with a class of securities registered under the Exchange Act. For example, a privately-owned entity meets the definition of a PBE if it is acquired by a registrant and its financial statements are required under Rule 3-05 of Regulation S-X.

See

FASB's Accounting Standards Update 2013-12,

Definition of a Public Business Entity.

c. Final Amendments

We have determined to retain these incremental requirements and refer some of them to the FASB for its consideration of whether to incorporate such disclosure requirements into U.S. GAAP

as part of its standard-setting process.

The discussions in this Section, as well as Sections II.B, III.B, and III.D, constitute our referral to the FASB.

See

further discussion in Sections II and III below.

The FASB's Rules of Procedure sets forth procedures followed by the FASB in establishing and improving standards of financial accounting and reporting for nongovernmental entities, including procedures related to the issuance of such standards and other communications.

See http://fasb.org/cs/ContentServer?c=Document_C&cid=1176162391050&d=&pagename=FASB%2FDocument_C%2FDocumentPage.

The International Accounting Standards Board (“IASB”), which is subject to oversight by the IFRS Foundation, is responsible for IFRS and establishes its own standard-setting agenda. The staff monitors and participates in the IASB's standard setting activities. In connection with such participation, staff will seek to discuss this rulemaking with the IASB's staff. For further information, see

http://www.ifrs.org/About-us/Pages/IFRS-Foundation-and-IASB.aspx.

See

Section II.B of the 2003 FASB Policy Statement.

Any incorporation of these incremental Commission disclosure requirements into U.S. GAAP could potentially affect all entities that prepare financial statements under U.S. GAAP, including those outside the scope of our regulatory authority. Because U.S. GAAP historically has scaled disclosure requirements only by public business entities versus other entities, and not by issuer status, incorporation into U.S. GAAP could result in the application of some of these requirements to SRCs and issuers relying on Regulation A or Regulation Crowdfunding.

By April 4, 2020, we request that the FASB complete its process to determine whether the referred disclosure items will be added to its agenda of projects

for potential standard-setting.

The FASB will determine whether and, if so, how to respond to our referrals.

In the meantime, we are retaining these disclosure requirements as suggested by commenters. Any future consideration of amendments to these disclosure requirements will take into account the outcome of the standard-setting activities undertaken by the FASB, if any, in response to the referrals we are making.

We recognize that the FASB will need to expend time and resources to consider the referrals we are making in this release, in addition to carrying out its other standard-setting activities. We believe that 18 months should provide sufficient time for the FASB to appropriately consider these referrals without imposing undue constraints on the FASB's current standard-setting agenda. Any impact to the FASB's current operations, as a result of the referrals described in this release, including any potential change to its annual budget and related accounting support fee paid for by issuers, could depend on how much overlap there is with existing FASB projects and how the FASB allocates its resources.

See

Section 109(e) of the Sarbanes-Oxley Act.

See supra

note 59.

3. Current FASB Projects Concerning the Application of U.S. GAAP

The FASB updates U.S. GAAP from time to time through its standard-setting projects. In the Proposing Release, the Commission invited commenters to consider two projects on the FASB's agenda when evaluating the proposals and providing feedback. In one project, the FASB proposed changes to U.S. GAAP

to describe how entities would assess whether disclosures are material

and included a proposal to revise U.S. GAAP to include a reference to materiality as a legal concept.

In another project, the FASB undertook to evaluate disclosure requirements for interim reporting.

In that project, the FASB has reached a tentative decision that disclosures about matters required to be provided in annual financial statements should be updated in the interim report if there is a substantial likelihood that the updated information would be viewed by a reasonable investor as significantly altering the total mix of information available to the investor.

FASB Exposure Draft,

Notes to Financial Statements (Topic 235): Assessing Whether Disclosures Are Material

(Sept. 24, 2015), available at:

http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176166402325&acceptedDisclaimer=true.

In 2014, the IASB amended IFRS to clarify that an entity does not have to disclose information required by IFRS if that information would not be material.

See Disclosure Initiative (Amendments to IAS 1).

Commenters on the FASB's standard-setting project have expressed a range of views on the proposed amendments and their potential impact on the volume of financial disclosures. The comment letters are available at:

http://www.fasb.org/jsp/FASB/CommentLetter_C/CommentLetterPage&cid=1218220137090&project_id=2015-310.

See

Project Update for Disclosure Framework: Disclosures-Interim Reporting, available at:

http://fasb.org/jsp/FASB/FASBContent_C/ProjectUpdatePage&cid=1176164227056.

See also

Minutes from FASB Board Meeting (May 29, 2014), available at:

http://www.fasb.org/jsp/FASB/FASBContent_C/ProjectUpdatePage&cid=1176164227056.

See

Minutes from FASB Board Meeting (May 29, 2014), available at:

http://www.fasb.org/jsp/FASB/FASBContent_C/ProjectUpdatePage&cid=1176164227056.

These FASB projects were, and the interim reporting project remains, subject to public comment and FASB deliberation and could impact those disclosure requirements we have decided to eliminate or revise on the basis that U.S. GAAP requires the same or similar disclosure. In particular, for Commission rules that contain a specified disclosure threshold, investors may receive less information if the disclosure requirement is incorporated into U.S. GAAP and the issuer determines that the information is not material. Throughout the Proposing Release, the Commission identified disclosure requirements that contemplate a disclosure threshold in some manner, for example, through the use of terms such as “material” or “significant” or through the use of bright line disclosure thresholds.

Several commenters expressed concern about the interaction between the current FASB projects and the proposed amendments.

Prior to the FASB's decision on materiality discussed below, some commenters submitted comment letters opposing reliance on U.S. GAAP as a basis to eliminate redundant or overlapping disclosure requirements, citing the FASB's potential change in its definition of materiality as the main reason for this opposition. One of these commenters also expressed concern that the FASB's materiality project could remove the phrase “an entity shall at a minimum provide” from several of the U.S. GAAP disclosure requirements referenced in the Proposing Release.

Other commenters stated that the FASB's disclosure framework projects

would not have a significant effect on the proposed amendments, provided that definitions of materiality applied by the Commission and the FASB remain consistent.

Several commenters were supportive of interim disclosure requirements and supported the FASB's tentative decision.

See, e.g.

letters from AFL-CIO and AFR; CalPERS; Domini; and Public Citizen.

See

letter from CalPERS.

The current topic-specific FASB disclosure framework projects include the interim reporting project and four disclosure areas that are relevant to the amendments. These disclosure areas are: Fair value measurement, defined benefit plans, income taxes, and inventory.

See, e.g.

letters from CAQ; E&Y; and KPMG.

See

letters from CAQ; CFA; KPMG; and PricewaterhouseCoopers LLP (Nov. 1, 2016) (“PwC”).

After the end of the comment period for the Proposing Release, the FASB concluded deliberations on a number of matters. For instance, in March 2018, the FASB decided not to amend U.S. GAAP to include a definition of materiality and also not to amend the disclosure sections currently in U.S. GAAP.

The FASB also made decisions related to FASB Concepts Statement No. 8. The FASB Concepts Statements are not U.S. GAAP; rather, the FASB Concepts Statements collectively compose the FASB's Conceptual Framework, which sets forth general principles to aid the FASB in identifying factors to be considered when setting disclosure requirements for individual accounting standards and evaluating existing disclosure requirements.

Among the decisions from March, the FASB will revise the concept of materiality included in the Conceptual Framework to clarify that the definition that was previously contained in FASB Concepts Statement No. 2,

which is also the definition quoted in SEC Staff Accounting Bulletin No. 99,

is the definition to be used by the FASB when it considers and formulates its standard setting projects. We believe these decisions by the FASB have clarified that the concept of materiality has not changed from the historical view of how an issuer applies materiality to the financial statements.

See

summary of decisions reached at the FASB Board Meeting (Mar. 21, 2018), available at:

https://www.fasb.org/jsp/FASB/FASBContent_C/ProjectUpdateExpandPage&cid=1176170687841.

See

Project Update for Disclosure Framework: Board's Decision Process, available at:

http://fasb.org/jsp/FASB/FASBContent_C/ProjectUpdatePage&cid=1176163077030.

Statement of Financial Accounting Concepts No. 2,

Qualitative Characteristics of Accounting Information.

See

SEC Staff Accounting Bulletin: No. 99—Materiality, which is available at:

https://www.sec.gov/interps/account/sab99.htm.

We believe the FASB's decision not to amend U.S. GAAP to include a definition of materiality, as well as the decisions related to FASB Concepts Statement No. 8, substantially address the concerns expressed by commenters about the impact of the current FASB standard-setting projects. As a result of these decisions, we believe there will not be changes to how an issuer applies the concept of materiality to its financial statements, including the related notes. We are therefore eliminating certain of

our disclosure requirements, as proposed, on the basis that U.S. GAAP requires the same or similar disclosures.

In addition, issuers remain liable for their disclosures, including the omission of any information required to make the disclosures not misleading.

Issuers should continue to consider both quantitative and qualitative factors in assessing materiality for the accounting and disclosure of an item, and also should continue to consider whether they have made critical accounting estimates and assumptions for which disclosure should be provided in MD&A.

Further, U.S. GAAP requires a description of an issuer's significant accounting policies.

See

Sections II.B., III.B., and V.B. below.

Exchange Act Rule 12b-20 [17 CFR 240.12b-20].

See Commission Guidance Regarding Management's Discussion and Analysis of Financial Condition and Results of Operations,

Release No. 33-8350 (Dec. 19, 2003) [68 FR 75056 (Dec. 29, 2003)] (“2003 MD&A Release”).

ASC 235-10-50 requires identification and description of the accounting principles followed by an issuer and the methods of applying those principles that materially affect the determination of financial position, cash flows, or results of operations.

D. Disclosure Location Considerations

a. Overview

In some cases, our amendments result in the relocation of disclosures within a filing,

with the following consequences:

For example, as discussed in Section III.B.2, our amendments eliminate the disclosures about an issuer's status as a real estate investment trust (“REIT”) in the audited notes to the financial statements, in reliance on required disclosures within the same filing, but outside the audited financial statements.

See also

Section III.C.1 of the Proposing Release,

supra

note 1, at 51616.

• Prominence Considerations—the current location of some disclosures may provide a certain level of prominence and/or context to other disclosures located with them. The relocation of these disclosures may change the prominence and/or context of both the relocated disclosures and the remaining disclosures. We refer to these consequences collectively as “Disclosure Location—Prominence Considerations.”

• Financial Statement Considerations—the amendments related to some topics result in the relocation of disclosures from outside to inside the financial statements, subjecting this information to annual audit and/or interim review, internal control over financial reporting (“ICFR”), and XBRL tagging requirements, as applicable. The safe harbor under the Private Securities Litigation Reform Act of 1995 (“PSLRA”) would not be available for such disclosures.

Conversely, relocation of disclosures from inside to outside the financial statements would have the opposite effect—namely, this information would not be subject to annual audit and/or interim review, ICFR, and XBRL tagging requirements, as applicable, while the safe harbor under the PSLRA would be available. These topics would also be subject to Disclosure Location—Prominence Considerations. We refer to these consequences collectively as “Disclosure Location—Financial Statement Considerations.”

Public Law 104-67, 109 Stat. 737 (1995).

• Bright Line Disclosure Threshold Considerations—some overlapping requirements, while similar, are not redundant or duplicative because one set of requirements includes a bright line disclosure threshold, while the other set of requirements does not.

Where a requirement contains a bright line disclosure threshold, matters involving amounts below that threshold are not required to be disclosed. With the exception of disclosure requirements about major customers, the Commission disclosure requirements we discuss contain bright line disclosure thresholds, while the corresponding U.S. GAAP requirements do not. For these topics, the elimination of the bright line threshold would potentially change the disclosure provided to investors. We refer to these considerations collectively as “Bright Line Disclosure Threshold Considerations.”

For example, Regulation S-K requires, as discussed in Section III.D.5, disclosure of the amount of revenue from products and services that account for 10 percent or more of consolidated revenue.

See also

Section III.E.13 of the Proposing Release,

supra

note 1, at 51632. The corresponding U.S. GAAP requirements do not contain such bright line disclosure thresholds.

b. Comments on Disclosure Location Considerations

Some commenters indicated that, due to the emergence of electronic data analysis and search tools, investors and other users are generally placing less emphasis on disclosure location.

Views were mixed on relocating disclosures into the financial statements. Some commenters stated that they prefer most financial disclosures to be within the financial statements given the audit requirement and ICFR,

while others opposed relocation for these same reasons.

Numerous commenters also expressed concern about moving disclosures that contain forward-looking information into the financial statements. These commenters noted that such relocation would introduce liability concerns for registrants because the safe harbor under PSLRA would no longer apply and could create potential verification and auditability issues for auditors.

