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© Practising Law Institute

SEC REPORTING SKILLS WORKSHOP 2017

Workshop Leaders Cheryl L. Linthicum George M. Wilson


SECTION 5: OTHER 1934 ACTS

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CHAPTER 19: The SEC Institute, Form 10-Q, General Filing Requirements of Form 10-Q (Revised January 2017)

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• Form 10-Q is used for quarterly reports under Section 13 or 15(d) of the Securities Exchange Act of 1934. Rules 13a-13 and 15d-13 provide that Form 10-Q shall be filed for each of the first three quarters of each fiscal year by every issuer which: •• Has securities registered under Section 12 of the 1934 Act or the Securities Act of 1933, and •• Is required to file an annual report (generally Form 10-K) under Section 13 or 15(d). •• Specific exemptions from 10-Q filing requirements are available to investment companies and certain

foreign issuers. •• Similarly to other forms, the “filing” of 10-Qs is done via electronic transmission under the EDGAR

system. • Due date – See Page 2-3 • Number of copies to be filed

•• With the SEC - no “copies”, the 10-Q is to be filed electronically. •• The stock exchanges and Nasdaq cannot accommodate electronic filings. Nevertheless, they do not

require paper copies; instead, they download the EDGAR filings from the SEC’s database. •• Registrants that were able to obtain a hardship exemption (very rare occurrence), three complete copies

of Form 10-Q including financial statements, exhibits, or other papers or documents filed as a part of the Form, and five additional copies (which need not include exhibits) must be filed with the SEC.

• Filing fee •• There is no filing fee for Form 10-Q.

• Amendments •• Occasionally a filed Form 10-Q must be amended because material information has been omitted or

because it contains an error. In such a case, an amendment should be filed with the SEC. The amended 10-Q will be called 10-Q/A, any subsequent amendment would be 10-Q/A-2, 10-Q/A-3, etc. The entire item of the Form 10-Q (e.g., Item 1, Financial Statements) that includes amended information must be attached to the cover page. Amendments should be filed only after review by legal counsel. The independent auditors should be advised of any amendment of the financial information in the 10-Q.

• Signatures •• The form must be signed on the registrant’s behalf by a duly authorized officer of the registrant and by

the chief financial officer or the chief accounting officer. •• Only typed signatures are transmitted in electronic filings; the manual signatures are to be kept in the

registrant’s office for at least five years.

Drafting Your Form 10-Q

• Structure of Form 10-Q •• 10 Items, divided into two Parts.

••• Part I - Financial Information. •••• Item 1. Financial Statements. •••• Item 2. Management’s Discussion and Analysis of Financial Condition and Results of

Operations. •••• Item 3. Quantitative and Qualitative Disclosures About Market Risk. •••• Item 4. Controls and Procedures.

••• Part II - Other Information. •••• Item 1. Legal Proceedings. •••• Item 1A. Risk Factors. •••• Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

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•••• Item 3. Defaults Upon Senior Securities. •••• Item 4. Mine Safety Disclosures. •••• Item 5. Other Information. •••• Item 6. Exhibits.

•• Omission of inapplicable items. ••• Part II items which are inapplicable or to which the answer is negative may be omitted. Note: This is different from the Form 10-K, which requires the inclusion of all Items, even though

an Item is inapplicable. ••• Incorporation by reference within the Form 10-Q – A response to an Item in Part II need not be

presented when the information is already disclosed in Part I, so long as the applicable Part II Item makes reference to the information in Part I.

•• Incorporation by reference - prescribed by Regulation 12B, Rule 12b-23 and by instructions to the Form 10-Q.

• Cover Page •• The Cover Page requires filling in the blanks with company information, such as fiscal quarter,

Commission file number, etc. There are also a series of statements that require checking a box, or potentially leaving it blank. The SEC Handbook that accompanies this workbook contains the most recent version of the Form 10-Q released by the SEC as of the publication date. Some pointers on the Cover Page follow.

