FR 2020-26090

The Securities and Exchange Commission (SEC) has made key changes to how companies disclose financial information. These changes aim to modernize and simplify existing requirements, reduce unnecessary repetition, and improve the clarity and usefulness of financial reports for investors. By eliminating the need for companies to provide Selected Financial Data and streamlining Supplementary Financial Information, the new rules provide a more principles-based approach, where companies focus on what is materially important. The Management's Discussion & Analysis of Financial Condition and Results of Operations (MD&A) is also updated to be less prescriptive, allowing firms more flexibility in how they report information that is crucial to investors.

Significant Issues and Concerns

One of the primary concerns with the new regulation is the potential complexity and technical language, which may confuse individuals without financial or legal expertise. This complexity can be daunting for smaller companies that now have to navigate a more principles-based reporting requirement. While aiming for transparency, the changes may inadvertently make compliance more challenging for these smaller entities.

Another issue is the potential overlap with existing U.S. GAAP rules, which might result in redundancy rather than the intended clarity. This unnecessary complexity could lead to higher costs for companies as they attempt to interpret and comply with the overlapping rules.

There is also concern over the potential gaps in disclosure. While the changes aim to eliminate repetitive information, some stakeholders worry that useful historical data might become less accessible, forcing investors to expend more effort to find the same information across different sources.

Impact on the Public and Stakeholders

The public, particularly investors, may initially face some difficulties as they adjust to the new format and availability of information. The elimination of certain data means that the information might not be as readily available in a consolidated format, leading to increased time and resources spent searching for historical trends that were previously easier to access.

On the positive side, these changes could lead to more meaningful and relevant disclosures, reflecting the true state of a company’s financial health. By cutting out unnecessary duplication, companies might reduce some compliance costs, although any savings might be offset by the effort needed to assess materiality under the new principles-based framework.

For larger companies and sophisticated investors, these updates may pose less of a challenge and may even lead to improved disclosure efficiency, as information becomes more customized and potentially less burdensome to compile. However, smaller companies and less experienced investors could struggle more with the changes and might need additional resources or assistance to adapt effectively.

Overall, this move by the SEC is intended to streamline and modernize financial disclosures, though it does come with some trade-offs in terms of accessibility and the need for understanding nuanced materiality assessments. Stakeholders will need to weigh these benefits against the challenges posed by adjusting to a more flexible but potentially more demanding reporting environment.

The document references several financial metrics and costs associated with the implementation and compliance of new rules in the management discussion and analysis of financial disclosures. These references highlight financial allocations related to the costs incurred by companies in order to comply with financial reporting and regulatory requirements.

One of the key references includes estimations of the average cost of retaining outside professionals, which is $400 per hour. This underscores the significant expenses companies might face when they require legal or expert advice to meet compliance standards. This cost can place a considerable financial burden on smaller companies or those not well-versed in technical financial requirements, addressing one of the issues identified about the technical nature and potential costliness of the document.

Moreover, the document cites a survey from the AICPA which found that reporting companies with $75 million or less in market capitalization saw an average XBRL filing cost of $5,850 per year. This figure is contrasted with a previous maximum cost of $51,500 per year, showing a decline in costs. This insight reflects an issue brought up regarding the ability of smaller entities to manage the financial burden of compliance and reporting.

Further survey data indicates that a typical issuer might spend over $334,000 per firm per quarter for various reporting requirements, including $20,000 per quarter specifically for XBRL costs. This significant expenditure highlights the financial pressures that can accompany compliance, matching concerns about the economic burden on especially smaller companies that might not have as much financial flexibility.

Additionally, the financial thresholds defining smaller reporting companies, such as a public float of less than $250 million or annual revenues of less than $100 million, frame the discussion within the document. These benchmarks clarify the entities most likely impacted by these regulations and point to an identified concern regarding how smaller entities might fare under the new principles-based regulations.

These financial allocations and references in the document illustrate the cost-related challenges of adhering to new regulations, underlining concerns about economic impacts on smaller entities and the potential gaps in empirical study on financial impacts. These references also map onto potential issues such as increased costs for compliance and the risk of increased financial burdens on the smaller registrants, further compelling a considered approach to the document’s impacts on different-sized entities.