This week I’ve been re-reading Gulliver’s Travels, where shifts in scale make all the difference in Gulliver’s world. And because I also am on a journey with Dave to XBRL acceptance, it got me thinking that “scale” is a very important concept for data tagging requirements as well. So, with apologies to anyone whose enjoyment of Swift’s classic may now be ruined, I will spotlight an exchange on our “Q&A Forum” (#11,840), where a member posed this question about Corp Fin’s recent sample comment on XBRL cover page tagging:
Corp Fin’s sample comment says, “The common shares outstanding reported on the cover page and on your balance sheet are tagged with materially different values. It appears that you present the same data using different scales (presenting the whole amount in one instance and the same amount in thousands in the second). Please confirm that you will present the information consistently in future filings.”
The numbers are as of different dates (balance sheet date versus latest practicable date) and are in different scales. This seems compliant with the rules and not problematic so the comment seems errant.
An astute member responded:
I think the SEC may be looking for consistent scale when a filer includes the number of outstanding shares in the line-item description in the balance sheet, not the actual GAAP common stock amount. The relevant tags being:
dei:EntityCommonStockSharesOutstanding – used on cover page, scale should be zero
us-gaap:CommonStockSharesOutstanding – used by some filers in the line-item description (presumably what the SEC is targeting in the sample comment letter and believes should be presented in same scale as cover page)
us-gaap:CommonStockValue – actual GAAP amount in the balance sheet columns and is often in thousands or millions and wouldn’t make sense to be the same scale as the cover page
John weighed in as well:
I think you may be onto something when you note the possibility that filers weren’t using the proper “scale” when tagging the amounts. The SEC’s Office of Structured Disclosure issued this guidance in 2019 about scaling errors in public float.
I blogged a year ago that FASB was considering an accounting standard for digital assets. The Board’s technical agenda shows that they deliberated in early September and that a new ASU is scheduled to land in Q4. Here’s a summary of the tentative decisions.
The Center for Audit Quality says the new standard will require companies holding cryptocurrency to recognize losses & gains immediately – and shared this color:
According to a CAQ analysis as of September 5, 2023 83 comment letters had been submitted to FASB in response to their cryptocurrency proposal. Nearly all commenters across stakeholder groups (including the CAQ) expressed support for accounting for crypto assets within the scope of the Proposed ASU at fair value. Only two commenters specifically opposed accounted for crypto assets within the scope of the Proposed ASU.
Many commenters were supportive of the narrow scope of the Proposed ASU but recommend that additional standard setting on a wide range of topics will be needed in the future. These topics included wrapped tokens, NFTs, stablecoins, and other emerging crypto assets fall outside the scope of the Proposed ASU. However, according to this article from Accounting Today, we may need to wait a while for a project on wrapped tokens as a spokesperson for the FAF said “at this time there are no plans for a project specifically addressing NFTs or wrapped tokens.”
Commenters on the proposed ASU also requested further guidance on accounting for certain types of digital asset transactions (including, derecognition, crypto lending and borrowing, and crypto receivables and payables).
For more on digital assets, here’s a primer for audit committees and key questions for audit committees to consider, both from the CAQ.
According to the latest Spencer Stuart Board Index, 68% of S&P 500 boards included a director skills matrix in their proxy this spring. That’s up from 56% last year and just 38% in 2020! The trend is responsive to investors’ desires to better understand how each director’s expertise supports the company’s overall board composition.
This WSJ article likens the challenge of assembling a strong board – consisting of directors who have experience across all of the relevant categories – to solving a “Rubik’s Cube.” The article parses through the new Spencer Stuart Index and several other recent studies on board composition & diversity. Here’s one trend that jumps out:
Among last year’s newly appointed directors, CEO experience is less common, at just 43%, among the lowest figures since at least 2015, Heidrick & Struggles found.
The share of directors with CEO experience declined in 60% of companies and nearly every sector of the S&P 500 from 2019 to 2022, a Wall Street Journal analysis of data from BoardEx found.
That’s in part because more employers now let lower-level executives join the boards of other companies as boards simultaneously seek executives with specific experiences and skill sets, says John Wood, a Heidrick & Struggles vice chairman who recruits CEOs and directors.
