SEC Proposes Changes to MD&A Disclosure

White & Case LLPThe recent proposal by the SEC would eliminate overlapping or unnecessary disclosures and promote a principles-based approach to MD&A. 


On January 30, 2020, the US Securities and Exchange Commission (the "SEC") published a proposal that would modernize, simplify and enhance certain financial disclosure requirements in Regulation S-K (the "Proposed Amendments").The Proposed Amendments would eliminate certain duplicative disclosures and promote disclosures in the Management's Discussion and Analysis of Financial Condition and Results of Operations section ("MD&A") that are more tailored to a registrant's businesses, facts and circumstances.  

The Proposed Amendments, which follow two sets of adopted rule amendments that became effective in recent months,2 continue a shift towards a more principles-based disclosure framework that places the onus on the reporting companies to exercise greater judgment in evaluating what disclosures to provide.

Proposed Amendments to Regulation S-K

Items Eliminated from Regulation S-K

Item 301 (Selected Financial Data). The SEC is proposing to eliminate the requirement to provide five years of selected financial data in comparative tabular form because it believes that five years of data is unnecessary in light of the requirement for discussion and analysis of trends in the MD&A under Item 303. Registrants may, however, continue to include a tabular presentation of relevant financial or other information discussed in MD&A, to the extent they believe that such a presentation would be useful to an understanding of the disclosure.

Item 302(a) (Supplementary Quarterly Financial Information). The SEC is proposing to eliminate the requirement to provide selected quarterly financial data for each full quarter within the two most recent fiscal years. The SEC concluded that this disclosure duplicates the information that is readily available in quarterly reports.

Item 302(b) (Information About Oil and Gas Producing Activities). The SEC is proposing to eliminate the requirement for registrants engaged in oil and gas-producing activities to disclose information about those activities for each period presented. The elimination is contingent on the Financial Accounting Standards Board ("FASB") adopting the Accounting Standards Update that it proposed in May 2019 and that would duplicate the disclosure requirements of Item 302(b).3

Item 303(a)(4) (Off-balance sheet arrangements). The SEC is proposing to eliminate the requirement to discuss off-balance sheet arrangements in a separate section. This proposal aims to (i) eliminate duplication of disclosures required by US GAAP and Item 303(a)(4), and (ii) promote the principles-based nature of MD&A by replacing Item 303(a)(4) with a more principles-based instruction. Accordingly, in lieu of Item 303(a)(4), the SEC is proposing a new instruction to Item 303 requiring discussion of off-balance sheet arrangements within MD&A if material to the registrant's financial condition.

Item 303(a)(5) (Table of Contractual Obligations). The SEC is proposing to eliminate the requirement of a separate table of contractual obligations on the basis that it duplicates disclosure in the financial statements and does not provide insight into the ability of a registrant to pay its debts when they become due.  

Item 303(a)(3)(iv) (Impact of Inflation and Changing Prices). The SEC is proposing to eliminate the requirement for a specific discussion of inflation and changing prices. This requirement was adopted at a time of rapid domestic inflation in the 1980s and can now be addressed appropriately as part of a principles-based approach to MD&A.

Restatement of the Objective and Components of MD&A

The Objective of MD&A

The SEC has issued guidance over the years regarding MD&A that, in some cases, has acquired importance beyond the text of Item 303 itself.  Among the most notable guidance was the SEC's 2003 interpretive release, which was "intended to elicit more meaningful disclosure in MD&A in a number of areas, including the overall presentation and focus of MD&A, with general emphasis on the discussion and analysis of known trends, demands, commitments, events and uncertainties, and specific guidance on disclosures about liquidity, capital resources and critical accounting estimates."4

The Proposed Amendments would codify elements of the 2003 guidance starting with a new Item 303(a) setting out the "Objective" of MD&A, namely, to provide both a historical and prospective analysis of the registrant's financial condition and results of operations, with particular emphasis on the registrant's prospects for the future. Key objectives of MD&A that would be emphasized under the amended rule include the following:

  • Material information relevant to an assessment of the financial condition and results of operations of the registrant, including an evaluation of the amounts and certainty of cash flows from operations and from outside sources.
  • Material financial and statistical data that the registrant believes will enhance a reader's understanding of the registrant's financial condition, changes in financial condition and results of operations. The reference to statistical data should be read in light of the SEC's recent guidance on the need to disclose material key performance indicators and metrics in MD&A.5
  • Material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition. This would include descriptions and amounts of matters that: (i) would have a material impact on future operations and have not had an impact in the past, and (ii) have had a material impact on reported operations and are not expected to have an impact on future operations.