Other commenters also expressed concern that it could result in loss of information that may currently be provided by registrants voluntarily.

See, e.g.

letters from CAQ and Davis Polk & Wardwell LLP (Nov. 2, 2016) (“Davis”).

See, e.g.

letters from Council of Institutional Investors (Sept. 22, 2016) (“CII”) and The Ohio Society of CPAs (Nov. 2, 2016).

See, e.g.

letters from CGCIV and Edison Electric Institute and American Gas Association (November 2, 2016) (“EEI and AGA”); and USCC.

See, e.g.

letters from CAQ; Davis; EEI and AGA; and FEI.

See, e.g.

letters from CalPERS; FEI; and R.G. Associates.

Some commenters opposed eliminating any bright line thresholds in Commission disclosure requirements because the thresholds establish a baseline of disclosure for all registrants in certain areas.

These commenters expressed concern about using a materiality standard for disclosure because it may reduce the information made available to investors or diminish comparability of registrants. Other commenters were supportive of eliminating the bright line thresholds, especially the thresholds discussed in the Proposing Release, and generally supported a more principles-based disclosure framework.

These commenters also indicated that materiality is a better disclosure standard because certain of the existing bright line thresholds result in disclosure that, in their view, is immaterial to investors and costly to provide.

See, e.g.

letters from AFL-CIO and AFR; CalPERS; CFA; Public Citizen; and R.G. Associates.

See, e.g.

letters from CAQ; CGCIV; The Clearing House Association L.L.C. (Oct. 28, 2016) (“Clearing House”); Davis; FEI; and USCC.

c. Final Amendments

We are adopting the majority of the proposed amendments that were identified with Disclosure Location—Prominence Considerations or Financial Statement Considerations because (a) commenters were supportive of the amendment and did not express concern with the relocation of the disclosure; or (b) the overlapping U.S. GAAP disclosure requirements, identified in the Proposing Release, are already subject to audit and ICFR requirements.

We also are amending

one disclosure requirement identified with Bright Line Disclosure Thresholds Considerations relating to restrictions on dividends as proposed.

We are not adopting other proposed amendments due to concern about the relocation of the disclosure and possible loss of forward-looking and voluntary information. In addition, we are referring some of the disclosure requirements with Disclosure Location or Bright Line Disclosure Threshold Considerations to the FASB for potential incorporation into U.S. GAAP.

The proposed amendments that give rise to Disclosure Location Prominence or Financial Statement Considerations include those discussed

in the following sections of the Proposing Release: Section III.B.2

REIT Disclosures—Status as a REIT;

Section III.B.3.f

Insurance Companies—Reinsurance Transactions, Interim Financial Statements—Material Events Subsequent to the End of the Most Recent Fiscal Year;

Section III.B.3.c

Segments;

Section III.B.3.d

Geographic Areas;

Section III.B.3.e

Seasonality;

Section III.B.1.c

Research and Development Activities;

Section III.B.1.d

Warrants, Rights, and Convertible Instruments;

Section III.C.2

Restrictions on Dividends and Related Items;

Section III.C.3

Geographic Areas;

Section III.D.3

Major Customers;

Section III.D.5

Products and Services;

and Section V.B.2

Dividends Per Share in Interim Financial Statements.

We are not adopting any requirements to disclose forward-looking information in a registrant's financial statements.

See

discussion in Section III.C.2 below.

II. Redundant or Duplicative Requirements

A. Background

In the Proposing Release, the Commission identified a number of disclosure requirements that require substantially similar disclosures as U.S. GAAP, IFRS, or other Commission disclosure requirements. The Commission proposed to eliminate these redundant or duplicative Commission disclosure requirements to simplify issuer compliance efforts in light of the obligation to provide substantially the same information to investors under other requirements.

B. Redundant or Duplicative Disclosure Requirements With U.S. GAAP

1. Foreign Currencies

Rule 3-20 of Regulation S-X describes the currency requirements for financial statements of foreign private issuers. The third sentence of Rule 3-20(d) of Regulation S-X provides the definition of “the currency of an operation's primary economic environment” and “a hyperinflationary environment.” The Commission proposed to eliminate these definitions because U.S. GAAP provides substantially the same definitions.

ASC 830-10-45-2, ASC 830-10-45-12, and ASC 830-10-55-10.

While most commenters

supported the elimination, two commenters

recommended that the Commission retain these provisions. These commenters indicated that while the definitions are the same in the Commission disclosure requirement and U.S. GAAP, the definition in U.S. GAAP

can be interpreted to apply only to a subsidiary, division, branch or joint venture of the issuer rather than the issuer itself, whereas Rule 3-20(d) applies to both the issuer and each of its material operations.

See

letters from Davis; Deloitte; & Touche LLP (Oct. 5, 2016) (“Deloitte”); E&Y; EEI and AGA; Grant; KPMG; and R.G. Associates.

See

letters from CAQ and PwC.

ASC 830-10-45-2, ASC 830-10-45-12, and ASC 830-10-55-10.

First sentence of Rule 3-20(d) of Regulation S-X.

After further consideration and in light of concerns raised about whether Rule 3-20(d) and U.S. GAAP are duplicative, we are retaining the definitions in the current rule and referring the issue to the FASB for potential clarification in U.S. GAAP.

2. Other

The Commission proposed to eliminate a number of other requirements that are substantially redundant or duplicative of U.S. GAAP disclosures. The table below describes each of these requirements and identifies the corresponding U.S. GAAP requirement.

For the Commission disclosure requirements proposed for elimination that apply to foreign private issuers that report using IFRS, we identify the corresponding IFRS requirement.

These proposed amendments are discussed in further detail in Section II.B of the Proposing Release.

See supra

note 23.

Commission disclosure requirement proposed for elimination

Description of commission disclosure

requirement proposed for elimination

Corresponding U.S. GAAP requirement

Consolidation

All except fourth sentence of Rule 3A-02(b)(1) of Regulation S-X

Permits consolidation of an entity's financial statements for its fiscal period if the period does not differ from that of the issuer by more than 93 days and requires recognition by disclosure or otherwise of material intervening events

ASC 810-10-45-12.

First sentence of Rule 3A-02(d) of Regulation S-X

Requires consideration of the propriety of consolidation under certain restrictions.

100

ASC 810-10-15-10.

Last two sentences of first paragraph of Rule 3A-02 of Regulation S-X and 3A-03(a) of Regulation S-X

Requires disclosure of the accounting policies followed in consolidation or combination.

101

ASC 235-10-50-1 and ASC 810-10-50-1.

First sentence of Rule 3A-04 of Regulation S-X

Requires elimination of intercompany transactions

ASC 323-10-35-5a and ASC 810-10-45-1 through 45-9.

Obligations

Reference to issuances in Rule 4-08(f) of Regulation S-X

Requires disclosure of significant changes

102

in amounts of debt issued subsequent to the latest balance sheet date

ASC 855-10-50-2 and 855-10-55-2a.

Income Tax Disclosures

First sentence of Rule 4-08(h)(2) of Regulation S-X

Requires an income tax rate reconciliation

ASC 740-10-50-12.

Fourth sentence of Rule 4-08(h)(2) of Regulation S-X

Permits the income tax rate reconciliation to be presented in either percentages or dollars

ASC 740-10-50-12

Warrants, Rights, and Convertible Instruments

Rule 4-08(i) of Regulation S-X

Requires disclosure of the title and amount of securities subject to warrants or rights, the exercise price, and the exercise period.

103

Non-compensatory

104

warrants or rights: ASC 505-10-50-3 and ASC 815-40-50-5.

Compensatory warrants or rights: ASC 505-10-50-3, ASC 718-10-50-1, and ASC 718-10-50-2.

Related Parties

Reference to identification of related party transactions in Rule 4-08(k)(1) of Regulation S-X

Requires identification of related party transactions

ASC 850-10-50-1.

Contingencies

References to “material contingencies” in Rule 8-03(b)(2),

105

the second sentence of Rule 10-01(a)(5) of Regulation S-X, and the entire last sentence of Rule 10-01(a)(5) of Regulation S-X.

106

Require disclosure of material contingencies in interim financial statements, notwithstanding disclosure in the annual financial statements

ASC 270-10-50-6.

Earnings per Share

Reference to “earnings per share” in first sentence of Rule 10-01(b)(2) of Regulation S-X

Requires presentation of earnings per share on the face of an interim income statement

ASC 270-10-50-1b.

Item 601(b)(11) of Regulation S-K

107

and Instruction 6 to “Instructions as to Exhibits” of Form 20-F

Require disclosure of the computation of earnings per share in annual filings

ASC 260-10-50-1a, Rule 10-01(b)(2) of Regulation S-X, and IAS 33, paragraph 70.

108

Insurance Companies

Last sentence of Rule 7-03(a)(11) of Regulation S-X

Requires a description of the activities being reported in the separate accounts.

109

ASC 944-80-50-1a.

Rule 7-04.3(c) of Regulation S-X

Requires disclosure of the method followed in determining the cost of investments sold.

110

ASC 235-10-50-1 and ASC 320-10-50-9b.

Bank Holding Companies

Rule 9-03.6(a) of Regulation S-X

Requires disclosure of the carrying and market values of (1) securities of the U.S. Treasury and other U.S. Government agencies and corporations, (2) securities of states of the U.S. and political subdivisions, and (3) other securities

ASC 320-10-50-1B, ASC 320-10-50-2, ASC 320-10-50-5, and ASC 942-320-50-2.

Rule 9-03.7(d) of Regulation S-X

Requires disclosure of changes in the allowance for loan losses

ASC 310-10-50-11B(c).

First part of Rule 9-04.13(h) of Regulation S-X

Requires disclosure of the method followed in determining the cost of investment securities sold

ASC 235-10-50-1 and ASC 320-10-50-9b.

Changes in Accounting Principles

Requirement to disclose reason for change in accounting principle in Rule 8-03(b)(5)

111

and Rule 10-01(b)(6)

112

of Regulation S-X

Requires disclosure of the reasons for making material accounting changes in an interim period

ASC 250-10-45-12 to 16, ASC 250-10-50-1a, and ASC 270-10-50-1g.

Interim Adjustments

Third sentence of Rule 3-03(d) and third sentence of Rule 10-01(b)(8) of Regulation S-X

Provide examples of adjustments in order for interim financial statements to be fairly stated

ASC 270-10-45-10.

Interim Financial Statements—Common Control Transactions

Part of first sentence of Rule 10-01(b)(3) of Regulation S-X

Requires that common control transactions be reflected in current and prior comparative period's interim financial statements

ASC 805-50-45-1 to 5.

Interim Financial Statements—Dispositions

Rule 10-01(b)(5) of Regulation S-X

Requires disclosure of the effect of discontinued operations on interim revenues, net income, and earnings per share for all periods presented

ASC 205-20-50-5B, ASC 205-20-50-5C, ASC 260-10-45-3, and ASC 270-10-50-7.

Commenters

generally supported these proposed amendments due to the redundant or duplicative nature of the Commission disclosure requirements with U.S. GAAP and IFRS,

113

and no commenter specifically opposed the amendments. We are adopting all of the amendments described in the table above as proposed.

ASC 810-10-45-12 uses the phrase “about three months” instead of 93 days.

100

Rule 3A-02(d) requires due consideration of the propriety of consolidation in the presence of political, economic, or currency restrictions. ASC 810-10-15-10 states that subsidiaries shall not be consolidated in the presence of foreign exchange restrictions, controls, or other governmentally imposed uncertainties so severe that they cast significant doubt on the parent's ability to control the subsidiary.

101

Rule 3A-02 states that the accounting policy disclosure should also include the circumstances associated with any departure from the normal practice of consolidating majority owned subsidiaries and not consolidating entities that are not majority owned. ASC 235-10-50-1 states that the accounting disclosure shall encompass important judgments about the appropriateness of accounting principles and unusual or innovative applications of U.S. GAAP.

102

ASC 855-10-50-2 requires disclosure of events subsequent to the balance sheet date that are of such a nature that non-disclosure would render the financial statements misleading. ASC 855-10-55-55-2a provides that the sale of a bond subsequent to the balance sheet date is an example of such a subsequent event.

103

For compensatory warrants or rights, U.S. GAAP requires disclosure of the nature and terms of such arrangements, the number and weighted-average exercise price, and the weighted-average contractual term.

104

Compensatory warrants and rights are those issued to an employee, non-employee or other entity for supply of goods or services for the issuer's benefit, whereas non-compensatory warrants and rights are those issued for all other reasons.

