Regulation S-X Definition
Regulation S-X outlines the specific form and content of financial statements that are required to be filed with the US Securities and Exchange Commission. Public companies are obligated to register their shares with the commission disclosing certain facts about the company in order to offer the shares to the public. They are also required to fulfill the ongoing reporting requirements Financial reports constitute an important part of the registration as well as of the periodical reporting.
It is mentioned as 17 C.F.R. Part 210. The name is “Form and Content of and Requirements for Financial Statements, Securities Act of 1933, Securities Exchange Act of 1934, Public Utility Holding Company Act of 1935, Investment Company Act of 1940, Investment Advisers Act of 1940, and Energy Policy and Conservation Act of 1975”.
A Little More on What is Regulation S-X
Regulation S-X, along with the Financial Reporting Releases (Staff Accounting Bulletins), provides the guidelines for the form and content of the financial statements of public companies to be filed with the SEC.
Financial statements are required to be filed as part of the registration statement under the Securities Act of 1933 or as part of the registration statements under section 12, annual or other reports under sections 13 and 15(d), and proxy and information statements under section 14 of the Securities Exchange Act of 1934. It is also a part of the registration statements and shareholder reports under the Investment Company Act of 1940.
These financial statements are to be compiled in accordance with the guidelines provided by Regulation S-X unless the forms which are to be used for registration and reporting under these sections of this Act specifically mention otherwise. Regulation S-X also mentions that this term “financial statements” includes all notes and related schedules.
All the public companies operating in the US need to follow the guidelines provided by Regulation S-X in order to file accurately and truthfully.
Some of the terms used in Regulation S-X
The terms used in Regulation S-X are specifically defined. When used in Regulation S-X, these meanings are to be followed unless the context requires otherwise.
In this document, an independent public or certified public accountant specifies the scope of the audit made by her/him. The accountant also needs to express her/his opinion regarding financial statements taken as a whole. If the concerned accountant believes that an overall opinion cannot be expressed, she/he must explain the reasons.
Attestation report on internal control over financial reporting
It is a report by a registered public accounting firm expressing their views on whether the registrant maintained in all material respects, effective internal control over financial reporting.
III. Attestation report on assessment of compliance with servicing criteria for asset-backed securities.
It is a report by a registered public accounting firm expressing their opinion concerning an asserting party’s assessment of compliance with servicing criteria, in accordance with standards on attestation engagements. If such opinions cannot be expressed, the reasons need to be explained.
A deficiency or a combination of deficiencies in internal control over financial reporting and there are reasons to believe that this deficiency may lead to a material misstatement of the registrant’s annual or interim financial statements that may not be checked on a timely basis.
Audit (or examination)
Auditing the financial statement of an issuer means the examination of the statement by an independent accountant. The accountant needs to follow the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”) while expressing her/his view on the statement.
It is the annual accounting period and if a closing date has not been adopted, then a fiscal year is the calendar year ending on December 31.
The issuer of the securities which is being registered or for which an application or a report is being filed is called the registrant.
VIII. Foreign business
If the majority of a company is owned by people who are not US citizens or residents, it is not organized under the federal laws or any US state laws and the majority of its executive officers and directors are not citizens or residents of United States it is considered as a foreign company. If the first two conditions are common and more than 50% of the company’s assets are located outside the country, then also it is considered as a foreign company.
Some of the major accounting-related entities that helped the SEC to formulate Regulation S-X are:
- American Institute of Certified Public Accountants
- Federal Accounting Standards Advisory Board
- Financial Accounting Standards with FASB Accounting Pronouncements
- House Committee on Financial Services
- International Accounting Standards Board and IFRS pronouncements
- Public Company Accounting Oversight Board
References for Regulation S-X
Academic Research on Regulation S-X
The aggregation problem in financial statements: An informational approach, Lev, B. (1968). Journal of Accounting Research, 247-261. For the purpose of reporting, the companies aggregate a large number of individual balances in their financial statements. This paper assumes that in principle, the users would like to have a detailed report rather than this aggregated report and this aggregation results in a loss of information for them. This paper attempts to measure this loss and to design a method to minimize it.
