It is now time for 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 1 May 2018.

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 2018 review process.

Trends in SEC Comment Letters in 2017

Disclosures of Non-GAAP Financial Measures1

Disclosures of financial measures that do not conform either to U.S. GAAP or IFRS (collectively, "non-GAAP") continue to be an area of importance for the SEC, as indicated by its comments on Form 20-F and other filings in 2017. Since the SEC updated its compliance and disclosure interpretations (C&DIs) regarding the use of non-GAAP financial measures in May 2016 (see here), it has increased focus on non-GAAP measures. In the 2017 commenting season, the SEC Staff highlighted the following topics:

  • Equal or Greater Prominence: The SEC has continued to stress that, as required by Regulation G and Item 10 of Regulation S-K, 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. Headings, bullets and tables must first present the GAAP or IFRS and then the non-GAAP measures (in that order), including in executive summaries and other summary sections. Non-GAAP measures must be presented individually or in small related sets, as a full non-GAAP income statement may give undue prominence to non-GAAP measures.

  • 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 asked companies to elaborate on the usefulness of each non-GAAP measure to both investors and management in the specific circumstances of the company, sometimes focusing on particular adjustments.
  • Clear and 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" should 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.2 Finally, "non-recurring" or similar terms can only be used if the requirements of Regulation S-X are met—generally that a similar adjustment has not occurred in the past two years and is unlikely to occur in the next two years. In particular, SEC comment letters have focused on adjustments for long-term and ongoing restructuring or acquisition costs.
  • Problematic Adjustments: The SEC identified several adjustments as problematic, taking the position that certain non-GAAP adjustments, while not expressly prohibited, are presumed to be misleading. The two most commonly identified adjustments are those for normal, recurring cash operating expenses, such as exclusion of rent expense from EBITDAR (particularly relevant to retail and property management companies); and the failure to account for the tax effects of non-GAAP adjustments, both of which were previously identified as problematic in a prior C&DI update. 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 defending those adjustments.
  • Non-GAAP Measures related to Acquisitions: In its updated non-GAAP C&DI, the SEC has clarified that financial measures (including forecasts), included in filings related to business combinations (primarily Rule 425 filings) as a result of being incorporated into the report of a financial advisor (most commonly in a fairness opinion), are not non-GAAP measures under Regulation S-K and Regulation G, provided the opinion is materially related to the business combination transaction and are being disclosed to comply with Regulation M-A or applicable foreign law. However, such exemption does not apply to inclusion of such measure in a Form 20-F, registration statement, proxy statement or tender offer statement.

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 U.S. Department of Justice. In its comment letters, 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 provide disclosure on any associated revenues, assets and liabilities derived from operations in countries designated by the U.S. Department of State as state sponsors of terrorism. Additionally, Form 20-F filers were also requested to include disclosure in their Form 20-F on the absence of such activity, if the issuer had included such disclosure for previous periods. The SEC takes a broad interpretation of the requirement to disclose contacts with sanctioned countries and has requested that companies provide information regarding past, current and anticipated contacts with sanctioned countries, whether through subsidiaries, joint ventures or other direct or indirect arrangements. For further details, please see the section "Sanctions Update," below.3

Cybersecurity Disclosure

The SEC Chairman has specifically referenced the duty of companies to disclose material information about cyber risks and cyber events. While comments on this topic have thus been limited, and related to domestic issuers, it is anticipated that this will continue to be an area of focus for the SEC going forward, and 20-F filers should review their risk factor disclosure on this topic.

Internal Controls Over Financial Reporting

In a continuation of historical trends, internal controls procedures have continued to receive attention from the SEC staff in comment letters. Where material weaknesses in internal controls over financial reporting have been identified, Form 20-F filers must include a discussion on the assessment of existing controls and the implementation of changes to enhance their internal controls.

Sanctions Update

Iran Sanctions

Despite officially renewing sanctions relief under the 2015 Joint Comprehensive Plan of Action (JCPOA), as Iran appears to be abiding by its obligations under the agreement, the Trump Administration has continued to expand non-nuclear related sanctions targeting specific individuals and entities for supporting the country's ballistic missile testing program, or for playing a role in regional unrest more generally. Political sentiment in both countries casts doubt on the future viability of the United States' participation in the JCPOA. This remains a rapidly evolving area of policy.

The "Countering America's Adversaries Through Sanctions" Act

On 2 August 2017, President Trump signed into law the "Countering America's Adversaries Through Sanctions Act," (the CAATSA) which imposes new sanctions against Russia.

The CAATSA imposes primary sanctions on U.S. Persons' activities (prohibition on supplying Russian oil projects; tightening of certain debt financing restrictions on Sectoral Sanctions Identifications-listed entities), and imposes secondary sanctions targeting non-U.S. persons' activities (blocking sanctions, including for cyber activity; termination or restriction of access to the United States for foreign financial institutions engaging in financial transactions on behalf of certain OFAC designated Russian persons or involving investments in Russian crude oil projects (i.e., deepwater, Arctic offshore, or shale projects); restriction on investments in special Russian crude oil projects). Finally, the Act allows the President to impose, in a discretionary fashion, secondary sanctions relating to Russian energy-export pipelines.

