Addressing the new SEC human capital disclosure

Woman on video confarance 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.

Eric Myszka
Senior Manager - Tax
T +1 949 431 9031

Nick Martell
Manager – Tax
T +1 949 878 3318

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