It is now time for foreign private issuers to prepare their annual reports on Form 20-F. For companies with a calendar year-end, the Form 20-F must be filed with the U.S. Securities and Exchange Commission (the SEC) by 30 April 2019.

To help you with the preparation of this filing, consider the following recent developments, trends and topics that may be areas of focus of the SEC in the 2019 review process.

In 2018, in its review of foreign issuers’ annual reports on Form 20-F and other disclosures, the SEC staff has continued its focus on disclosures of non-GAAP financial measures. Other trends in SEC comment letters in 2018 include the Operating and Financial Review and Prospects (OFR) section (Item 5 of Form 20-F) and continued focus from the SEC’s Office of Global Security Risk on dealings in sanctioned countries and state sponsors of terrorism. Going forward, the SEC has indicated that it expects robust disclosures from companies regarding cybersecurity risk and Brexit. We discuss these in further detail below.

Disclosures of Non-GAAP Financial Measures[1]

In accordance with the trend observed following the May 2016 update to its compliance and disclosure interpretations (C&DIs) regarding the use of financial measures that do not conform either to U.S. GAAP or IFRS (collectively, “non-GAAP”) (view the SEC’s update to its C&DIs on non-GAAP measures), the use of such measures has remained on the SEC’s radar.

SEC comment letters in 2018 have focused on the following topics relating to disclosure of non-GAAP measures:

  • Undue Prominence: The SEC has continued to stress that, as required by Regulation G and Item 10 of Regulation S-K, a presentation of the most directly comparable GAAP or IFRS financial measure must be presented “with equal or greater prominence” whenever a non-GAAP measure is disclosed. Headings, bullets and tables must first present the GAAP or IFRS and then the non-GAAP measures (in that order), including in executive summaries and other summary sections. Non-GAAP measures must be presented individually or in small related sets, as a full non-GAAP income statement may give undue prominence to non-GAAP measures.
  • Net of Tax Presentation: Several SEC comments remind companies that when adjustments are used to arrive at a non-GAAP measure, such adjustments must show taxes as a separate adjustment and must also be adequately explained.
  • Individually Tailored Recognition & Measurement Methods: Where adjustments appear to substitute individually tailored recognition and measurement methods for those of GAAP, the SEC has requested companies to remove these adjustments from the relevant non-GAAP measure or explain why they are necessary in light of its guidance on non-GAAP measures.
  • Measures Excluding Normal, Recurring or Cash Operating Expenses: The SEC staff has stressed that if a 20-F filer eliminates an expense that the SEC staff considers to be a normal, recurring or cash operating expense necessary to operate its business, it may be required to disclose that it presents this measure solely as a valuation metric and to add disclosure emphasizing the limitations of its use, including that it should not be viewed as a measure of overall performance. Companies should explain in detail the considerations for excluding normal, recurring or cash-operating expenses since these often revolve around circumstances that are unique for each company.

Non-GAAP disclosures must include an explanation of why management believes the non-GAAP measure provides useful information to investors regarding the company’s financial condition and results of operations, as well as any additional purposes for which management uses the non-GAAP measure. The SEC staff may request information provided to the company’s board to support statements that non-GAAP financial measures are used to assess business or operating performance.

Operating and Financial Review and Prospects (Item 5 of Form 20-F)

Performance metrics have remained a point of focus of SEC comment letters over the past year. Form 20-F filers are reminded that when the results of operations in the OFR section of Form 20-F are discussed by referring to a key metric, a clear definition of the metric (particularly when the definition diverges from the one commonly used in the industry) as well as the method used by the registrant to calculate the metric should be provided, along with a discussion regarding any limits on the usefulness of the metric. Where more than one factor is presented as contributors to material period-to-period changes, the SEC will often comment that the registrant must provide a separate analysis of the effect of each factor. Additionally, performance metrics should be used only if they adequately explain changes in income statement line items.

