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On November 19, 2020, the Securities and Exchange Commission
adopted final amendments to the disclosure rules affecting
Management’s Discussion and Analysis (MD&A) and related
financial disclosures. The amendments were proposed on January 30,
20201 and are intended to modernize, simplify and
enhance certain financial disclosures called for by Regulation S-K
and related rules and forms in a manner that reduces the costs and
burdens on registrants while continuing to provide material
information to investors.
The amendments will go into effect 30 days after publication in
the Federal Register. Registrants will be required to follow the
amended rules for their first fiscal year ending on or after the
date 210 days after publication in the Federal Register, or in
their annual report for the year ending December 31, 2021 for
calendar-year companies. Registrants may voluntarily provide
disclosure consistent with the amendments any time after the
effective date.
Selected Financial Data (Item 301)
The new amendments eliminate the requirement for a tabular
disclosure of five years (or, in the case of an emerging growth
company, two years) of selected financial data contained in Item
301 of Regulation S-K. The SEC notes in the adopting release that
“[n]ot withstanding the amendments to eliminate Item 301, we
encourage registrants to consider whether trend information for
periods earlier than those presented in the financial statements
may be necessary as part of MD&A’s objective to provide
material information relevant to an assessment of the financial
condition and results of operations.” Emerging growth
companies (EGCs) that are providing the information called for by
Item 301 in a Securities Act registration statement need not
present selected financial data for any period prior to the
earliest audited financial statement presented in connection with
the EGC’s initial public offering (IPO) of its common equity
securities. In addition, an EGC that is providing the information
called for by Item 301 in a registration statement, periodic
report, or other report filed under the Exchange Act need not
present selected financial data for any period prior to the
earliest audited financial statements presented in connection with
its first registration statement that became effective under the
Exchange Act or Securities Act.
Supplementary Financial Information (Item 302)
Under the new rules, registrants are no longer required to
provide tabular disclosure of two years of selected quarterly
financial data. In order to reduce repetition and focus disclosure
on material information, Item 302(a) has been revised to require
disclosure only when there are one or more retrospective changes
that pertain to the statements of comprehensive income for any of
the quarters within the two most recent fiscal years and any
subsequent interim period for which financial statements are
included or required to be included by Article 3 of Regulation S-X,
and that, individually or in the aggregate, are material. In such
instances, registrants would provide an explanation of the reasons
for the material changes and disclose, for each affected quarterly
period and the fourth quarter in the affected year, summarized
financial information and earnings per share reflecting such
change. Item 302(a) does not apply to first-time registrants
conducting an IPO because it only applies to companies that already
have a class of securities registered under Section 12 of the
Exchange Act at the time of filing. The new amendments do not
revise the population of registrants that are not required to
provide disclosure pursuant to Item 302(a), including, but not
limited to, first time registrants conducting an IPO.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (Item 303)
The new amendments reorganize Item 303 of Regulation S-K and
streamline its requirements in order to “enhance the MD&A
disclosures for investors while reducing the compliance burdens for
registrants.”
- Objective of MD&A. A new Item 303(a) was adopted to
clarify the objectives of MD&A. Item 303(a) explains the
overarching requirements of MD&A and applies throughout amended
Item 303. These requirements “emphasize registrant’s
future prospects and highlight the importance of materiality and
trend disclosures to a thoughtful MD&A.” More
specifically, Item 303(a) calls for the following disclosures,
which are expected to provide investors with an enhanced view of
the registrant from management’s perspective:
- Material information relevant to an assessment of the
registrant’s financial condition and results of operations,
including an evaluation of the amounts and certainty of cash flows
from operations and from outside sources. - Material events and uncertainties known to management that are
reasonably likely to cause reported financial information not to be
indicative of future operating results or of future financial
condition. This includes descriptions and amounts of matters that
have had a material impact on reported operations as well as
matters that are reasonably likely, based on management’s
assessment, to have a material impact on future operations. - The material financial and statistical data that the registrant
believes will enhance a reader’s understanding of the
registrant’s financial condition, cash flows, and other changes
in financial condition and results of operations.
- Material information relevant to an assessment of the
- Liquidity and Capital Resources. Currently, Item
303(a)(2) requires a registrant to discuss material commitments for
capital expenditure as of the end of the latest fiscal period and
to indicate the general purpose of such commitments and the
anticipated sources of funds needed to fulfill such commitments.