105

This rule specifically applies to SRCs and Regulation A issuers in a Tier 2 offering that report under U.S. GAAP.

106

This rule specifically applies to companies other than SRCs (“non-SRCs”).

107

We also proposed conforming revisions to delete references to Item 601(b)(11) of Regulation S-K in the Exhibit Table and in Rule 10-01(b)(2) of Regulation S-X.

108

IAS 33, paragraph 70, is the IFRS requirement that corresponds to the Commission disclosure requirement in Instruction 6 to “Instructions as to Exhibits” of Form 20-F.

109

ASC 944-80-50-1a requires disclosure of the nature of the contracts reported in separate accounts.

110

ASC 320-10-50-9b refers to the “cost of a security sold.”

111

This rule specifically applies to SRCs and Regulation A issuers in a Tier 2 offering that report under U.S. GAAP.

112

This rule specifically applies to non-SRCs.

113

See, e.g.

letters from CAQ; Davis; EEI & AGA; and R.G. Associates.

C. Redundant or Duplicative Disclosure Requirements With Other Commission Requirements

1. Proposed Amendments

In the Proposing Release, the Commission identified disclosure requirements that are redundant or duplicative of other Commission requirements. In most of these cases, the rule or item proposed to be eliminated is a reference to another Commission requirement and elimination would not affect compliance with the underlying requirement. The table below describes each proposed amendment.

114

17 CFR 210.3A-01 through 210.3A-04.

115

We also proposed conforming revisions to delete the reference to Item 601(b)(19) of Regulation S-K in the Exhibit Table.

116

17 CFR 249.308a.

117

We also proposed to amend the Exhibit Table within Item 601 of Regulation S-K to clarify that Item 601(b)(13) applies to Form 10-Q.

Commission disclosure requirement proposed for elimination

Description of commission disclosure

requirement proposed for elimination

Corresponding other commission disclosure requirement

Foreign Currency

Last sentence of Rule 3-20(d) of Regulation S-X

States that foreign private issuers must comply with Item 17(c)(2) of Form 20-F, which requires disclosure and quantification of departures from the methodology of Rule 3-20 if their financial statements are prepared on a basis other than U.S. GAAP or IFRS

Item 17(c)(2) of Form 20-F.

Also Item 4 of Form F-1, General Instructions I.B of Form F-3, and Items 11, 12, and 13 of Form F-4, which indirectly refer to Item 17 of Form 20-F.

Consolidation

Rule 4-08(a) of Regulation S-X

Requires compliance with Article 3A.

114

Article 3A itself requires compliance. The requirement is repeated in Rule 4-08(a).

Rule 3A-01 of Regulation S-X

States subject matter of Article 3A

The same information is set forth in the title of Article 3A.

Report Furnished to Security Holders

Item 601(b)(19) of Regulation S-K.

115

Provides specific instructions to address the incorporation by reference into Form 10-Q

116

of information that is separately made available to security holders

General Instruction D(3) to Form 10-Q, which refers to Item 601(b)(13) of Regulation S-K.

117

2. Comments on Proposed Amendments

Commenters generally supported these proposed amendments.

118

One commenter recommended retaining the last sentence of Rule 3-20(d) of Regulation S-X without providing further explanation.

119

118

See

letters from Davis; Deloitte; E&Y; EEI and AGA; Grant; KPMG; and R.G. Associates.

119

See

letter from PwC. The last sentence of Rule 3-20(d) states that “Departures from the methodology presented in this paragraph shall be quantified pursuant to Item 17(c)(2) of Form 20-F.”

3. Final Amendments

We are adopting the other amendments as proposed, with one exception. After additional analysis, we are not adopting the proposed elimination of the last sentence in Rule 3-20(d) because it relates to a small population of issuers (

i.e.

foreign private issuers that do not apply either U.S. GAAP or IFRS) and to avoid any unintended consequences in light of a commenter's recommendation. Additionally, the amendments eliminate a redundant requirement in Instruction 3 to Item 504 of Regulation S-K that was identified subsequent to the proposal.

120

The requirement to disclose the sources of any material amounts of other funds needed to accomplish the specific purpose is stated twice within the instruction.

III. Overlapping Requirements

A. Background

In the Proposing Release, the Commission identified disclosure requirements that are related to, but not the same as, U.S. GAAP, IFRS, or other Commission disclosure requirements, which we refer to in this release as overlapping requirements. The Commission proposed the following related to these requirements:

• Delete disclosure requirements that: (1) Require disclosures that convey reasonably similar information to or are encompassed by the disclosures that result from compliance with the overlapping U.S. GAAP, IFRS, or Commission disclosure requirements; or (2) require disclosures incremental to the overlapping U.S. GAAP, IFRS, or Commission disclosure requirements and may no longer be useful to investors.

• Integrate Commission disclosure requirements that overlap with, but require information incremental to, other Commission disclosure requirements.

The Commission also solicited comment on certain Commission disclosure requirements that overlap with, but require information incremental to, U.S. GAAP to determine whether to retain, modify, eliminate, or refer them to the FASB for potential incorporation into U.S. GAAP.

B. Overlapping Requirements—Proposed Deletions

1. Overlapping Disclosure Requirements With U.S. GAAP

The Proposing Release identified several disclosure requirements that the Commission believed to be overlapping with U.S. GAAP.

a. Repurchase and Reverse Repurchase Agreements

121

See

the related discussion in Section III.D.5.

(1) Proposed Amendments

Since the requirements in Regulation S-X governing repurchase and reverse repurchase agreements were adopted in 1986, the FASB has amended the U.S. GAAP requirements for the accounting and disclosures for repurchase agreements and similar transactions,

122

which has resulted in overlapping disclosure requirements. We discuss these overlapping requirements and the proposed amendments below.

122

See

Accounting Standards Update (“ASU”) No. 2014-11,

Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.

(a) Balance Sheet Presentation

Regulation S-X

123

and U.S. GAAP

124

both require separate presentation of repurchase liabilities associated with repurchase agreements on the face of the balance sheet.

125

Regulation S-X, unlike U.S. GAAP, sets forth a 10 percent threshold for separate presentation.

126

The Commission proposed to delete the requirement for separate presentation in Rule 4-08(m)(1)(i) and the related 10 percent threshold and noted the Bright Line Disclosure Threshold Considerations. The Commission also proposed to retain the requirement to include accrued interest payables in the separately presented liability amounts.

123

See

Rule 4-08(m)(1)(i) of Regulation S-X.

124

See

ASC 860-30-45-2.

125

Regulation S-X requires separate presentation of repurchase liabilities incurred pursuant to repurchase agreements. U.S. GAAP is broader in that it includes other transactions with similar characteristics—specifically, “transactions in which cash is obtained in exchange for financial assets with an obligation for an opposite exchange later,” such as dollar rolls (an agreement to sell and repurchase similar but not identical securities) and securities lending transactions.

See

ASC 860-30-15-3.

126

Specifically, Regulation S-X requires separate presentation if the carrying amount (or market value, if higher than the carrying amount or if there is no carrying amount) of the securities or other assets sold under repurchase agreements, in the aggregate, exceeds 10 percent of total assets.

(b) Disaggregated Disclosures

While Regulation S-X

127

and U.S. GAAP

128

both require disaggregated disclosures about repurchase agreements, they differ in the form and content of the disaggregated disclosures. First, Regulation S-X and U.S. GAAP both require disaggregated disclosures of repurchase liabilities by class of collateral and maturity interval. U.S. GAAP permits an entity to determine the appropriate level of disaggregation and classes of collateral to be presented on the basis of the nature, characteristics, and risks of the collateral pledged, whereas Regulation S-X provides a few illustrative examples of classes. Regulation S-X also specifies maturity intervals (

e.g.,

overnight, up to 30 days), whereas U.S. GAAP permits judgment to determine an appropriate range of maturity intervals. Further, Rule 4-08(m)(1)(ii) of Regulation S-X requires the disaggregated disclosure to be combined in the form of a single table. Although U.S. GAAP is silent about the form of disclosure, its sole example of an approach to comply with its requirements is a single table that includes both classes of collateral as well as maturity intervals similar to those required by Regulation S-X.

129

Overall, U.S. GAAP permits more judgment to determine the classes to be presented, the range of maturity intervals, and the form of disclosure than Regulation S-X.

130

127

See

Rule 4-08(m)(1)(ii) of Regulation S-X.

128

See

ASC 860-30-50-7.

129

See

ASC 860-30-55-4.

130

Id.

Second, Regulation S-X specifies tabular disclosure of the carrying amount of associated assets sold under repurchase agreements disaggregated by class of asset sold and maturity interval (

e.g.,

overnight, up to 30 days) of the repurchase agreement.

131

Instead of a tabular format, U.S. GAAP requires separate presentation on the transferor's balance sheet of the carrying amount of assets that the transferee has the right to sell or repledge.

132

U.S. GAAP also requires disclosure in the notes to the financial statements of the carrying amount and balance sheet classification of both the assets pledged as collateral that the transferee does not have the right to sell or repledge and the associated liabilities, along with quantitative information about the relationship(s) between them.

133

131

See

Rules 4-08(m)(1)(ii)(A)(i) and 4-08(m)(1)(ii)(B) of Regulation S-X.

132

See

ASC 860-30-25-5a.

133

See

ASC 860-30-50-1A.b.1 and 2.

The Commission proposed to delete the identified Regulation S-X requirements because the disclosures that result from compliance with U.S. GAAP, and the accompanying disclosure objectives and aggregation principles, convey reasonably similar information as the disclosures required by Regulation S-X.

134

U.S. GAAP requires that its minimum disclosure requirements about transactions such as repurchase agreements be supplemented as necessary to meet certain disclosures objectives (

e.g.,

providing investors with an understanding of how transfers of financial assets affect an issuer's financial statements) and aggregation principles (

e.g.,

presentation in a manner that clearly and fully explains the transferor's risk exposure related to the transferred financial assets and any restrictions on the assets of the entity).

See

ASC 860-10-50.

Third, Regulation S-X requires disaggregated disclosures of the market value of assets sold under repurchase agreements for which unrealized changes in market value are reported in income.

135

Although the FASB deliberated adding a requirement to U.S. GAAP to disclose the market value of these assets, it ultimately decided against doing so due to operability concerns.

136

135

See

Rules 4-08(m)(1)(ii)(A)(i) and 4-08(m)(1)(ii)(B) of Regulation S-X. These rules, however, do not require disclosure of the carrying amount and market value of securities and other assets for which unrealized changes in market value are reported in current income or which have been obtained under reverse repurchase agreements. This scope is narrower than that for the U.S. GAAP requirement to separately present carrying amounts, which applies to all assets sold under repurchase agreements.

136

See

Minutes from FASB Board Meeting (Mar. 12, 2014), available at:

http://www.fasb.org/jsp/FASB/Document_C/DocumentPage&cid=1176163899372.

See also Accounting Standards Update (“ASU”) No. 2014-11,

Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.

Based on the foregoing, the Commission proposed to delete Rule 4-08(m)(1)(ii), with the exception of the requirement in Rule 4-08(m)(1)(ii)(A)(ii) to disclose the interest rate on repurchase liabilities, which the Commission would retain. Regulation S-X, unlike U.S. GAAP, sets forth a 10 percent threshold for the disaggregated disclosures;

137

therefore, the proposed amendments give rise to Bright Line Disclosure Threshold Considerations.

137

Specifically, Regulation S-X requires the tabular disclosures if the aggregate carrying amount (or market value, if higher than the carrying amount) of the securities or other assets sold under repurchase agreements exceeds 10 percent of total assets. The amount of securities or other assets sold under repurchase agreements excludes securities and other assets for which unrealized changes in market value are reported in current income or have been obtained under reverse repurchase agreements.

The Commission proposed to delete the requirement in Regulation S-X

138

to disclose an issuer's policy with regard to taking possession of assets purchased under reverse repurchase agreements because U.S. GAAP requires disclosure of the issuer's policy for requiring collateral or other security.

139

Although U.S. GAAP is not as specific as Regulation S-X about taking possession of collateral, the Commission believed Regulation S-X requires disclosures that are encompassed by the disclosures that result from compliance with U.S. GAAP.

138

See

Rule 4-08(m)(2)(i)(B)(1) of Regulation S-X.

139

See

ASC 860-30-50-1Aa.

Regulation S-X, unlike U.S. GAAP, requires these disclosures when the aggregate carrying amount of reverse repurchase agreements exceeds 10 percent of total assets. As such, the proposed amendment gives rise to Bright Line Disclosure Threshold Considerations.

(2) Comments on Proposed Amendments

Commenters were split on the proposals related to the requirements for repurchase and reverse repurchase agreements. A number of commenters expressed support for the proposed amendments except for the elimination of the collateral policy disclosure requirement.