•• Indication (by check mark) as to whether the Form 10-Q is a quarterly report or a transition report. ••• Transition report is for the extra Form 10-Q filed upon a change in fiscal year, when the

transition period is less than six months. ••• When the extra period is six months or longer, a transition report on Form 10-K must be filed.

•• Indicate (by check mark) whether registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that registrant was required to submit and post such files). (Do not check either box if company is not required to file the Interactive Data exhibit)

• Part I - Item 1 - Financial Statements (A smaller reporting company may provide the information required by Article 8-03 of Regulation S-X.)

•• Financial statements may be condensed financial statements, with the condensing to be done within the parameters prescribed by Article 10 of Regulation S-X. However, condensing is not a requirement; uncondensed financial statements are provided by many registrants in their quarterly reports.

•• Financial statements (which need not be audited) must be reviewed by the registrant’s independent public accountants prior to the filing of the Form 10-Q. ••• The review must be performed in accordance with PCAOB standards established for such

reviews. ••• Although not required, the registrant may, at its option, state in the Form 10-Q that such a

review was performed. If such statement is made, an auditors’ review report must be filed with the financial statements.

•• Financial statement schedules are not required. •• Industry guide information (financial institutions, property-casualty insurance, and mining companies)

is not required. •• Required financial statements.

••• Balance sheets - as of the end of the current fiscal quarter and as of the end of the preceding fiscal year.

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••• Income statements - for the current fiscal quarter, for the year-to-date period (i.e., for the period from the end of the preceding fiscal year to the end of the current fiscal quarter) and for the corresponding periods of the preceding fiscal year.

••• Statements of cash flows - for the year-to-date period (i.e., for the period from the end of the preceding fiscal year to the end of the current fiscal quarter) and for the corresponding period of the preceding fiscal year.

•• Additional financial statements in certain situations. ••• A third balance sheet – as of the end of the corresponding fiscal quarter of the preceding fiscal

year when, in management’s opinion, it is necessary for an understanding of the impact of seasonal fluctuations on the company’s financial condition (this is rarely used).

••• Income statements and statements of cash flows for the twelve-month period ended as of the end of the most recent fiscal quarter and for the corresponding preceding twelve-month period: •••• May be presented by companies engaged in the seasonal production and sale of a single-

crop agricultural commodity in lieu of the year-to-date statements otherwise required. •••• May also be presented (on an optional basis) by other companies in addition to the year-

to-date statements otherwise required. •• Rules of condensing.

••• Based upon Article 10 of Regulation S-X, but still complying with any applicable SEC guidance contained in Financial Reporting Releases and Staff Accounting Bulletins and with normal GAAP, especially the measurement principles of ASC 270.

••• Balance sheet and income statement need include only those line items corresponding to the major captions (i.e., the numbered paragraphs) of Article 5 (or such other applicable Article) of Regulation S-X.

Example: Rule 5-02(19) of Regulation S-X states: “Accounts and notes payable. State separately amounts payable to (1) banks for borrowings;

(2) factors or other financial institutions for borrowings; (3) holders of commercial paper; (4) trade creditors; (5) related parties; (6) underwriters, promoters and employees (other than related parties); and (7) others.”

Despite this rule, the balance sheet in the Form 10-Q need only present one line item captioned “Accounts and notes payable”, with no required segregation or disclosure of the seven sub-captions.

••• The only exception to this format relates to inventories, the composition of which (i.e., raw materials, work in process, and finished goods) must be disclosed, either on the face of the balance sheet or in a note to the financial statements.

••• Still further condensation is permitted, in that the otherwise required major captions may be combined with others, based on the following parameters: •••• Balance Sheet: If any major caption is less than 10% of total assets and its amount has not

increased or decreased by more than 25% since the preceding fiscal year end, it may be combined with others. However, the general format of the balance sheet should be preserved (e.g., a current asset should not be combined with a noncurrent asset).

