CIRO Financial Reporting & Disclosure 5 — Questions and Answers
Question 1: Which SEC filing form is used by foreign private issuers to submit their annual report?
- 10-K
- 20-F (Correct answer)
- 40-F
- 6-K
Correct answer: 20-F
Foreign private issuers that do not qualify to use Form 40-F (reserved for certain Canadian issuers) file their annual reports with the SEC on Form 20-F.
Question 2: An analyst asks an IR officer for a breakdown of revenue by individual customer. The IR officer should be aware that SEC rules generally require disclosure of a customer only when:
- That customer accounts for more than 5% of total revenue
- That customer accounts for 10% or more of total revenue (Correct answer)
- That customer is a government entity
- That customer is also a related party
Correct answer: That customer accounts for 10% or more of total revenue
ASC 280-10-50-42 requires disclosure of revenues from a single external customer that account for 10% or more of the entity's total revenues.
Question 3: What is the primary distinction between a 'restatement' and a 'revision' in the context of financial reporting corrections?
- Restatements involve errors in current-period filings; revisions correct prior-period filings
- Restatements correct material errors in previously issued financial statements; revisions correct immaterial errors (Correct answer)
- Restatements are voluntary; revisions are SEC-mandated
- Restatements require shareholder approval; revisions do not
Correct answer: Restatements correct material errors in previously issued financial statements; revisions correct immaterial errors
A restatement is required when a material error is identified in previously issued financial statements, while a revision (also called a 'little r' restatement) corrects immaterial errors in prior periods.
Question 4: Under IFRS (as adopted by many foreign companies listed in the U.S.), how does the treatment of development costs differ from U.S. GAAP?
- IFRS requires expensing all R&D costs, while GAAP allows capitalization
- IFRS allows capitalization of development costs when certain criteria are met, while U.S. GAAP generally requires expensing (Correct answer)
- Both IFRS and GAAP require full capitalization of development costs
- IFRS prohibits any R&D spending disclosure, while GAAP requires full disclosure
Correct answer: IFRS allows capitalization of development costs when certain criteria are met, while U.S. GAAP generally requires expensing
Under IAS 38, development costs meeting specific criteria (technical feasibility, intention to complete, ability to use/sell, etc.) may be capitalized, whereas U.S. GAAP under ASC 730 generally requires immediate expensing of R&D costs.
Question 5: A company's stock price drops 40% following an earnings miss. An investor sues, claiming securities fraud. Under the Private Securities Litigation Reform Act (PSLRA), what must the plaintiff demonstrate to survive a motion to dismiss?
- That the company's stock declined by more than 20% after the disclosure
- That the complaint states with particularity facts giving rise to a strong inference of scienter (Correct answer)
- That the company failed to file required SEC reports on time
- That the CEO sold shares within six months of the earnings release
Correct answer: That the complaint states with particularity facts giving rise to a strong inference of scienter
The PSLRA requires plaintiffs to plead with particularity facts that give rise to a strong inference that the defendant acted with scienter (intentional or reckless misconduct), a high pleading standard designed to deter frivolous suits.
Question 6: Which of the following best describes 'earnings guidance' from an investor relations perspective?
- A legally required quarterly forecast filed with the SEC
- Forward-looking management estimates of future financial performance shared with investors (Correct answer)
- An analyst's published earnings estimate for the company
- A board-approved budget that must be disclosed in the proxy statement
Correct answer: Forward-looking management estimates of future financial performance shared with investors
Earnings guidance refers to management's voluntary forward-looking estimates of future revenues, earnings, or other financial metrics provided to the investment community.
Question 7: When a company includes a forward-looking statement in a press release, what legal protection is provided by the 'safe harbor' under the PSLRA?
- The company is immune from all securities lawsuits related to that statement
- The company is protected if the statement is accompanied by meaningful cautionary language identifying important factors that could cause actual results to differ (Correct answer)
- The safe harbor applies only to statements made during SEC-filed documents, not press releases
- Protection applies only if the statement turns out to be accurate within a 10% margin
Correct answer: The company is protected if the statement is accompanied by meaningful cautionary language identifying important factors that could cause actual results to differ
The PSLRA safe harbor protects forward-looking statements that are accompanied by meaningful cautionary language identifying risk factors, or that are immaterial, or where the plaintiff cannot prove the speaker had actual knowledge the statement was false.
CIRO Financial Reporting & Disclosure 5
Which SEC filing form is used by foreign private issuers to submit their annual report?