140

These commenters agreed that the U.S. GAAP disclosures provide reasonably similar information for the balance sheet presentation and disaggregated disclosure requirements. Certain commenters were not supportive of the deletion of the collateral policy disclosure requirements

141

and recommended referring the requirement to the FASB for potential incorporation into U.S. GAAP.

142

These commenters stated that the disclosure provides useful information to understanding the credit risk associated with the transactions in which the issuer does not take possession of the collateral.

140

See

letters from CAQ; Clearing House; Deloitte; E&Y; and KPMG.

141

See

Rule 4-08(m)(2)(i)(B)(1) of Regulation S-X.

142

See

letters from CAQ; Grant; and PwC.

Several other commenters opposed the proposed amendments, expressing concern that the amendments would eliminate disclosures that are material to investors and other users of the financial statements.

143

For example, one of the commenters stated that the information required by Rule 4-08(m)(1)(ii) is essential to understanding an issuers' liabilities in the repo market.

144

Another commenter indicated that it cannot support the proposed revisions to repurchase and reverse repurchase agreements disclosure requirements at this time, given the importance of these disclosures, the relative newness of the changes to the U.S. GAAP requirements, and the existence of differences in the form and content of the respective requirements.

145

One commenter also indicated that it believes repurchase and reverse repurchase agreements should be discussed in SEC filings more than just in the financial statement footnotes because they are complex financial instruments that can have a dramatic impact on the financing and liquidity of financial institutions and other businesses.

146

143

See, e.g.

letters from As You Sow, Bellamy Woods LLC, Brighton Shores LLC, CSC LLC, Essential Information, Greenpeace, Howard's End LLC, Institute for Policy Studies—Global Economy Project, Interfaith Center on Corporate Responsibility, NF Trust, OpenTheGovernment, Public Citizen, Rolyan Fund, Sunlight Foundation and Zevin Asset Management, LLC (Oct. 31, 2016) (“As You Sow, et al.”); CalPERS; and CII.

144

See

letter from Zevin Asset Management, LLC (Nov. 2, 2016) (“Zevin”).

145

See

letter from CII.

146

See

letter from Elise J. Bean (Oct. 3, 2016) (“Bean”).

Additionally, while one commenter explicitly supported the elimination of the 10 percent threshold in Rule 4-08(m)(1)(ii),

147

other commenters expressed concerns, indicating that the removal could result in less disclosure of information that is material to investors.

148

147

See

letter from Clearing House.

148

See

letters from As You Sow, et al. and Public Citizen.

(3) Final Amendments

In light of the comments about the importance of the information, we are retaining the Regulation S-X disclosure requirements related to repurchase and reverse repurchase agreements and referring these requirements to the FASB for potential incorporation into U.S. GAAP.

b. Derivative Accounting Policies

(1) Proposed Amendments

Regulation S-X

149

and U.S. GAAP

150

both require disclosure in the notes to the financial statements of accounting policies for certain derivative instruments. Regulation S-X applies to: (1) Derivative financial instruments, as

defined under U.S. GAAP, and (2) derivative commodity instruments such as commodity futures, swaps, and options that are permitted to be settled in cash or with another financial instrument, to the extent such instruments are not within the definition of derivative financial instruments. For both types of instruments, Regulation S-X requires, where material, disclosure of the accounting policies; the criteria required to be met for each accounting method used; the accounting method used if those criteria are not met; the method used to account for terminations of derivatives designated as hedges or derivatives used to affect the terms, fair values, or cash flows of a designated item; the method used to account for derivatives when the designated item matures, is sold, is extinguished, or is terminated; and how the derivative instruments are reported in the financial statements.

149

See

Rule 4-08(n) of Regulation S-X and Note 2(b) to Rule 8-01 of Regulation S-X. Rule 4-08(n) applies to non-SRCs and Note 2(b) to Rule 8-01 applies to SRCs and Regulation A issuers in a Tier 2 offering that report under U.S. GAAP.

150

See

ASC 815-10-50.

U.S. GAAP requires disclosure of accounting principles and methods that materially affect the financial statements, including those involving a selection from existing acceptable alternatives, and important judgments about the appropriateness of the principles.

151

In the Proposing Release, the Commission stated that it believes these U.S. GAAP principles call for reasonably similar information as the corresponding requirements in Regulation S-X, as they require disclosure of the accounting method applied to each aspect of a material derivative transaction from inception to termination.

151

See

ASC 235-10-50-1 and ASC 235-10-50-3.

In addition, for derivative financial instruments, as defined under U.S. GAAP, U.S. GAAP requires disclosure of how and why the issuer uses derivative instruments, how the derivative instruments and related hedged items are accounted for, and how they affect the financial statements.

152

Although Regulation S-X is more detailed than U.S. GAAP, the specificity in Regulation S-X stemmed, in part, from the absence of a comprehensive accounting model for derivatives when the Commission adopted these disclosure requirements.

153

Since that time, the FASB has adopted an accounting model for derivative financial instruments, as defined under U.S. GAAP.

154

Because U.S. GAAP has a comprehensive accounting model for contracts that meet the definition of a derivative financial instrument, the Commission stated in the Proposing Release that it believes that the additional specific disclosure requirements in Rule 4-08(n) are no longer applicable.

152

See

ASC 815-10-50.

153

See Disclosure of Accounting Policies for Derivative Financial Instruments and Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative Information about Market Risk Inherent in Derivative Financial Instruments, Other Financial Instruments and Derivative Commodity Instruments,

Release No. 33-7386, (Jan. 31, 1997) [62 FR 6044 (Feb. 10, 1997)]. In this adopting release, the Commission stated that in the absence of comprehensive accounting literature, registrants have developed accounting practices for options and complex derivatives by analogy to the limited amount of literature that does exist. The Commission also noted that those analogies are complicated because, under existing accounting literature, there are at least three distinctively different methods of accounting for derivatives (

e.g.

fair value accounting, deferral accounting, and accrual accounting). The Commission further observed that the underlying concepts and criteria used in determining the applicability of those accounting methods is not consistent.

154

See

SFAS No. 133,

Accounting for Derivative Instruments and Hedging Activities,

codified in ASC 815.

Based on the foregoing, the Commission proposed to delete Rule 4-08(n) and Note 2(b) to Rule 8-01.

(2) Comments on Proposed Amendments

While several commenters

155

supported the proposed deletion of the Regulation S-X requirements related to derivative accounting policies, two commenters

156

expressed concern. One of these commenters,

157

while supportive of deleting the disclosure requirements, indicated that U.S. GAAP does not provide clear guidance on how to measure written options that do not meet the definition of a derivative financial instrument under U.S. GAAP.

158

For this reason, this commenter recommended referring this issue to the FASB for potential incorporation into U.S. GAAP. The other commenter stated that the Commission should increase instead of decrease disclosures related to derivatives.

159

155

See

letters from CAQ; Deloitte; E&Y; Grant; and PwC.

156

See

letters from Bean and KPMG.

157

See

letter from KPMG.

158

ASC 815-10-35-1 requires all derivative instruments to be measured subsequently at fair value and written options that do not qualify for equity classification have been measured at fair value in the financial statements.

See

ASC 815-10-S99-4. The commenter stated the disclosure requirement in Rule 4-08(n) has been applied by analogy to measure these options at fair value. Rule 4-08(n) is not measurement guidance.

159

See

letter from Bean.

(3) Final Amendments

We are eliminating most of the requirements in Rule 4-08(n) as proposed. However, after additional consideration, we are not eliminating the requirement to disclose where in the statement of cash flows the effect of derivative financial instruments is reported.

160

U.S. GAAP does not have a similar disclosure requirement.

161

We also are referring the statement of cash flows disclosure requirement to the FASB for potential incorporation into U.S. GAAP. We continue to believe that the U.S. GAAP disclosure requirements and related principles

162

call for information that is reasonably similar to the information called for by the disclosure requirements in Regulation S-X and that some of the additional disclosure requirements in Rule 4-08(n) are no longer applicable. Finally, we are sharing the comment letters that request review of the disclosures for derivatives and accounting for written options with the FASB because these considerations are beyond the scope of this rulemaking.

163

160

Because we are no longer eliminating all of 4-08(n), we are retaining Note 2(b) to Rule 8-01.

161

ASC 815 and ASC 230.

162

See

ASC 235-10-50-1, ASC 235-10-50-3, and ASC 815-10-50.

163

The FASB, in its role of establishing and maintaining U.S. GAAP, continuously monitors the financial reporting environment and objectively considers all stakeholder views on accounting and reporting issues in order to evaluate the effectiveness of U.S. GAAP in providing investors with decision useful information and to determine whether changes to U.S. GAAP are needed. The items raised by commenters here is an external source of data available for the FASB's consideration when evaluating potential improvements to U.S. GAAP.

c. Research and Development Activities

(1) Proposed Amendments

Regulation S-K requires disclosures, if material, of the amount spent on research and development activities for all years presented.

164

The Commission proposed to delete this requirement because, although Regulation S-K uses terms that differ from U.S. GAAP,

165

U.S. GAAP requires reasonably similar disclosures.

164

See

Item 101(c)(1)(xi) of Regulation S-K for non-SRCs and Item 101(h)(4)(x) of Regulation S-K for SRCs. Item 101(c)(1)(xi) only requires this disclosure by non-SRCs if material.

165

See

ASC 730-10-50-1 and ASC 730-20-50-1.

First, Regulation S-K refers to the “amount spent,” while U.S. GAAP refers to “costs charged to expense” or “costs incurred.” The Commission release adopting this requirement used the term “expense” when discussing this requirement.

166

See Adoption of Disclosure Regulation and Amendments of Disclosure Forms and Rules,

Release No. 33-5893 (Dec. 23, 1977) [42 FR 65554 (Dec. 30, 1977)] (“Regulation S-K Adopting Release”).

Regulation S-K also uses the term “company-sponsored,” but U.S. GAAP

does not. However, the Regulation S-K Adopting Release specified that the amount of company-sponsored research and development expenses to be disclosed should be determined in accordance with U.S. GAAP, suggesting no difference in scope was intended.

167

Id.

In addition, Regulation S-K refers to “customer-sponsored” research and development activities, while U.S. GAAP refers to “research and development performed on behalf of others.” Because U.S. GAAP refers to all other parties, which is broader than customers, the disclosures required by U.S. GAAP would encompass those required by Regulation S-K.

Further, Item 101(c)(1)(xi) only refers to customer-sponsored “research activities” rather than research

and

development activities. However, we do not believe this difference is substantive because Item 101(h)(4)(x) refers to “research and development activities” and it was intended to “parallel” Item 101(c)(1)(xi).

168

See Small Business Initiatives,

Release No. 33-6949, (Jul. 30, 1992) [57 FR 36442 (Aug. 13, 1992)].

Similarly, Item 5.C of Form 20-F requires foreign private issuers to describe their research and development policies, where significant, and disclose the amount spent on company-sponsored research and development activities. The Commission proposed to delete the requirement to disclose the amount spent, as foreign private issuers are already required to disclose the amount of research and development expenses in the notes to the financial statements.

169

In certain circumstances, IFRS requires that amounts spent on development be capitalized as an intangible asset, instead of expensed, and also disclosed.

170

While Commission disclosure requirements use terms different from IFRS, the Commission stated in the Proposing Release that it believes IFRS results in reasonably similar disclosures for the same reasons discussed above with regards to differences in terminology between Commission disclosure requirements and U.S. GAAP.

169

Paragraph 126 of IAS 38,

Intangible Assets,

requires foreign private issuers that report under IFRS to disclose the aggregate amount of research and development expenses in the notes to their financial statements. Foreign private issuers that report under U.S. GAAP or Another Comprehensive Body of Accounting Principles with a reconciliation to U.S. GAAP are also required to disclose the amount of research and development expenses in the notes to their financial statements.

170

See

paragraphs 57 and 118 of IAS 38,

Intangible Assets

for the criteria to be used when determining whether to capitalize development expenditures, including internal costs, and the related disclosures. The capitalized amounts are amortized and reflected as amortization expense on the income statement.

Form 1-A also requires Regulation A issuers to disclose, if material, the amount spent on research and development activities for all years presented.

171

As this requirement is based on the requirement in Regulation S-K, Regulation A issuers that report under either U.S. GAAP or IFRS provide substantially the same information in the notes to their financial statements, as described above.

171

Item 7(a)(1)(iii) of Form 1-A.