Public (US) compared to private (UK) regulation of corporate financial disclosure, Benston, G. J. (1976). The Accounting Review, 51(3), 483-498. The United States depends on the public regulation of financial disclosure (The Securities and Exchange Commission), whereas the United Kingdom relies on private regulation (The Stock Exchange). This paper compares these two systems in terms of costs and benefits and concludes private regulation is better in many important respects.
Lost in translation: Detecting tax shelter activity in financial statements, McGill, G. A., & Outslay, E. (2004). National Tax Journal, 739-756. This paper explains the method of determining a company’s tax payment and its involvement in “tax shelter” by analyzing the data provided in the “income tax note”. The paper uses specific examples to explain the method and identifies the limitations of using the financial statement data in tax issues. It recommends enhanced disclosure to increase transparency in tax-related issues.
Disclosure requirements under federal securities regulation, Heller, H. (1960). Bus. Law., 16, 300. This essay discusses the theory and purpose of disclosure under the Securities Act of 1933 and Securities Exchange Act of 1934. It mostly remarks on the Securities Act, but those are also applicable to the Securities Exchange Act of 1934.
Financial reporting in US capital markets: International demensions, Sutton, M. H. (1997). Accounting Horizons, 11(2), 96. This is a commentary by Michael H. Sutton, Chief Accountant of the United States Securities and Exchange Commission. It gives an overview of the role played by the SEC in financial reporting and discusses its rule-making and interpretive authority. The working relationship between the private sector standard-setting bodies and SEC is discussed at some length and in this context, the paper discusses the future of efforts to harmonize international accounting.
Financial statement disaggregation decisions and auditors’ tolerance for misstatement, Libby, R., & Brown, T. (2012). The Accounting Review, 88(2), 641-665. This study investigates whether the provision of voluntary disaggregation of income statement number leads to improved reliability of income statement subtotals. The study finds the experienced auditors require correction of small errors in disaggregated numbers. The auditors expect extra SEC scrutiny of uncorrected financial statement errors when the disaggregation is more. This effect can be mitigated considerably by presenting the disaggregated numbers in the notes. The participants expressed different views on whether disaggregated numbers are to be considered as relevant materiality benchmarks and the requirement of the current auditing guidance. From these observations, the paper concludes there is a potential deficiency in current audit guidance. It also suggests the voluntary disaggregation positively affects (unintentionally) the reliability of income statement subtotals.
Debt Reporting by Parent Companies: Parent‐Only Versus Consolidated Statements, Francis, J. R. (1986). Journal of Business Finance & Accounting, 13(3), 393-403. This article attempts to identify the differences between the Parent-only debt reporting and consolidated statements, and it does a comparative study between these two.
What can we infer about a firm’s taxable income from its financial statements?, Hanlon, M. (2003).National Tax Journal, 831-863. This paper presents an assessment of the income tax disclosure requirements in the financial statements of the companies. It argues these disclosures and income tax expenses are inadequate for estimating a firm’s actual tax liabilities and taxable income and identifies many problems in this regard. It describes the conditions under which the information provided in the financial statement helps to estimate the taxable income most accurately and when the estimation becomes difficult.
Disclosure regulations and the cost of capital, Dhaliwal, D. S. (1979). Southern Economic Journal, 785-794. This paper investigates the effect of disclosure regulations on the cost of capital of the concerned firms. It conducts an empirical study to asses the impact of SEC’s requirement to report by line-of-business on the cost of equity capital.
The regulation of accountants and public accounting before and after Enron, Benston, G. J. (2003). Emory LJ, 52, 1325. This paper analyzes the regulations concerning accountants and public accounting before and after the incident of the Enron scandal. It is a scandal that led to the enactment of the Sarbanes–Oxley Act of 2002.
Company size, listed versus unlisted stocks, and the extent of financial disclosure, Buzby, S. L. (1975). Journal of accounting research, 16-37. The adequacy of disclosure varies from one company to another depending on various factors and sometimes this variation is significant. This paper conducts a study to estimate how each of these factors affects the adequacy of disclosure in annual reports. It attempts to assess the relationship between a subcomponent of adequate disclosure- to which extent this component is present in corporate annual reports and two characteristics of a company. These characteristics are the size of the company and its listing status.
Financial reporting for regulatory agencies, Barr, A. (1958). Journal of Accountancy (pre-1986), 105(000002), 26. This paper discusses the requirement of financial reporting by the SEC and its amendments. It tries to assess whether the regulatory agency is moving in the right direction.