SEC Adopts Amendments to MD&A and Other Financial Disclosures

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On November 19, the Securities and Exchange Commission (SEC) continued its brisk pace of end-of-year rulemaking by approving amendments to Items 301, 302 and 303 of Regulation S-K, which collectively govern the disclosures of Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) as well as other selected financial data.  These amendments were initially proposed in January 2020 as part of the SEC’s ongoing effort to improve and modernize the current disclosure regime for both investors and companies.

The amendments will become effective 30 days after they are published in the Federal Register, which means they will probably be effective around the end of January assuming the typical timing for rule publication. At that time voluntary compliance is permitted, so long as registrants provide disclosure responsive to an amended item in its entirety. Compliance is not mandatory until a registrant reports on its first fiscal year ending on or after 210 days following publication, which means that for a calendar year-end filer, the Form 10-K filed in 2022 with respect to the fiscal year ended December 31, 2021.  However, we expect that many companies will welcome the new rules (particularly the elimination of the contractual obligations table and five-year selected financial table, among others) and begin complying sooner.

Amendment Highlights

In summary, the highlights of the amendments are as follows:

  • Eliminate Item 301 (Selected Financial Data), which required a five-year selected financial data table.
  • Significantly modify Item 302 (Supplementary Financial Information) to replace the current requirement for quarterly tabular disclosure with a principles-based requirement for material retrospective changes.
  • Make significant enhancements and changes to Item 303 (MD&A). For example, the following amendments:
    • Add a new Item 303(a), Objective, to state the principal objectives of MD&A.
  • Amend current Item 303(a)(1) and (2), to modernize, enhance and clarify disclosure requirements for liquidity and capital resources.
  • Amend current Item 303(a)(3) to clarify, modernize and streamline disclosure requirements for results of operations.
  • Replace Item 303(a)(4), Off-balance sheet arrangements, with an instruction to discuss such obligations in the broader context of MD&A.
  • Eliminate Item 303(a)(5), Tabular disclosure of contractual obligations, in light of the amended disclosure requirements for liquidity and capital resources and certain overlap with the information required in the financial statements.
  • Add a new Item 303(b)(3), Critical accounting estimates, to clarify and codify SEC guidance on critical accounting estimates.
  • Amend current Item 303(b), Interim periods, to allow for flexibility in the comparison of interim periods by providing a company with the option to compare its most recent quarter to the immediately preceding quarter (i.e., a sequential comparison) rather than to the same quarter of the prior year.

The SEC also adopted certain parallel amendments to Forms 20-F and 40-F, along with other conforming amendments to the SEC’s rules and forms, related to financial disclosure requirements applicable to foreign private issuers.

For ease of reference, click here for a PDF redline of existing Items 301, 302 and 303 compared to the amended items.

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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