Accordingly, the Commission proposed to delete Item 101(c)(1)(xi) of Regulation S-K and Item 101(h)(4)(x) of Regulation S-K, Item 5.C of Form 20-F, and Item 7(a)(1)(iii) of Form 1-A. The Proposing Release noted Disclosure Location—Prominence Considerations, because these disclosures are located in the business description section of the filing, while the corresponding U.S. GAAP and IFRS disclosures are in the notes to the financial statements.

(2) Comments on Proposed Amendments

Most commenters were supportive of the proposed amendments.

172

Additionally, a commenter recommended that the Commission consider feedback from preparers and users, including feedback provided in response to the S-K Concept Release, that issuers may be less willing to voluntarily supplement the required disclosures in the notes to the financial statements with forward-looking information because note disclosures are not subject to the safe harbor under the PSLRA. This commenter indicated some registrants do voluntarily provide qualitative disclosures about research and development activities and the loss of this information may be material to a user's understanding of the registrant's financial statements.

173

Another commenter recommended also rescinding the requirement to disclose a description of a foreign private issuer's research and development policies for the last three years in Item 5.C of Form 20-F or clarifying whether this disclosure requirement relates to accounting policies or research and development activities.

174

172

See

letters from CAQ; Deloitte; E&Y; Grant; KPMG; and PwC.

173

See

letter from KPMG.

174

See

letter from E&Y.

One commenter did not support the deletion of Item 101(c)(1)(xi) and Item 101(h)(4)(x) of Regulation S-K, indicating that these disclosures, along with other disclosures required by Item 101, are necessary in assessing and understanding a company's ability to create long-term value for shareholders.

175

See

letter from CalSTRS.

(3) Final Amendments

We are adopting the amendments as proposed. We do not believe eliminating these requirements regarding amounts spent on research and development activities will affect the assessment and understanding of a company's ability to create long-term value for shareholders, as this information will remain in the notes to the financial statements. In addition, disclosure of trend information related to research and development activities and expenses, where material, is required by Item 303 of Regulation S-K,

176

and we expect registrants to continue to provide such disclosures as necessary. Further, the proposed amendments do not preclude registrants from continuing to provide voluntary disclosures as part of the description of their business or elsewhere outside the financial statements.

176

For example, Item 303(a)(3)(ii) of Regulation S-K requires a description of “

any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations. If the registrant knows of events that will cause a material change in the relationship between costs and revenues (such as known future increases in costs of labor or materials or price increases or inventory adjustments), the change in the relationship shall be disclosed.”

We are not eliminating the requirement to disclose a description of a foreign private issuer's research and development policies for the last three years, as one commenter suggested. This requirement was initially adopted as part of the description of business disclosure, and it is intended to cover research and development activity rather than an accounting policy.

177

See Adoption of Foreign Issuer Integrated Disclosure System,

Release No. 34-19258 (Nov. 19, 1982) [47 FR 54764 (Dec. 6, 1982)];

Foreign Private Issuers,

Release No. 34-14128 (Nov. 2, 1977) [42 FR 58684 (Nov. 10, 1977)].

d. Warrants, Rights, and Convertible Instruments

(1) Proposed Amendments

Item 201(a)(2)(i) of Regulation S-K requires disclosure on Form S-1 or Form 10 of the amount of common equity subject to outstanding options, warrants, or convertible securities, when the class of common equity has no established United States public trading market. U.S. GAAP more broadly requires disclosure of the terms of significant contracts to issue additional shares, the number of shares authorized

for certain equity awards,

178

and, in the calculation of diluted earnings per share, the weighted-average incremental shares that would be issued from the assumed exercise or conversion of options, warrants, and convertible securities.

179

As such, the Commission proposed to delete Item 201(a)(2)(i) of Regulation S-K.

178

ASC 470-20-50, ASC 505-10-50-3, ASC 505-50-50-1, ASC 718-10-50-1, ASC 718-10-50-2, and ASC 815-40-50-5.

179

ASC 260-10-50. U.S. GAAP also requires disclosure of amounts not included in the calculation of diluted earnings per share because exercise or conversion of the securities would have had an antidilutive effect in the period. In aggregate, these amounts may be similar to, but not the same as, those required by Item 201(a)(2)(i) of Regulation S-K, as U.S. GAAP determines the incremental shares as a weighted average based on the period outstanding during the year and assumes that cash received from the assumed exercise or conversion is used to repurchase outstanding shares.

The Proposing Release explained that the proposed amendments give rise to Disclosure Location—Prominence Considerations because Item 201(a)(2)(i) disclosures are located with related information about the potential dilution of equity for which there is no established United States public trading market, while the U.S. GAAP disclosures are in the notes to the financial statements.

(2) Comments on Proposed Amendments

Most commenters were supportive of the proposed amendments.

180

One commenter opposed the amendments, stating that these requirements should not be eliminated because U.S. GAAP does not explicitly require the same information and the disclosure requirements in Regulation S-K are more “straightforward.”

181

180

See

letters from CAQ; Deloitte; E&Y; Grant; KPMG; and PwC.

181

See

letter from Bean.

(3) Final Amendments

We are eliminating Item 201(a)(2)(i) of Regulation S-K as proposed. We believe U.S. GAAP elicits reasonably similar information to that required by the disclosure requirement in Regulation S-K, and in some cases, would elicit information for a broader array of potentially dilutive arrangements. For example, disclosure of the existence of contingently issuable shares is not an explicit requirement in Item 201(a)(2)(i), though it is explicitly contemplated by the U.S. GAAP requirement.

182

See

ASC 260-10-50.

e. Equity Compensation Plans

(1) Proposed Amendments

Regulation S-K prescribes the form and content for the disclosure of existing equity compensation plans where equity securities are authorized for issuance.

183

This information is currently required in Part III of Form 10-K, Item 11 of Form S-1, Item 9 of Form 10, and Item 10 of Schedule 14A.

184

In 2004, the FASB issued SFAS No. 123 (revised 2004),

Share-Based Payment

(“SFAS No. 123R”), which resulted in disclosures that overlap with Item 201(d).

185

183

See

Item 201(d) of Regulation S-K.

184

Item 1 of Schedule 14C [17 CFR 240.14c-101] also requires inclusion of the information that would have been provided in a Schedule 14A if proxies were being solicited even though consents are not being solicited by the information statement.

185

See

ASC 718-10-50-1 to 4. Additionally, ASC 505-50-50-1 requires similar disclosure when share based payments are made to non-employees.

Regulation S-K incrementally requires: (1) For options, warrants, or rights assumed in a business combination, disclosure of the number of securities to be issued upon exercise and the weighted-average exercise price,

186

and (2) disclosure of any formula for calculating the number of securities available for issuance under the plan.

187

Item 201(d) further provides instructions about the aggregation of equity compensation plan disclosures. Although these requirements are not explicitly contained in U.S. GAAP, the Commission stated in the Proposing Release that it believes the U.S. GAAP requirement to provide disclosures to enable investors to understand the nature and terms of equity compensation arrangements and the potential effects of those arrangements on shareholders

188

would result in reasonably similar disclosures.

186

See

Instruction 5 to Item 201(d).

187

See

Instruction 8 to Item 201(d).

188

ASC 718-10-50-1a.

Regulation S-K also incrementally requires disaggregation of information between equity compensation plans approved by security holders and those not approved by security holders. The Commission adopted these requirements in 2001

189

before the major national securities exchanges required listed issuers to have, with limited exceptions, shareholder approved plans.

190

Because the exchanges

191

on which the majority of domestic issuers, representing substantially all domestic issuer market capitalization, are listed now have such requirements, the Commission stated in the Proposing Release that it believed disaggregation of the disclosures about the plans in this manner is no longer useful to investors.

192

189

See Disclosure of Equity Compensation Plan Information,

Release No. 33-8048 (Dec. 21, 2001) [67 FR 232 (Jan. 2, 2002)].

190

For example, the New York Stock Exchange (“NYSE”) listing standard does not require shareholder approval of employment inducement awards, certain grants, plans, and amendments in the context of mergers and acquisitions, and certain other specific types of plans.

See Self-Regulatory Organizations; New York Stock Exchange, Inc. and National Association of Securities Dealers, Inc.; Order Approving NYSE and Nasdaq Proposed Rule Changes and Nasdaq Amendment No. 1 and Notice of Filing and Order Granting Accelerated Approval to NYSE Amendments No. 1 and 2 and Nasdaq Amendments No. 2 and 3 Thereto Relating to Equity Compensation Plans,

Release No. 34-48108 (June 30, 2003) [68 FR 39995 (Jul. 3, 2003)].

See also

New York Stock Exchange, Listed Company Manual § 303A.08; Nasdaq Listing Rule 5635(c) and IM-5635-1;

American Stock Exchange Rulemaking Re: Shareholder Approval of Stock Option Plans and Other Equity Compensation Arrangements,

Release No. 34-48610 (Oct. 9, 2003) [68 FR 59650 (Oct. 16, 2003)]; and NYSE MKT Company Guide § 711.

191

These exchanges are the NYSE, NYSE MKT, and Nasdaq.

192

One commenter on the Disclosure Effectiveness Initiative recommended that Item 201(d)(3), which requires the material features of non-shareholder approved equity compensation plans, be deleted, noting that such plans are either not material or covered by other disclosure requirements.

See

letter from Disclosure Effectiveness Working Group of the Federal Regulation of Securities Committee and the Law & Accounting Committee of the American Bar Association (“ABA Committee”) (Mar. 6, 2015), available at

https://www.sec.gov/comments/disclosure-effectiveness/disclosureeffectiveness.shtml.

Based on the foregoing, the Commission proposed to delete Item 201(d) and the references to it in Part III of Form 10-K and Item 10(c) of Schedule 14A. These proposed amendments would not affect the disclosures related to new plans or modifications of existing plans subject to shareholder action.

193

Because disclosures required by Item 201(d) are located with related information about the issuer's common equity and related stockholder matters, while the corresponding disclosures are in the notes to the financial statements, the proposed amendments give rise to Disclosure Location—Prominence Considerations. In particular, as a result of the proposed amendments, Item 201(d) disclosures would no longer be provided in Schedule 14A

194

alongside information on equity compensation plans subject to security holder action. Instead, investors would obtain that information from the notes to the financial statements in the separate

Form 10-K filing. With the proposed amendments, issuers may also be less willing to voluntarily supplement the required disclosures in the notes to the financial statements with forward-looking information because note disclosures are not subject to the safe harbor under the PSLRA.

193

See

Items 10(a), 10(b), and the Instructions to 10(c) of Schedule 14A.

194

The proposed amendment to delete the Item 201(d) requirements from Schedule 14A would result in such information being omitted from information statements filed on Schedule 14C disclosing adoption of an equity compensation plan when shareholder consents are not being solicited.

(2) Comments on Proposed Amendments

Some commenters

195

supported the proposed amendments, but a number of commenters

196

opposed eliminating certain Item 201(d) disclosure requirements. Some commenters expressed concern that the proposed amendments would eliminate the requirement to disclose the number of shares available for future issuance,

197

which they stated is material to shareholders.

198

Other commenters

199

opposed deleting the requirement to disclose the formula for calculating the number of securities available for issuance under the equity compensation plan.

200

These commenters indicated that such disclosure is not likely to occur without further clarification of how the general disclosure principle in U.S. GAAP applies to the calculation, and recommended we refer this item to the FASB for potential incorporation into U.S. GAAP. Additionally, some commenters opposed the deletion of the disaggregation disclosure requirement.

201

195

See

letters from E&Y; FedEx Corporation (Nov. 2, 2016) (“FedEx”); Grant; and KPMG.

196

See, e.g.

letters from AFL-CIO and AFR; CalSTRS; CalPERS; CAQ; and Public Citizen.

197

See

Instruction 5 of Item 201(d) of Regulation S-K.

198

See, e.g.

letter from AFL-CIO and AFR.

199

See

letters from CAQ; Deloitte; and PwC.

200

See

Instruction 8 of Item 201(d) of Regulation S-K.

201

See

letters from As You Sow,

et al.

and Public Citizen.

(3) Final Amendments

After further consideration, we are retaining the equity compensation plans disclosure requirements and are referring them to the FASB for potential incorporation into U.S. GAAP. We recognize the concerns expressed by commenters that U.S. GAAP does not explicitly require certain information, such as the formula for calculating the number of securities available for issuance under the plan. This information may be material to investors in making informed decisions about the scope of an issuer's equity compensation program and the potential dilutive effect, both economically and in voting power, of awards authorized for issuance under all equity compensation plans.

f. Ratio of Earnings to Fixed Charges

(1) Proposed Amendments

Regulation S-K requires issuers that register debt securities to disclose the historical and pro forma ratios of earnings to fixed charges.