Dealings in Countries Designated as “State Sponsors of Terrorism” and Countries Subject to US Sanctions

When a company discloses, in its Form 20-F or elsewhere, that it engages in transactions in or with countries designated by the U.S. Department of State as “state sponsors of terrorism,” which currently include Iran, Sudan, North Korea and Syria, such companies will frequently receive comment letters from the SEC’s Office of Global Security Risk requesting additional information on such activities. These comment letters often request information regarding the nature and extent of any past, current and anticipated contacts with these countries, such as any services, products, information or technology provided to, and direct or indirect agreements, commercial arrangements or other contacts with, the governments of those countries or any entities that might be controlled by those governments.

The SEC has also routinely requested that companies provide information regarding past, current and anticipated contacts with sanctioned countries, whether through subsidiaries, joint ventures or other direct or indirect arrangements. Companies are also frequently requested to provide the SEC with information as to whether any of the materials or technologies provided to any country subject to U.S. trade sanctions are listed as controlled materials or technologies by the U.S. Department of Commerce’s Bureau of Industry and Security (BIS). Please see the section “Sanctions Update” below for further details.

As a reminder, under Section 13(r) of the Securities Exchange Act of 1934, companies are required to disclose in Form 20-F if they or any of their affiliates knowingly engaged in specified activities relating to Iran, terrorism or the proliferation of weapons of mass destruction. There is no materiality threshold for disclosure under Section 13(r), so all transactions, however de minimis, are required to be reported.

Fair Value Measurements

Fair value measurements have continued to receive attention from the SEC staff in comment letters. Companies should take care to include adequate information on the precise valuation techniques and inputs used in determining fair value. For example, the SEC noted that a registrant’s Form 20-F did not appear to provide the quantitative information about the significant unobservable inputs used in the fair value measurement of certain investments, as is required by IFRS 13.

Sanctions Update

Iran Sanctions

During 2018, the Trump administration withdrew the United States from the 2015 Joint Comprehensive Plan of Action (JCPOA), which had previously relaxed certain secondary sanctions against Iran applicable to non-U.S. persons. As a result, after phased wind-down periods, the last of which ended in November, the sanctions that were in place before the effectiveness of the JCPOA have “snapped back.” These sanctions apply to non-U.S. persons conducting Iran-related transactions, and largely target Iran’s energy, ship building, shipping and financial sectors. The Trump administration specifically seeks to cut off Iranian oil exports as much as possible.

For more information, you may wish to view our related client publication on the withdrawal of the United States from JCPOA.

Russia Sanctions

For several months now, American lawmakers have considered imposing curbs on Russian sovereign debt sales and tougher limits on some of the country’s biggest banks in retaliation for perceived election meddling by Russia. Most prominent among several proposed Senate bills, the bipartisan Defending American Security from Kremlin Aggression Act of 2018 (DASKAA) would include sanctions targeted at Russia’s sovereign debt, financial institutions and energy sector.

For more information on these and other sanctions, you may wish to view our most recent quarterly Sanctions Roundup.

SEC Updates

SEC Simplification of Disclosure Rules

On 17 August 2018, the SEC adopted amendments to simplify and update disclosure requirements that have become duplicative, overlapping or outdated in light of other SEC disclosure requirements, U.S. GAAP or changes in the information environment. The amendments, which affect annual reports on Form 20-F, became effective on 5 November 2018. The noteworthy changes affecting foreign private issuers (FPIs) include:

  • Exchange Rate Data. Form 20-F no longer requires FPIs to provide exchange rate data when financial statements are prepared in a currency other than U.S. dollars, as such data is widely available.
  • Earnings Per Share Calculation. The requirement to file as an exhibit a statement explaining how any earnings per share information presented in a filing was calculated has been eliminated.
  • Eliminate Trading Price History. Companies whose shares are traded in an established trading market no longer need to disclose high and low trading prices for each quarter in the last two full fiscal years and interim periods, given that such information is easily accessible to investors, so long as the company’s trading symbol and principal trading markets are disclosed. Additionally, issuers with common equity that is not traded on an exchange are required to indicate, as applicable, that any over-the-counter quotations reflect inter-dealer prices and may not necessarily represent actual transactions.
  • Research and Development Expenditures. Companies are no longer specifically required to disclose research and development expenditures, since such information is already required in the notes to the financial statements. However, companies should continue to consider whether disclosure regarding research and development expenditures is appropriate in the context of describing material trends in the “Operating and Financial Review and Prospects” section.
  • Dividend Restrictions. Requirements to disclose any dividend restrictions and any limitations on the payment of dividends have been eliminated through changes to Items 10.F and 14.B of Form 20-F, namely because FPIs are already required to disclose dividend restrictions in the financial statements.

