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Multiple Filing Deadlines: No Way To Reduce Complexity

Dec 15

Written by: Jack Ciesielski
12/15/2005 8:13 AM

Back in 2001,under then-Chairman Harvey Pitt, the SEC embarked on a mission to make firms file their financial statements and current events 8-K filings on a greatly accelerated basis. The 90 days allowed for 10-Ks and 45 days allowed for 10-Qs had been in place since the early 1970's, long before cheap computing power and software speeded up the financial reporting process. In view of progress, it didn't seem unreasonable to ask companies to hurry up and get their annual report done in 60 days and quarterlies in 35, on a phased-in basis.

That was then, this is now. Plenty of water has gone over that dam: the evaporation of Enron and Arthur Andersen, the passing of the Sarbanes-Oxley Act and the first full season of Section 404 reviews for companies of any size. Companies have lobbied for relief as the phase-in timetable unfolded, and there were carve-outs for companies that weren't accelerated filers - meaning they were given clemency if their public float was less than $75 million. Last fall, in light of Section 404 demands, a year's breather was given to all companies.

The final phase of the shorter deadlines would have arrived in the upcoming reporting season. Last September, the SEC softened the deadlines once again, offering for comment a revised schedule and serving up another category of filers: "large accelerated filers." These are companies with over $700 million of public float. Instead of the filing dates being the same for all public companies, there are now different filing dates for non-accelerated filers (companies with less than $75 million in public float); accelerated filers (between $75 and $700 million in float); and large accelerated filers (over $700 million in float).

Yesterday, the Commission approved the new deadlines. Here's a rundown on what's effective in the upcoming season and beyond:

Large accelerated filers will be subject to a 60-day Form 10-K annual report deadline starting in fiscal years ending on or after Dec. 15, 2006, and to a 75-day deadline until then;

Large accelerated filers will be subject to a 40-day Form 10-Q quarterly report deadline;

The now-redefined accelerated filers will be subject to a 75-day Form 10-K annual report deadline; and

The now-redefined accelerated filers will be subject to a 40-day Form 10-Q quarterly report deadline.

Non-accelerated filers (the really little firms) will continue to file their annual reports on Form 10-K or 10-KSB (Small Business) under the original 90-day deadline and quarterly reports on Form 10-Q or 10-QSB under the original 45-day deadline. Also, Form 20-F or Form 40-F filing deadlines for private issuers will not change.

Last week, Chairman Cox gave a speech in which he encouraged the accounting profession to reduce the complexity that's crept into the financial reporting system. The proposal approved by the Commission yesterday were riding on rails built long before Cox came on board; if he's trying to mend a tempestuous Commission, derailing the proposals wouldn't serve him well. It's hard not to observe the contradiction, however: one day the SEC is grousing about complexity in financial reporting, then a week later, it adds more complexity by balkanizing something as simple as when a company is going to file its financial statements. Giving exceptions and exemptions whenever a group asks for them only adds complexity to the system. What the SEC should have done is look at its original idea for reducing the filing times and figured out why it isn't a good idea now (it still is), instead of layering in complexity by cutting small firms an exemption.

Being a publicly-traded firm used to carry with it a sort of swagger that the firm was good enough to meet tough reporting requirements. Creating an incubator for small firms isn't going to serve investors well - and once the journey down that path has begun, it'll be hard to stop.

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Pension & Other Benefit Plans: A Look Ahead

Investors in firms with defined benefit pension plans always face the risk of suddenly being pushed farther back in line when it comes to being served their returns. Variability in plan assets and variability in benefit plan obligations are the reason: poor asset returns coupled with sinking interest rates always spell tough times for defined benefit plan funding. In that regard, this year’s asset returns combined with the Fed’s “Operation Twist” add up to “Operation Agony” for defined benefit pension plans. If trends continue along their current path, firms that may have anticipated moving to more realistic pension accounting - like Honeywell, AT&T and Verizon already have done - might forego that decision. It could be just too painful.

Pensions aren’t the only kind of benefit plan affected by Operation Twist. Other postemployment benefit (OPEB) plans share much the same accounting model as pensions, including the calculation of a projected benefit obligation that similarly incorporates a discount rate - one that will also be affected by Operation Twist. The net OPEB obligations were slightly less than pension obligations at the end of 2010, but also promise to grow in 2011. Investors perceive them as less threatening than pension obligations because they don’t require funding. Strangely, there are a number of firms that are recognizing income from these benefit plans - without ever creating a dime of cash for investors.

A recent edition of The Analyst’s Accounting Observer dissects these issues, and is available only to paid subscribers. A condensed version is available for free upon request. To receive it, send an e-mail to Brenda Rappold at brappold@accountingobserver.com, with “PENSIONS” in the subject line.

For information about subscribing to The Analyst’s Accounting Observer, click here.