•••• Income Statement: If any major caption is less than 15% of average net income for the three most recent fiscal years and its amount has not increased or decreased by more than 20% compared with the corresponding interim period of the preceding fiscal year, it may be combined with others. Loss years are excluded in calculating average net income. If all three years were loss years, however, the average loss should be used for the test.

•••• Statement of Cash Flows: The statement may start with one figure for net cash flows from operating activities, and need only present individual cash investing and financing activities that exceed 10% of the average of net cash flows from operating activities for the most

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recent three fiscal years. Information about individual non-cash investing and financing activities also need only be disclosed when they exceed 10% of the above-mentioned average.

••• Practical considerations regarding rules of condensing. •••• Although financial statement condensation is permitted, it is not required. •••• Condensation criteria must be applied to the current quarter’s financial statements; hence,

it requires the criteria computations to be redone each quarter, and requires the reclas-sification of previously filed information.

•••• To avoid this additional work, many companies present either (a) complete (uncondensed) financial statements in the Form 10-Q, since their accounting system is already designed to generate such complete financial statements, or (b) financial statements condensed only to a limited degree, creating a “style” that is then followed from period to period, year after year.

•• Required footnote disclosures. ••• Footnote requirements are based on the assumption that the reader of the Form 10-Q has read, or

has access to, the audited financial statements for the preceding fiscal year. Hence, footnote disclosures that have not changed significantly since the previous year end (other than the expected changes based on the passage of time) need not be given. This would include such disclosures as: •••• Significant accounting policies (assuming no changes in or no new accounting policies). •••• Long-term debt disclosures (assuming no change in debt structure, other than normal

repayments made during the interim period). •••• Pension plan disclosures (assuming no change in the plan).

••• Footnote disclosure is required when transactions or events occurring during the interim period cause the previous year-end disclosure to no longer be appropriate. Disclosure is also required for new transactions or events that, had they occurred in the previous year, would have required footnote disclosure in the previous year’s financial statements. This would include such disclosures as: •••• A change in, or adoption of, a new accounting policy or principle.

••••• Note should describe the change in accounting, and should also include all disclo-sures required by the new accounting policy as required to be included in annual financial statements.

••••• If the change in accounting is made in a period other than the first quarter, no amendment of prior filings is required; however, a restatement of each of the prior quarter’s results is to be included in the filing for the quarter in which the change in accounting is made. For a change in accounting adopted retroactively to prior years, the prior year’s interim quarterly and year-to-date figures should be restated.

•••• A change in long-term debt structure, such as significant new borrowings or modification of existing financing arrangements.

•••• A business combination. Requires pro forma income disclosures pursuant to ASC 805, as though the acquired entity had always been owned, for the current year-to-date period and the corresponding preceding year period.)

•••• Information to support estimations inherent in the preparation of financial statements. ••• The one exception to this underlying approach relates to contingencies. Any material contin-

gency that exists must continue to be disclosed, even though no change in the contingency has occurred since the preceding year end. This exception is based on the SEC’s literal interpretation of ASC 450-10-60-1, which states the following: “Contingencies and other uncertainties that could be expected to affect the fairness of

presentation of financial data at an interim date should be disclosed in interim reports in

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the same manner required for annual reports. Such disclosures should be repeated in interim and annual reports until the contingencies have been removed, resolved, or have become immaterial.”

The significance of a contingency is to be evaluated in relation to the annual financial statements rather than the interim financial statements. Thus, if a contingency is not significant enough to warrant disclosure in the annual financial statements, it need not be disclosed in the Form 10-Q.

••• Any footnote disclosures made in the first or second quarter Form 10-Q (because of a new or changed event or transaction) must be repeated in the Form 10-Q(s) for the subsequent quarter(s). This is because of the underlying assumption that the reader of each Form 10-Q has read, or has access to, only the prior year’s Form 10-K. Such access to any intervening Form 10-Qs may not be assumed. Thus, each quarterly Form 10-Q must update the footnote disclosures made in the prior year’s Form 10-K.