202

Regulation S-K also requires issuers that register preference equity securities to disclose the historical and pro forma ratio of combined fixed charges and preference dividends to earnings (collectively, “ratio of earnings to fixed charges”).

203

Regulation S-K further requires the filing of an exhibit setting forth the computation of any ratio of earnings to fixed charges.

204

Similarly, Instruction 7 to “Instructions as to Exhibits” of Form 20-F requires foreign private issuers to disclose how any ratio of earnings to fixed charges presented in the filing was calculated. U.S. GAAP and IFRS require disclosure of many of the components commonly used in this ratio (

e.g.,

income, interest expense, lease expense), as well as information from which other ratios that convey reasonably similar information about an issuer's ability to meet its financial obligations may be computed.

202

See

Item 503(d) and Item 1010(a)(3) of Regulation M-A. These requirements only apply to non-SRCs.

See

Item 503(e) and Item 601(c) of Regulation S-K.

203

Id.

204

Item 601(b)(12).

A variety of analytical tools are available today to investors that may accomplish a similar objective as the ratio of earnings to fixed charges. This ratio measures the issuer's ability to service fixed financing expenses—specifically, interest expense, including management's approximation of the portion of lease expense that represents interest expense, and preference dividend requirements—from earnings. Other ratios that accomplish similar objectives include other variations of the ratio of earnings to fixed charges,

205

the interest coverage ratio,

206

and the debt-service coverage ratio,

207

which can be calculated based on information readily available in the financial statements. Certain components commonly used in the ratio of earnings to fixed charges, such as the portion of lease expense that represents interest

208

and the amortization of capitalized interest, are not readily available elsewhere. Despite this, the requirement to disclose the ratio of earnings to fixed charges, as opposed to the various components (

e.g.,

income, interest expense, lease expense) of this ratio that investors may use as desired, may place undue emphasis on this particular measure.

205

Other variations of the ratio of earnings to fixed charges include alternative earnings measures such as earnings before interest and taxes and alternative fixed charges measures such as total lease payments and one-third of lease payments (to approximate the interest component in lease payments).

206

The interest coverage ratio is often calculated as earnings before interest and taxes divided by interest payments.

207

The debt-service coverage ratio is often calculated as operating income divided by total debt service.

208

In January 2016, the IASB issued IFRS 16,

Leases,

which is effective on January 1, 2019, with early application permitted in certain circumstances. Under IFRS 16, interest expense will be recognized for all leases with a term of more than 12 months, unless the underlying asset is of low value. In February 2016, the FASB issued ASU No. 2016-02,

Leases (Topic 842)

(“ASU No. 2016-02”), which is effective for fiscal years beginning after December 15, 2018, with early application permitted. Under ASU No. 2016-02, leases with a term of more than 12 months will be classified into one of two types, with one type requiring recognition of an interest expense component (a finance lease) and the other type requiring recognition of lease expense without separate recognition of interest expense (an operating lease). Like IFRS 16, interest expense will not be recognized on leases with a term less than 12 months. Interested parties may still need to estimate the portion of lease expense that is viewed to represent interest for operating leases in order to determine the components of the ratio of earnings to fixed charges, which will be facilitated by disclosure of the weighted-average discount rate for operating leases required by ASU No. 2016-02.

Moreover, while debt agreements may contain fixed charge coverage covenants,

209

debt investors often negotiate contractual agreements with issuers to obtain financial information to meet their needs,

210

which may be more relevant and useful than a

prescribed disclosure of a ratio of earnings to fixed charges. Companies are also required to discuss the material impacts of these covenants to the extent that they are reasonably likely to limit the company's ability to undertake additional financing or are reasonably likely to be breached.

211

209

See

Gerald T. Nowak P.C.,

Negotiating the High-Yield Indenture,

(Feb. 17, 2009),

available at http://www.pli.edu/emktg/toolbox/HighYield_Indenture13.pdf

(noting that a typical high-yield credit agreement might require the debtor to maintain a certain level of revenue or a certain ratio of earnings to fixed charges).

See

also Li, Ningzhoung,

Performance Measures in Earnings-Based Financial Covenants in Debt Contracts,

LONDON BUS. SCH. (2011)

available at http://www.olin.wustl.edu/docs/Faculty/Performance_measures_in_earnings_based_financial_covenants.pdf

(noting that fixed charge coverage covenants are common in loan documents).

210

One commenter on the Disclosure Effectiveness Initiative stated: “Many of [the financial metrics debt investors use to evaluate an issuer's financial position and liquidity] are reflected in the measures of performance or liquidity that are defined in the issuers' debt instruments. For investors in such instruments, a metric that is tied to a contractually defined covenant test is more useful than the SEC-mandated disclosure. Importantly, our experience is that market participants in unregistered debt offerings—initial purchasers as well as institutional investors—do not generally request or require that the SEC-prescribed ratio of earnings to fixed charges be included in the offering document; instead, issuers disclose one or more interest coverage ratios or similar financial metrics that are calculated with reference to the instruments governing the securities being offered.”

See

letter from ABA Committee (Mar. 6, 2015), available at

https://www.sec.gov/comments/disclosure-effectiveness/disclosureeffectiveness-32.pdf.

211

See

2003 MD&A Release.

Based on these considerations, the Commission proposed to remove the requirement to disclose the ratio of earning to fixed charges by deleting Item 503(d) and Item 601(b)(12).

212

The Commission also proposed to delete Instruction 7 to “Instructions as to Exhibits” of Form 20-F.

212

The Commission additionally proposed conforming revisions to Item 503(e), Item 601(c), the Exhibit Table in Item 601, Item 1010(a)(3), Item 1010(b)(2), Item 1010(c)(4), Item 3 of Form S-1, Item 3 of Form S-3, Item 3 of Form S-4, Item 3 of Form S-11, Item 3 of Form F-1, Item 3 of Form F-3, and Item 3 of Form F-4.

(2) Comments on Proposed Amendments

Commenters were supportive of the proposed amendments.

213

One of these commenters indicated that, in its experience, the ratio of earnings to fixed charges is generally not used by investors or other users of financial statements, and debt covenant financial requirements may already be disclosed where material

214

and vary significantly from company to company.

215

Another commenter, while supportive of the proposed amendments, recommended that the Commission obtain feedback from investors about the continued utility of the pro forma ratio disclosure, as information on a pro forma basis may not be as readily available.

216

213

See, e.g.

letters from CAQ; CGCIV; National Association of Real Estate Investments Trusts (Oct. 28, 2016) (“NAREIT”); and Shearman and USCC.

214

For example, the 2003 MD&A release (

https://www.sec.gov/rules/interp/33-8350.htm

) states that if covenants limit, or are reasonably likely to limit, a company's ability to undertake financing to a material extent, the company is required to discuss the covenants in question and the consequences of the limitation to the company's financial condition and operating performance.

215

See

letter from FedEx.

216

See

letter from Deloitte.

(3) Final Amendments

We are adopting the amendments as proposed, including the elimination of the pro forma ratio. Although one commenter suggested that pro forma information may be less readily available, we note that information about the offering's effect on fixed charges, such as the interest rate, maturities, and amount of proceeds used to discharge indebtedness, is currently required by Item 504 of Regulation S-K.

217

Item 504 of Regulation S-K requires disclosure of the principal purposes for which the net proceeds to the registrant from the securities to be offered are intended to be used and the approximate amount intended to be used for each such purpose. In addition, Instruction 4 of Item 504 of Regulation S-K requires disclosure of the interest rate and maturity of such indebtedness, if any material part of the proceeds is to be used to discharge indebtedness.

g. Other

(1) Proposed Amendments

The table below describes each of the remaining disclosure requirements that are overlapping with U.S. GAAP and the proposed amendments.

218

These proposed amendments are discussed in further detail in Section III.C of the Proposing Release.

219

See, e.g.,

ASC 505-10-45.

220

As described in the Proposing Release, REITs are not subject to entity-level taxation on the amounts distributed to their investors. Rather, their investors are liable for taxes on these distributions, depending on the character of the dividends (

i.e.,

ordinary income, capital gains, or return of capital) the REIT distributes to them. Because the amount of undistributed gains or losses required by Rule 3-15(a)(2) of Regulation S-X is not presented on a tax basis, this disclosure does not provide investors with insight into the tax implications of the REIT's distributions.

221

See

ASC 810-10-45-12.

222

See

ASC 810-10-45-13.

223

See

ASC 946-20-50-11.

224

Similar to REITs, registered investment companies are generally structured such that they are not subject to entity-level taxation on the amounts distributed to their investors.

225

See

ASC 944-40-50.

226

See

ASC 250-10-50-1 and ASC 270-10-50-1g.

Topic

Commission disclosure

requirement(s)

Proposed amendments

REIT Disclosures—Undistributed Gains or Losses on the Sale of Properties

Rule 3-15(a)(2) of Regulation S-X

Delete as U.S. GAAP

219

also sets forth presentation of components of stockholders' equity and the incremental requirement to separately present undistributed gain/loss on the sale of properties on a book basis is not useful to investors because of the unique tax status of REITs.

220

Consolidation—Difference in Fiscal Periods

Rule 3A-02(b)(1) of Regulation S-X

Delete as U.S. GAAP

221

requires similar presentations. The incremental requirements in Rule 3A-02(b)(1) (1) to disclose the subsidiary's fiscal year closing date and (2) an explanation of the necessity for using different closing dates are no longer useful to investors because U.S. GAAP's requirements to recognize by disclosure or otherwise the effect of intervening events that materially affect the financial position or results of operations eliminates the effect of differences in the fiscal periods of the issuer and its subsidiaries.

Consolidation—Changes in Fiscal Periods

Final sentence of Rule 3A-03(b) of Regulation S-X

Delete the final sentence of this requirement as U.S. GAAP

222

provides similar, but more specific, requirements, which limit potential changes, provide for more consistency in issuer financial statements and result in better financial reporting.

Distributable Earnings for Registered Investment Companies

Rule 6-04.17 of Regulation S-X

Amend to require presentation of the total, rather than the components, of distributable earnings on the balance sheet. U.S. GAAP

223

requires similar presentation and the incremental requirement to separately present three components of distributable earnings on a book basis is not useful to investors because they do not provide insight into the tax implications of distributions.

224

Rule 6-09.7 of Regulation S-X

Delete the requirement for parenthetical disclosure of undistributed net investment income on the statement of changes in net assets on a book basis, as it does not provide insight into the tax implications of distributions.

Insurance Companies—Liability Assumptions

Rule 7-03(a)(13)(b) of Regulation S-X

Delete as U.S. GAAP

225

does not limit its disclosure to certain assumptions, and therefore, it may elicit more disclosure.

Interim Financial Statements—Changes in Accounting Principles

Rule 8-03(b)(5) and Rule 10-01(b)(6) of Regulation S-X

Delete the requirement for disclosure of the date of any material accounting change, as U.S. GAAP

226

requires disclosure of the accounting change in the period of the change.

(2) Comments on Proposed Amendments

Commenters supported these proposed amendments.

227

In addition, commenters identified another overlapping requirement in Regulation

S-X for Registered Investment Companies.

228

The commenters noted that Rule 6-09.3 of Regulation S-X requires separate disclosure of distributions paid to shareholders from (a) Investment income—net; (b) realized gain from investment transactions—net; and (c) other sources, while U.S. GAAP requires distributions paid to be disclosed as a single line item.

229

These commenters recommended amending Regulation S-X to align it with the requirements in U.S. GAAP.

227

See, e.g.

letters from CAQ and NAREIT.

228

See

letters from E&Y and Investment Company Institute (Nov. 2, 2016).

229

See

ASC 946-20-50-8.

(3) Final Amendments

We are adopting all of the amendments described in the table above as proposed. We are also amending Rule 6-09.3 of Regulation S-X, as suggested by commenters and similar to the amendments to Rule 6.04-17, to require presentation of the total, rather than the components, of distributions to shareholders, except for tax return of capital distributions. U.S. GAAP requires similar presentation of information as the Regulation S-X requirements, and the incremental requirement to separately present certain components is not useful to investors because of the unique tax status of registered investment companies.

2. Other Overlapping Disclosure Requirements

The Proposing Release also identified overlapping Commission disclosure requirements. These disclosure requirements and the related proposed amendments are described in the table below.

230

These proposed amendments are discussed in further detail in Section III.C of the Proposing Release.

Topic

Commission disclosure

requirement(s)

Proposed amendments

REIT Disclosures—Status as a REIT

Rule 3-15(b) of Regulation S-X

Delete, as Regulation S-K

231

requires similar disclosures and the incremental requirement to disclose assumptions in making or not making federal income tax provisions is encompassed by the disclosures provided to comply with Regulation S-K.

