Wilson Sonsini Goodrich & Rosati

Below is a summary of the rule changes, guidance, and disclosure considerations related to annual reports on Form 10-K to be filed in 2021.

Reminders for Preparing the Form 10-K

  • Amendments to Business, Legal Proceedings, and Risk Factors. In August 2020, the U.S. Securities and Exchange Commission (SEC) adopted amendments related to the description of business, legal proceedings, and risk factors in SEC filings. Companies will need to assess whether updates to their Form 10-K are required as a result of these amendments. For example, to the extent material to an understanding of a company’s business, a description of the company’s human capital resources will be required. Companies may also need to update their risk factor disclosure, including the addition of a risk factor summary in the forepart of their filings if their risk factors exceed 15 pages and organization of their risk factors under relevant headings, including the placement of any generic risk factors under the caption “General Risk Factors.” In addition, the amendments allow a company to select an appropriate materiality threshold, within limitations, for environmental proceedings. These amendments were effective November 10, 2020. For a detailed discussion of these amendments, please see our previous alert.
  • COVID-19 Disclosure. With the continued progression in early 2021 of the COVID-19 pandemic, companies should keep in mind the CF Disclosure Guidance: Topic No. 9 and CF Disclosure Guidance: Topic No. 9A published in 2020. In these guidance documents, the staff of the SEC encouraged companies to assess and disclose the evolving impacts of COVID-19, including in MD&A, the business section, risk factors, legal proceedings, disclosure controls and procedures, internal control over financial reporting, and the notes to the financial statements. These disclosures should allow investors to evaluate the current and expected impact of COVID-19 through the eyes of management and be revised as facts and circumstances evolve. Companies should be aware that the SEC continues to monitor COVID-19 disclosures, and recently settled charges against a national restaurant chain for misleading COVID-19 disclosures.1 For additional detail related to best practices for COVID-19 disclosures, please see our previous alert.
  • Risk Factors. Companies should take a fresh look at risk factors. In addition to risks related to the COVID-19 pandemic, companies should consider updates related to Brexit, the transition away from LIBOR expected in 2021, and privacy matters under the California Privacy Rights Act approved in November 2020.
  • Incorporation by Reference in MD&A. In January 2020, the SEC published compliance and disclosure interpretations (CDIs) related to Instruction 1 of Item 303(a) of Reg. S-K. Instruction 1 provides that, for companies providing financial statements covering three years in a filing, discussion about the earliest of the three years may be omitted if the company previously included such discussion in a prior filing on EDGAR that required such disclosure. The company must, however, identify the location in the previous filing where the omitted discussion may be found. The CDIs clarified that the statement identifying the location of the previous filing does not automatically incorporate such disclosure by reference into the current filing unless the company expressly states that the information is incorporated by reference. For a detailed discussion of these CDIs, please see our previous alert.
  • Filer Status and Cover Page. In March 2020, the SEC adopted amendments related to the definitions of “accelerated filer” and “large accelerated filer” that first impact annual reports on Form 10-K filed after the adoption date (meaning those companies with a December 31 fiscal year-end are confronting these changes for the first time). The amendments exclude from the accelerated filer and large accelerated filer definitions companies that qualify as smaller reporting companies (SRCs) and that had annual revenues of less than $100 million in the most recent fiscal year for which audited financial statements are available. The amendments also increase the transition thresholds for companies exiting certain filer statuses. SRCs that no longer qualify as an accelerated filer or large accelerated filer are not required to include an auditor attestation report in their annual report on Form 10-K. Companies should take note that the cover page of the annual report on Form 10-K has been updated and includes a statement and checkbox indicating whether a Section 404(b) auditor attestation is included in the filing. For a detailed discussion of these amendments, please see our previous alert.
  • Electronic Signatures. In November 2020, the SEC adopted rules permitting, subject to certain requirements, the use of electronic signatures for authentication documents used in connection with SEC filings (including the Form 10-K). In order to utilize electronic signatures for SEC filings, the signatory must have manually signed an attestation agreeing that the use of an electronic signature constitutes the legal equivalent of such individual’s manual signature. Companies may opt to have an attestation signed at the time they seek signature for their annual report on Form 10-K. A sample attestation can be found here. For additional details related to the use of electronic signatures for SEC filings, please see our previous alert.
