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.


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.


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.

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