United States: It's Annual Report Time—Recent Developments And Trends For The Preparation Of Form 20-F

It is now time for a large number of 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 2 May 2017.

To help you with the preparation of this filing, we highlight the following recent developments, trends and topics that may be important focus areas of the SEC in the 2017 review process.

Trends in SEC Comment Letters in 2016

During the 2016 review process, the SEC focused on the following themes:

Disclosures of Non-GAAP Financial Measures

Disclosures of financial measures that do not conform either to US GAAP or IFRS (collectively, "non-GAAP"), as applicable to the registrant, continue to be an area of importance for the SEC, as indicated by its comments not only on Form 20-F filings, but also on quarterly earnings releases filed on Form 6-K and initial public offerings filed on Form F-1. In May 2016, the SEC updated its Compliance and Disclosure Interpretations ("C&DIs") regarding the use of non-GAAP financial measures and highlighted the following topics in comment letters to various filers:1

  • Equal or Greater Prominence: The SEC has requested, as required by Regulation G and Item 10 of Regulation S-K, that 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. Accordingly, headings, bullets and tables must first present the GAAP or IFRS and then the non-GAAP measures (in that order). Further, derivative non-GAAP metrics such as "adjusted EBITDA as a percentage of sales" need both reconciliation and a presentation of the comparable GAAP or IFRS measure in a location of equal or greater prominence; in this case, a presentation of net income as a percentage of sales. Such presentation, to the extent the derivative non-GAAP metrics appear elsewhere in the Form 20-F, must also follow the same order as they are presented in the first instance.
  • Reasons for the Inclusion of Non-GAAP Measures: Boilerplate language that management believes the company's non-GAAP measures provide investors with helpful supplemental information may not be sufficient. In several comment letters, the SEC has asked companies to elaborate on the usefulness of each non-GAAP measure to the specific circumstances of the company, sometimes focusing on particular adjustments.
  • Accurate Labeling: Measures, such as "EBITDA" or "Free Cash Flow," must be labeled as "adjusted" if they include adjustments beyond those customarily made for measures with those names. Similarly, "pro forma" could only be used where such financial measures have been prepared in accordance with the SEC's rules for pro forma financial statements in Regulation S-X.
  • Proper Adjustments and Reconciliation: In its updated non-GAAP C&DI, the SEC has identified several adjustments as problematic, taking the position that certain non-GAAP adjustments, while not expressly prohibited, are presumed to be misleading. Those adjustments include, among others: normal, recurring cash operating expenses; acquisition-related expenses; and purchase accounting adjustments. In upcoming Form 20-F filings, companies can still provide explanations as to why such adjustments are relevant but may now face an uphill battle in keeping those adjustments.

Dealings with Sanctioned Countries

As in past years, the Office of Global Security Risk of the SEC's Division of Corporation Finance continues to review annual reports on Form 20-F for transactions in or with countries and entities subject to sanctions implemented by the Office of Foreign Assets Control of the US Department of Justice. In its comment letters (sometimes even referencing Form 20-F filings in 2011), the SEC has required Form 20-F filers to disclose any past, current and anticipated contacts with sanctioned countries, such as 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. Given this practice, Form 20-F filers may want to review their prior filings to prepare themselves for any inquiries in this area.

In particular, the comments have instructed Form 20-F filers to describe the materiality of their contacts with any sanctioned countries and explain whether those contacts constitute a material investment risk for security holders. The materiality assessment should be provided in both quantitative and qualitative terms. Quantitatively, estimates should be denominated in US dollar amounts of the associated revenues, assets and liabilities for a period spanning the last three fiscal years and any subsequent interim period. Qualitatively, the disclosure should provide any information that a reasonable investor would deem important in making an investment decision, including the potential impact of the transactions on the company's reputation and share value. For further details, please see the section "Sanctions Update," below.

Litigation Disclosure

The SEC has continued to request Form 20-F filers to disclose, whenever possible, their best estimates of the potential outcome of pending litigation, and to describe the effects the outcome would have on their financial condition. In particular, where there is at least a reasonable possibility that a loss may have been incurred (in excess of the amounts already recognised), the comment letters have requested further information on the nature of the loss contingency. Additionally, the SEC has requested disclosure of a) the amount or range of reasonably possible losses in excess of amounts accrued, b) whether reasonably possible losses cannot be estimated or c) whether any reasonably possible losses are not material to the company's financial statements.

