Regulator demands more details of inflation impact on US companies

The Securities and Exchange Commission has been firing off letters to some of the largest companies in the US demanding that they give investors more information on how inflation is affecting their business.

Staff at the regulator have become concerned that some companies’ financial reports gloss over the impact of rising prices on profits and liquidity.

The SEC is using its “filing review process” to extract more details that investors can use to judge how companies are responding to inflation that recently hit a 40-year high.

The shipping group FedEx and the retailer Costco are among the companies whose public filings attracted a letter from the SEC demanding that they expand their disclosures.

Sarah Lowe, deputy chief accountant in the SEC’s office of corporation finance, told a conference for finance executives last week that companies needed to do more than simply say inflation was affecting their business.

“Instead we are asking that you should explain how it has affected results of operations, sales, profits, capital expenditures or maintenance you may do,” she told the event organised by Financial Executives International.

Filings should also discuss how business goals and pricing strategies were changing as a result, she said.

“Are you forced to pass along your increased costs to customers or do you just absorb those losses? Are you negotiating with customers about price changes and is there uncertainty about how those talks will resolve?”

Companies must respond in writing to the SEC’s sometimes pointed comments, and are expected to follow the regulator’s demands in future filings.

FedEx told investors that inflation was negatively affecting its operating results this year, but the SEC wrote in a letter in September that it should add more on the specific factors behind its rising costs, and what it was doing to limit the impact.

SEC staff told the industrial giant Eastman Chemical in August to identify the “specific raw materials and energy commodities” where higher prices were hitting its results.

In a letter to water technology group Xylem, they wrote: “You refer to mitigating inflation headwinds but it is unclear what specific actions you have taken.”

And in a letter to Costco in April, SEC staff said they had heard executives discussing on quarterly earnings calls how the retailer was adjusting merchandising and pricing strategies in response to inflation. That kind of discussion should also be in the formal regulatory filings, they wrote.

The SEC’s letters are made public, but only after an interval. The review process covers both the financial results of listed companies and fundraising prospectuses from companies planning to list.

The SEC said earlier this year that it would use its filing review process to demand more information about how the war in Ukraine was affecting some companies, and to ask for extra disclosures about ongoing disruption to global supply chains.

The addition of inflationary impacts to the list of demands reflects concern at the agency that many executives involved in the preparation of financial reports have never lived through a period of rising prices.

Current economic conditions “might require some additional disclosure beyond what has historically been provided when entities were operating in a more steady-state economic environment,” the SEC’s acting chief accountant, Paul Munter, said in September.

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