Wednesday, December 12, 2018

More than 2,000 corporate securities lawyers and accountants convened in Washington this week for the annual AICPA conference on public company accounting issues, where a parade of officials from the Securities and Exchange Commission took the stage to talk about what they want to see in corporate disclosures.

One subject that came up repeatedly: Brexit.

As you may have seen already, the British government is having a nervous breakdown right now because it can’t figure out what sort of departure it wants to have with the European Union — even though the deadline for a “hard Brexit” is March 29, barely one quarter away.

So, um, what exactly are companies supposed to disclose about Brexit, if the Brits themselves don’t know what they’ll do? And whatever companies might disclose about Brexit, how can you easily find it in Calcbench?

The SEC wants companies to disclose anything that might be material to investors. Bill Hinman, director of the SEC Division of Corporation Finance, told the AICPA conference folks that could be anything from currency fluctuations, to regulatory uncertainty, to supply chain disruptions from goods that might no longer flit back and forth between Britain and the EU.

OK, not a ton of specificity there, but better than nothing. So where do financial analysts dig up Brexit disclosure on Calcbench?

As always, start with our Interactive Disclosure database, where you can easily search narrative text. Set the group of companies you want to search, the range of periods you want to search, and then type “Brexit” into the text field on the right-hand side. That’s really all there is to it. See Figure 1, below.

So What Are They Disclosing?

A wide range of statements, to say the least. Most of the time, Brexit disclosures appear in the company’s discussion of risk factors, sometimes in the Management Discussion & Analysis. We also noticed them in the Controls & Procedures section, Subsequent Events, and even in the occasional earnings release.

Here’s a rather skimpy example from Starbucks ($SBUX), filed in its 10-K on Nov. 16. Starbucks was listing various risks to its international business, and then said —

  • uncertainties and effects of the implementation of the United Kingdom’s referendum to withdraw membership from the European Union (refer to as “Brexit”), including financial, legal, tax and trade implications;
  • That’s all Starbucks had to say, which was not much. At the AICPA conference, Hinman specifically frowned on companies that roll through Brexit risk as one bullet point among many (although he didn’t identify Starbucks or any other company by name).

    Contrast that disclosure to what Mattel ($MAT) said in its most recent quarterly filing on Oct. 25:

    During June 2016, the referendum by British voters to exit the European Union (“Brexit”) adversely impacted global markets and resulted in a sharp decline of the British pound sterling against the U.S. dollar. In February 2017, the British Parliament voted in favor of allowing the British government to begin the formal process of Brexit and discussions with the European Union began in March 2017. In the short-term, volatility in the British pound sterling could continue as the United Kingdom negotiates its anticipated exit from the European Union. In the longer term, any impact from Brexit on Mattel’s United Kingdom operations will depend, in part, on the outcome of tariff, trade, regulatory, and other negotiations. Mattel’s United Kingdom operations represented approximately 4% of Mattel’s consolidated net sales for the nine months ended September 30, 2018.

    That seems much more in step with the SEC’s line of thinking. Mattel mentions currency fluctuations and regulatory uncertainty, and gives an estimate of how much U.K. revenue contributes to overall sales.

    And don’t forget, you can also use the Show All History tab at the top of the disclosure viewer to see how a company’s disclosure may have changed from one period to the next. In Mattel’s case, we can see that essentially nothing has changed all year long, except to update references to the last three, six, or nine months. (See Fig. 2, below.)

    Is that static disclosure reasonable, given how the Brexit drama-rama has unfolded in 2018? It’s not Calcbench’s place to answer that question — but it could be yours, if Mattel is a company you follow. We simply offer you a crisp, easy way to find Brexit disclosures and then decide whether you should ask more questions.

    That’s all for now. We’re off to watch the BBC live feed to see what happens next.

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