10 February 20237 minute read

Eight key considerations for 2022 Form 10-K updates

In this alert, DLA Piper’s Public Company Advisory group highlights eight key considerations for calendar year-end registrants preparing their 2022 Annual Reports on Form 10-K.

1.  New checkboxes on Form 10-K and clawback rules

In October 2022, the Securities and Exchange Commission (the SEC) approved final rules that require stock exchanges to adopt listing standards that require publicly traded companies to adopt policies to recover erroneously awarded incentive-based compensation, or clawback policies. (This development is discussed further in this DLA Piper alert.) In connection with these rules, the SEC adopted two new checkboxes on the cover page of Form 10-K requiring issuers to indicate if their financial statements reflect any correction of an error to previously issued financial statements and whether this error required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period.

In January 2023, the SEC’s Division of Corporation Finance published a Compliance and Disclosure Interpretation confirming that, while the checkboxes and other disclosure requirements are in the rules and forms in 2023, it does not expect issuers to provide such disclosure until they are required to have a recovery policy under the applicable listing standard.  It is unlikely that there will be such a requirement until late 2023, at the earliest. 

2. Updating risk factors

Registrants should review and update their risk factors to reflect emerging risks and address risks that have been realized in the last fiscal year. Companies should consider a number of recent economic, social, and political developments when updating their risk factors, including risks related to the economy, climate change, human capital, the Russia-Ukraine conflict, increasing cybersecurity threats, and artificial intelligence.  See our alert on these risk factors.

These risks should not be considered in a vacuum, as they are developments that may impact a registrant’s discussion in its Business Section or its Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).

3. Regulatory and legal updates

Registrants should consider if recently adopted or proposed regulations or other legal changes have had, or could in the future have, a material impact on a company and its business.  If so, registrants should discuss these developments in its risk factors or, if appropriate, Business Section or MD&A. 

Recent key legal and regulatory changes that could necessitate updates in this year’s Annual Report on Form 10-K include the Inflation Reduction Act, the CHIPS and Science Act, the Strengthening American Cybersecurity Act, the Uyghur Forced Labor Prevention Act, the European Union (EU)’s Corporate Sustainability Reporting Directive and proposed EU rule making on Corporate Sustainability Due Diligence and proposed SEC climate and cyber rules.  See our alert on these developments.

4. Improving climate-related disclosures

As we discussed in more detail in this DLA Piper alert, in March 2022, the SEC proposed rule changes that would require registrants to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics. 

While the climate rules proposed by the SEC have not yet been adopted, the SEC has been scrutinizing climate-related disclosures by registrants, and, in September 2021, issued a sample comment letter to public companies regarding climate change, which solicits additional climate-related disclosures, such as a discussion of material indirect consequences of climate-related regulation or business trends, the physical effects of climate change on the company’s operations and results and capital expenditures for climate-related projects and compliance costs.

Registrants should therefore be aware that, in addition to the pending climate disclosure rules, the SEC is focused on the accuracy and completeness of climate-related disclosures. If a registrant determines that climate-related risks, regulation, business trends, or costs are immaterial to the business, disclosure teams should consider documenting the company’s materiality analysis, as the SEC has pushed issuers on `materiality of climate-related matters in recent comment letters. 

5. Cybersecurity

As we discuss in more detail in this DLA Piper alert, in March 2022 the SEC proposed new rules to enhance and standardize disclosures regarding cybersecurity risk management, strategy, governance, and incident reporting by public companies.

While the cybersecurity rules proposed by the SEC have not yet been adopted, the SEC Division of Enforcement’s Cyber Unit, established in September 2017, has brought actions against a number of companies related to disclosures of cybersecurity incidents and risks. 

Until new cybersecurity disclosure rules are adopted, registrants should consider comparing their cybersecurity disclosure and disclosure controls and procedures against the SEC’s 2018 and 2011 cybersecurity disclosure guidance. In particular, the 2018 guidance notes that cybersecurity developments may impact not only the company’s risk factors, but its MD&A, Business Section, legal proceedings and financial statements. 

6. Russia and Ukraine disclosures

In May 2022, the SEC issued a Sample Letter to Companies Regarding Disclosures Pertaining to Russia's Invasion of Ukraine and Related Supply Chain Issues, which discusses potential disclosure obligations under the federal securities laws related to the direct or indirect impact that Russia’s invasion of Ukraine and the international response have had or may have on a company’s business. 

To satisfy these obligations, the SEC notes that the Division of Corporation Finance believes that companies should provide detailed disclosure, to the extent material or otherwise required, regarding, among other issues, (1) direct or indirect exposure to Russia, Belarus, or Ukraine through their operations, employee base, investments in Russia, Belarus, or Ukraine, securities traded in Russia, sanctions against Russian or Belarusian individuals or entities, or legal or regulatory uncertainty associated with operating in or exiting Russia or Belarus; (2) direct or indirect reliance on goods or services sourced in Russia or Ukraine or, in some cases, in countries supportive of Russia; (3) actual or potential disruptions in the company’s supply chain; or (4) business relationships, connections to, or assets in, Russia, Belarus, or Ukraine.

7. Economic concerns, including inflation, economic downturn, supply chain and labor shortages

Global economic concerns, particularly the impact of inflation and an anticipated economic downturn, may present risks to registrants or known material trends or uncertainties that registrants should discuss in their MD&A. Where a company has made changes to its product offerings or services as a result of these factors, disclosure in the Business Section may also be required. Additionally, in recent years, companies have experienced potentially significant delays and disruptions resulting from local and international shipping delays and labor shortages. 

Companies should assess whether economic concerns, delays and disruptions have impacted, or may impact, company operations and should confirm whether those particular issues are sufficiently addressed in the company’s risk factors, MD&A and Business Section. Of note, risks related to mitigation efforts of material supply chain and labor shortage issues should be disclosed as well to the extent applicable. Many issuers addressing concerns about an economic downturn, inflation or supply chain disruptions may combine this discussion with discussion of the COVID-19 pandemic or Russia-Ukraine conflict or may address labor shortages in the company’s human capital disclosure.

8. Human capital disclosure updates

Starting in Forms 10-K for 2021, SEC rules have required disclosure in the Business Section, to the extent material, a description of the registrant’s human capital resources and human capital measures or objectives that the registrant focuses on in managing the business. 

Companies should review and update their disclosures on current labor conditions in their respective industries and markets.  For example, the latest reductions in force in the technology sector and changing hiring trends among broad industries may warrant consideration and may require updates to a company’s human capital disclosures.  As we discuss will discuss in more detail in an upcoming DLA Piper Alert, human capital disclosures may include such topics as diversity and inclusion, talent acquisition and retention, the impact of COVID-19, workplace health and safety, employee wellbeing, compensation and benefits, employee engagement and professional development opportunities, company culture, and quantitative diversity and/or turnover statistics. 

Return to our full set of alerts on key considerations for the 2022 annual reporting season.  For more information, please contact the authors of this article or your DLA Piper relationship attorney.