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Bloomberg recently reported that inflation has been a hot topic in SEC comment letters — particularly the depth and detail of the discussion of inflation in MD&A. That shouldn’t come as a surprise — for one, it had been a long while since we’ve really had to flex our MD&A disclosure muscles when it comes to inflation. But also, just before inflation became a problem for the first time in a long time in the US, the SEC amended Item 303 of Regulation S-K to remove the express requirement to address the impact of inflation on the basis that other MD&A requirements would require a discussion of material inflationary impacts (for example, as a known trend or uncertainty or to explain material changes in line items from period to period). The 2020 Proposing Release for the MD&A amendments stated that a specific reference to inflation and changing prices “may give undue attention to the topic.” But here we are in an environment where attention is deserved.

Cooley’s Cydney Posner pulled recent comment letters on the topic and, in this post, shared additional color & sample comments:

In regular comments on SEC filings to a diverse mix of companies, Corp Fin has asked companies to discuss in more detail the impact of inflationary pressures, including at times, with quantification.  From a quick EDGAR search, I found, for example, a comment from Corp Fin related to a risk factor that discussed inflation, asking the company to “update this risk factor in future filings if recent inflationary pressures have materially impacted your operations. In this regard, identify the types of inflationary pressures you are facing and how your business has been affected.”

In another case, where a company disclosed that its costs of necessary commodities, labor, energy and other inputs had significantly increased and were expected to continue to affect the business, the staff asked for more detail, requesting that the company revise its disclosure to quantify the impact of inflation, including providing year-over-year comparisons of the impact, and provide more detail regarding the company’s efforts to offset cost pressures through price increases, including the success of those efforts. In another instance, commenting on MD&A disclosure that inflation had negatively affected results of operations as a consequence of increased cost of sales and operating expenses, Corp Fin asked the company to “quantify and disclose the impact of the inflationary pressures you are experiencing on cost of sales, gross margins and operating expenses,” quantifying increases in transportation and fuel costs, materials, commodities and packaging costs, as well as production inefficiencies and geographical sales mix.

Another comment asked a different company to expand on how the impact of higher rates of regional inflation and raw material supply in certain regions affected the company’s operations, potentially affecting its operating segment analysis. In yet another example, the staff observed that when the financials reflect material changes from period-to-period in one or more line items, or where material changes within a line item offset one another, the company is still required to describe the underlying reasons in quantitative and qualitative terms. The staff then asked the company to “quantify the impact of each factor or component associated with material changes, including the impact of inflation associated with any material changes.”

Inflation was already a trending comment letter topic in 2022 when it was at its peak, but comments seemed to focus more on risk factors and, in particular, the ever-important-to-avoid hypothetical risk factor trap. Cydney notes that these comments — now MD&A focused — are still coming, even as inflation slows.

– Meredith Ervine