The Advisors' Blog

At yesterday’s SEC Speaks, the Corp Fin Staff noted that they are still getting a lot of questions about the new(ish) checkboxes on the Form 10-K cover page that may be triggered by correcting financial reporting errors and a clawback analysis. As a reminder, the Form now says:

– If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements.

– Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).

Jessica Barberich, who is Assistant Chief Accountant in Corp Fin, shared some color about the Staff’s views on interpretive questions. Here are key takeaways (with the caveat that the standard Staff disclaimer applies and this summary is based on our real-time notes):

– The first box is required to be checked by listed issuers when the financials included in the filing reflect the correction of an error to previously issued financial statements.

– The Staff looks to the definitions in US GAAP when considering whether a change to previously issued financial statements is an “error” – and companies should do the same.

– The term “error” can include mathematical errors, mistakes from the application of GAAP, or oversight or misuse of facts that existed at the time the financials were issued. Examples of things that are not errors include: Adoption of new accounting standard that requires retroactive application; disaggregation of financial statement line items; or a change in account principle (including a change in the method of applying the principle, as long as the prior application wasn’t an error in US GAAP). See the adopting release for other examples.

– For judgment questions – things like fixing a typo, or a change to a prior-year footnote disclosure – your accountants should be involved to help you analyze whether this is considered an “error” under US GAAP.

– The most common question is whether this first checkbox really applies to all corrections. The answer is yes. It must be checked for all restatements: “Big R” restatements, “little r” restatements, as well as restatements that were made voluntarily by the issuer.

– What’s a “voluntary” restatement? Jess gave this example: If the error is immaterial to the prior year, and correction in the current year would also be immaterial, the company is permitted to correct the financials through an out-of-period adjustment to the current year, and the company isn’t required to restate the prior year. If the company chooses to correct the error via a restatement of the prior year, it will need to check the box. If the company instead uses an out-of-period adjustment to the current year, it does not need to check the box, because it hasn’t revised previously issued financial statements.

– The second checkbox has a narrower scope than the first. It indicates whether a recovery analysis is triggered by any of the restatements indicated in the first checkbox.

– It won’t be checked for voluntary restatements that don’t trigger a recovery analysis.

– If there is a “Big R” or a “little r” restatement, a recovery analysis will be triggered under the company’s clawback policy. However, the extent of the analysis will vary. For example, although there would be no recovery amounts to determine if no financial-based incentive compensation was received during the relevant period, the box would still need to be checked, because the analysis was triggered.

Jess noted that both checkboxes only relate to restatements of prior years, not current-year errors corrected in the same year. She also highlighted one other question they’ve been receiving, that is unrelated to scope:

If the 2023 10-K was amended in 2024 for a restatement of errors related to 2023, and the company properly checked boxes in the 2023 Form 10-K/A that it filed, does the company need to check in the 2024 Form 10-K (since it still includes FY 2023 financials)? Jess noted that assuming no other restatements occurred, the company would NOT need to check the box on the 2024 cover in this situation.

Lastly, the Staff noted that the Disclosure Review team will be monitoring filings to ensure that the clawback policy is correctly filed as an exhibit and that the checkboxes are correctly completed if a restatement occurs.

– Liz Dunshee