Form 10-K

Recent Commission Comments on the Tax Implications of Overseas Earnings and Offshore Cash Holdings

by Vanessa Schoenthaler on September 21, 2011

SEC Comment LettersThe Financial Times ran a piece on Monday noting the the Securities and Exchange Commission’s Division of Corporation Finance has been increasingly focusing on disclosure regarding the tax implications of overseas earnings and offshore cash holdings in accounting and regulatory reviews of company filings.

Below are some of the recurring comments that the Commission has been issuing*:

  1. Please disclose the amount of cash, cash equivalents and investments held outside the U.S. Please also describe any potential income tax consequences or other limitations that may impact your ability to repatriate cash, cash equivalents and investments held outside of the U.S.
  2. Please tell us what consideration you gave to providing a discussion of the need to repatriate undistributed earnings of foreign subsidiaries and the associated potential tax impact.
  3. Please tell us how you considered providing disclosures that explain how having earnings in countries where you have different statutory tax rates impacts your effective income tax rates and obligations. In this regard, you should consider explaining the relationship between the foreign and domestic effective tax rates in greater detail as it appears as though separately discussing the foreign effective income tax rates may be important information necessary to understanding your results of operations. To the extent that certain countries have had a more significant impact on your effective tax rate, then tell us how you considered disclosing this information and including a discussion regarding how potential changes in such countries’ operations may impact your results of operations.

Most of the above also refer back to Item 303(a)(1) of Regulation S-K, addressing liquidity in MD&A disclosure, and Sections III.B and IV of Interpretive Release 33-8350, addressing the Commission’s guidance on MD&A content and focus, and on liquidity and capital resources disclosure. Both of which you may want to revisit as we approach the quarter’s end.

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*Remember, comment letters are released no earlier than 20 business days after the Commission has completed its review.

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The SEC Proposes New Rules on Conflict Minerals … Do You Know What’s In Your Supply Chain?

by Vanessa Schoenthaler on December 16, 2010

Yesterday the Securities and Exchange Commission proposed a series of new rules to implement provisions of the Dodd-Frank Act addressing:

The proposed rules on conflict minerals would add a new Section 13(p) to the Securities Exchange Act of 1934, applicable to all reporting companies (including, as proposed, smaller reporting companies and foreign private issuers) for whom “conflict minerals are ‘necessary to the functionality or production of a product manufactured’ or contracted to be manufactured” by the company.

Conflict minerals include:

  • any derivatives of the above or any other minerals or derivatives designated by the Secretary of State.

If a company falls within this new category of issuer, it would be required to make a reasonable country of origin inquiry to determine whether the conflict minerals it uses originate from the Democratic Republic of the Congo or any country sharing an internationally recognized border with the D.R. Congo (which, at this time, includes: Angola, Tanzania,Rwanda, Uganda, The Republic of Congo, The Central African Republic, The Sudan, Burundi and Zambia).

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If a company finds that its conflict minerals did not originate from the D.R. Congo or a bordering country, it would be required to disclosure that determination, and the reasonable country of origin inquiry used to make the determination, in its annual report and on its website.

If, however, a company finds that its conflict minerals did originate from the D.R. Congo or a bordering country, or if it is unable to find that they did not, then the company would be required to disclose that determination in its annual report, prepare and furnish as an exhibit to its annual report a Conflict Minerals Report and make the Conflict Minerals Report available on its website.

A company’s Conflict Mineral Report would be required to include a description of the:

  • due diligence undertaken on the source and chain of custody of the company’s conflict minerals;
  • products that are not “D.R. Congo conflict free”;
  • country of origin of the conflict minerals,
  • facilities used to process the conflict minerals; and
  • efforts used to determine the mine or location of origin of the conflict minerals.

The company would also be required to obtain an independent audit of the Conflict Minerals Report, to certify the audit report and to furnish a copy of the audit report with its Conflict Minerals Report.

The Commission’s release defines a number of terms used throughout proposed rule, including: “manufacture” and “contract to manufacture”. Comments are due by January 31, 2011.

Summit on the Illegal Exploitation of Natural Resources

Coincidentally (unless yesterday was international conflict minerals day and no one told me), Mail and Globe is reporting that the International Conference on the Great Lakes Region held a Special Summit on the Illegal Exploitation of Natural Resources yesterday, where leaders from 11 African nations signed a pledge to take steps to implement a regional certification system to track conflict minerals from their location of origin to the facilities where they are processed.

Do You Know What’s In Your Supply Chain?

These proposed rules have the potential to affect a large number of companies (the Commission estimates approximately 6,000 issuers will be affected in some way).  Take a look at this report published by The Enough Project (an affiliate project of the Center for American Progress), leaving your political predilections aside for a moment, over the course of two years the group surveyed 21 of the largest electronic companies regarding the conflict status of their supply chains and found none of them to be conflict-free.  If Apple and Intel have conflict minerals in their supply chains, what’s in yours?

