Keep Your Financial Reports Compliant with Form 8-K

By Lita Epstein

Sometimes significant changes in a company’s financial position occur between the times the company files its financial reports. When that happens, the company must file a special report called an 8-K, which reports any material changes (changes that may have a significant financial impact on the company’s earnings) that happen between the times of the quarterly or annual reports.

The Sarbanes-Oxley Act of 2002 mandates that the SEC review all its compliance requirements regarding financial reporting. In response to the legislation, the SEC issued new rules for Form 8-K, requiring companies to report any material changes within four days of the event. Critical events to be reported on Form 8-K include

  • Business combination: Any agreement related to a business combination (such as a merger combining two companies or consolidating two major divisions into one) or other extraordinary corporate transaction that may be material to the company’s financial position. This report must include this information:

    • Date of execution

    • Parties involved

    • Material relationship between the company or its affiliates and any other party involved in the agreement

    • Brief description of the terms and conditions of this agreement

  • Companies don’t need to disclose any nonbinding agreements or letters of intent, provided that they aren’t material to the company.

  • Agreement termination: Any termination of an agreement that was previously reported, such as the cancellation of a signed contract to provide a significant amount of the company’s product to another company if this cancellation means a loss of significant future earnings.

  • Bankruptcy or receivership: Any plans to declare bankruptcy or enter into receivership, a type of bankruptcy in which the company can avoid liquidating itself and instead work with a court-appointed trustee to restructure its debt with the intention of emerging from bankruptcy.

  • Acquisition or disposition: Any acquisition or sale of major assets outside the course of ordinary business operations. For example, the acquisition of a new company fits the reporting requirement, but the acquisition of new equipment for continuing operations doesn’t need a special report on Form 8-K.

  • Financial results: Any earnings results related to earnings, company operations, or financial conditions that occurred between the quarterly or annual reports and were distributed by press releases or other public means.

  • Financial obligations: Any direct financial obligations that are material to the company, such as the signing of a long-term debt or lease obligation. The company must include a brief description of the transaction and agreement.

  • Disposal of assets: Any costs related to the disposal of long-held assets when the company enters into an agreement (usually called an exit agreement) to get rid of those assets. The company must also disclose termination of employees under an exit plan.

  • Impairment of asset value: Any conclusion by the board or an authorized company officer that the value of an asset is significantly impaired — for example, when the value of goodwill is determined to be significantly less than what the company reports on the balance sheet.

  • Changes in stock exchange listing: Any time the company gets notification that it may be delisted (removed) from a stock exchange, or if the company fails to meet the rules or standards set by the stock exchange it’s listed on. It must also report any plans to change to a new stock exchange.

  • Accountant change: Any change in the company’s certifying accountant.

  • Unreliable financial reports: Any conclusion by the company’s board of directors, a committee of the board, or an authorized officer that a previously issued financial report can’t be relied on for information. You’ve probably heard press reports indicating that a company plans to restate its financial reports because of an error. Many times those press reports are based on a press release and the Form 8-K.

  • Changes in control of company: Any departures of directors or principal officers, election of new directors, or appointment of new principal officers.

  • Changes in charter or bylaws: Any proposed change in the charter or bylaws and its impact on the company’s operations.

  • Changes in fiscal year: Any plans to change a company’s fiscal year if the decision is made outside the vote of the shareholders or by amendment to its bylaws. The company must include the date of determination, the date of the new fiscal year, and the form on which the report covering the transition period will be filed.

  • Temporary suspension of trading in the company’s employee benefit plans: Any suspensions of employee benefit plans for a period of time. Most often such suspensions happen when the company changes from one benefit provider to another. However, this change can be a sign of a major decision impacting the company’s stock, such as a pending announcement about company earnings, a buyback of stock, or an issuance of new stock.

  • Amendments to the company’s code of ethics: Any significant changes to the company’s code of ethics.

As you can see from this list, you’d never hear about most of these events if companies weren’t required to report them. But this information may be critical to any decision you make about the stock you currently hold or may want to buy.