SEC Adopts Amendments to MD&A and Financial Disclosures

Kramer Levin Naftalis & Frankel LLP

On Nov. 19, 2020, the U.S. Securities and Exchange Commission (SEC) adopted amendments to the disclosure rules affecting Management’s Discussion and Analysis (MD&A) and related financial disclosures. The adopted amendments are intended to modernize, simplify and enhance certain financial disclosure requirements in Regulation S-K. Registrants will be required to apply the amended rules for their first fiscal year ending on or after the mandatory compliance date, which is 210 days after publication of the amendments in the Federal Register. The final amendments modify key items of Regulation S-K and related rules:

Selected Financial Data and Supplementary Financial Information

The SEC eliminated Item 301 (Selected Financial Data), which required registrants to provide five years of selected financial data, and streamlined the requirements of Item 302(a) (Selected Quarterly Financial Data) to require disclosure only when retrospective changes to the statements of comprehensive income for any of the quarters within the two most recent fiscal years and any subsequent interim period are material. Revised Item 302(a) will also require registrants to provide an explanation of the reasons for the changes and to disclose summarized financial information for the income statement and earnings per share reflecting the changes.

MD&A of Financial Condition and Results of Operations

Objective. The SEC adopted a new Item 303(a) (Objective) to describe the objective of MD&A. Companies are required to provide disclosure regarding material information relevant to an assessment of the financial condition and results of operations of the company; material financial and statistical data that the company believes will enhance readers’ understanding of the company’s financial condition; and material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be necessarily indicative of future operating results or of future financial condition.

Full Fiscal Years and Interim Periods. Current Items 303(a) (Full Fiscal Years) and 303(b) (Interim Periods) have been recaptioned as Items 303(b) and 303(c), respectively. The SEC adopted amendments in recaptioned Item 303(b) to clarify that MD&A requires a narrative discussion of the “underlying reasons” for material changes from period to period in one or more line items in quantitative and qualitative terms, rather than only the “cause” for material changes. The SEC also clarified that companies should discuss material changes within a line item, even when such material changes offset each other. The SEC amended current Item 302(a)(2) to require that a company broadly disclose material cash commitments, including, but not limited to, capital expenditures in light of the deletion of the contractual obligations table (discussed below).

Current Item 303(a)(3)(ii) was amended to provide that when a company knows of events that are reasonably likely to cause a material change in the relationship between costs and revenues, the “reasonably likely” change must be disclosed. Current Item 303(a)(3)(iii) was amended to codify the SEC’s guidance that the results of operations discussion should describe not only increases but also decreases in net sales or revenues and to clarify the requirement by tying the required disclosure to “material changes” in net sales or revenues, rather than solely to “material increases” in those line items.

Off-Balance Sheet Arrangements. Current Item 303(a)(4), which requires off-balance sheet disclosure to be in a separately captioned section and contains prescriptive requirements that overlap with the requirements of U.S. GAAP, was replaced with a principles-based instruction that requires companies 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 expenses, results of operations, liquidity, cash requirements or capital resources.

Tabular Disclosure of Contractual Obligations. SEC eliminated current Item 303(a)(5) that requires companies to disclose in tabular format their known contractual obligations.

Critical Accounting Estimates. SEC added a new disclosure requirement to Item 303 (Critical Accounting Estimates) in Item 303(b)(3) to clarify and codify existing SEC guidance by explicitly requiring disclosure of critical accounting estimates, which are estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the registrant’s financial condition or results of operations.

Interim MD&A Requirement. SEC amended Item 303(b) (renumbered as Item 303(c)) to permit companies to compare their most recently completed quarter to either the corresponding quarter of the prior year (as is currently required) or to the immediately preceding quarter. If the basis of comparison is changed, the registrant will be required to discuss the reasons for the change and provide both comparisons when the change is first made. Item 303(c)(2) retains the current requirement to discuss any material changes in a registrant’s results of operations between the most recent fiscal year-to-date interim period and the corresponding period of the preceding fiscal year.

Foreign Private Issuers (FPIs)

The SEC adopted corresponding amendments for FPIs providing disclosure required by Form 20-F to eliminate the requirement to provide five years of selected financial data and to ensure that MD&A requirements for FPIs continue to mirror the substantive MD&A requirements in Item 303 of Regulation S-K. 

Release No. 33-10890, Management’s Discussion and Analysis, Selected Financial Data and Supplementary Financial Information (Nov. 19, 2020) is available here.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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