Should U.S. Companies Adopt Semi -Annual Reporting?

Federal law requires public companies to disclose their financial results each quarter in filings with the U.S. Securities Exchange Commission (the “SEC”). Because these quarterly reports contain key financial metrics and provide detailed information about the financial health of a company, investors and investment managers rely heavily on them to inform investment decisions.

Quarterly reporting promotes transparency, allowing investors to make informed investment decisions. But, in recent years, some market participants and commentators have begun to question the value of the practice, arguing that quarterly reporting distracts companies from focusing on long-term growth, forcing executives to instead consistently prioritize short-term quarterly earnings results.

Discussion

For years, commentators have questioned the value of quarterly reporting. Many suggest that quarterly reporting forces companies to focus too heavily on short-term results at the expense of long-term growth.

Fosters Short-Term Thinking While quarterly reporting affords investors greater transparency and allows companies to raise funds more cheaply, it may entice management to sacrifice long-term strategy for short term gains. In contrast, a semi-annual reporting system would arguably shift management focus towards long-term value creation and lift the stress of comparing company performance every three months. Critics of the current system range from ranking politicians to high-profile investors and company executives.

Going Public

When a company goes public, it is required to follow the strict rules laid out by the Securities and Exchange Commission (SEC), the government body which oversees capital markets and protects investors. One of the many rules requires companies to file earnings reports that detail how a company has been performing.

The earnings reports are expected after the end of a company's first three quarters, and both quarterly and annual reports after their fiscal year ends. Note that the fiscal year-end for many companies is not the same as the calendar year-end.

The earnings reports are public records and are intended to keep the company's investors and potential investors up to date on the company's performance as well as to highlight any areas of difficulty. These reports are not only important to investors but also to investment analysts working at banks that provide their judgement and recommendations on public companies.

When a company releases its earnings, there is usually a direct and immediate response to its stock price. When the reports contain good news and match or exceed expectations, the stock usually sees a boost, whereas if the earnings are below expectations, the stock price typically suffers. As such, earnings announcements are carefully watched.

Filers Category

There are several categories of filers. A filler is an issuer that meets the following requirements at the end of its fiscal year:

What category does an IPO issuer fall into?

By definition, an IPO issuer would not satisfy the second or third condition for Accelerated Filer status set forth above under “What is an Accelerated Filer” and “What is a Large Accelerated Filer.” Accordingly, an IPO issuer’s first annual report on Form 10-K will be due 90 days after its fiscal year end.

President Donald J. Trump

In 2018, President Donald J. Trump called on the SEC to study whether financial reporting should become less frequent - and the SEC has sought public comment to help evaluate whether changes to the current practice are necessary.

While the comments received do not appear to indicate widespread support for changing the frequency of quarterly reporting, they do indicate support for modifying certain elements of the practice. Investors should continue to monitor this ongoing debate, as any changes to quarterly reporting requirements will impact the availability of information on which investment decisions are made.

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From the full article published on December 17, 2018: “Should U.S. Companies Adopt Semi-Annual Reporting? An Analysis of Quarterly Reporting Requirements and the Practice of Earnings Guidance”, by Brown University, Providence, Rhode Island:

“We would suggest that a mid-ground might make sense: adopting a bifurcated reporting system appropriately addresses the major issues with quarterly reporting for small-cap companies, but holds mid and large cap companies to the current reporting regimen. Under such a system, smaller sized companies would be allowed to report on a semi-annual basis, while mid and larger businesses would continue to disclose quarterly. The higher cost of compliance for smaller companies compared to larger ones (as a percentage of revenue) leads to an asymmetric impact on capital expenditures and reinvestment. Quarterly reporting is a negligible cost for large cap companies, but has been shown to adversely impact smaller businesses from both a monetary and time perspective. Reduced reporting requirements would allow small-cap company executives to spend less time on quarterly filings and more on projects that maximize long-term.

shareholder value. In addition, cost savings from semi-annual reporting can be allocated towards projects that unlock long-term shareholder value. In October 2018, SEC Chairman Jay Clayton confirmed that quarterly reporting will remain in place for larger companies, but has yet to address smaller businesses. The SEC is currently exploring the possibility of a bifurcated reporting system.”

• for the full article please click here: https://bit.ly/2P7HBVG

Sources:

1. “Should U.S. Companies Adopt Semi-Annual Reporting? An Analysis of Quarterly Reporting Requirements and the Practice of Earnings Guidance”, by Brown University, Providence, Rhode Island - https://bit.ly/2P7HBVG

2. Morrison & Foerster LLP - Frequently asked questions about periodic reporting requirements for U.S. issuers - overview - https://bit.ly/3sAJCXS

3. Investor Alert: The Ongoing Debate Over Quarterly Reporting Requirements, by Michael P. Canty, Ross M. Kamhi - https://bit.ly/3apiN2X