A few months ago, we put out our own set of a dozen FAQs about the clawback checkboxes on the Form 10-K cover page in this blog. Now, Corp Fin has issued six CDIs on the topic. The new CDIs, which are set forth below, confirm the more informal Corp Fin guidance reflected in our prior blog and provide helpful clarifications regarding specific fact patterns.
Question 104.20
Question: When a listed issuer reports a change to its previously issued financial statements in an annual report, how should the issuer determine whether “the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements” for purposes of determining whether the check box indicating such correction of an error should be marked on the cover of its annual report?
Answer: The listed issuer should look to the guidance under the generally accepted accounting principles applicable to its financial statements in determining whether the change represents the correction of an error. When the financial statements of the registrant included in the filing have been revised to reflect the correction of an error to previously issued financial statements, regardless of whether those restatements are required or not, the listed issuer must mark the check box.
A required restatement includes (1) an accounting restatement to correct an error in previously issued financial statements that is material to those financial statements (commonly referred to as a “Big R” restatement) and (2) an accounting restatement to correct an error that is immaterial to those financial statements but would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period (commonly referred to as a “little r” restatement).
The correction of an immaterial prior period error that is recorded in the current year (commonly referred to as an “out-of-period adjustment”) does not require the listed issuer to mark the check box because the previously issued financial statements are not revised. [April 11, 2025]
Question: In 20X4, a listed issuer reports a “Big R” restatement to the 20X3 financial statements in an amendment to its 20X3 annual report and marks the check box on the cover to indicate that the financial statements reflect the correction of an error to previously issued financial statements. After applying its recovery policy pursuant to Exchange Act Rule 10D-1(b), the listed issuer determines that no recovery of erroneously awarded compensation is required.
Is the listed issuer also required to mark the check box on the cover of the amended 20X3 annual report to indicate that the restatement “required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period” pursuant to Exchange Act Rule 10D-1(b) and explain in that amended report why application of the recovery policy resulted in no recovery?
Answer: Yes, the listed issuer must mark the check box indicating that the restatement required the recovery analysis. This would include circumstances when:
- no incentive-based compensation was received by any executive officers at all during the relevant time frame, or
- incentive-based compensation was received by an issuer’s executive officers during the relevant time frame, but that incentive-based compensation was not based on a financial reporting measure impacted by the restatement.
Further, the listed issuer should briefly explain why application of its recovery policy resulted in no recovery. [April 11, 2025]
Question: Assume the same facts in Question 104.21. In its subsequent 20X4 annual report, the listed issuer includes in its financial statements the restated 20X3 annual period that was previously included in the amended 20X3 annual report. Is the listed issuer required to mark both of the check boxes discussed in Question 104.21 on the cover and provide disclosure pursuant to Item 402(w)(2) of Regulation S-K?
Answer: Assuming there are no additional restatements, the staff will not object to the check boxes remaining unmarked on the cover page of the listed issuer’s 20X4 annual report.
However, when the listed issuer files its proxy or information statement during 20X5 that includes 20X4 executive compensation information pursuant to Item 402 of Regulation S-K, it must also include the disclosure of Item 402(w)(2) of Regulation S-K. The Commission has stated in the adopting release that this information is similar to other executive compensation information required by Item 402 and is likely to serve a similar purpose for investors in evaluating the issuer and making voting decisions.
Accordingly, because the restatement took place during 20X4 and Item 402(w)(2) applies to restatements “during or after [the issuer’s] last completed fiscal year,” the issuer’s proxy or information statement filed during 20X5 must include Item 402(w)(2) disclosure, to the extent Item 402 applies to such proxy or information statement. This is the case even if the issuer included in the amended 20X3 annual report information explaining why application of its recovery policy resulted in no recovery. This is also the case if the required disclosure is (1) provided in the annual report (and not incorporated by reference from a proxy or information statement) or (2) made pursuant to the applicable requirements of Form 20-F or Form 40-F. [April 11, 2025]
Question: In 20X5 (prior to filing the 20X4 annual report), a listed issuer with a calendar fiscal year discovers an error in its previously issued 20X3 financial statements that requires a “little r” restatement. After applying its recovery policy pursuant to Exchange Act Rule 10D-1(b), the listed issuer determines that no recovery of erroneously awarded compensation is required. The listed issuer checks both boxes on its 20X4 annual report, which is filed in 20X5, and provides Item 402(w)(2) disclosure in the proxy or information statement incorporated by reference in that report. Must the listed issuer subsequently include the Item 402(w)(2) disclosure in its proxy or information statement incorporated by reference in its 20X5 annual report, which is filed in 20X6, given the restatement occurred “during… [the issuer’s] last completed fiscal year”?
Answer: If there are no additional facts that would affect the conclusion of the prior Exchange Act Rule 10D-1(b) recovery analysis that no recovery is required, the staff will not object if the 20X5 annual report does not include or incorporate by reference Item 402(w)(2) disclosure, notwithstanding that the restatement occurred “during…the [issuer’s] last completed fiscal year.” Under the same facts, the staff will similarly not object if a foreign private issuer who has previously provided the applicable disclosure pursuant to Item 6.F(2) of Form 20-F or Instruction (B)(19)(c) to Form 40-F omits the disclosure in its subsequent annual report. [April 11, 2025]
Question: A listed issuer initially reports a restatement of an annual period in its financial statements in a form that does not include a check box requirement on the cover page for indicating that the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements – for example, a Form 8-K or a Securities Act registration statement. If that annual period is presented in the issuer’s financial statements in its next annual report, is the issuer required to mark that check box on the cover page of that annual report?
Answer: Yes. [April 11, 2025]
Question: If a listed issuer determines in the fourth quarter of its 20X5 fiscal year that it is required to prepare restatements of its first, second and third quarterly periods of that year, is the listed issuer required to mark any of the check boxes discussed in Question 104.21 on the cover page of its 20X5 annual report or provide any disclosure pursuant to Item 402(w) of Regulation S-K in that annual report?
Answer: The listed issuer is not required to mark the related check boxes on the cover page of the 20X5 annual report because the restatements do not impact the annual periods in the issuer’s financial statements included in that annual report. This is true even if the issuer includes disclosures about the interim restatements in a footnote to the annual period financial statements pursuant to Item 302(a) of Regulation S-K.
However, the listed issuer is required to include or incorporate by reference from its proxy or information statement, disclosure pursuant to Item 402(w) of Regulation S-K in the 20X5 annual report filed in fiscal year 20X6, because the issuer determined during fiscal year 20X5 that it needed to prepare an accounting restatement. For purposes of that disclosure, an accounting restatement is not limited to an accounting restatement that impacts annual periods, but also includes an accounting restatement that impacts interim periods only. This position also applies to disclosure pursuant to Item 6.F of Form 20-F or Instruction (B)(19) to Form 40-F filed in fiscal year 20X6. [April 11, 2025]
Authored by
Broc Romanek