Where a reasonable estimate cannot be made, the SEC has requested Form 20-F filers to explain a) the procedures the Form 20-F filer undertook to attempt to develop a range of reasonably possible loss for disclosure and b) for each material matter, what specific factors are causing the inability to estimate and when the company expects those factors to be alleviated. In light of these instructions, however, the SEC has recognised that uncertainties associated with loss contingencies exist. To address this potential area of concern for companies, the SEC has allowed Form 20-F filers to disclose pending matters on an aggregated basis.

Impairment Charges

Impairment calculations including methodology and assumptions have continued to be an area of interest for the SEC. In certain instances, the comment letters noted inconsistencies in the impairment assessment between certain impairment calculations compared against other impairment calculations performed throughout the Form 20-F filing. In other cases, the SEC has requested clarification on why certain segments of the company's business were not subject to impairment pursuant to IAS 36. Where an impairment assessment was made, the comment letters instructed companies to explain which factors (including external factors such as declines in commodity prices in 2015) led companies to recognise an impairment charge.

Disclosure of Government Payments by Resource Extraction Issuers

On 27 June 2016, the SEC adopted a final rule implementing Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act"). Pursuant to Section 1504 of the Dodd-Frank Act (commonly known as "publish what you pay") the SEC implemented rules requiring resource extraction issuers to disclose payments they make to governments for the commercial development of oil, natural gas or minerals.

The commercial development of oil, natural gas or minerals is given broad scope to include stages from exploration to midstream activities, but does not extend to the final processing stages of refining and smelting. A broad range of payments, such as taxes, royalties, fees, bonuses, infrastructure payments and community social responsibility payments, whether made in cash or in-kind must be reported if paid to any level of government, including majority state owned enterprises. Under the rule, payments must be disclosed by type and total amount at the project level.

The new rule will take effect for an issuer's first fiscal year ending on or after 30 September 2018, and will require disclosure of government payment information annually in a specialised disclosure report on Form SD no later than 150 days after an issuer's fiscal year-end. For companies with a calendar year-end, the first year of compliance will be the year ended 31 December 2018, and the filing deadline will be 30 May 2019. Reports filed in compliance with the substantially similar Canadian and European Union reporting regimes will be recognised by the SEC rule.

Conflict Minerals Rules

2016 marks the fourth year of compliance with the SEC's conflict minerals rules. For companies that are subject to the conflict minerals rules, the deadline for filing Form SD for calendar year 2016, including a conflict minerals report, if required, is 31 May 2017. There have been no changes in the conflict minerals rules or SEC guidance since 2015. The SEC's position, following a 2015 US Court of Appeals ruling invalidating part of the original conflict minerals rule, continues to be that no company is required to describe its products as "DRC conflict free," having "not been found to be 'DRC conflict free'" or "DRC conflict undeterminable." An independent private sector audit will not be required unless a company voluntarily elects to describe a product as "DRC conflict free" in its conflict minerals report. Based on publicly available SEC comment letters, during 2016, the SEC Staff has used disclosure in Form SD and conflict minerals reports that refer to sourcing conflict minerals in countries that are the subject of US economic sanctions and export controls, such as Sudan, to request additional information about companies' contacts in those countries.

Risk Factors Relating to "Brexit" and the US Presidential Election

Several Form 20-F filers began including Brexit-related risk factors, and some (as a result of their filing date) have also disclosed potential risks relating to the results of the US presidential election. Although SEC comment letters have not yet requested Form 20-F filers to assess any risks related to Brexit or the US presidential election, some comments directed at US filers have requested consideration of those factors.

Brexit

A number of Brexit-related risk factors disclosed in Form 20-F filings have focused particularly on the uncertainty of the United Kingdom vis-à-vis its relation to the European financial and banking markets. Almost all risk factors explain that the withdrawal of the United Kingdom from the European Union will involve lengthy negotiations, and the uncertainty could increase volatility in the markets. Some risk factors also note that Brexit is non-binding, and that the United Kingdom has yet to invoke Article 50 of the Lisbon Treaty (which is currently expected to occur in late March of this year) to trigger the withdrawal. Among particular risks identified by Form 20-F filers are the following: the fact that sales are denominated in British pounds, which may reduce revenue as expressed in another currency; the depreciation of the British pound may impair the purchasing power of UK counterparties, potentially leading to cancellation of contracts or default on payments; restriction of imports and exports; reduction in movement of skilled professionals between the United Kingdom and the rest of the European Union; and increase in regulatory compliance costs.