SEC Proposed Conflict Mineral Rules

Source: Enough!, Conflict Minerals Company Ranking

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The SEC Proposes New Disclosure Rules on Mine Safety

by Vanessa Schoenthaler on December 16, 2010

SEC Proposed Mine Safety RulesYesterday the Securities and Exchange Commission proposed a series of new rules to implement provisions of the Dodd-Frank Act addressing:

The proposed rules on mine safety require that companies operating coal or other mines (as defined in the Federal Mine Safety and Health Act of 1977) disclose information regarding specific health and safety violations, orders and citations, related assessments and legal actions, and mining-related fatalities in their quarterly and annual reports. The proposed rules also require companies to file a Form 8-K whenever they receive certain shut-down orders and notices of patterns or potential patterns of violations from the Mine Safety and Health Administration.

But these disclosure requirements aren’t entirely new, they really went into effect on August 20, 2010 pursuant to a self-executing provision of the Dodd-Frank Act.  The proposed rules issued by the Commission yesterday simply codify the changes and add some additional disclosure requirements that are “designed to provide context”.  For example, yesterday the James River Coal Company filed this Form 8-K disclosing, under Item 8.01, its receipt of an imminent danger order from the Mine Safety and Health Administration related to a miner having an open pack of cigarettes and a lighter in an underground mine.  If the Commission’s rules are adopted as proposed future disclosures of this nature would appear under a new Form 8-K Item 1.04.

Notably, the rules only apply to mines located within the United States, so a company that operates mines in both the U.S. and Canada, for example, would only be required to make the disclosures mandated by the new rules with respect to its U.S. mines.

The Commission’s release provides a greater level of detail on the proposed disclosure requirements and comments are due by January 31, 2011.

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The SEC Proposes New Disclosure Rules on Payments Made in Connection with Resource Extractions

by Vanessa Schoenthaler on December 16, 2010

SEC Proposed Resource Extraction Rules

Yesterday the Securities and Exchange Commission proposed a series of new rules to implement sections of the Dodd-Frank Act addressing:

The proposed rules on disclosure of payments made to governments by companies involved in resource extraction would add a new Section 13(q) to the Securities Exchange Act of 1934. Section 13(q) would require companies to disclosure information related to the type and total amount of payments made to the U.S. and foreign governments in connection with projects related to the commercial development of oil, natural gas or minerals.

The disclosure would be made in a company’s annual report and “payments” would include taxes, royalties, fees, including licensing fees, production entitlements, bonuses and other material benefits. A company would be required to break down payment information according to the:

  • total amount of payments, by category;
  • currency used to make the payments;
  • financial period in which the payments were made;
  • business segment of the company that made the payments;
  • government that received the payments; and
  • project to which the payments relate.

The Commission’s release defines a number of other terms used throughout the proposed rule, including: “resource extraction issuer”, “commercial development of oil, natural gas, or minerals” and “foreign government”, and is specifically seeking comments on whether smaller reporting companies and foreign private issuers should be:

  • all together exempt from the proposed rules;
  • subject to scaled disclosure requirements, or
  • subject to a period of delayed implementation.

Comments are due by January 31, 2011.

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Financial Statement Red Flags

by Vanessa Schoenthaler on December 3, 2010

Financial Statement Red Flags

Yesterday the Securities and Exchange Commission made available a slide presentation from the Public Company Accounting Oversight Board’s  2010 Forum on Auditing in the Small Business Environment.  The slides include detailed notes on some of the more common issues encountered by the Commission in reviewing company financial statements.  A number of topics are addressed, from reverse mergers and business combinations to MD&A and disclosure controls and procedures, with some of the more universally applicable take-aways being:

  • Management’s Discussion and Analysis - Make sure that you are providing a sufficient level of detail in discussing factors that may contribute to fluctuations in your operating results from period to period and when discussing your liquidity and capital resources.  Also, make sure that you are disclosing known and predictable uncertainties that may have a material impact on your income from continuing operations.  In its presentation the Commission notes that it may issue comments in a situation where an event that triggers an impairment or other charge appears to have been predictable but was not addressed in an earlier period.
  • Revenue Recognition – Avoid using overly vague or boilerplate language in your accounting policy disclosure and make sure that you clearly state the timing and method you use for recognizing each material stream of revenue.
  • Disclosure Controls and Procedures – Disclosure controls and procedures encompass internal controls over financial reporting and even though disclosure controls and procedures may be found effective at the same time internal controls over financial reporting are found ineffective, if you reach that conclusion you should be prepared to support it.
  • Internal Control Over Financial Reporting – Make sure that you are explicitly stating, without the use of any qualifying language or limitations in scope, whether or not your internal controls over financial reporting are effective.  If you find a material weakness in your internal controls over financial reporting, you should focus on more than just its impact on the particular line item in which it was discovered, instead, in both your disclosure of the weakness itself and your remediation disclosure, you should consider and discuss its impact on other items in your financial statements.  And, again, avoid using overly vague or boilerplate language that remains static from period to period.
  • Changing a Certifying Accountant – If you dismiss your independent accountant because it has been involuntarily deregistered by the PCAOB, disclose that fact in your Forms 8-K, and if your former independent accountant’s audit report contained a going concern opinion it should also be disclosed in the Form 8-K as a modification as to uncertainty.

There are a number of other useful bits of disclosure guidance throughout the slide presentation, and it’s probably worth a flip through as you prepare for you next periodic filing.

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