After our recent posts about the disclosure issues surrounding emerging and changing issues including Brexit and Libor, we are returning to our series delving into the details of implementing the SEC’s March 20, 2019 Disclosure Modernization and Simplification rule, and specifically the changes in properties disclosures.

As you likely have heard, most of the changes in this rule, including property disclosures, are effective for filings after May 2, 2019.

To being reviewing the changes in property disclosures Item 2 in Form 10-K requires the disclosures in Regulation S-K Item 102.

The old text Item 102 is:

229.102   (Item 102) Description of property.

State briefly the location and general character of the principal plants, mines and other materially important physical properties of the registrant and its subsidiaries. In addition, identify the segment(s), as reported in the financial statements, that use the properties described. If any such property is not held in fee or is held subject to any major encumbrance, so state and describe briefly how held.

Instructions to Item 102: 1. What is required is such information as reasonably will inform investors as to the suitability, adequacy, productive capacity and extent of utilization of the facilities by the registrant. Detailed descriptions of the physical characteristics of individual properties or legal descriptions by metes and bounds are not required and shall not be given.

2.  In determining whether properties should be described, the registrant should take into account both quantitative and qualitative factors. See Instruction 1 to Item 101 of Regulation S-K (§229.101).

The new text effective May 2, 2019 is:

229.102 (Item 102) Description of property.

To the extent material, disclose the location and general character of the registrant’s principal physical properties. In addition, identify the segment(s), as reported in the financial statements, that use the properties described. If any such property is not held in fee or is held subject to an encumbrance that is material to the registrant, so state and describe briefly how held.

Instruction 1 to Item 102: This item requires information that will reasonably inform investors as to the suitability, adequacy, productive capacity, and extent of utilization of the principal physical properties of the registrant and its subsidiaries, to the extent the described properties are material. A registrant should engage in a comprehensive consideration of the materiality of its properties. If appropriate, descriptions may be provided on a collective basis;detailed descriptions of the physical characteristics of individual properties or legal descriptions by metes and bounds are not required and shall not be given.

Instruction 2 to Item 102: In determining materiality under this Item, the registrant should take into account both quantitative and qualitative factors. See Instruction 1 to Item 101 of Regulation S-K (§ 229.101).

The changes to this item focus on one of the more complex judgments we make in SEC reporting,materiality.  (This was one of the key judgments that CorpFin Director Hinman discussed in the speech explored in our last two posts.)

The old item started:

“State briefly the location and general character of the principal plants, mines and other materially important physical properties…”

 This has been changed to:

 “To the extent material, disclose the location and general character of the registrant’s principal physical properties.”

The change in wording from“materially important physical properties” to  “To the extent material, disclose…” tells us that we don’t need to include information that, in the words of CorpFin Director Hinman, does not provide investors:

“material information they need about companies and their securities offerings to make informed investment and voting decisions”

 While the information about segments and suitability, adequacy, productive capacity and extent of utilization reads very similarly from the old to the new requirement, the words “to the extent the described properties are material” makes clear we can make materiality calls and not be concerned with the other potential considerations in the old language.  We can hopefully no longer by rote disclose information about our properties that will not matter to investors.

Additionally, the new instruction “A registrant should engage in a comprehensive consideration of the materiality of its properties” more or less makes this a requirement.

In the final rule release, the SEC made this observation:

Despite existing language in Item 102 that limits the required information to properties that are “materially important” to the registrant and its subsidiaries, the disclosure elicited in response to this item may not have been consistently material.For many companies, the only physical properties held may be their headquarters, office space, or ancillary facilities, a description of which is likely to be unimportant to an investor’s evaluation of an investment in the company.

As an example, if a service company uses only simple office space and is in an area where an adequate supply of suitable space is available and the company has no excess space problems, it could be appropriate to make no disclosures about properties.  This would reduce the clutter of immaterial information in Form 10-K.

The last part of instruction 1 makes a suggestion to avoid immaterial details:

“If appropriate, descriptions may be provided on a collective basis”

Materiality Considerations

The last instruction, which is the same on both the old and new versions of S-K Item 102, makes it clear that the definition of materiality is not just the magnitude of an item.

Instruction 2 to Item 102: In determining materiality under this Item, the registrant should take into account both quantitative and qualitative factors. See Instruction 1 to Item 101 of Regulation S-K (§ 229.101).

Instruction 1 to Item 101 does not actually refer to SAB 99.  It does include an example that perhaps is similar to considerations in SAB 99

Instructions to Item 101: 1. In determining what information about the segments is material to an understanding of the registrant’s business taken as a whole and therefore required to be disclosed, pursuant to paragraph (c) of this Item, the registrant should take into account both quantitative and qualitative factorssuch as the significance of the matter to the registrant (e.g., whether a matter with a relatively minor impact on the registrant’s business is represented by management to be important to its future profitability), the pervasiveness of the matter (e.g., whether it affects or may affect numerous items in the segment information), and the impact of the matter (e.g., whether it distorts the trends reflected in the segment information). Situations may arise when information should be disclosed about a segment, although the information in quantitative terms may not appear significant to the registrant’s business taken as a whole.

While this change does present some new materiality judgments for properties, it does hopefully modernize and simplify these disclosures.  And, to provide a starting point, here are two examples from 3M Corporation and General Motors, which are wonderfully brief even though prepared under the old disclosure requirements:

3M Corporation – Item 2. Properties.

In the U.S., 3M’s general offices, corporate research laboratories, and certain division laboratories are located in St. Paul, Minnesota. The Company operates 80 manufacturing facilities in 29 states. Internationally, the Company operates 125 manufacturing and converting facilities in 37 countries.

3M owns the majority of its physical properties. 3M’s physical facilities are highly suitable for the purposes for which they were designed. Because 3M is a global enterprise characterized by substantial intersegment cooperation, properties are often used by multiple business segments.

General Motors – Item 2. Properties

At December 31, 2018 we had over 100 locations in the U.S. (excluding our automotive financing operations and dealerships) which are primarily for manufacturing, assembly, distribution, warehousing, engineering and testing. We, our subsidiaries or associated companies in which we own an equity interest own most of these properties and/or lease a portion of these properties. Leased properties are primarily composed of warehouses and administration, engineering and sales offices.

We have manufacturing, assembly, distribution, office or warehousing operations in 33 countries, including equity interests in associated companies which perform manufacturing, assembly or distribution operations. The major facilities outside the U.S., which are principally vehicle manufacturing and assembly operations, are located in Argentina, Brazil, Canada, China, Colombia, Ecuador, Mexico, South Korea and Thailand.

In November 2018 we announced our plans to realign our manufacturing capacity in response to market-related volume declines in passenger cars.

GM Financial owns or leases facilities for administration and regional credit centers. GM Financial has 39 facilities, of which 26 are located in the U.S. The major facilities outside the U.S. are located in Brazil, Canada, China and Mexico.

One final note – the specific requirements in industries such as mining and oil and gas are not changed by this new rule.

As always, your thoughts and comments are welcome!