US Presidential Election

Results of the US presidential election have led to identification of a few risk factors, namely potential changes to existing trade policies and agreements, proposed reforming of the US Food and Drug Administration, potential repeal of the Patient Protection and Affordable Care Act as well as perceived changes in the US social, political, regulatory and economic conditions. As the SEC has continued to emphasise the need to tailor risk factors to the particular company's circumstances, Form 20-F filers may need to carefully consider how potential changes in the US social, political, regulatory and economic landscape could impact the companies' operations and financial conditions. While the result of the US presidential election may not be a risk itself, subsequent changes in legislation, trade policy and economic conditions may be important considerations in drafting the risk factors.

Sanctions Update

Iran Sanctions

On 16 January 2016, the Joint Comprehensive Plan of Action (the "JCPOA") which was signed amongst the Islamic Republic of Iran and the E3/EU+3 (China, France, Germany, the Russian Federation, the United Kingdom and the United States, with the High Representative of the European Union for Foreign Affairs and Security Policy), was implemented, lifting a number of so-called "secondary" sanctions. However, the "primary" US sanctions, which are directed primarily at US persons, continue to apply, as well as certain sanctions that are outside of the scope of the JCPOA, such as those relating to terrorism and human rights violations in Iran.

Even though the JCPOA has lifted certain sanctions, the current reporting company disclosure requirements under the Iran Threat Reduction and Syria Human Rights Act of 2012 (TRA) have not been eliminated. Under the TRA, any foreign private issuer that prepares annual reports on Form 20-F is required to disclose in its annual report certain of its (and its affiliates') investments and transactions relating to the Iranian petroleum and petrochemical sectors and transactions involving the Government of Iran. The company is required to disclose the nature and extent of the activity, the gross revenues and net profits attributable to the activity, and whether the activity will be continued. In addition, the current requirement under the TRA to file separately with the SEC a notice that the disclosure of that activity has been included in the company's annual report on Form 20-F will also continue to apply.

Impact of US Presidential Election on Iran and Cuba Sanctions

Results of the US Presidential Election suggest that the lifting of "secondary" sanctions might be short-lived. The JCPOA contained a provision allowing any party to unilaterally "snap back" sanctions if it determines that Iran has violated the terms of the agreement. Although there is no public information indicating that to be the case, the JCPOA is only an executive agreement, and President-Elect Trump has stated that one of his first tasks as president will be to withdraw from the JCPOA and re-impose the full panoply of sanctions on Iran. For European and other non-US companies that have cautiously reopened commercial ties with Iran, the US Presidential Election raises the risk of sanctions considerably. Companies in the financial and oil and gas sectors face a choice of pursuing Iranian business or risk facing secondary sanctions.

Over the past several years, the United States has loosened sanctions against and normalised relations with Cuba, including removing it from the State Sponsors of Terrorism list. During the campaign, President-Elect Trump stated that he supported this approach although he "would have negotiated a better deal." However, immediately before the election, President-Elect Trump announced that he was opposed to the policy and would reverse previous executive orders on Cuba. If President-elect Trump carries through on this late-election position, then current and anticipated commercial deals involving airline routes, cruise lines, resort development and tourism may all have to be revisited. For further details on the impact of the US election on sanctions, please see our recent client publication on this topic.

SEC Updates

Updated Compliance and Disclosure Interpretations

The Division of Corporation Finance last updated its C&DIs on Securities Act Forms and Rules as well as Exchange Act Forms in December 2016. The C&DIs are available here.

Updated Financial Reporting Manual

The Division of Corporation Finance last updated its Financial Reporting Manual in November 2016. The Financial Reporting Manual is available here.

Footnotes

1. The SEC's release adopting Regulation G, which sets out the rules governing the use of non-GAAP financial measures in public disclosures generally, is available here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.