232

Dividends

Item 201(c)(1) of Regulation S-K

Delete requirement to disclose the frequency and amount of cash dividends declared, as amended Rule 3-04 of Regulation S-X

233

will require disclosure of the amount of dividends in interim periods, similar to Item 201(c)(1). In addition, the frequency of dividends will be evident from this disclosure.

Invitations for Competitive Bids

Item 601(b)(26) of Regulation S-K

234

Delete, as this disclosure does not provide additional value to investors because those participating in the competitive bid would directly receive the invitation and all other investors would have access to the registration statement covering the securities offered at competitive bidding, as well as the results of the competitive bidding and the terms of reoffering.

Commenters

supported the proposed amendments.

235

We are adopting all of the amendments described in the table above as proposed because investors will continue to receive similar information under other Commission disclosure requirements.

231

Items 101(a)(1), 503(c), and 303(a)(3)(ii) of Regulation S-K.

232

For REITs, the primary assumption in making or not making federal income tax provisions is the issuer's continued REIT status and its consideration of the risks affecting its continued REIT status. Therefore, the Regulation S-K requirement to disclose significant risk factors and a description of known uncertainties that are reasonably expected to have a material effect on income elicit this information. In addition, issuers often repeat or expand on the Regulation S-X disclosures in their risk factor disclosures.

233

In this release, we are adopting amendments to Rule 8-03 and Rule 10-01 of Regulation S-X to mandate that Rule 3-04 be applied to interim periods.

See

Section V.B.2 below.

234

The Commission also proposed to delete its accompanying reference in the Exhibit Table within Item 601.

235

See, e.g.

letters from CAQ; KPMG; and PwC.

3. Overlapping Disclosure Requirements With Both U.S. GAAP and Other Commission Disclosure Requirements

The Proposing Release identified several Commission disclosure requirements that overlap with both U.S. GAAP and other Commission disclosure requirements.

a. Interim Financial Statements—Pro Forma Business Combination Information

(1) Proposed Amendments

Regulation S-X

236

and U.S. GAAP

237

both require supplemental pro forma information about business combinations in the notes to interim financial statements. These disclosure requirements differ in two ways: (1) Scope and (2) the line items required to be disclosed. Notwithstanding these differences, the Proposing Release noted that U.S. GAAP and Item 9.01 of Form 8-K

238

result in disclosures reasonably similar to the corresponding requirements in Regulation S-X.

236

See

Rule 8-03(b)(4) and Rule 10-01(b)(4) of Regulation S-X. Rule 8-03(b)(4) specifically applies to SRCs and Regulation A issuers in a Tier 2 offering that report under U.S. GAAP, while 10-01(b)(4) applies to non-SRCs.

237

See

ASC 270-10-50-7, which refers to ASC 805-10-50-2h.3 for purposes of interim disclosures.

238

17 CFR 249.308.

Regulation S-X requires disclosure of pro forma information for “significant” business combinations for SRCs and Regulation A issuers in a Tier 2 offering that report under U.S. GAAP and “material” business combinations for non-SRCs. U.S. GAAP, on the other hand, does not qualify the size of the business combinations to which pro forma information requirements apply. Accordingly, the requirements in U.S. GAAP apply to the same or a greater number of business combinations and, thus, subsume the scope of the corresponding requirements in Regulation S-X.

With respect to the line items required to be disclosed, Regulation S-X requires disclosure of pro forma revenue, net income, net income attributable to the issuer, and net income per share. Regulation S-X also requires SRCs and Regulation A issuers in a Tier 2 offering that report under U.S. GAAP to disclose pro forma income from continuing operations. U.S. GAAP only requires disclosure of pro forma revenue and earnings. This difference resulted from changes to U.S. GAAP, in part to converge with IFRS, in 2007.

239

For additional discussion of this difference,

see

Section III.C.9 of the Proposing Release,

supra

note 1, at 51621.

As a result of these changes, issuers are required to disclose more pro forma information about business combinations in interim periods than in annual periods,

240

even though Regulation S-X generally imposes fewer obligations with regard to interim

financial statements.

241

Moreover, Rule 8-03(b)(4) requires SRCs and Regulation A issuers in a Tier 2 offering that report under U.S. GAAP to present more line items than the corresponding requirement in Rule 10-01(b)(4) for non-SRCs, even though Commission disclosure requirements, as a general matter, provide certain accommodations for SRCs

242

and Regulation A issuers.

240

See

ASC 805-10-50-2h.3.

241

For example, Article 8 and Article 10 of Regulation S-X permit the presentation of condensed financial statements, do not require audits of interim financial statements, allow issuers to assume that a user has read the preceding year's audited financial statements, permit omission of details of accounts that have not changed significantly since the audited balance sheet date, and permit omission of the disclosures required by Rule 4-08 of Regulation S-X.

242

For example, SRCs are required to present two, rather than three, years of financial statements and are not required to present selected financial data in accordance with Item 301 of Regulation S-K [17 CFR 229.301].

In proposing these amendments, the Commission noted that Item 9.01 of Form 8-K mitigates at least in part the absence of a U.S. GAAP requirement to present pro forma earnings per share, as it requires SRCs and non-SRCs to file pro forma financial information for significant acquisitions, including earnings per share, through the issuer's most recently filed balance sheet.

243

We note, however, this pro forma financial information would not cover the same periods as the pro forma information required under Rule 8-03(b)(4) and Rule 10-01(b)(4) for SRCs and non-SRCs, and Form 8-K does not apply to Regulation A issuers.

244

243

Rule 11-01(a) and Rule 11-02(b)(7) of Regulation S-X. [17 CFR 210.11-01(a)].

244

For example, for a significant acquisition that occurs on September 1, 2015, the Form 8-K would contain pro forma financial information for the year ended December 31, 2014 and the six months ended June 30, 2015 and 2014. Under Rule 8-03(b)(4) and Rule 10-01(b)(4), however, the Form 10-Q for the nine months ended September 30, 2015 would be required to include pro forma disclosures for the nine months ended September 30, 2015 and 2014.

Based on the foregoing, the Commission proposed to eliminate the requirements for pro forma financial information in interim filings for business combinations in Rule 8-03(b)(4) and Rule 10-01(b)(4).

(2) Comments on Proposed Amendments

Several commenters supported the proposal to eliminate pro forma business combination financial information in interim filings.

245

However, other commenters opposed eliminating these requirements, expressing concern over the level of disclosure about merger and acquisition activities.

246

One commenter stated that frequent financial reporting about mergers, such as pro forma results on an interim basis, results in the issuer more timely identifying and disclosing problems related to a merger.

247

Another commenter recommended the disclosure requirements be improved rather than deleted because they provide a window into merger and acquisition activities.

248

245

See

letters from CAQ; Deloitte; E&Y; Grant; KPMG, and PwC.

246

See

letters from As You Sow, et al. and Zevin.

247

See

letter from Public Citizen.

248

See

letter from Zevin.

(3) Final Amendments

We are deleting the requirement for pro forma financial information in interim filings for business combinations in Rule 8-03(b)(4) and Rule 10-01(b)(4) as proposed. We continue to believe that U.S. GAAP, and Item 9.01 of Form 8-K for SRCs and non-SRCs, result in reasonably similar disclosures as the corresponding requirements we are deleting. We also believe the elimination of these requirements will not result in less frequent financial reporting about mergers and their impact on issuers because U.S. GAAP will continue to require disclosure of such activities in interim periods as well as year-end.

249

See

ASC 270-10-50, which requires disclosure of unusual and infrequent items and references business combinations.

b. Interim Financial Statements—Dispositions by SRCs and Tier 2 Regulation A Issuers

(1) Proposed Amendments

For significant dispositions, Regulation S-X requires SRCs and Regulation A issuers in a Tier 2 offering that report under U.S. GAAP to disclose in the notes to the financial statements pro forma information. The pro forma disclosure requirements for dispositions for these issuers are the same as described above for significant business combinations.

250

See

Rule 8-03(b)(4) of Regulation S-X, which requires pro forma revenue, income from continuing operations, net income, net income attributable to the issuer, and net income per share for all interim periods presented, as though the disposition occurred at the beginning of the periods.

There are two types of dispositions: (1) Those that meet the definition of discontinued operations and (2) all others (hereafter referred to as “other dispositions”). U.S. GAAP requires that the effects of discontinued operations be isolated and separately presented on the income statement on a retrospective basis,

251

thereby obviating the need for pro forma information for discontinued operations in the notes to the financial statements.

251

See

ASC 205-20-45.

For other dispositions, we believe the disclosures required by U.S. GAAP generally result in reasonably similar disclosures as the pro forma disclosures mandated by Rule 8-03(b)(4). Specifically, U.S. GAAP requires disclosure of pre-tax profit and pre-tax profit attributable to the parent for individually significant dispositions for all interim periods presented.

252

However, U.S. GAAP does not contain an equivalent to the requirement in Rule 8-03(b)(4) to disclose pro forma revenues as if the other disposal occurred at the beginning of the periods presented.

252

See

ASC 270-10-50-7, which refers to ASC 360-10-50-3A for purposes of interim disclosures.

The Proposing Release noted that Item 9.01(b) of Form 8-K may help mitigate any loss of information about pro forma revenues, as it requires SRCs to file within four business days after a significant disposition, pro forma financial information pursuant to Rule 8-05 of Regulation S-X, including revenue, income from continuing operations, and income per share, through the most recently filed balance sheet date. This pro forma financial information would not cover the same periods as the separate results required under Rule 8-03(b)(4) and is not applicable to Regulation A issuers.

253

For example, for a significant disposal that occurs on August 3, 2017, the Form 8-K filed by August 7, 2017, would contain pro forma financial information for the year ended December 31, 2016 and the three months ended March 31, 2017 and 2016, as if the disposal had occurred on January 1, 2016. In contrast, Rule 8-03(b)(4) would require pro forma disclosures in the September 30, 2017 interim financial statements, filed on Form 10-Q by November 16, 2017, for the nine months ended September 30, 2017 and 2016, as if the disposal had occurred at the beginning of each period presented.

In addition, Rule 8-03(b)(4) requires SRCs and Regulation A issuers in a Tier 2 offering that report under U.S. GAAP to disclose more information about dispositions in interim periods than in annual periods,

254

even though Regulation S-X, as noted above, generally imposes fewer obligations with regard to interim financial statements. Moreover, Rule 8-03(b)(4) requires SRCs and Regulation A issuers in a Tier 2 offering that report under U.S. GAAP to disclose more extensive information about other dispositions than is required of non-SRCs,

255

even though Commission disclosure requirements, as a general matter, provide certain scaled disclosure accommodations for SRCs.

256

254

See

ASC 360-10-50-3A.

255

See

Rule 10-01(b)(5) of Regulation S-X.

256

See supra

note 234.

Accordingly, the Commission proposed to delete the pro forma disclosure requirements in Rule 8-03(b)(4).

(2) Comments on Proposed Amendments

Commenters

257

indicated that the requirement in Item 9.01 of Form 8-K

258

to provide pro forma financial information pursuant to Rule 8-05 does not sufficiently substitute for the pro forma disclosure requirement for significant dispositions in Rule 8-03(b)(4) for SRCs because Item 9.01 of Form 8-K only refers to significant acquisitions and does not reference dispositions. Several of these commenters were nevertheless supportive of the proposed deletion because, in their observation, a number of issuers provide pro forma information for significant dispositions under Item 9.01 of Form 8-K despite there not being an explicit requirement.

259

Some commenters recommended that the Commission amend Article 8 to encompass significant dispositions.

260

257

See

letters from BDO USA LLP (November 1, 2016) (“BDO”); CAQ; Deloitte; E&Y; and PwC.

258

Item 9.01(b)(1) of Form 8-K states, “For any transaction required to be described in answer to Item 2.01 of this form, furnish any pro forma financial information that would be required pursuant to Article 11 of Regulation S-X [17 CFR 210] or Rule 8-05 of Regulation S-X [17 CFR 210.8-05] for smaller reporting companies.”

259

See

letters from BDO; CAQ; Deloitte; E&Y; Grant; KPMG; and PwC.

260

See

letters from BDO; CAQ; Deloitte; E&Y; and PwC.

(3) Final Amendments

After further consideration, we are retaining the pro forma disposition disclosure requirement in Rule 8-03(b)(4). We believe the views expressed by commenters about Item 9.01(b) of Form 8-K and its reference to the pro forma requirements for significant acquisitions in Article 8 of Regulation S-X

261

warrant additional analysis and consideration.

