On June 28, 2018, the Securities and Exchange Commission (SEC) voted on several final rules and rule proposals, including the adoption of final rules that broaden the definition of “smaller reporting company” and that require the use of the Inline XBRL format in certain operating company and mutual fund filings.
Broadened Definition of Smaller Reporting Company
In an effort to reduce the disclosure burden for smaller companies, in 2008 the SEC established the smaller reporting company (SRC) category of companies. SRCs may provide more limited, or “scaled,” disclosure under Regulation S-K and Regulation S-X, including:
The provision of less detailed disclosure regarding their business;
Fewer years of analysis under the MD&A and Results of Operations section;
Scaled executive compensation disclosure; and
The provision of two, rather than three, years of financial statements.
The prior definition and new definition are presented in the chart below.
The new SRC definition allows a company with less than $250 million of public float to take advantage of the scaled disclosure accommodations, as compared to the $75 million threshold under the prior definition. The final rules also expand the definition of SRC to include companies with less than $100 million in annual revenues during their most recently completed fiscal year if they also have either no public float or a public float of less than $700 million. Previously, the revenue test required no public float and less than $50 million in annual revenues.
Consistent with the previous definition, under the revised definition a company that is unable to qualify as an SRC under the initial thresholds will remain unqualified until it determines that it meets one or more lower SRC subsequent qualification thresholds. The subsequent qualification thresholds, set forth in the table below, are set at 80 percent of the initial qualification thresholds. The SEC believes that these lower thresholds are necessary to avoid situations in which companies frequently enter and exit SRC status due to small fluctuations in their public float.
The final rules will allow many newly public companies and other existing filers to fit within the new definition of SRC and be able to take advantage of more abbreviated disclosures in their periodic filings. The SEC estimates that 966 additional companies will be eligible for SRC status in the first year under the new definition.
The amendments to Rule 3-05(b)(2)(iv) of Regulation S-X increase the net revenue threshold in that rule from $50 million to $100 million. As a result, companies may omit financial statements of businesses acquired or to be acquired for the earliest of the three fiscal years otherwise required by Rule 3-05 if the net revenues of that business are less than $100 million.
Accelerated and Large Accelerated Filer Status
The final amendments preserve the application of the current thresholds contained in the “accelerated filer” and “large accelerated filer” definitions in Exchange Act Rule 12b-2. As a result, companies with $75 million or more of public float that qualify as SRCs will remain subject to the requirements that apply to accelerated filers, including the timing of the filing of periodic reports and the requirement that accelerated filers provide the auditor attestation of management’s assessment of internal control over financial reporting required by Section 404(b) of the Sarbanes-Oxley Act. However, the adopting release notes that SEC Chairman Clayton has directed the staff to formulate recommendations for possible additional changes to the accelerated filer definition that, if adopted, would have the effect of reducing the number of companies that qualify as accelerated filers.
New Inline XBRL Requirements
The SEC also voted to adopt amendments to the eXtensible Business Reporting Language (XBRL) requirements for operating companies and funds. The amendments require the use of the Inline XBRL format for the submission of operating company financial statement information and fund risk/return summary information. Inline XBRL, currently used voluntarily by a number of operating company filers, involves embedding XBRL data directly into the filing so that the disclosure document is both human-readable and machine-readable. While the amendments modify existing XBRL requirements, they do not change the categories of filers or scope of disclosures subject to XBRL requirements.
The new Inline XBRL requirements apply to all operating companies, including emerging growth companies, smaller reporting companies, and foreign private issuers that provide their financial statements in accordance with U.S. GAAP or IFRS as issued by the International Accounting Standards Board.
The SEC anticipates that the use of Inline XBRL would, among other things, reduce XBRL preparation time and effort, give the preparer full control over the presentation of XBRL disclosures within the HTML filing, reduce the likelihood of inconsistencies between HTML and XBRL filings, and enhance the usability of structured disclosures for investors.
Operating companies that are currently required to submit financial statement information in XBRL will be required, on a phased basis, to transition to Inline XBRL as follows:
Large accelerated filers that use U.S. GAAP will be required to comply beginning with fiscal periods ending on or after June 15, 2019.
Accelerated filers that use U.S. GAAP will be required to comply beginning with fiscal periods ending on or after June 15, 2020.
All other filers, including foreign private issuers, will be required to comply beginning with fiscal periods ending on or after June 15, 2021.
Filers will be required to comply beginning with their first Form 10-Q filed for a fiscal period ending on or after the applicable compliance date.
The requirement that operating companies and funds post XBRL data on their websites will be eliminated upon the effective date of the amendments.
The final rules that broaden the definition of SRCs can be found here and the final rules regarding the use of the Inline XBRL format can be found here. The final rules will become effective 60 days after publication in the Federal Register.