  • Inline XBRL. In 2018, the SEC adopted amendments requiring the use, on a phased-in basis, of iXBRL format for financial statements; in 2019, the SEC adopted amendments requiring iXBRL tagging for certain cover page information for annual reports on Form 10-K and other filings. Large accelerated filers and accelerated filers are already required to comply with these rules, while all other filers must comply beginning with their reports for fiscal periods ending on or after June 15, 2021. As a reminder, in August 2019, the SEC published CDIs to clarify certain iXBRL requirements.
  • Critical Audit Matters (CAMs). In 2017, the Public Company Accounting Oversight Board adopted a new auditor reporting standard requiring auditors to provide more information about the company’s audit, including CAMs. The new standard was applicable for large accelerated filers for audits of fiscal years ending on or after June 30, 2019, and is applicable for accelerated filers, non-accelerated filers, and smaller reporting companies for audits of fiscal years ending on or after December 15, 2020. For those companies with a December 31 fiscal year-end, the upcoming annual report on Form 10-K will be the first year that CAMs may be included in the audit report. Companies should continue to discuss this standard and how it may apply to the company’s audit report with their independent auditor. This standard is not applicable to emerging growth companies.
  • Guidance on Confidential Treatment Process. In September 2020, the Division published an amended version of CF Disclosure Guidance: Topic No. 7 relating to the submission of confidential treatment applications pursuant to Rules 406 and 24b-2. The amended guidance provides three choices for companies with a soon-to-expire confidential treatment order: 1) if the contract is still material but the redacted information no longer needs to be protected from public disclosure, then the company should refile it in unredacted form; 2) if the original order was issued less than three years ago, then companies may use a short form application to extend the order; and 3) if the original order was issued more than three years ago, then companies may either (A) file a new, complete application for confidential treatment under Rule 406 and Rule 24b-2 (the short form application is not available in these cases) or (B) comply with the requirements in Item 601(b)(10) of Regulation S-K (as amended in 2019 and referred to as the redacted exhibit rules). The guidance also states that “the staff will not recommend enforcement action to the Commission if a company refiles a redacted exhibit in compliance with the redacted exhibit rules in the company’s first Exchange Act report following the expiration of the confidential treatment order.” Companies should check the status of all of their outstanding confidential treatment applications.
  • Update Confidential Treatment Legends. In November 2020, the SEC adopted amendments that updated the standard for redacting confidential information based on the U.S. Supreme Court’s adoption of a new definition of “confidential” that does not include the competitive harm requirement.2 Under the amendments, companies may redact confidential information from acquisition agreements and material contracts if the company customarily and actually treats that information as private or confidential and if the omitted information is not material. If it does so, the company should include a prominent statement on the first page of the redacted exhibit that certain identified information has been excluded from the exhibit because it is both not material and is the type that the company treats as private or confidential. These amendments are effective March 15, 2021.
  • Exhibit Filings for Collateral Securities. In March 2020, the SEC adopted amendments to Rules 3-10 and 3-16 of Regulation S-X intended to streamline financial disclosure requirements for issuers of registered debt. Companies complying with these streamlined rules are required to file a new Exhibit 22, under Item 601(b)(22) of Regulation S-K, listing each affiliate whose securities are pledged as collateral for the company’s debt securities and the securities pledged. This exhibit requirement applies to Forms 10-K and 10-Q and became effective on January 4, 2021.

Coming Soon: Additional Regulation S-K Amendments

In November 2020, the SEC adopted amendments to certain financial disclosure requirements in Regulation S-K, including MD&A. These amendments are effective February 10, 2021; however, there is a transition period for compliance. Companies will be required to apply the amended rules for their first fiscal year ending on or after August 9, 2021. Notwithstanding the transition period, companies may apply the amended rules at any time after the effective date so long as they provide disclosure responsive to an amended item in its entirety. For a detailed description of these amendments, please see our previous alert.

[1] In the Matter of The Cheesecake Factory Incorporated, Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order, Release No. 90565 (December 4, 2020), available here.

[2] See Food Marketing Institute v. Argue Leader Media, 139 S. Ct. 2356 (2019).