Mastering your next 10-Q Filing

During the quarterly SEC Professionals Group 10-Q/K Disclosure Prep series, industry experts gathered to provide key insights into the latest trends shaping the financial reporting landscape. Check out the trends they're watching.

Q3 2024 10-Q Takeaways

Timothy Brown, Partner at KPMG's National Office, and Chelsea Hall, Industry Principal at Workiva, joined me in discussing essential takeaways to help financial teams prepare for their upcoming 10-Q filings.

What's on the horizon for the SEC climate rule?

Timothy opened the discussion by addressing the looming uncertainty surrounding the SEC's climate-related disclosure rule. Although the rule is paused due to legal challenges, financial reporting teams should not become complacent. Timothy emphasized that companies should continue preparing by aligning with the 2010 guidance and global frameworks like the EU's Corporate Sustainability Reporting Directive (CSRD). Regardless of the rule's final outcome, preparation is key to staying ahead of potential regulatory shifts and to comply with existing climate disclosure requirements.

Non-GAAP measures: Getting it right

Non-GAAP measures continue to be a focus area of the SEC's disclosure review process. Chelsea highlighted the importance of transparency when using non-GAAP measures. Companies must ensure that non-GAAP figures are presented with equal or greater prominence than comparable GAAP measures. Reconciliation between the two is essential to provide a clear and accurate financial snapshot. Failing to meet these standards could lead to scrutiny from the SEC.

Emerging risks: What to watch

Disclosing emerging risks is critical for informing stakeholders. Timothy and Chelsea discussed several areas that should be top of mind for reporting teams, including:

• Supply chain disruptions

• Geopolitical uncertainties

• Technological advancements

These risks can have significant implications for financial performance and should be carefully monitored and disclosed, if they have material impacts on your business. If there have been material impacts, then merely disclosing these as risk factors is not enough.

Cybersecurity: The SEC's new focus

Cybersecurity is now a key area of concern for the SEC. Under new rules, companies are required to disclose material cybersecurity incidents within four business days of determining that an incident was material. Chelsea shared examples of how to handle these disclosures, including by companies who voluntarily disclosed an incident before determining its materiality. Companies must act swiftly, ensuring that their cross-functional teams-including IT, legal, and reporting-are ready to respond effectively.

AI and SEC scrutiny

Artificial intelligence (AI) is increasingly becoming a focal point for the SEC. The agency has begun to scrutinize disclosures around AI use, with a particular focus on whether companies are overstating their capabilities. Timothy advised that companies should provide clear, transparent descriptions of how AI is integrated into their operations, avoiding any "AI-washing."

Compensation clawback: New rules in play

The new compensation clawback rules, which went into effect in late 2023, require companies to recover compensation based on erroneous financial statements. Chelsea walked through early examples, explaining how companies are starting to comply. These rules require companies to more prominently disclose changes to previously issued financial statements, even if such changes do not affect previously paid compensation.

Looking ahead: Resources for SEC Pro members

As financial reporting continues to evolve, staying informed is crucial. SEC Pro offers a wide array of resources, including webinars, comment letter reviews, and in-depth sessions like the upcoming KPMG comment letter webinar in October. For financial reporting teams, engaging with these resources will help teams stay compliant and prepare for the next quarterly SEC filing season.

Key takeaways for late 2024:

• Climate rule preparedness: Continue preparing for potential climate disclosure requirements by following existing guidance and aligning with global frameworks like CSRD

• Non-GAAP measures: Ensure transparency and accurate reconciliation between GAAP and non-GAAP measures

• Cybersecurity: Be ready to disclose material cyber incidents promptly, and document the process carefully

• AI disclosures: Be transparent, and avoid overstating AI capabilities to mitigate regulatory scrutiny

• Compensation clawback rules: Stay up to date on clawback requirements, and prepare cross-functional teams to handle restatements and recoveries

Q2 2024 10-Q Takeaways

As financial reporting teams gear up for the next 10-Q filing season, staying ahead of the curve is crucial.

During the latest SEC Professionals Group 10-Q disclosure prep webinar that I had the pleasure of moderating, Paula Hamric, Professional Practice Partner at BDO, and Ganesh Rajappan, Founder and CEO of My LogIQ, provided invaluable insights about recent disclosure trends to help you navigate the complexities of preparing for your upcoming filing.

What to do while the SEC climate rule is paused

The U.S. Securities and Exchange Commission's newly adopted (but then stayed) rule on climate-related disclosures underscores the increasing importance of integrating climate-related risks and opportunities into financial reporting. Even though the SEC has paused its climate disclosure rule pending court challenges, there is still guidance from 2010 available for companies to follow.

The SEC's sample letter on climate change disclosures has more helpful information. Watch the SEC Pro Group Q2 2024 meeting on demand for examples from Paula and Ganesh. You'll have to join SEC Pro to gain access, but membership is free.

Beyond the SEC, the Corporate Sustainability Reporting Directive (CSRD) in the European Union is becoming a de facto standard for integrating financial and climate-related data in corporate reports, Paula said, with the International Sustainability Standards Board (ISSB) serving as another guide. Be aware that even though you might not be required to disclose certain data like greenhouse gas emissions in SEC filings just yet, some of your peers and competitors may be doing so to comply with the CSRD or other requirements.

Avoid misleading and insufficient non-GAAP measures

Paula and Ganesh highlighted common pitfalls and best practices, emphasizing that non-GAAP measures should not be misleading and must be presented with equal or greater prominence than the most directly comparable GAAP measures. Proper reconciliation between GAAP and non-GAAP figures is crucial to provide a clear and accurate financial picture.

Watch out for emerging risks

Disclosing emerging risks that affect your business is crucial for informed decision-making by stakeholders. Key risks to be aware of include:

• Supply chain disruptions

• Geopolitical uncertainties

• Technological advancements

The SEC has recently highlighted these risks as disclosure review focus areas, so it's important that you and your team monitor their impact on your performance as they evolve, and not just the first time they come up.

Stay ahead of cyber threats

Similarly, the new SEC cybersecurity rule emphasizes the importance of proactive planning with IT, legal, and other teams to effectively respond to cyber incidents-and disclose them, when required.

Under the rule, if your company deems a cyber incident to be material, it must be disclosed within four business days of that determination. Paula noted that a materiality evaluation should consider both quantitative and qualitative factors.

As Paula mentioned, material incidents would be disclosed on Item 1.05 of Form 8-K. If an incident is immaterial (or you haven't determined materiality yet) and you want to disclose it voluntarily, that disclosure should go elsewhere, like Item 8.01 of the 8-K.

And, if you unfortunately are the victim of a cyber incident, don't forget to document what you know and when you know it as your team works on assessing materiality. This documentation may be critical if the SEC (and certainly your auditors and securities counsel) wants to see how you arrived at your materiality conclusion.

How can collaboration and data automation enhance SEC reporting?

In the webinar, presenters highlighted the importance of leveraging technology solutions to automate data collection, validation, and reporting processes, thereby reducing manual errors and improving efficiency. Automating these processes not only saves time but also enhances the accuracy and reliability of financial reports.

(Workiva, for example, has an SEC reporting solution.)

Learn more about SEC Pro

Join SEC Pro and watch the full webinar on demand to get more details for a successful 10-Q filing season.

Stay compliant, stay informed, and stay connected with SEC Pro.
SEC Pro, part of Pro Groups, is sponsored by Workiva. SEC Pro is the trusted organization for financial reporting professionals seeking best practices from industry experts and a community of peers. Learn more at progroups.org.

6 Questions to Help Comply with the SEC Cybersecurity Rule

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