On June 28, 2018, the Securities and Exchange Commission (the “SEC”) approved the adoption of amendments to expand the number of companies that meet the definition of “smaller reporting company” and require the use of Inline XBRL in certain filings.
New “Smaller Reporting Company” Definition
The new “smaller reporting company” definition expands the number of companies that qualify for certain scaled disclosures in their SEC filings. A company can meet the new definition of “smaller reporting company” if it meets one of two revised tests. First, a company may qualify as a smaller reporting company if its public float is less than $250 million, which represents a $175 million increase over the $75 million threshold in the pre-amendment definition. For this purpose, public float is measured as of the last business day of a company’s most recently completed second fiscal quarter. Second, a company may qualify as a smaller reporting company if the company has annual revenues of less than $100 million and either no public float or a public float that is less than $700 million. This new revenue threshold marks a change from the prior “smaller reporting company” definition, which allowed for scaled disclosures only when a company had no public float and less than $50 million in annual revenues.
Qualification as a smaller reporting company provides a significant modification to a company’s disclosure obligations. For example, among other disclosure accommodations, a smaller reporting company is permitted to:
- provide two (rather than three) years of financial statements and corresponding Management’s Discussion and Analysis of Financial Condition and Results of Operations;
- provide executive compensation information for three (rather than five) named executive officers;
- omit the Compensation Discussion & Analysis;
- provide two (rather than three) years of information in the Summary Compensation Table; and
- omit several other executive compensation tables, pay-ratio disclosure and narrative descriptions of certain compensation policies and practices.
The SEC did not amend any of the scaled disclosure accommodations for smaller reporting companies in Regulation S-K and Regulation S-X. A smaller reporting company may continue to comply with the scaled disclosure requirements on an item-by-item basis.
As with the current “smaller reporting company” definition, a company that previously determined it did not qualify as a smaller reporting company will not qualify as a smaller reporting company until it meets one or more of the lower subsequent qualification thresholds set forth in the definition. The subsequent qualification thresholds are based on 80% of the initial qualification threshold amounts, which results in a public float test threshold of less than $200 million, as well as an annual revenue test of less than $80 million and a corresponding public float threshold of less than $560 million.
The SEC’s definitions of “accelerated filer,” which includes a public float threshold of $75 million, and “large accelerated filer,” which contemplates a public float threshold of $700 million, were amended to preserve the application of these thresholds, by eliminating the exclusions for companies that are eligible to use the smaller reporting company requirements for their periodic reports. As a result, a company that qualifies as a smaller reporting company and has a public float of $75 million or more must comply with the accelerated filer periodic reporting deadlines and provide the auditor attestation of management’s assessment of internal control over financial reporting required by Section 404(b) of the Sarbanes-Oxley Act of 2002. Chairman Jay Clayton has asked the SEC staff to recommend future changes to the “accelerated filer” definition to reduce the number of companies that qualify as accelerated filers, considering, among other things, the historical and current relationship between the “smaller reporting company” and “accelerated filer” definitions.
The Commission noted that the new “smaller reporting company” definition would increase the number of companies that qualify as smaller reporting companies by nearly 1,000 companies. The amendments will become effective 60 days after publication in the Federal Register. Once effective, the amended rules will allow a company that qualifies as a smaller reporting company to utilize scaled disclosures immediately.
Inline XBRL for Tagged Data
The SEC also approved the adoption of amendments to the eXtensible Business Reporting Language (“XBRL”) requirements for operating companies and open-end management investment companies (“funds”). Companies use XBRL, which presents information as interactive data, to tag each point of data in their financial statements, while funds tag information included in risk/return summaries. Inline XBRL, which allows a document to be both human-readable as well as machine-readable, requires companies and funds to embed XBRL data directly into their HTML filings. Currently, operating companies and funds are required to provide XBRL data only in exhibits to SEC filings and post the XBRL information on the filers’ websites; however, operating companies have had the option to voluntarily file their financial statements for periodic and current reports using the Inline XBRL format since June 2016.
The amendments will require the use of Inline XBRL for operating company financial statement information and fund risk/return summaries included in prospectuses. Despite these changes to existing XBRL requirements, the amendments do not alter the categories of filers or the type of disclosures subject to XBRL requirements.
The amendments will go into effect in phases starting in 2019, with compliance required beginning with the filer’s first Form 10-Q for a fiscal period ending on or after the applicable compliance date. Large accelerated filers that prepare their financial statements in accordance with U.S. GAAP must comply with the new requirements for financial statements for fiscal periods ending on or after June 15, 2019. Accelerated filers that prepare their financial statements in accordance with U.S. GAAP must comply with the new requirements for financial statements for fiscal periods ending on or after June 15, 2020. All other operating company filers that are subject to financial statement XBRL requirements, including foreign private issuers that prepare their financial statements in accordance with IFRS, must comply with the new requirements for financial statements for fiscal periods ending on or after June 15, 2021. With regard to funds, the compliance dates will be two years after the effective date of the amendments for large fund groups and three years after the effective date of the amendments for small fund groups.
The SEC eliminated the XBRL website posting requirements for financial statement information and risk/return summaries, effective within 30 days of publication of the final rules in the Federal Register.
Given the need to make significant changes to the SEC filing preparation process to accommodate Inline XBRL, operating companies and funds should begin exploring the ways in which they will comply with the new requirements, and should anticipate having sufficient lead time to prepare and test filings that include Inline XBRL.