On June 28, 2018, the Securities and Exchange Commission (SEC) amended the definition of a smaller reporting company (SRC) to expand the number of companies that qualify for existing scaled-disclosure accommodations.
The amendments don’t change the threshold provided in the accelerated-filer definition that requires filers to provide an auditor’s attestation of internal control over financial reporting. However, SEC chairman Jay Clayton has directed SEC staff to develop recommendations for changes to the accelerated-filer definition—with a focus on reducing how many companies are subject to the Sarbanes-Oxley Act’s (SOX) auditor-attestation requirements.
The SEC also adopted amendments requiring the use of Inline eXtensible Business Reporting Language (XBRL) format in certain filings.
Revised Definition of Smaller Reporting Company
Under the revised definition, a registrant would qualify as an SRC if it meets either of the following tests:
- It has less than $250 million in public float as of the last business day of its most recently completed second fiscal quarter. The previous threshold was $75 million.
- It has no public float or less than $700 million in public float as well as less than $100 million in annual revenue in the most recently completed fiscal year. The previous threshold only applied to companies with no public float and less than $50 million in annual revenue.
Because the SEC preserved the existing threshold for an accelerated filer and eliminated the automatic exclusion of SRCs in the definitions of accelerated and large accelerated filers, a registrant could now meet the definition of both an SRC and accelerated filer.
As an accelerated filer, a registrant would be required to provide auditor attestation of internal control over financial reporting.
Newly Qualified Registrants
Consistent with the current SRC definition, a registrant that previously determined it didn’t qualify as an SRC remains unqualified until it meets one or more lower qualification thresholds based on 80% of the threshold amounts.
Accordingly, an entity that previously had more than $250 million in public float won’t meet the SRC definition until its public float is less than $200 million. It’s important to note this provision doesn’t apply for the first fiscal year after the amendments go into effect.
Registrants that meet the definition of an SRC qualify for certain scaled disclosures, including the following:
- Two years of financial statements and related Management’s Discussion and Analysis of Financial Condition and Results of Operations comparison, instead of three years
- No requirement to include selected Financial Data, Supplementary Financial Information, or Quantitative or Qualitative Disclosures about Market Risk
- Two—instead of three—years of summary compensation information for three named executive officers instead of five officers
- No requirement to provide Compensation Discussion and Analysis, pay-ratio disclosures, and certain other compensation tables
- No requirement to include risk factors in Exchange Act filings
- Fewer circumstances under which pro-forma financial statements are required
The SEC also amended Rule 3-05 of Regulation S-X to allow registrants to omit the financial statements of an acquired business for the earliest of the three fiscal years as long as the acquired company’s revenue is less than $100 million.
The amended rules will become effective on September 10, 2018. The SEC indicated approximately 1,000 registrants will be impacted by the revised definition, which means registrants will want to assess whether they meet the revised SRC definition under the new guidelines.
Companies that qualify as an SRC will be eligible for scaled disclosures as soon as the rule is effective.
Inline XBRL for Tagged Data
The SEC approved amendments requiring the use of Inline XBRL format for the submission of operating-company financial statements and fund risk/return statements. These amendments also eliminate the 15-business-day XBRL filing period for fund risk/return summaries as well as the requirement for filers to post interactive data files on their websites.
Inline XBRL allows filers to embed XBRL data directly into an HTML document, eliminating the need to tag a copy of the information in a separate XBRL exhibit. The changes are intended to improve data usefulness, timeliness, and quality, and over time, reduce the cost of preparing submission data.
The amendments for operating companies are effective on these dates:
- June 15, 2019—large accelerated US generally accepted accounting principles (GAAP) filers
- June 30, 2020—accelerated US GAAP filers
- June 30, 2021—all other filers
The amendments for funds will go into effect on the following dates:
- Two years after the effective date—large fund groups with net assets of $1 billion or more as of the end of the most recent fiscal year
- Three years after the effective date—all other funds
We’re Here to Help
For any questions or help understanding how the new standard may affect your business, contact your Moss Adams professional.