The proposed changes to Item 303(a) would also codify the seminal concept of MD&A being a view of the registrant through the eyes of management, something that was previously only articulated in SEC guidance.6

Key MD&A Modifications

Other key changes are as follows:

Certain Disclosure Elements Will Change. The SEC has proposed the following refinements to existing disclosure requirements:

  • The proposed rule would expressly require a quantitative and qualitative discussion of material period-to-period changes in financial statement line items, including where material changes within a line item offset one another.
  • A registrant's discussion of capital resources should include material cash requirements and not just material commitments for capital expenditures. While the SEC has declined to define the term "capital resources," the proposing release makes clear that the SEC expects registrants to disclose their cash needs more broadly than just those required for capital expenditures. The SEC specifically notes that expenditures and cash commitments in human capital and intellectual property are key to some registrants. The proposed change is intended to enhance disclosure of a registrant's ability to generate cash and meet its material cash requirements.
  • The proposed standard for disclosing a future event impacting costs or revenues is whether it is "reasonably likely" to have an impact and not the current higher standard of whether it "will" have an impact. This conforms the disclosure standard for future events to the standard for trends and uncertainties and is consistent with providing investors with a better understanding of future prospects.

Critical Accounting Estimates ("CAEs") Will Have a Rule-Based Standing. The requirement to disclose CAEs derives from the SEC's 2003 MD&A guidance, but has largely been observed by registrants copying and pasting select accounting policies from financial statement footnotes. Item 303(b)(4) now places the requirement to discuss CAEs at the heart of MD&A by requiring the following:

  • A discussion, to the extent material, as to why each CAE is subject to uncertainty, how much each estimate has changed during the reporting period, and the sensitivity of the reported amount to the methods, assumptions and estimates underlying its calculation.
  • Quantitative as well as qualitative information, when quantitative information is reasonably available and would provide material information to investors.

Moreover, the proposed instruction to Item 303(b)(4) would state that the disclosure of CAEs should "supplement, but not duplicate, the description of accounting policies or other disclosures in the notes to the financial statements." 

Finally, the SEC noted the requirement for the audit reports of large accelerated filers for fiscal years ending on after June 30, 2019, to include a discussion of critical audit matters ("CAMs").  The SEC views CAMs as different from CAEs because a CAM is a critical matter involving challenging, subjective or complex auditor judgment, while a CAE involves significant management estimates having a material impact on a company's financial condition or operating performance. Accordingly, the SEC does not believe that the proposed Item 303(a)(4) would necessarily result in duplicative disclosure.

Interim Reports

The SEC is proposing to amend Item 303(c) (former Item 303(b)) to permit registrants to compare their most recently completed quarter to either the corresponding quarter of the prior year or to the immediately preceding quarter. This will offer registrants greater flexibility in tailoring MD&A disclosure to their specific situation. For example, a non-seasonal registrant may find that a comparison to the immediately preceding quarter offers investors a more meaningful way to assess performance of the business.

Foreign Private Issuers

Consistent with the proposed changes discussed above, the SEC is also proposing conforming changes to Form 20-F and Form 40-F.


Comments on the Proposed Amendments are due 60 days following publication in the Federal Register.

1 The full text of the SEC proposed rule is available here
2 The two recent rule amendments that are already applicable for companies' upcoming Form 10-Ks are: (1) the FAST Act Modernization and Simplification of Regulation S-K, Release No. 33-10618 (Mar. 20, 2019), summarized in our alert, "SEC Adopts Amendments to Modernize and Simplify Disclosure Requirements"; and (2) the Disclosure Update and Simplification, Release No. 33-10532 (August 17, 2018), summarized in our alert, "SEC Adopts Amendments to Simplify and Update Disclosure Requirements." See also, the SEC's proposed rule, Modernization of Regulation S-K Items 101, 103, and 105, Release No. 33-10668 (August 8, 2019), available here, summarized in our alert, "SEC Proposes Amendments to Modernize Disclosures; Considers Requiring Human Capital Resources Disclosure."
3 FASB's proposed Accounting Standard Update is available here.
4 See, e.g., Interpretation: Commission Guidance Regarding Management's Discussion and Analysis of Financial Condition and Results of Operations, dated December 29, 2003, available here.
See Commission Guidance on Management's Discussion and Analysis of Financial Condition and Results of Operations, dated January 30, 2020, available here, and our related client alert, available here.
See, e.g., Interpretation: Commission Guidance Regarding Management's Discussion and Analysis of Financial Condition and Results of Operations ("one of the principal objectives of MD&A is to give readers a view of the registrant through the eyes of management") dated December 29, 2003, 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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