•• Other required financial statement disclosures (as applicable). ••• As to unconsolidated subsidiaries and 50% or less-owned investees accounted for under the

equity method that meet either the first or third condition of the “significant subsidiary test” at the 20% threshold (and therefore require separate financial statements in the Form 10-K), sum-marized income statement information is to be presented in the Form 10-Q.

••• The income statement should show, if appropriate, earnings per share and dividends declared per share applicable to common stock. The basis of the earnings per share computation, including the number of shares used, is to be disclosed. Companies with complex capital structures should file an exhibit showing in reasonable detail the computation of earnings per share (similar to the one included with Form 10-K - Exhibit 11).

••• Normal disclosure of a retroactive prior period adjustment made in the current quarter is required, including the effect on total and per-share net income of any prior period presented and on the balance of retained earnings. Similarly, if the results of operations for any period presented have been adjusted retroactively since the last reporting of the period in an SEC filing, disclosure should be made of the adjustment and its effect on net income.

•• Required statement re: adjustments made - Each Form 10-Q must contain a statement making the following two representations: ••• That the financial statements “reflect all adjustments which are, in the opinion of management,

necessary to a fair statement of the results for the interim periods presented”, and ••• Whether or not all adjustments made are of a normal recurring nature. If they are not, then full

disclosure of the nature and amount of any adjustments that are not normal and recurring must be made.

••• These representations may be included either in a note to the financial statements or elsewhere within Item 1 of Part I.

•• Reporting a change in accounting principles. ••• Any material change in accounting principles, other than a change to implement and new FASB

Accounting Standard update, made by a registrant requires the filing of a “preferability letter” from the registrant’s independent accountant as an exhibit to its next Form 10-Q (or its Form 10-K if the accounting change is made in the fourth quarter of the fiscal year).

••• Item 601 of Regulation S-K (Exhibits) describes this Exhibit (Exhibit No. 18) as follows: “Letter re: change in accounting principles: Unless previously filed, a letter from the registrant’s

independent accountant indicating whether any change in accounting principles or practices followed by the registrant, or any change in the method of applying any such accounting principles or practices, which affected the financial statements being filed with the Commission in the report or which is reasonably certain to affect the financial statements of future fiscal years is to an alternative principle which in his judgment is preferable under the circumstances.

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No such letter need be filed when such change is made in response to a standard adopted by the Financial Accounting Standards Board...”

• Part I - Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations •• Prescribed by Item 303(b) of Regulation S-K, which indicates that substantially all of the requirements

of the annual MD&A (S-K 303(a) included in the Form 10-K are applicable to the interim MD&A. Two exceptions are:

•••• The impact of inflation, if any, need not be discussed). •••• The Table of Contractual Obligations may be omitted. Material changes in contractual

obligations may be described narratively. •• The interim MD&A is based on the assumption that the reader of the Form 10-Q has read, or has

access to, the MD&A for the preceding fiscal year contained in the most recently filed Form 10-K. Hence, the emphasis is on updating the discussion in the most recent annual MD&A, and is required to focus only on material changes in financial condition and results of operations.

•• Specific parameters of the discussion are as follows: ••• Material changes in financial condition.

•••• Addresses material changes in liquidity and capital resource requirements. •••• Requires comparison of financial condition at the end of the most recent interim period

with that at the end of the preceding fiscal year. •••• If a balance sheet is presented as of the end of the corresponding prior year interim period

(required only when necessary for an understanding of the impact of seasonal fluctuations on the company’s financial condition), comparison of financial condition at the end of that interim period to that at the end of the most recent quarter is also required. When both comparisons are required, the discussion and analysis may be combined.

