With the potential for a significant change in the corporate tax rate (35% to 20%) this month as a result of the tax bill in Congress, we are re-posting a potential sleeper issue that could arise for some companies in their Q4 and FYE results. If a tax bill is enacted with a lower corporate tax rate (e.g., new 20% rate), companies will need to recalculate their deferred tax assets and deferred tax liabilities on their balance sheets based on the new rate as the assets and liabilities need to be adjusted in the period of enactment. Any charges would flow through to the companies’ income statements.
We thought you may find of interest prepared remarks by SEC Chairman Jay Clayton at the annual Government-Business Forum on Small Business Capital Formation held on November 30, 2017, where he stated, “In the coming months I anticipate that the Commission will consider adopting rules to expand the definition of ‘smaller reporting company’ to permit additional companies to avail themselves of scaled disclosure requirements.” A full transcript of the speech is available at the SEC’s website.
Proposed Rules Would Change Qualifications for Smaller Reporting Companies
As you may recall, in July 2016 the SEC voted to propose amendments that would increase the financial thresholds in the “smaller reporting company” definition. The proposed rules would enable a company with less than $250 million of public float to provide scaled disclosures as a smaller reporting company, as compared to the $75 million threshold under the current definition. The SEC did not, however, propose to increase the $75 million threshold in the “accelerated filer” definition.
As a result, under the proposed rules, a company with a public float between $75 million and $250 million would qualify as a smaller reporting company for scaled disclosure purposes but would be subject to other filing requirements that currently apply to accelerated filers, including the timing of the filing of periodic reports and the requirement that accelerated filers provide the auditor’s attestation of management’s assessment of internal controls over reporting required by Section 404(b) of the Sarbanes-Oxley Act of 2002.
Recall also that, exclusive of any scaled disclosure permitted due to a company’s classification as a smaller reporting company, a company may also be classified as an “emerging growth company” and take advantage of certain reduced disclosure requirements pursuant to the Jumpstart Our Business Startups Act of 2012 (JOBS Act), some of which overlap with smaller reporting companies and others that offer additional disclosure relief.
Recently, the house panel approved to raise the Reg A+ IPO limit to $75 million designed to bolster capital-raising efforts. The “moving up [to $75 million] could have a positive impact for smaller companies because it may attract some of the more traditional underwriters to the process. By attracting more sophisticated parties to the transaction, that could help facilitate raising capital.”
The full article, “House Panel Approves Bill Lifting Reg A+ IPO Limit To $75M,” was published by Law360 on November 16, 2017, and is available online.
I provided insight in a recent Law360 article on the CEO pay ratio disclosure requirements mandated by the Dodd-Frank Act. The disclosure requires that public companies disclose the compensation of its chief executive and its median average employee, as well as the ratio between the two. Companies will soon have to comply by disclosing the pay gap for fiscal 2017 in their annual 10-K reports and in their 2018 proxy statements.
In a recently published Accounting Today article, I provided insight on the impact of the new audit report standard from the Public Company Accounting Oversight Board (PCAOB), which was approved by the Securities and Exchange Commission (SEC) on October 23. The new standard — which is the first significant change to the audit report in over 70 years – expands the scope of the audit report by requiring a discussion of “critical audit matters” and a disclosure of auditor tenure.
In monitoring SEC comment letters, we came across this SEC comment letter made public this month. It serves as a reminder to registrants that, when calculating a company’s public float, there is an informal presumption that a 10% or greater stockholder is an affiliate of the company; however, this presumption is rebuttable by the registrant.
The letter stated that “[t]he Staff has consistently taken the position that the determination of ‘control’ status is dependent in large part on the facts and circumstances involved and, therefore, has declined to state definitively what circumstances will result in a person being deemed to be in ‘control’ of an issuer. While the Company recognizes that, as a rule of thumb, more than 10% ownership has become an informal benchmark at which control should be evaluated, such ownership, standing alone, is not dispositive.”
In a Bloomberg BNA article, I provided insight on what future additional updates the SEC Staff could be focusing on following the Commission’s announcement of proposed amendments to Regulation S-K last week. The article quotes Elizabeth Murphy, an associate director in the SEC Division of Corporation Finance, from an October 18 Association of Corporate Counsel conference discussion saying the SEC has “more to come from our Reg S-K disclosure initiative,” but did not specify any particular recommendations to Regulation S-K the Commission plans to focus on. I noted that the Staff might continue to focus on MD&A disclosures and Regulation S-K’s Item 101, the narrative description of the business. In those areas, many comments on the concept release urged the SEC to “move from prescriptive rules to a more principles-based approach,” I explained in the article. “Given how fundamental these S-K sections are to SEC filings generally, it seems reasonable to believe the SEC Staff would develop recommendations to these rules for Commission consideration.”
The full article, “More SEC Proposals on Disclosure Rule Coming, Official Says,” was published on October 18, 2017, by Bloomberg BNA and is available online.
On October 11, the SEC proposed amendments to modernize and simplify disclosure requirements in Regulation S-K, which were mandated by the Fixing America’s Surface Transportation (FAST) Act. In large part, the proposed amendments follow the recommendations of a November 2016 report from the SEC staff. As one SEC commissioner put it, the incremental adjustments to Regulation S-K are meant to “prune” the SEC’s existing disclosure regime rather than as “an exercise in slash-and-burn clearcutting.”
Below are six highlights from the SEC’s proposed amendments to Regulation S-K:
- Rules for Management’s Discussion and Analysis (MD&A) would be amended to clarify that a registrant need only provide a period-to-period comparison for the two most recent fiscal years presented in the financial statements and may hyperlink to the prior year’s annual report for additional period-to-period comparison. The proposed amendments would require hyperlinks to information that is incorporated by reference if that information is available on EDGAR. Instruction 1 to Item 303(a).
On August 5, 2015, the SEC adopted new rules implementing the pay ratio disclosure requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). Section 953(b) of the Dodd-Frank Act required the SEC to adopt rules requiring reporting companies to disclose the ratio of the annual compensation of the company’s median employee to the annual compensation of its principal executive officer. These rules will become effective generally for companies in their Form 10-K for the 2017 fiscal year or in their proxy statement for the 2018 annual meeting. Below are some frequently asked questions that companies should be considering now in preparing for this new disclosure.
1. What are the new rules on pay ratio generally?
The new rules are contained in a new Item 402(u) of Regulation S-K added by the SEC. Item 402(u) generally requires companies to disclose
- the median of the annual total compensation of all company employees other than the company principal executive officer (PEO),
- the PEO’s annual total compensation, and
- the ratio between the two numbers.
I recently provided insight for an article published in Compliance Week on the SEC’s pay ratio rule, which will require companies to disclose for the first time in their 2018 proxy statements the ratio between the median annual total compensation of all employees and the annual total compensation of its CEO. While the rule has brought some opposition, companies should still keep an eye out for developments in Washington and the SEC, but should not have unrealistic expectations. As I point out in the article, “given all the dynamics and the make-up of the Commission still evolving, companies should proceed with things the way they are now, with the rule in effect.” While there may be possibilities for some type of alleviation, companies should not rely on that to avoid delaying any adjustments needed to be made in preparation.