by Cydney Posner

I loved this column from Compliance Week by Scott Taub, former deputy chief accountant and former acting chief accountant at the SEC. It’s full of common sense ideas about how to shorten 10-Ks and 10-Qs, both of which seem to grow exponentially longer every year. Making them shorter really helps to make them more readable too. As we wait for the recommendations from Corp Fin’s  “disclosure effectiveness“ project, here are some tips from the column that can be undertaken in the meantime: 

  • Analyze Results of Operations Once, Not Twice. Many companies insist on discussing each of the two year-to-year or quarter-to-quarter comparisons separately, but combining them into a single discussion helps to eliminate a lot of repetition. He also argues that it helps to explain longer term trends. (I would add that, by placing the discussions together, it also helps to highlight the changes that have occurred over the periods.) The author predicts this practice alone will reduce the length by 30%.

  • Stop Talking About Every New Accounting Standard. The author contends that companies take too literally the SEC instruction to discuss the anticipated effect of new accounting standards, even to the extent of discussing everything twice (financial statement notes and MD&A). Rather, he suggests that companies not “waste space describing a bunch of new standards, with each paragraph ending with: ‘We do not expect this standard will have a material impact on our financial statements.’ The only new standards that need to be discussed are (1) those that management believes will or might affect the financial statements, or (2) those that management thinks that investors might believe could materially affect the financial statements. That’s it. Drop the rest of the discussion.”
  • Stop Disclosing That You Follow GAAP. According to the author, under ASC 235, the disclosure of significant accounting policies in Note 1 “should generally focus on areas involving ‘a selection from existing acceptable alternatives,’ ‘methods peculiar to the industry,’ and ‘innovative applications of GAAP.’” So what does that mean?  It means that there’s no need to discuss policies for which GAAP provides no alternatives, such as accounting for inventory at historical cost or measuring derivatives at fair value. Instead, companies should use the space to discuss only those policies where GAAP provides alternative approaches.
  • Don’t Repeat Yourself. Some topics are required to be discussed in more than one location in the filing. However, the disclosures are usually intended for different purposes, requiring somewhat different content. As a result, as the author explains, “the fact that there is some overlap shouldn’t result in the same discussion appearing twice.” For example, critical accounting policies are discussed in the notes and in MD&A. However, recent SEC staff comments on critical accounting polices have advised that the discussion “should be restricted to only those issues requiring significant management estimates and judgment, and not a recitation of accounting policy disclosures from the footnotes.” (See my news brief of 2/4/14.) In addition, prior staff guidance has urged that the MD&A discussion supplement the description in the notes to the financial statements, providing greater insight into the quality and variability of information regarding financial condition and operating performance.  As the author suggests, companies should “save space by cross-referencing to the financial statement disclosures as needed, and use the real estate currently taken up by repeating what’s already in the footnotes to cover additional information that isn’t required by GAAP.” Companies should also look at eliminating disclosures that are no longer material.
  • Risk Factors. The author recommends that companies stop including risk factors — such as competition, reliance on key management, new regulations, loss of a significant customer — that could apply to any issuer. As the author notes, “Risk Factors” are “supposed to help investors differentiate the risks of investing in your company from the risks of investing in another company.” Moreover, SEC rules expressly advise that companies “not present risks that could apply to any issuer.”   However, many litigators are happy to see those risk factors in place if it turns out that the risk happens to materialize, especially in light of the admonitions of the PSLRA.  Another approach, also acknowledged by the author, is to think through and particularize otherwise generic risk factors so that they are specific to the company.  For example, when an economic downturn has occurred that affects virtually all companies, rather than eliminating a risk factor about the poor economy because it applies to any issuer, consider and discuss how the downturn is most likely to affect the company in particular.  Similarly, if the company has recently lost a major customer or if recent advances by a competitor have adversely affected or may affect the company’s business, those specific events could be discussed in the risk factor.

Posted by Cydney Posner