••• Material changes in results of operations. •••• Requires a discussion of material changes in the results of operations of (1) the current

quarter compared to the corresponding quarter of the preceding fiscal year, and (2) the current year-to-date period compared to the corresponding year-to-date period of the preceding fiscal year.

•••• If an income statement is presented for the twelve-month period ended as of the end of the most recent fiscal quarter, the discussion also should cover material changes in that twelve-month period compared to the corresponding twelve-month period of the prior year.

•••• The discussion should identify any significant elements of income or loss from continuing operations that do not arise from or are not necessarily representative of the company’s ongoing business.

•••• The discussion should introduce individual business segments or other components to the extent necessary to explain changes from one period to another or changes from the most recent fiscal year end. Any facts indicating that the prior year segment data may not be indicative of current or future operations should be discussed.

••• The discussion should cover any seasonal aspects of the business that had a material effect on the company’s financial condition or results of operations.

• Part I - Item 3 - Quantitative and Qualitative Disclosures About Market Risk (Not required for a smaller reporting company.)

•• Prescribed by Item 305(c) of Regulation S-K as an update of the Item 7A (Quantitative and Qualitative Disclosures About Market Risk) disclosure of the Form 10-K filed for the most recent fiscal year end.

•• Hence, disclosure is required only if there have been any material changes in market risks since the prior year end.

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•• The disclosure, when required, should address the sources and the effects of any such changes in market risks, so as to update the disclosure made in the Form 10-K for the most recent fiscal year end to the company’s market risk exposure position as of the most recent fiscal quarter end.

• Part I - Item 4 - Controls and Procedures •• Must disclose the conclusions of the company’s principal executive officer or officers and principal

financial officer or officers, or persons performing similar functions, about the effectiveness of the registrant’s disclosure controls and procedures.

•• These conclusions must be based on their evaluation of these controls and procedures as of period end for the quarterly report that includes the disclosure.

•• Disclose whether or not there were significant changes in the company’s internal control over financial reporting or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. (Note: Material changes in accounting systems, even when not made to correct problems, must be evaluated for this disclosure.)

•• Asset-Backed Issuers are not required to disclose the information required by this Item. •• The term “disclosure controls and procedures” means controls and other procedures of an issuer that

are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.

•• Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits is accumulated and communicated to the issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

•• These procedures are intended to cover a broader range of information than is covered by an issuer’s internal controls related to financial reporting. They apply to the entire report, not just the financial statements.

• Part II - Item 1 - Legal Proceedings •• An update of the Item 3 (Legal Proceedings) disclosure of the Form 10-K filed for the most recent

fiscal year end. Hence, disclosure is limited to: ••• New legal proceedings initiated during the quarter. ••• Change in status (i.e., material developments) during the quarter of a previously reported legal

proceeding. ••• Termination during the quarter of a previously reported legal proceeding.

•• Disclosure requirements, materiality considerations, etc. are identical to the Form 10-K requirements. •• Disclosures made in the first or second quarter Form 10-Q must be repeated in the Form 10-Q(s) of the

subsequent quarter(s); alternatively, the subsequent quarter’s Form 10-Q may reference to the Form 10-Q of the previous quarter(s). (This is because each quarter’s Form 10-Q on its own must update the Item 3 disclosure made in the previous year’s Form 10-K.)

• Part II - Item 1A - Risk Factors •• Set forth any material changes from risk factors as previously disclosed in the registrant’s Form 10-K

in response to Item 1A to Part 1 of Form 10-K. Smaller reporting companies are not required to provide the information required by this item.

• Part II - Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds •• As to any class of registered securities, disclose the following:

••• Any changes in the securities that result in a material modification of the rights of the holders.

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••• Any material limitations on the rights of the holders caused by the issuance or modification of a different class of securities.