261

Rule 8-05 of Regulation S-X.

c. Segments

(1) Proposed Amendments

Item 101(b) of Regulation S-K requires disclosure of segment financial information, restatement of prior periods when reportable segments change, and discussion of interim segment performance that may not be indicative of current or future operations. U.S. GAAP

262

and Item 303(b) of Regulation S-K

263

require similar disclosures. Moreover, Item 101(b) explicitly permits issuers to cross-reference between the notes to the financial statements and the description of business to avoid duplicative disclosures about segments. The Commission, therefore, proposed to delete Item 101(b).

262

See

ASC 280-10-50-22, ASC 280-10-50-34, and ASC 280-10-50-35.

263

Specifically, Instruction 4 of Item 303(b) of Regulation S-K, which addresses interim periods, requires that the registrant's discussion of material changes in results of operations shall identify any significant elements of the registrant's income or loss from continuing operations which do not arise from or are not necessarily representative of the registrant's ongoing business. The introductory paragraph to Item 303(b) also states that the interim discussion and analysis shall include a discussion of material changes in those items specifically listed in paragraph (a) of the Item. Since paragraph (a) indicates that, where in a registrant's judgment a discussion of segment information or of other subdivisions of the registrant's business would be appropriate to an understanding of such business, the discussion shall focus on each relevant, reportable segment or other subdivision of the business and on the registrant as a whole, the requirement in Item 101(b)(2) of Regulation S-K is duplicative of Item 303 requirements.

Regulation A issuers are similarly required to cross-reference to their segment disclosures under U.S. GAAP or IFRS.

264

The Commission, therefore, also proposed to delete Item 7(b) of Form 1-A.

264

See

Item 7(b) of Form 1-A.

Because the disclosure required by Item 101(b) of Regulation S-K and Item 7(b) of Form 1-A (or the cross-reference to the notes to the financial statements) are located in the business description section of the filing, while the corresponding U.S. GAAP disclosures are in the notes to the financial statements, the Commission noted in the Proposing Release that the proposed elimination gives rise to Disclosure Location—Prominence Considerations.

(2) Comments on Proposed Amendments

Most commenters supported the proposed amendments.

265

One of these commenters

266

observed that another disclosure requirement,

267

which requires segment disclosures for each year an audited financial statement is provided, also overlaps with U.S. GAAP.

268

One commenter opposed the proposed amendments, stating that the segment disclosures in Item 101(b) of Regulation S-K, along with other disclosures required by Item 101, are necessary in assessing and understanding a company's ability to create long-term value for shareholders.

269

265

See

letters from CAQ; Deloitte; E&Y; Grant; KPMG; and PwC.

266

See

letter from Deloitte.

267

See

Rule 3-03(e) of Regulation S-X.

268

See

ASC 280-10-50-20.

269

See

letter from CalSTRS.

(3) Final Amendments

We are eliminating the requirements in Item 101(b) of Regulation S-K and Item 7(b) of Form 1-A as proposed. While this will remove the requirement to provide financial information about segments in the business description section, these disclosures will continue to be available in the notes to the financial statements. Accordingly, we do not believe eliminating the requirement will affect the assessment and understanding of a company's ability to create long-term value for shareholders. Additionally, we are eliminating Rule 3-03(e) of Regulation S-X, as suggested by a commenter, because it is also redundant with U.S. GAAP.

270

Further, U.S. GAAP requirements are broader than Rule 3-03(e) because U.S. GAAP requires segment disclosures for all periods for which a statement of income is provided, including unaudited interim periods, while Rule 3-03(e) requires the disclosure for each year for which an audited statement of income is provided.

270

See

ASC 280-10-50-20

d. Geographic Areas

(1) Proposed Amendments

Regulation S-K

271

requires disclosure of financial information by geographic area. U.S. GAAP requires similar disclosures.

272

Item 101(d)(2) explicitly permits issuers to cross-reference between the notes to the financial statements and the description of business to avoid duplicative disclosures about geographic areas. The Commission, therefore, proposed to delete Item 101(d)(1) and Item 101(d)(2).

271

Items 101(d)(1) and 101(d)(2).

272

See

ASC 280-10-50-41.

Further, Item 101(d)(3) of Regulation S-K requires disclosures of any risks associated with an issuer's foreign operations and any segment's dependence on foreign operations. The Proposing Release stated that Item 101(d)(3) requires disclosures that appear to be largely encompassed by the disclosures that result from compliance with other parts of Regulation S-K. For example, Item 503(c) of Regulation S-K requires disclosure of significant risk factors.

In addition, Item 303(a) of Regulation S-K requires disclosure of trends and uncertainties by segment, if appropriate to an understanding of the issuer as a whole, which would include disclosure of a segment's dependence on foreign operations. The Commission, therefore, proposed to delete Item 101(d)(3).

(2) Comments on Proposed Amendments

Most commenters

273

were supportive of the proposed amendment, while a few commenters

274

opposed it. One commenter stated that the geographic area disclosures, along with other disclosures required by Item 101, are necessary in assessing and understanding a company's ability to create long-term value for shareholders.

275

Another commenter expressed concern that the Commission is proposing to reduce information about the geographic segments of a business when geographic factors are growing in importance (

i.e.,

foreign tax consideration).

276

This commenter further suggested that the Commission should simultaneously add explicit references to geographic factors in the required discussions of business risk and trends, if Items 101(d)(l)-(3) are eliminated.

273

See

letters from CAQ; Deloitte; E&Y; Grant; KPMG; and PwC.

274

See

letters from Bean; and CalSTRS.

275

See

letter from CalSTRS.

276

See

letter from Bean.

(3) Final Amendments

We are eliminating the requirements in Item 101(d) as proposed. We believe that U.S. GAAP requires reasonably similar disclosures and note that Item 101(d)(2) explicitly permits issuers to cross-reference between the notes to the financial statements and the description of business to avoid duplicative disclosures about geographic areas. Further, we are amending, as proposed, Item 303(a) of Regulation S-K to add an explicit reference to “geographic areas.”

277

We believe this requirement, along with the disclosures required under Item 503(c) of Regulation S-K, will provide the disclosure necessary to understand the risks associated with geographic factors and to assess a company's ability to create long-term value for shareholders.

277

See

discussion in Section III.C.3 below.

e. Seasonality

(1) Proposed Amendments

Regulation S-K

278

and U.S. GAAP

279

both require disclosures about seasonality in interim periods. Item 101(c)(1)(v) of Regulation S-K requires annual seasonality disclosure. Seasonality, by definition, relates to variations within annual periods, so the effects of seasonality are not evident in annual financial statements. The Proposing Release stated that interim seasonality disclosures required under U.S. GAAP seem more useful to investors than annual seasonality disclosures.

278

Instruction 5 to Item 303(b) of Regulation S-K requires a discussion of any seasonal aspects of an issuer's business where the effect is material.

279

See

ASC 270-10-45-11.

Item 101(c)(1)(v), unlike U.S. GAAP, incrementally requires seasonality disclosure at the segment level, to the extent material to an understanding of the business as a whole. Item 303(b) of Regulation S-K requires disclosure of results of operations, liquidity, and capital resources in interim periods at the segment level, when appropriate to an understanding of the business.

280

Accordingly, the Proposing Release stated that Item 303(b), in conjunction with U.S. GAAP, would seem to result in reasonably similar disclosures as Item 101(c)(1)(v) about the effects of seasonality on an issuer's financial statements at the segment level, if material and appropriate to an understanding of the business. The Commission therefore proposed to delete Item 101(c)(1)(iv). Because the disclosures required by Item 101(c)(1)(v) are located in the business description section, while the corresponding disclosures required by Item 303(b) and U.S. GAAP are in MD&A and the notes to the financial statements, the proposed amendment gives rise to Disclosure Location—Prominence Considerations.

280

Specifically, Item 303(b) requires discussion of material changes in the items listed in Item 303(a). Item 303(a) requires discussion at the reportable segment level when appropriate to an understanding of the business.

The Commission also proposed to delete Instruction 5 to Item 303(b) of Regulation S-K because it requires disclosures that convey reasonably similar information to the disclosures that result from compliance with U.S. GAAP.

281

The proposed deletion of Instruction 5 to Item 303(b) gives rise to Disclosure Location—Prominence Considerations because U.S. GAAP requires seasonality disclosures in the financial statements, whereas Instruction 5 requires disclosure in MD&A.

281

See

ASC 270-10-45-11.

See

also Item 101(c)(1)(v) of Regulation S-K.

(2) Comments on Proposed Amendments

Most commenters supported the proposed amendments.

282

Some of these commenters also provided their views on the Disclosure Location Considerations.

283

For example, one commenter, who supported both proposed amendments, indicated that U.S. GAAP requires disclosure about seasonality when the interim financial statements reflect material seasonal variations, but it does not require disclosure when an issuer expects interim financial results to become seasonal or an issuer expects the seasonal financial results to change significantly in the future.

284

Another commenter recommended that the Commission consider feedback from preparers and users about the potential for registrants to reduce any voluntary information about seasonality that may currently be provided that is subject to the safe harbor provisions of the PSLRA.

285

282

See

letters from CAQ; CGCIV; Deloitte; E&Y; Grant; KPMG; PwC; and USCC.

283

See

letters from CAQ and KPMG.

284

See

letter from CAQ.

285

See

letter from KPMG.

One commenter opposed the proposed amendments indicating that these disclosures, along with other disclosures required by Item 101, are necessary in assessing and understanding a company's ability to create long-term value for shareholders.

286

See

letter from CalSTRS.

(3) Final Amendments

We are adopting as proposed the elimination of Instruction 5 to Item 303(b). We continue to believe that U.S. GAAP in combination with the remainder of Item 303 requires disclosures in interim reports that convey reasonably similar information to the disclosures required by Instruction 5 to Item 303(b). We also believe that, even without this instruction, the requirements in Item 303 elicit disclosure of forward-looking information in interim reports to the extent that the effects of seasonality may become material.

287

However, we are retaining the seasonality disclosure requirements in annual reports in Item 101(c)(1)(v), due to a concern about potential loss of information in the fourth quarter about the extent to which the business of an issuer or its segment(s) is or may be seasonal because U.S. GAAP may not elicit this disclosure.

288

287

See

2003 MD&A Release.

288

ASC 270-10-45-11 states that entities should consider supplementing interim reports with information for 12-month periods ended at the interim date to avoid the possibility that interim results with material seasonal variations may be taken as fairly indicative of the estimated results for a full fiscal year.

f. Other

The table below describes each of the remaining disclosure requirements that are overlapping with both U.S. GAAP and other Commission disclosure requirements. The related proposed amendments to delete those overlapping

Commission disclosure requirements are also discussed below.

289

These proposed amendments are discussed in further detail in Section III.C. of the Proposing Release.

Topic

Commission requirement

Proposed amendments

Insurance Companies—Reinsurance Transactions

Rule 7-03(a)(13)(c) of Regulation S-X

Delete, as this provision requires disclosures that are encompassed by the disclosures that result from compliance with U.S. GAAP

290

and Regulation S-K.

291

Interim Financial Statements—Material Events Subsequent to the End of the Most Recent Fiscal Year

Rule 8-03(b)(2) and Rule 10-01(a)(5) of Regulation S-X

Delete the requirements to disclose material events subsequent to the end of the most recent fiscal year, as they require disclosures that are encompassed by the disclosures that result from compliance with U.S. GAAP

292

and Regulation S-K,

293

in combination.

Commenters

generally supported the proposed amendments,

294

and no commenter specifically opposed the amendments. Accordingly, we are adopting all of the amendments described in the table above as proposed.

290

See

ASC 944-20-50-3 and ASC 944-20-50-4.

291

See

Item 303(a)(3)(i) of Regulation S-K.

292

See

ASC 270-10-50-1 and 7.

293

See

Item 303(b) of Regulation S-K (or Item 9 of Form 1-A and Item 1 of Form 1-SA for Regulation A issuers).

294

See

letters from CAQ; Deloitte; E&Y; Grant; KPMG; and PwC.

C. Overlapping Requirements—Proposed Integrations

In the proposing release, the Commission discussed disclosure requirements that overlap with, but require information incremental to, other Commission disclosure requirements. In these cases, the Commission proposed to integrate the overlapping Commission disclosure requirements.

1. Foreign Currency Restrictions

a. Proposed Amendments

If consolidation of foreign subsidiaries is deemed appropriate notwithstanding the presence of foreign currency exchange restrictions, Rule 3A-02(d) of Regulation S-X requires disclosure of the effect of foreign subsidiaries' currency exchange restrictions upon the consolidated financial position and operating results of the issuer and its subsidiaries. To streamline Commission disclosure requirements, the Commission proposed to relocate this requirement to Rule 3-20(b)

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