The movement for disclosure effectiveness and simplification appears to be gaining real momentum, both in terms of official rule-setting activities and voluntary efforts by a growing number of companies. Of special interest is that over the past six months, the SEC has issued a flurry of documents as part of its major Disclosure Effectiveness Initiative. Two of these documents could portend significant changes in the SEC reporting requirements.
First, in April, the SEC issued a lengthy concept release, Business and Financial Disclosure Required by Regulation S-K, soliciting comments on 340 questions on a broad range of both overarching and specific disclosure matters relating to Regulation S-K, which is the central source of non-financial statement disclosures for SEC registrants. The SEC received over 26,000 comment letters on the concept release, the vast majority of which are form letters advocating expanded disclosures regarding political spending, overseas tax payments, amounts of taxes owed to the United States by foreign subsidiaries, and sustainability plans.
It also received over 350 unique comment letters, some addressing one or a few specific issues, others focusing on broader themes, and still others providing detailed comments on many of the questions posed in the release. I found it interesting that many commentators expressed support for the current definition and approach to materiality in the securities laws, retaining quarterly reporting, removal of redundant information requirements, use of new reporting technologies, and expanded disclosure of sustainability information.
In July, the SEC issued a major proposal entitled Disclosure Update and Simplification, aimed at removing redundant and overlapping disclosure requirements contained in SEC rules and regulations and those required under U.S. GAAP or IFRS and at updating and modernizing other disclosures. The comment period for this proposal ended on Oct. 3, 2016.
For its part, FASB also has a number of projects underway as part of its major Disclosure Framework effort. These include proposals on applying materiality to disclosures, proposed revisions to the disclosure requirements relating to fair-value measurements, defined benefit plans, income taxes, and an exposure draft of a concepts statement on presentation. They have also begun to review inventory and interim reporting disclosures.
As the SEC and FASB continue with their official projects and initiatives on disclosure effectiveness, more and more U.S. public companies have been voluntarily undertaking efforts to enhance the quality and understandability of their financial reports and SEC filings. These are the key findings of two related reports issued by the Financial Executives Research Foundation (FERF) in collaboration with EY.
Both FERF/EY studies are available through the Financial Executives International (FEI) website and the EY Disclosure Effectiveness webpage. I strongly encourage companies considering undertaking disclosure effectiveness efforts as well as those that have already begun this journey but are looking to further enhance their reporting to review these informative and helpful reports.
In the first report titled, “Disclosure effectiveness: companies embrace the call to action” and issued in October 2015, FERF and EY surveyed 120 finance, accounting, and financial reporting executives across major industry sectors and a range of sizes of companies to gain an understanding of the actions, benefits, and challenges facing them in their efforts to improve corporate disclosures. Further insights were gained through in-depth interviews with investors, preparers of financial reports, audit committee members, legal counsel, and other stakeholders. Overall, the study found that 74 percent of the companies surveyed were taking action to improve their financial reporting, with the primary focus being on the annual 10-K and quarterly 10-Q filings, particularly in regard to the MD&A, the description of their business, and risk factors in their SEC filings and to certain financial statement footnotes.
Some companies also made improvements to their earnings releases and proxy statements. The extent of the disclosure improvements ranged from more modest efforts to remove redundant, outdated, and immaterial information from their filings and financial reports to enhancing the look and communication effectiveness of disclosures through, for example, the use of more charts, tables, graphs, and cross-referencing, to a very major reorganization and revamping of filings and communications by companies such as General Electric, which first did this for its 2014 proxy statement, then to its annual report and 10-K for the year ended Dec. 31, 2014, and most recently in February 2016 to its “Integrated Summary Report” for the year ended Dec. 31, 2015, that concisely set forth what management viewed as the most important information from the company’s annual report, proxy statement, and sustainability report.
The 2015 FERF/EY study found that the primary impetus for these efforts came from CEOs and CFOs who questioned the clarity and readability of their financial reports and filings. Companies identified a number of benefits from undertaking these disclosure improvement efforts, including reducing their cycle to prepare and issue reports and favorable feedback from investors. The study also contains a helpful 10-point list of disclosure effectiveness for companies to consider.
Since the issuance of the 2015 FERF/EY study, companies have continued to undertake disclosure improvement efforts. Hot off the presses, is a second FERF-EY study issued a few weeks ago that provides numerous specific examples of disclosure effectiveness and simplification actions taken by companies in the S&P 500. The report, “Disclosure effectiveness in action: companies make great strides,” is the result of a systematic and detailed analysis of recent SEC filings and includes examples, including before and after examples, of how S&P 500 companies have improved and streamlined their reporting in the MD&A, business, and risk factors sections of their SEC filings and to financial statement footnotes.
The most common improvements were to the MD&A and business sections. For example, with regard to MD&A, the report provides examples of how companies have used charts, graphics, and tables to depict changes in key measures, infographics to summarize financial and non-financial information, layering to discuss the most important information first with more detailed data provided elsewhere, bullet points to replace lengthy text, cross references to eliminate redundancies, plain English to eliminate boilerplate language and accounting terminology, and reorganizing MD&A based on topics.
The latest FERF/EY report also provides examples of enhancements companies have made to their websites and other reporting channels such as the use of videos and interactive infographics and provides overall data by industry on trends in page and word counts for various sections of SEC filings of S&P 500 companies.
Both FERF/EY studies are available through the Financial Executives International (FEI) website and the EY Disclosure Effectiveness webpage. I strongly encourage companies considering undertaking disclosure effectiveness efforts as well as those that have already begun this journey but are looking to further enhance their reporting to review these informative and helpful reports. Also, continue to monitor the ongoing activities of the SEC and FASB in this area and provide comments to them on their proposals.