Financial Reporting, Taxation, & Accounting

• SEC Staff Comfortable With New Flexibility In Non-GAAP Disclosure

Corporate Governance & Directors' Duties

• Quality Or Quantity? How Much And What Information Do Decisionmakers Need?

Securities Regulation & Disclosure

• When The Sea Rises, Disclose The Effects Of Climate Change

• What To Do When The SEC Comes Calling

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At last, an interpretive release. An SEC interpretive release that became effective in early 2010 may help compliance professionals understand the requirements for disclosing climate-change concerns. Environmental lawyers Jeffrey Smith, Matthew Morreale, and Kimberley Drexler highlight four sectors that could give rise to a need for disclosure: present and pending laws and regulations (e.g., the costs under the cap-and-trade system); international agreements on combatting climate change; business trends indirectly resulting from climate change (e.g., decreases in demand by green-conscious consumers); and the physical effects of climate change (e.g., the impact of rising sea levels on a factory situated near the ocean). After two years of stalemate, the Commission finally approved the release, albeit by just a 3-2 vote. The release followed a request from Ceres (a coalition of environmental public interest groups and investors), institutional investors, New York State's Attorney General, state treasurers, and corporate officials. The requestors sought guidance on when companies must disclose risks related to climate change.

How Reg. S-K applies. The Ceres petition requested that issuers be required to evaluate the effects of climate change on their operations, supply and distribution chains, and personnel. Item 101, Item 103, the MD&A section, and Item 503 under Reg. S-K may all be applicable to climate-change disclosures. Item 101 requires disclosure of the effects on capital expenditures, earnings, and competitive position from complying with environmental protection laws, so issuers should monitor legislative changes and the consequences of various regulatory choices. Under Item 103, which covers disclosure of material legal proceedings and administrative actions, a diverse and growing array of climate-change litigation may be pertinent, the authors advise. For example, three courts in late 2009 considered whether climate-change remedies are appropriate for judicial decision or should be left to the executive or legislative branch; they also evaluated who has standing to sue. The MD&A section requires an issuer to disclose known trends and uncertainties—such as climate change—that will probably have a material effect on liquidity, capital resources, net sales, or income. Management must assume that an event will occur unless it can conclude that the event is not reasonably likely, and disclosure is required unless the event is not reasonably likely to affect the company materially. Risk factors that must be disclosed under Item 503 include physical risk to facilities or operations.

Implications of the new approach. The SEC always wants issuers to avoid generalized disclosures that could apply to any company, but the new release might encourage self-protective disclosures (which might obscure the consequences of climate change). Although companies need not reveal their carbon footprint, the calculation of emissions could provide the basis for some required disclosure of business trends under Item 303 or strategic planning under Item 101. One commissioner commented that issuers disclosing the effects of pending climate-change legislation must determine whether they can effectively calculate greenhouse-gas emissions. The release clearly brings climate change under the SEC's general disclosure requirements; as a result, disclosure control procedures will apply. The authors advise issuers to determine whether to include—in their SEC filings—any climate-change disclosures they have made in other vehicles. If including disclosures from alternate sources, the issuer will need to ensure that appropriate disclosure control procedures were in place.

Accounting standards come into play as well. Applying accounting standards to climate-change concerns, the authors warn, is not an easy task. The FASB's Accounting Standards Codification Topic 450, which codified FAS No. 5, is now the most frequently applied in the environmental area. It requires that a loss contingency be accrued and the contingency described in a footnote if the loss is “probable” and the amount can be “reasonably estimated.” If the loss is only “reasonably possible” or the amount cannot be estimated, then the company does not need to accrue it but must explain it in a footnote. SEC Staff Accounting Bulletin No. 92 requires that issuers measure liabilities by using available facts and existing technology and legislation. When a range of reasonable likely outcomes exists, the company must recognize the lowest amount in the range. Determining whether an event is probable and whether a liability can be estimated will be complicated when considering climate change and will vary by industry, company, plant, and locale.

Abstracted from Review of Securities & Commodities Regulation, published by RSCR Publications, 25 East 86th Street, Ste. 13C, New York NY 10028-0553. To subscribe, call (866) 425-1171; or visit www.rscrpubs.com. Editor's Note: To read the full text of the release, visit www.sec.gov/rules/interp/2010/33-9106.pdf.