The new rules amend Item 303(a)(2) to specify that a registrant
should broadly disclose material cash commitments, including, but
not limited to, capital expenditures. The amendment requires a
company to describe its material cash requirements, including
commitments for capital expenditures, as of the latest fiscal
period, the anticipated source of funds needed to satisfy such cash
requirements and the general purpose of such requirements. - Results of Operations. The SEC has streamlined the
disclosure requirements for results of operations as provided
below:
- Known Trends or Uncertainties. Registrants will be
required to disclose known events that are reasonably
likely to cause a material change in the relationship
between costs and revenues, such as known or reasonably likely
future increases in costs of labor or materials or price increases
or inventory adjustments. This amendment reflects a change from the
current rule, which limited such disclosure to those
that will cause such a change. - Net Sales and Revenues. To the extent that there
are material changes in net sales or revenue a
narrative discussion will be required explaining the extent to
which the changes are attributable to changes in prices, the amount
of goods or services being sold or the introduction of new products
or services. This amendment reflects a change from the current
rule, which limited such disclosure to material
increases of net sales or revenue. - Inflation and Price Change. The new rules will eliminate
Item 303(a)(3)(iv) and Instructions 8 and 9 to Item 303(a), which
generally require companies, for the three most recent fiscal
years, or for those fiscal years in which the company has been
engaged in business, whichever period is shortest, to discuss the
impact of inflation and price changes on their net sales, revenue
and income from continuing operations. However, the adopting
release specifies that, under the new rules, registrants will still
be required to “discuss the impact of inflation or changing
prices if they are part of a known trend or uncertainty that had,
or is reasonably likely to have a material impact on net sales,
revenue, or income from continuing operations.”
- Known Trends or Uncertainties. Registrants will be
- Off-Balance Sheet Arrangements. Instead of the current
separately captioned requirement for a discussion of off-balance
sheet arrangements under Item 303(a)4, the new amendments adopt a
new principle-based instruction to Item 303(b) that requires
registrants to discuss commitments or obligations, including
contingent obligations, arising from arrangements with
unconsolidated entities or persons that have, or are reasonably
likely to have, a material current or future effect on a
company’s financial condition, changes in financial condition,
revenues or expense, results of operations, liquidity, cash
requirements, or capital resources even when the arrangement
results in no obligations being reported in the company’s
consolidated balance sheet. - Contractual Obligations Table. Registrants are no longer
required to provide a contractual obligations table. However, a
discussion of material contractual obligations will remain required
through the enhanced principles-based liquidity and capital
resources disclosure requirements focused on material short- and
long-term cash requirements from known contractual and other
obligations. Known contractual obligations may include lease
obligations, purchase obligations or other liabilities reflected on
the company’s balance sheet. - Critical Accounting Estimates. The new amendments
codified previous SEC guidance and adopted an explicit requirement
to disclose critical accounting estimates. New Item 303(b)(3)
expressly requires disclosure of qualitative and quantitative
information necessary to understand the estimation uncertainty and
the impact the critical accounting estimates have had or are
reasonably likely to have on financial condition or results of
operations to the extent the information is material and reasonably
available. This information should include why each critical
accounting estimate is subject to uncertainty and, to the extent
the information is material and reasonably available, how much each
estimate and/or assumption has changed over a relevant period, as
well as the sensitivity of the reported amount to the methods,
assumptions and estimates underlying its calculation. - Interim Period Comparisons. The requirements for an
interim period discussion remain largely the same except that
registrants will be permitted to compare the most recently
completed quarter to either the corresponding quarter of the prior
year (as is currently required) or the immediately preceding
quarter. If a registrant elects to discuss changes as compared to
the immediately preceding quarter, the registrant must include the
prior quarter’s summary financial information or,
alternatively, reference the EDGAR filing that presents such
previous quarter information. If it decides to change the manner of
quarterly comparison from that in the previous interim comparison,
it is required to disclose the rationale for the change and present
both comparisons in the filing in which the change is
disclosed.
Application to Foreign Private Issuers
The SEC adopted certain parallel amendments to the financial
disclosure requirements applicable to foreign private issuers,
including to Forms 20-F and 40-F, as well as other conforming
amendments to the SEC’s rules and forms, as appropriate.
Note on Environmental, Social and Governance Issues
In the adopting release, the SEC noted that in keeping with its
principles-based approach to the MD&A, it has declined to add
any requirements relating to environmental, social or governance
issues (ESG) and sustainability matters. This approach is
consistent with the SEC’s past guidance outlined in the
Commission Guidance Regarding Disclosure Related to Climate
Change2 and that taken in the modernization of
certain items under Regulation S-K earlier this
year.3 However, in a joint
statement,4 Commissioners Lee and Crenshaw advocate
for new rules to address climate, human capital and other ESG
risks, noting that the amendments fail to address such risks and
that, in their view, a principles-based approach to disclosure is
not sufficient because ESG matters pose a significant risk to
global financial stability, thus requiring a more uniform and
standardized approach.
Footnotes
1 See SEC Release No.
33-10750, Management’s Discussion and Analysis,
Selected Financial Data, and Supplementary Financial
Information (January 30, 2020), available at https://www.sec.gov/rules/proposed/2020/33-10750.pdf.
2 See SEC Release No.
33-9106, Commission Guidance Regarding Disclosure Related
to Climate Change (February, 2010), available at https://www.sec.gov/rules/interp/2010/33-9106.pdf.
3 See SEC Release No.
33-10825, Modernization of Regulation S-K items 101, 103,
and 105 (November, 2020), available at https://www.sec.gov/rules/final/2020/33-10825.pdf.
4 See Joint Statement on Amendment to Regulation S-K:
Management’s Discussion and Analysis, Selected Financial Data,
and Supplementary Financial Information, Commissioners
Caroline A. Crenshaw and Allison Herren Lee (November 19, 2020),
available at https://www.sec.gov/news/public-statement/lee-crenshaw-statement-amendments-regulation-s-k.
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