Where in the past there was concern that such appointments would distract executives from their day jobs, Wood says, now “boards and management [are] saying: Can we give her some board experience? Because she could be in consideration for CEO succession.”
All that said, the Spencer Stuart analysis finds that boards continue to rely on retirement policies as their primary refreshment tool, so turnover is slow despite the rapidly changing business environment. I suppose that means that it’s more important than ever for directors to possess skills that can withstand the test of time.
Last week on CompensationStandards.com, I blogged about approaches that some companies are taking to incentivize compliance & ethics. But even “good” companies are regularly dealing with complaints, which may or may not be valid. Management & the board then face the difficult question of what to do – and recent experience shows that the decision can have important implications for officer & director liability.
This 4-page Skadden memo gives a roadmap that audit committees & boards can follow when deciding whether to launch an internal investigation, and what form it should take. Here are the key takeaways:
– When a complaint reaches a company’s board, directors need to assess how serious and detailed it is, and how credible it is at first glance, before deciding how to investigate it.
− If similar complaints have been lodged in the past, that could suggest systemic problems and greater risk for the company.
− An investigation will take on added urgency if the regulators or external auditors are aware of the allegations, or if those may affect pending financial or strategic transactions.
− Other complicating factors: any allegations against management, conduct the company has a duty to report and the potential for financial restatements.
If you find yourself answering “yes” to most of the questions in the memo, the Skadden team says that the board should strongly consider conducting an investigation, with help from outside experts.
The SEC has extended the comment period for Nasdaq’s proposal to require notice & disclosure of reverse stock splits, which John blogged about in July. This means that, under Exchange Rules, November 1st is the date by which the Commission will either approve or disapprove, or institute proceedings to determine whether to disapprove, the proposed rule change. You can use this form to submit comments.
Whether you spent the weekend as outside counsel frantically finalizing registration statements in order to claim your spot in “the backlog review queue,” a corporate employee worrying whether delayed regulatory approvals could cost you budget or even your job, or a federal employee attempting to plan for a month or more without pay, it likely was welcome news that, with mere hours to spare on Saturday, our legislators came to a last-minute compromise to keep our government running.
Unfortunately, the SEC’s operating plan and Corp Fin’s guidance on how the Commission and Staff will operate during a shutdown could still become relevant, because the resolution only funds the government for the next 45 days – through November 17th. Let’s all hope for the best!
On Friday, the SEC posted the notice & request for comment for a proposed listing standard from the NYSE that would create a new asset class for “Natural Asset Companies.” Here’s an excerpt that defines what an “NAC” is:
For purposes of proposed Section 102.09, a NAC is a corporation whose primary purpose is to actively manage, maintain, restore (as applicable), and grow the value of natural assets and their production of ecosystem services. In addition, where doing so is consistent with the company’s primary purpose, the company will seek to conduct sustainable revenue-generating operations. Sustainable operations are those activities that do not cause any material adverse impact on the condition of the natural assets under a NAC’s control and that seek to replenish the natural resources being used. The NAC may also engage in other activities that support community well-being, provided such activities are sustainable.
NYSE announced that it was working to develop this new asset class way back in 2021, so it’s been at least two years in the making. A lot has changed since then! ESG sentiment has become more discerning, and many companies have become more transparent over the past two years about environmental risks and emissions. But the proposal predicts that demand for this separate type of investment opportunity exists and will continue to grow because “investors still express an unmet need for efficient, pure-play exposure to nature and climate.”
Under the proposed standard, in addition to GAAP financial reporting provided in SEC filings, NACs would be required to periodically publish an “Ecological Performance Report.” Here’s more detail:
The EPR provides statistical information on the biophysical measures (e.g., tons of carbon, acre feet of water produced), condition, and economic value of each of the ecosystem services produced by the natural assets managed by the NAC. This will allow investors to gauge the effectiveness of management. The information will be consistently produced and periodically reported, following best practices from accepted valuation methodologies, as outlined in the Reporting Framework (as defined below).
The EPR produced by a NAC must follow IEG’s Ecological Performance Reporting Framework (the “Reporting Framework”). The Framework, in turn, is based on the natural capital accounting standards established in the United Nations System of Environmental- Economic Accounting – Ecosystem Accounting Framework (“SEEA EA”).