•• Includes such items as working capital restrictions and other limitations on dividend payments. •• For any unregistered sales of equity securities made during the current quarter of the registrant’s fiscal

year, disclose the following: ••• Date of sale and title and amount of securities sold. ••• Name of underwriter or placement agent. ••• Persons or classes of persons to whom sold. ••• Consideration received. ••• Exemption from registration claimed. ••• In the case of options, warrants or securities that are exchangeable or convertible into equity

securities, the terms of exercise or conversion. •• Use of proceeds disclosure (relates only to the proceeds of the registrant’s first Securities Act

registration statement). ••• Required in detail in the first Form 10-Q or Form 10-K filed after the effective date of the

registration statement; required to be updated in each subsequent Form 10-Q or Form 10-K until the use of all proceeds has been reported or until the offering has been terminated.

••• As to the registration statement, the commission file number, the effective date, the offering date, and (when applicable) the termination of the offering.

••• As to offerings for which securities were sold, the managing underwriter, the title of the securities registered, the amount and aggregate offering price (1) registered and (2) sold to date, and whether the offering has terminated.

••• Offering expenses incurred to date, by type. ••• Net offering proceeds received to date and their use, by purpose for which used. ••• Material differences (if any) between actual use of proceeds and use as described in the

registration statement. •• Issuer purchases of equity securities.

••• A month-by-month tabulation, for each of the three months of the fourth quarter of the year, of any purchases by the company of its registered equity securities (either open market or by private transaction).

••• Tabulation should show, in columnar format, for each of the three months: •••• Total number of shares purchased •••• Average price paid per share

••• Total number of shares purchased under publicly announced plans (programs) •••• Maximum number of shares that may still be purchased under the publicly announced

plans (programs) ••• If the total number of shares purchased includes purchases not made under a publicly announced

plan (program), disclosure by footnote to the table: ••• The number of shares so purchased. ••• The nature of the transaction(s) (i.e., an open market purchase, a tender offer, the exercise of an

outstanding put option issued by the company, etc.). ••• Information in the table regarding shares purchased and remaining to be purchased under plans

(programs) should be aggregated if the company has more than one such plan (program). ••• The following footnote disclosures are required separately for each plan (program): ••• Date the plan (program) was announced.

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••• The dollar (or share unit) amount approved. ••• Expiration date (if any) of the plan (program). ••• The expiration of any plan (program) during the three-month period covered by the table (i.e.,

during the fourth quarter of the year). ••• Any plan (program) that the company (1) has decided to terminate prior to its expiration date, or

(2) does not intend to make any further purchases. • Part II - Item 3 - Defaults Upon Senior Securities

•• Disclosure of material debt defaults and material preferred stock dividend arrearages not cured within 30 days.

•• As to debt defaults: ••• Relates only to debt exceeding 5% of total consolidated assets. ••• Requires disclosure only when the event has become a true “default” under the agreement (i.e.,

notification by lender, expiration of grace period, etc.). •• As to preferred stock dividend arrearages, relates to (1) registered preferred stock and (2) preferred

stock ranking prior to any class of registered securities. •• Disclosure is to include the nature of the default and, when applicable, the amount of the default

(arrearage) and the total arrearage. • Part II - Item 4 – Mine Safety Disclosures

•• If applicable, provide a statement that the information concerning mine safety violations or other regulatory matters required by Item 104 of Regulation S-K is included in exhibit 95 to the quarterly report.

• Part II - Item 5 - Other Information •• Optional disclosure of any information a registrant wishes to report. •• If information is an “8-K Event”, it does not have to be reported again on a Form 8-K.

• Part II - Item 6 - Exhibits •• Exhibits, as required by Item 601 of Regulation S-K.

• Signatures •• A duly authorized officer. •• Chief financial officer or chief accounting officer.

NOTE that if the chief financial officer or chief accounting officer is a “duly authorized officer” (which is usually the case), only the one signature is required, so long as such dual responsibility is indicated.

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NOTES

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sec reporting skills workshop 2017a123.g.akamai.net/7/123/121311/abc123/yorkmedia... · •• only...

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