On Aug. 8, 2019, the SEC proposed amendments to modernize the disclosure requirements for Regulation S-K Items 101, 103, and 105. The proposed amendments were adopted
on Aug. 26, 2020, and became effective on Nov. 9, 2020. These amendments provide updates and edits to Section 101 – Description of Business, Section 103 – Legal Proceedings, and Section 105 – Risk Factor Disclosures. Registrants will need to incorporate the SEC’s amendments into disclosures made to assist investors. This article will focus on the updates to Item 101(c) focus on the expansion human capital management disclosures.
Summary of human capital disclosure
Prior to the adoption of the SEC’s amendments, the only required human capital management disclosure was the total number of persons employed by a registrant. At the discretion of a registrant, the number of persons employed could be bifurcated between full- and part-time employees or employees in each department or division. The amendments to Item 101(c) will require a registrant to provide a description of human capital resources, including any human capital measures or objectives that are focused on managing the business. It should be noted the amendments to Item 101(c) remove the direct mention for registrants to report the total number of persons employed. The SEC has provided a number of examples human capital measures and objectives that may be included in a registrant’s disclosures.
One important detail of the new human capital disclosure is that the SEC preserved guidance stating that such disclosures are required to the extent that such disclosure is material to an understanding of the registrant’s business taken as a whole. While the SEC believes human capital disclosures are important information for investors, the amendments do not explicitly state they will be material for all registrants. Similarly, the examples provided should be viewed as being potentially relevant rather than mandates.
Impact of human capital disclosure
As part of the new amendments, the SEC has chosen not to define human capital because the SEC believes the definition of human capital may evolve over time. Further, human capital can be defined in several different ways based on a registrant’s specific circumstances and objectives.
Following the discussion above, registrants will be faced with the question of what human capital information should be included in their disclosures. Registrants must consider what could be viewed as material to current and potential investors. Factors such as a registrant’s nature of business, workforce makeup, and policies with a focus on the development, attraction, and retention of persons should be evaluated when determining the contents of the human capital disclosure.
Conversely, based on the new amendments to Item 101 (c), certain registrants may no longer disclose any human capital information, depending on the determination if this information is material to understanding their business. Further, the updates remove any quantitative requirements and shift to broader, qualitative measures to evaluate the human capital state of registrants. The preceding statement does not disallow registrants from disclosing quantitative metrics in the human capital disclosure but these metrics are not required. It should be noted, that while not adopted, the SEC has expectations that human capital disclosures will include both qualitative and quantitative statistics that can assist investors in understanding a registrant’s business.
Complying with requirements
To assist in the completion of the new human capital disclosure, registrants should evaluate what human capital measures are currently in place and what gaps should be addressed prior to completing the disclosure. The steps below provide registrants a guide to begin evaluation of their human capital disclosure.
- Inventory all human capital measures or objectives that are currently focused on or prefer to objectively measure in managing the business.
- Narrow the inventory to include the objective measures that are material to an understanding of the business.
- Implement processes and controls over the preparation and reporting of human capital measures.
- Consider subsequent measurement and reporting. Human capital measures should be consistent from period to period. Changes to how the measures are used or calculated should be disclosed.
Potential human capital metrics registrants may consider disclosing include workforce demographics (e.g. diversity goals), recruitment and employee turnover rates, training costs and the percentage of employees completing required compliance training programs. Registrants should not go about this alone and instead reach out to key stakeholders, outside advisors and results of employee engagement surveys to identify those human capital metrics that are material to the understanding registrant’s business. Lastly, once material human capital metrics are identified, registrants should develop a communication plan to prepare for possible changes in business results against these material metrics.
Senior Manager - Tax
+1 949 431 9031
Manager – Tax
+1 949 878 3318
Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.