Posts Tagged ‘Financial reporting’

Easing the small-cap regulatory burden

June 29, 2018

Companies at the low end of the market cap spectrum often view compliance with Securities and Exchange Commission regulations as a Sisyphean burden, with costly, recurring, quarterly and yearly work. While designed to protect investors, the level of detail demanded can be daunting. Adding to the practical burden of finding and reaching investors in a competitive capital market, small-cap managements can struggle with the weight of legal and accounting fees built into corporate overhead.

This week, the SEC provided some relief for nearly 1,000 businesses. As reported by The Wall Street Journal, the new rule classifies a company with less than $250 million in publicly traded shares as a “smaller reporting company,” with less detailed reporting requirements, especially on executive compensation. That enlarges the category from the previous threshold of $75 million. The SEC also added companies with less than $100 million in annual revenue and a public float of less than $700 million.

The new rule also allows smaller reporting companies (SRCs) to report two years of audited financial statements rather than three. Read the SEC’s announcement on the changes here or the full 100-plus page final rule here.

SEC Chairman Jay Clayton was quoted in the agency’s release:

I want our public capital markets to be a place where smaller companies can thrive … Expanding the smaller reporting company definition recognizes that a one size regulatory structure for public companies does not fit all.  These amendments to the existing SRC compliance structure bring that structure more in line with the size and scope of smaller companies while maintaining our long-standing approach to investor protection in our public capital markets.  Both smaller companies — where the option to join our public markets will be more attractive — and Main Street investors — who will have more investment options — should benefit.

In my mind, the main beneficiaries will be emerging businesses like biotech and IT companies, starting up the market-cap scale – plus small, regional businesses that seem to stay in the $100-200 million range. In both cases, the costs and time involved in reporting have discouraged going public or remaining public. Simplifying seems like a good thing.

No doubt there are critics. And regulatory philosophies are cyclical – the next time there’s a bear market, we’ll hear cries of “Never again!” along with tightening up on rules that are being relaxed now. For now, it’s a positive for our small-cap friends.

© 2018 Johnson Strategic Communications Inc.

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Disclosure committees and IR

November 24, 2014

With ever-growing regulatory requirements and the complexity of global business, disclosure committees are playing a crucial role in ensuring accurate and useful reporting to investors, according to “Unlocking the Potential of Disclosure Committees,” a new report by the Financial Executives Research Foundation and Ernst & Young LLP.

And investor relations officers – in most companies – play an important role with the disclosure committee.

In more than 100 companies surveyed, some 65% of disclosure committees included the head of investor relations as a member – along with the controller or chief accounting officer, general counsel or equivalent, CFO and assorted other executives (usually not the CEO).

The study says having multiple functions represented in addition to finance and accounting – such as general counsels, heads of communications and IROs – adds value because diversity brings to the table insights on the business from multiple points of view:

“It’s a cross between finance and non-finance,” said one of the executives, a senior director of corporate accounting and reporting. So it’s important, she continued, to “make sure the right representation of the business is there … I think we have pretty good coverage.”

As a non-accountant and occasional participant in disclosure committees, I try to ask big-picture questions and challenge insiders to explain the business more clearly … because what investors need most from disclosure is clarity and perspective.

While we’re thinking about taxes

April 16, 2010

“Today is the first day of the rest of your taxable year.”

– Jeffrey Yablon, a Washington tax lawyer
who has compiled an extensive and amusing
collection of quotations on taxes and life

I know, I know – we’d like to forget about taxes now that we’ve survived the annual runup to April 15. But this post-deadline breather actually may be a good time to think about taxes and how they relate to our mission in investor relations.

Taxes on corporations and various aspects of business are bound to change – OK, I really mean bound to increase – in the coming years. IR people need to be looking ahead to understand the impact on our companies’ P&Ls.

The first round of disclosures came three weeks ago after health reform became law. A few companies disclosed that one change in the health law will cost them billions in additional taxes (see post on Disclosing ObamaCare’s impact). This caused a brief outrage and flurry of saber-rattling in Congress, until lawmakers thought better and canceled a hearing that would have grilled executives on the GAAP-required charges. That would have given business leaders a forum to testify on the actual costs of what Congress passed.

What’s next? Hard to say, but various changes are in the works …

  • New taxes under the 2010 healthcare law will impose costs on pharmaceutical companies, medical device makers, and health insurance companies …
  • Not to mention the cost of healthcare coverage requirements, which everyone’s still sorting out, including a $2,000 a head penalty for employers who don’t cover workers and an excise tax down the road on “Cadillac” health plans …
  • President Obama has proposed taking away foreign tax credits and deferrals for US companies, a potential $200 billion of additional revenue …
  • The president has proposed taxing large banks and financial institutions to pay for the bailout …
  • Unless something changes, the “Bush tax cuts” will expire at the end of 2010 for individuals – including both the 15% maximum capital gains tax and 15% maximum tax on qualified dividends. Higher marginal rates on stock-related income will affect shareholders; it’s hard to say how this tax increase might affect dividend policy or other ways of returning cash to shareholders.
  • Other taxing ideas are floated almost daily. As a non-accountant and non-politician, I won’t attempt to lay odds on the various proposals. But Washington is on the hunt for revenue – that much we know.