New Disclosure Rules for Mining Companies

In October 2018, the SEC adopted new disclosure rules for companies with material mining operations, which will replace the existing Industry Guide 7. The new rules are intended to bring the SEC’s mining disclosure requirements closer in line with international standards, in particular the Committee for Mineral Reserves International Reporting Standards (CRIRSCO). 20-F filers that have mining operations (including royalty companies) that are material to the company’s business or financial condition will be subject to the new rules, which will take effect beginning with a company’s first fiscal year beginning on or after 1 January 2021. Key changes from the SEC’s existing rules for mining companies include:

  • requiring that every disclosure of mineral resources, mineral reserves and material exploration results reported in a company’s registration statements and periodic reports be based on, and accurately reflect, information and supporting documentation prepared by a “qualified person;” and
  • requiring the disclosure of mineral resources (currently prohibited under SEC rules except in limited circumstances) in addition to mineral reserves.

For more information on the new disclosure rules for mining companies, you may wish to view our related client publication.

Risk Factors

In a recent speech, SEC Chairman Jay Clayton emphasized three areas of risk disclosure that the SEC will monitor in the upcoming filing season: (1) Brexit, (2) the transition away from LIBOR in financial contracts and (3) cybersecurity. The following points from this speech provide insight into what the SEC staff may be looking for in reviewing companies’ public disclosures, in particular in the “Risk Factors” and “Operating and Financial Review and Prospects” sections of Form 20-F:


Chairman Clayton indicated that the SEC will focus on disclosure regarding risks and uncertainties faced by SEC reporting companies in connection with the United Kingdom’s exit from the European Union.

Chairman Clayton noted that:

  • he has directed the SEC staff to focus on disclosures companies make about Brexit; and
  • in contrast to some existing disclosures that simply state that Brexit presents a risk, he would like to see more robust disclosure regarding management’s consideration of Brexit and its potential impact on companies and their operations.

Transition Away from LIBOR

With LIBOR set to be phased out by 2021, the SEC will be looking to ensure that companies have planned and are acting accordingly.

Specifically, disclosures should address the following:

  • For companies with floating rate obligations tied to LIBOR, does the documentation provide fallback language?
  • If so, will it work in such a situation?
  • Will consents be needed to amend the documentation, and have market participants considered the difficulty and costs associated with obtaining such consents?

Cybersecurity Risk

From a disclosure perspective, key takeaways for 20-F filers include:

  • The importance of sufficiently informing investors of cybersecurity risk.
  • Ensuring that disclosure controls and procedures are in place for the disclosure of material cybersecurity events, as well as policies that protect against corporate insiders trading in advance of company disclosures of material cyber incidents.

For further guidance, view the interpretive guidance issued by the SEC to assist public companies in preparing their disclosures.

Developments in Global Trade Policy

Companies should assess the impact on their business and results of operations of developments in global trade regimes, in particular recent increased tariffs between the United States and China and the Trump Administration’s decision not to accede to a Trans-Pacific trade agreement. If material, companies should include meaningful disclosure regarding global trade policy-related risks in their 20-F.

SEC Filing Fee

For the period from 1 October 2018 to 30 September 2019, the SEC filing fee for registration statements is $121.20 per $1 million of securities registered.

Other Development

Critical Audit Matters

A new Public Company Accounting Oversight Board (PCAOB) standard requiring independent auditor reports to include disclosure of critical audit matters takes effect beginning with the first fiscal year ending after 30 June 2019 (for large accelerated filers) or after 15 December 2020 (for all other companies to which the requirements apply). While this requirement does not apply to annual reports for the fiscal year ending 31 December 2018, Form 20-F filers—and in particular large accelerated filers—should consider engaging with their auditors to begin to understand what the reporting of critical audit matters may look like in the future and how this could affect other disclosures in the Form 20-F, such as critical accounting policies and estimates.