On 27 and 31 October, 2017, the U.S. Department of State issued public guidance on the implementation of the CAATSA. With regards to potential sanctions against individuals or entities that knowingly engage in "significant transactions" with a Russian nexus, (i.e. with persons that are a part of, or operating for or on behalf of, Russia's defense or intelligence sectors), such guidance provided a list of entities considered by the State Department to be operating in Russia's defense or intelligence sectors. The guidance includes a discussion as to whether a transaction is "significant" for purposes of the CAATSA. As such, defense and intelligence-related transactions are more likely to be considered "significant," while transactions with civil parties or transactions required by law with the Federal Security Service are less likely to raise any sanctions risks.

The second set of guidance focuses on the State Department's view on secondary sanctions relating to investments in special Russian crude oil projects and energy export pipelines. It defines several key terms and narrows the potential scope of several provisions, removing some uncertainty regarding how the U.S. government intends to apply these new sanctions.

SEC Updates

PCAOB New Standard on Auditor's Report

On 23 October 2017, the SEC adopted PCAOB's new audit standard on auditor's reports content and presentation. Enhanced information is expected to be included in audit reports. Part of the new standard requirements are effective for annual reporting periods ending on or after 15 December 2017. For audit reports included in this year's Form 20-F, this new standard will require auditors, to provide information about auditor's tenure (i.e. year the audit firm began consecutively serving as the issuer's auditor), make a statement on the auditor's independence, include standardized language relating to the role and responsibilities of the auditor and address the report to the shareholders and directors of the reporting company.

For large accelerated filers and other filers, from annual periods ending on or after, respectively, 15 June 2019 and 15 December 2020, auditors will have to include in their report information about matters that they communicated or were required to communicate to the company's audit committee that relate to material accounts or disclosures and involve especially challenging, subjective or complex auditor judgement.

XBRL Filing Requirements Are Now Mandatory for Foreign Private Issuers

Foreign private issuers that prepare financial statements in accordance with IFRS are now required, beginning with annual reports on Form 20-F filed in 2018 relating to fiscal years ending on or after 15 December 2017, to provide a version of their financial statements in interactive data format using eXtensible Business Reporting Language (XBRL) in addition to providing financial statements in their traditional format. Previously, foreign private issuers could voluntarily file financial data in XBRL format, although they were not required to comply with XBRL reporting, because the SEC had not specified tags for certain pieces of data—known as "taxonomy"—specifically applicable to IFRS.

Hyperlinks to Exhibits Now Required

New rules requiring hyperlinking of exhibits in SEC filings took effect in September 2017. The SEC adopted these rules in order to make access to exhibits in registration statements and periodic reports that were originally provided in previous filings easier for market participants to locate. The new rules apply to Form 20-F, but will not apply to Form 6-Ks.

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 October 2017. The C&DIs are available here.

Updated Financial Reporting Manual

The Division of Corporation Finance last updated its Financial Reporting Manual in December 2017. The Financial Reporting Manual is available here.

Planned Disclosure of Government Payments by Resource Extraction Issuers Vacated

In the prior edition of this memo, we updated you on the proposed rule, commonly known as "publish what you pay," which would have required resource extraction issuers to disclose payments they make to governments for the commercial development of oil, natural gas or minerals, and which was scheduled to take effect for the 2018 20-F season. However, on 3 February 2017, U.S. Congress passed a resolution that disapproves the SEC's rule on resource extraction payments, resulting in the rule no longer being in effect.

NYSE Rule Changes

Prohibition on Disclosure of Material News Immediately After Market Close

On December 4, 2017, the NYSE adopted a rule change prohibiting NYSE-listed companies from publishing material news after the official closing time for the NYSE's trading session until the earlier of 4:05 p.m. Eastern Time ("ET") or the publication of the official closing price of the listed company's security. This rule is implemented to alleviate confusion caused by price discrepancies between the NYSE closing price and trading prices on other markets after the NYSE official closing time and before the NYSE closing auction is completed, which can be after 4:00 p.m. ET.

Advance Notice of Dividend or Stock Distribution Announcements

On June 13, 2017, the NYSE proposed a rule change to require listed companies to provide notice to the NYSE at least ten minutes before making any public announcement with respect to a dividend or stock distribution, including when the notice is outside of NYSE trading hours. The effective date will be February 1, 2018.


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.

[2]  In securities offerings exempt from SEC registration pursuant to Rule 144A under the U.S. Securities Act of 1933, while the practice is to follow the SEC rules as closely as possible, there is often flexibility to depart from a strict application of the rules.

[3]  In a related recent development, certain clearing systems (such as Euroclear/Clearstream) are requiring representations from the issuer relating to compliance with sanctions laws prior to admitting securities for clearing.

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.