Already, the US imposes the second-highest corporate tax rate among the world’s industrialized countries – 39.1% in combined federal and average state taxes – according to 2009 OECD data cited by the Tax Foundation. (This site also has a state-by-state comparison of combined corporate tax rates.)

The effective tax rate – what companies actually pay after working the system – is the operative issue for disclosure, along with potential balance-sheet impacts of deferred tax assets or liabilities. The conservative Cato Foundation estimates the US effective tax rate at 36%.

You don’t hear many analysts or investors on conference calls asking about effective tax rates, but what kind of dollar impact would a 1 or 2 percentage point increase – or decrease – in tax rate have on your P&L? Put a calculator to it. Have a conversation with your company’s tax people. Write your congressman.

And consider the potential need for disclosure as new tax policies continue to take shape in Washington.

Happy first day of the rest of your taxable year!

© 2010 Johnson Strategic Communications Inc.

Disclosing ObamaCare’s impact

March 29, 2010

Now is the time (if it wasn’t weeks ago) for investor relations people to get on top of the question: What impact will President Obama’s healthcare overhaul have on our companies?

The ObamaCare question will be asked in first-quarter conference calls and one-on-one conversations, and companies ought to disclose the material impacts either before first-quarter earnings or in their normal reporting.

Already the disclosures have begun to emerge after the president’s March 23 signing of the new government framework for health insurance. For example:

  • AT&T said Friday it will take a $1 billion noncash charge  when it reports first-quarter earnings. In a brief 8-K, the phone company  said the charge reflects loss of a tax benefit for subsidizing retiree healthcare costs. AT&T also said it will review its health benefits in light of the new law and the added tax burden.
  • 3M issued a news release and filed with the SEC on Friday, saying it expects an after-tax charge of $85 to $90 million, about 12 cents a share, when it reports first-quarter results. 3M did a more thorough job of explaining: ObamaCare eliminates a tax benefit for company payments that subsidize retiree prescription drug coverage. Under the new law, the extra tax bite doesn’t hit until 2013, but the change reduces the value of a deferred tax benefit on 3M’s books, so GAAP requires a charge now.
  • Caterpillar filed an 8-K estimating its tax hit at approximately $100 million, again to be recognized in Q1. Deere & Co. estimated its charge at $150 million, AK Steel at $31 million … and we can expect many more.

These filings with the SEC are not about politics, but bookkeeping, of course. Just another development that may require an 8-K and explanation in the next 10-Q. But editorial writers were quick to seize on the announcements as an “I told you so” moment on ObamaCare (The Wall Street Journal here, Investors Business Daily here). And now Congress wants to call these evil companies on the carpet for – the horror – disclosing the cost of the new healthcare law in a timely manner.

Update: The American Benefits Council, speaking for 300 large employers, on Monday called for repeal of the tax increase related to retiree prescription benefits. White House response: Buzz off.

Without wading further into the swamps of Washington, let’s just pay attention to our own duty as investor relations people: Each of us should be asking internally – if we haven’t already – what impact the health overhaul law will have. And how we need to disclose that, either now or with our upcoming quarterly results.

In a broader way, investors will be looking to companies in the biopharma, medical equipment, hospital and other health industries to provide analysis and forward-looking perspective on how ObamaCare will help (or hurt) future results.

© 2010 Johnson Strategic Communications Inc.

Two bottom lines (at least)

September 21, 2009

DollarSignGreenAs everyone knows, corporate earnings today commonly include two bottom lines: Companies report net income and EPS under Generally Accepted Accounting Principles, and then there’s a second number on the street that takes out one-time items. These metrics are commonly called GAAP earnings and “operating earnings,” without one-offs.

Over the years the gap between these two numbers has been growing, so that operating earnings for the S&P 500 have averaged nearly 24% higher than GAAP earnings in recent years, says a column (“Investors, It Pays to Mind the GAAP Gaps”) Friday in the Money & Investing section of The Wall Street Journal.

Says the Journal:

It isn’t clear why the difference has grown so wide. One inescapable conclusion is that, since 1995, either by happy accident or accounting shenanigans, one-time losses have grown more quickly than one-time gains, elevating the operating earnings that Wall Street watches.

Investors have mixed feelings about excluding one-offs from earnings. When you throw in EBITDA or adjusted EBITDA, which proponents in some industries prefer as a tool for valuation, some investors are confused or skeptical. You may have heard unconvinced accounting profs push back on “Earnings Before All the Bad Stuff.”

The Journal observes that companies tend to label negative events (write-downs or special charges) as one-offs more often than happy events (windfalls or gains on assets), and excessive write-offs may signal deeper problems:

Investors are well advised to watch both figures for another reason: Some companies have bigger differences between GAAP and operating earnings than others. According to research by Société Générale quantitative strategist Andrew Lapthorne, those with bigger gaps tend to underperform in the long run.

An interesting cautionary note, that bit about underperforming long-term.

Companies need to be careful that one-time accounting items and adjustments do help investors understand the business realities. Inflation in the gap between as-reported and “operating” earnings raises questions. For IR professionals, clarity in reporting (including consistent accounting approaches) should be the goal.