The EPR will measure, value, and report on the ecosystem services and natural assets managed by a NAC. Under the proposed amendments to the Manual, NACs will conduct a Technical Ecological Performance Study (“Technical EP Study”) annually, following the Reporting Framework. This Technical EP Study will generate the information used to prepare and publish the EPR. The EPR and Technical EP Study must be examined and attested to by a public accounting firm that is registered with the Public Company Accounting Oversight Board (“PCAOB”) and is independent from the NAC and NAC licensor, if applicable, under the independence standard set forth in Rule 2-01 of Regulation S-X (“Independent Reviewer”).
NACs would also be required to adopt policies on biodiversity, human rights, and other matters and post those on their website. The proposal gives more detail on the reporting framework, license, charter & policy requirements, corporate governance standards, and more. The standard, if adopted, will also come with a bunch of new terms to add to your “ESG glossary,” because it includes a whole section dedicated to definitions. The SEC is requesting comments on the proposal.
Also on Friday, the SEC posted notice & request for comment for a proposed NYSE rule change that would make it easier for companies to raise money from existing shareholders. Long story short, under the proposed amendment, companies would no longer have to get shareholder approval before issuing shares at a discount to “passive” (non-controlling) shareholders, even if the shareholder is buying more than 1% of currently outstanding shares and even if the shareholder owns 5% or more of the company’s outstanding stock or voting power at the time of the transaction – as long as they aren’t part of a control group. Here’s the rationale:
Certain NYSE listed companies are significantly dependent on their ability to regularly raise additional capital to fund their operations or acquire new assets. For example, pre-revenue stage biotechnology companies regularly seek additional capital to fund their research and development activities and real estate investment trusts seek to fund the acquisition of new properties by selling equity securities in private placements or direct registered sales priced at a small discount to the prevailing market price.
It is the Exchange’s understanding that, in many cases, existing shareholders of the listed company are willing purchasers of securities in such circumstances, as they already understand the company’s business and have a positive view of its future prospects. Sales to existing shareholders can also be advantageous to both the issuer and the shareholders because of the speed with which a direct sale to an existing shareholder can be completed if no shareholder approval is required.
However, the benefits of low transaction costs and speed of execution that typically exist when conducting these transactions with existing shareholders face countervailing factors if the counterparty is deemed to be a substantial securityholder for purposes of Section 312.03(b)(i). In such cases, to mitigate potential conflicts of interest, Exchange rules require that any sale below the Minimum Price can relate to no more than one per cent of the shares of common stock or one percent of the voting power outstanding before the issuance. Any such transaction that relates to more than one per cent of the common stock is subject to shareholder approval, which imposes significant delay and additional costs on the issuer, thereby often making the sale impracticable.
The NYSE notes that it is currently the only U.S. exchange with this requirement, which puts its listed companies at a disadvantage. The Exchange believes that transactions with these kinds of passive holders do not give rise to the potential conflicts of interest in the determination of transaction terms that exist where the purchaser has a role in the listed company’s board or management.
The shareholder approval requirement for issuances that exceed 1% of outstanding shares or voting power (other than cash sales for at least the “Minimum Price”) would continue to apply to issuances to officers or directors. In addition, it would apply to any controlling shareholder or member of a control group or any other substantial security holder of the company that has an affiliated person who is an officer or director of the company. The proposal emphasizes that other shareholder approval requirements also would continue to apply:
The Exchange notes that any listed company selling securities in a private placement that does not meet the Minimum Price requirement to a passive investor will remain subject to the shareholder approval requirement of Section 312.03(c) if such transaction relates to 20 percent or more of the issuer’s common stock. In addition, any such transaction would remain subject to shareholder approval under Section 312.03(e) if it resulted in a change of control. Finally, the Exchange notes that Section 312.03(b)(i) as proposed to be amended would continue to provide a significant protection to shareholders against conflicts of interest in sales of securities to related parties and that no other listing venue has such a protection in its rules.
The SEC is seeking comments on the proposal. We have resources in our “NYSE” Practice Area for anyone who is trying to navigate approval requirements or other compliance issues.
I confess that my eyes glaze over when I see anything relating to XBRL, and I suspect I’m not the only one who suffers from this weakness. Apparently, the Corp Fin Staff has noticed that “structured data” is getting short shrift, because they posted a wake-up call yesterday in the form of a sample comment letter.
