This is the second article in a series about preparing annual reports on Form 20-F.(1) For companies with a calendar year end, Form 20-F must be filed with the Securities and Exchange Commission (SEC) by 30 April 2021.
New SEC guidance and amendments
In 2020 the SEC issued new guidance and adopted amendments to its rules and forms, including Form 20-F, to modernise and simplify disclosure requirements. Registrants should consider the guidance on key performance indicators (KPIs) and management discussion and analysis (MD&A) disclosure, and the related amendments, when preparing Form 20-F.
KPIs and other metrics
The new guidance promotes the disclosure of KPIs and other metrics to facilitate the SEC's goal of enabling investors to see a company "through the eyes of management". The guidance, which came into effect on 25 February 2020, reminds companies that when including such metrics in their disclosure, they should consider existing MD&A requirements and the need to include any other material information necessary to ensure that the presentation of the metrics is not misleading. As such, the guidance recommends that to accurately define and disclose any metrics, the disclosure should include:
- a clear definition of the metric and how it is calculated;
- a statement that indicates why the metric provides useful information to investors; and
- a statement that indicates how management uses the metric in managing or monitoring business performance.
These disclosures are consistent with those that the SEC has encouraged over recent years in public statements and comment letters. However, such specific commission-level guidance will likely lead to additional focus on disclosures about KPIs and other metrics that companies include in their operating results discussions.
Revised MD&A rules
In January 2020 the SEC also issued guidance to clarify foreign private issuers' (FPI's) ability to omit discussion of the earliest of the three years in the MD&A included in their filings. Where FPIs omit such discussion in a filing, the required statement that identifies the location of a discussion in a prior filing does not result in the prior discussion being incorporated by reference into the filing.
The guidance clarifies that if an FPI believes that a discussion of the earliest of three years in a filing is necessary to understand its financial condition, changes in condition and operation results, it may not omit the discussion, pursuant to the new rules.
Amendments to modernise and enhance MD&A disclosure
In November 2020 the SEC adopted amendments to simplify, modernise and enhance MD&A and other financial disclosures. The amendments came into effect on 10 February 2021 and compliance is required in the first fiscal year that ends on or after 9 August 2021. Therefore, companies with calendar year ends need not comply with the amendments for the 2020 Form 20-F. However, companies may voluntarily comply with the amendments, provided that they adopt the amended item in its entirety.
The key changes include:
- eliminating Item 3(A) from Form 20-F, which requires disclosure of selected financial data for the past five years;
- revising Item 5 of Form 20-F to specify that the discussion must include a quantitative and qualitative description of the reasons that underlie material changes, including where material changes within a line item offset each other;
- amending Item 5(A)(2) of Form 20-F to require disclosure only of hyperinflation (the existing standard requires disclosure of inflation if material and hyperinflation if the currency in which the financial statements are presented is of a country that has experienced hyperinflation);
- revising the liquidity and capital resources requirement in Item 5(B) of Form 20-F to specify that registrants must broadly disclose material cash commitments, not just capital expenditures;
- changing Item 5(D) of Form 20-F to require disclosure of 'material trends' instead of 'the most significant recent trends';
- replacing Item 5(E) of Form 20-F, which requires disclosure of material off-balance sheet arrangements in a separate section, with a principles-based instruction to include a discussion of material commitments in the liquidity and capital resources discussion;
- eliminating the requirement for a contractual obligations table in Item 5(F) of Form 20-F and replacing it with the disclosure of material cash requirements from known contractual and other obligations as part of the liquidity and capital resources discussion; and
- adding a requirement for registrants to disclose critical accounting estimates, which codifies previous SEC guidance.
Registrants are expected to adopt some of these amendments, particularly those relating to Items 3(A), 5(D) and 5(E), for the 2020 annual reports on Form 20-F.
Risk factor disclosure
In August 2020 the SEC adopted amendments to modernise certain disclosure requirements in Regulation S-K.(2) These amendments, which came into effect on 9 November 2020, seek to simplify compliance requirements and improve the readability of disclosure documents by discouraging the inclusion of immaterial information and eliminating repetition. The updates address the following Regulation S-K disclosures:
- Item 101 (description of business);
- Item 103 (legal proceedings); and
- Item 105 (risk factor disclosure).
These changes generally align with the recent changes to the EU Prospectus Regulation (2017/1129).
The final amendments to Items 101 and 103 affect only domestic companies and FPIs that have elected to file on domestic forms. In contrast, the amendments to Item 105 apply to the 2020 Form 20-F in that the 20-F disclosure is incorporated by reference into an FPI's SEC registration statement. The updates to the risk factor disclosure include the following changes:
- If the risk factor section exceeds 15 pages, registrants must provide a summary section of no more than two pages which consists of concise, bulleted or numbered statements that summarise the principal factors that make an investment in the company or offering speculative or risky.
- The disclosure standard has changed from the disclosure of the 'most significant' risks to the disclosure of 'material' risk factors.
- Risk factors must be organised under relevant headings (in addition to the sub-captions currently required), with any risk factors that may generally apply to an investment in securities disclosed at the end of the risk factor section under a separate heading.
While both domestic issuers and FPIs have begun to incorporate these changes into their reports, there does not yet appear to be a consistent approach to how the required risk factor summary section should be presented. Informal discussions with SEC staff suggest that a simple bullet point list of certain risk factors will be insufficient. Accordingly, companies are advised to analyse material risk factors within each category and provide a summary of one to two sentences for each applicable risk factor, along with a heading.
As part of the various updates introduced over the past year, Form 20-F's cover page has been updated to include a box to be ticked if an FPI has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act by the registered public accounting firm that prepared or issued its audit report. FPIs need not file a separate exhibit as the report is included as part of the auditor's report that precedes the financial statements.
In line with the August 2019 Compliance and Disclosure Interpretations, which clarified the applicability of the new Inline eXtensible Business Reporting Language (XBRL) requirements, FPIs must comply with the Inline XBRL requirements based on their filer status and basis of accounting. As such, for FPIs that prepare their financial statements in accordance with the International Financial Reporting Standards, the Inline XBRL requirements will apply to Form 20-Fs on the first fiscal year that ends on or after 15 June 2021.
Replacement of Industry Guide 3
In September 2020 the SEC finalised rules to replace Industry Guide 3, the industry guide for banking organisations.(3) In addition to streamlining Industry Guide 3-type disclosures since 1986, the rules eliminate several requirements which were formerly established under Industry Guide 3 and, under applicable accounting rules, are now captured in the financial statements.
The new rules will apply on the first fiscal year that ends or after 15 December 2021. While voluntary compliance with the new rules is accepted in advance of the mandatory compliance date (provided that the rules are adopted in their entirety), widespread early adoption is not expected, given that registrants will need time to coordinate these changes with their public accounting firm. Industry Guide 3 will be rescinded from 1 January 2023.
Between 1 October 2020 and 20 September 2021, the SEC filing fee for registration statements will decrease to $109.10 per $1 million of securities registered.
Endnotes
(1) For the first article in the series, please see "Annual reports: developments and trends to consider for Form 20-F".
(2) For further information please see "SEC approves final amendments modernising disclosure requirements of Regulation S-K".
(3) For further information please see "At long last – SEC modernises Guide 3 disclosures for banking registrants".