Corp Fin has been providing guidance in the format of “Dear Issuer” letters on a somewhat regular basis since at least 2021. The letters tend to be issued when the Staff notices an emerging disclosure or market-related issue that is affecting a lot of companies. Topics have included market volatility, China-based disclosure requirements, and crypto fallout. But for this instance of sample comments, with XBRL being required since 2009 and Inline XBRL since 2018, you might wonder, “Why now?” The Staff gives a couple of reasons:
1. Comments on the pay versus performance rule provided increased evidence that this data format is useful to investors.
2. The Financial Data Transparency Act (FDTA) became law at the end of last year and requires the SEC to establish a program to improve the quality of the corporate financial data filed or furnished by companies under the ’33 and ’34 Acts.
In addition, new XBRL requirements have accompanied several recent SEC rulemakings (clawbacks, pay vs. performance, repurchases, insider trading), so there actually are new practices to watch out for right now. The sample comment letter flags these issues:
1. Item 405 of Regulation S-T: Your filing does not include the required Inline XBRL presentation in accordance with Item 405 of Regulation S-T. Please file an amendment to the filing to include the required Inline XBRL presentation.
2. Cover Page: The common shares outstanding reported on the cover page and on your balance sheet are tagged with materially different values. It appears that you present the same data using different scales (presenting the whole amount in one instance and the same amount in thousands in the second). Please confirm that you will present the information consistently in future filings.
3. Pay versus Performance: Disclosure under Regulation S-K Item 402(v) must be in Inline XBRL, in accordance with Item 405 of Regulation S-T and the EDGAR Filer Manual. Please ensure that you have provided the appropriate Inline XBRL tagging for all the required Item 402(v) data points.
4. Pay versus Performance: Refer to the [relationship disclosures] graph. Although it is permissible to combine one or more sets of relationship disclosures under Regulation S-K Item 402(v)(5) into one graph, table, or other format, note that you must still provide separate XBRL tags for each required item. Please ensure that you have provided the appropriate Inline XBRL tagging for all the required Item 402(v) data points.
5. Financial Statements and Supplementary Data: You have used different XBRL elements to tag the same reported line item on the income statement from period to period. Please provide us your analysis as to how you concluded that the results reported necessitated the change in the element. Alternatively, if you conclude that the change from period to period was not necessary to communicate a change in the nature of the line item, confirm that you will ensure that your choice remains consistent for line items from period to period.
6. Financial Statements and Supplementary Data: We note that instead of using an XBRL element consistent with current U.S. GAAP in your income statement, you instead used a custom tag. Custom tags are to be used by filers when an appropriate tag does not exist in the standard taxonomy. See Item 405(c)(1)(iii)(B) of Regulation S-T. Please tell us why the current U.S. GAAP tag is not applicable, or alternatively revise your disclosure, beginning with your next filing, to correctly tag this disclosure.
Yesterday’s sample comment letter says that more investors are using XBRL data, but they aren’t the only ones: Corp Fin is also putting this info to work. In the SEC’s most recent “Semi-Annual Report to Congress on Machine Readable Data for Corporate Disclosures” – which John flagged in July – the Staff gave a heads up that they had been issuing comment letters about tagging requirements. In addition, the report says that Corp Fin is using the data in these ways:
– To help identify issuers that are subject to the disclosure and submission requirements of, and potentially subject to a trading prohibition under, the Holding Foreign Companies Accountable Act (Commission-Identified Issuers). Specifically, the staff uses data in Forms 10-K, 20-F and 40-F identifying the auditor (or auditors) who provided opinions related to the financial statements presented in the registrant’s annual report, the location where the auditor’s report has been issued, and the Public Company Accounting Oversight Board (PCAOB) ID Number(s) of the audit firm(s) or branch(es) providing the opinion(s).
– To identify, count, sort, compare, and analyze registrants and their disclosures (e.g., to identify more readily and accurately issuers that are listed on a specific exchange or that have identified themselves as well-known seasoned issuers), based on several items of machine-readable data that appear on the cover pages of registrants’ annual reports (Forms 10-K, 20-F, and 40-F).
– To make preliminary assessments of compliance with the Commission’s recently adopted pay-versus performance disclosure requirements.
With XBRL creeping in to proxy statements, will it also come for ESG? Only time will tell.
