The SEC continued its recent run of rulemaking activity with two sets of amendments last week that impact reporting by public companies. On Tuesday, November 17, the SEC announced that it will begin to permit the use of electronic signatures for filings subject to certain conditions (see our November 18 post). On Thursday, November 19, the SEC approved amendments that “modernize, simplify and enhance” several disclosure requirements contained in the 300 series of Regulation S-K relating to financial information.
The S-K amendments, which were proposed at the end of January 2020, will not become mandatory until a company’s first fiscal year ending on or after the date that is 210 days after publication in the Federal Register, although voluntary early compliance will be allowed when the new rules become effective 30 days after publication in the Federal Register.
In summary, the amendments:
- Eliminate S-K 301 and its current requirement to provide up to five years of selected financial data (including removing Item 6 (“Selected Financial Data”) of Part II of Form 10-K), though companies are encouraged to consider whether such disclosure, including trend information for periods earlier than those presented in the financial statements, may still be necessary in MD&A
- Replace the current requirement in S-K 302 that certain filings include two years of selected quarterly financial information with a new principles-based requirement to disclose material quarterly changes that result from one or more retrospective changes to the statements of comprehensive income (for example, correction of an error, disposition of a business that is accounted for as discontinued operations, or a change in an accounting principle)
- Add at the beginning of S-K 303, Management’s Discussion and Analysis of Financial Condition and Results of Operations, a statement of the objective of MD&A, including a reminder that MD&A is intended to better allow investors to view the company from management’s perspective, which reflects a further attempt by the SEC to prompt improved analysis in MD&A
- Revise the scope of current S-K 303(a)(2) regarding capital resources so that it covers cash requirements more generally, rather than just capital expenditures
- Clarify that “reasonably likely” is the disclosure threshold that applies to the current requirements to describe known trends or uncertainties
- Clarify that a discussion of material changes in net sales or revenue, rather than just material increases, is required under current S-K 303(a)(3)(iii)
- Replace the Sarbanes-Oxley Act era requirement in S-K 303(a)(4) regarding off-balance sheet arrangements with a new instruction prompting companies to consider providing disclosure of such arrangements within the context of MD&A
- Eliminate another SOX-era requirement, the contractual obligations table, which is currently required by S-K 303(a)(5), while adding elsewhere a prompt that the discussion of material cash requirements should include those for known contractual and other obligations
- Clarify that the requirement to explain material changes from period-to-period includes discussion of offsetting items
- Allow the comparison of interim period results to either the prior year period (as is currently required) or the prior sequential period
- Codify that companies are required to disclose critical accounting estimates in MD&A, disclosure that the SEC has been calling for since a 2003 interpretive release
Although the rule amendments will not be mandatory for upcoming Form 10-K filings by calendar year filers (or by other filers with fiscal year ends near the end or beginning of the calendar year), companies should still find it useful to consider the changes in connection with drafting their next MD&A given the numerous clarifications provided about how the SEC interprets several of its existing disclosure requirements and the opportunity to apply the new rules, on an item-by-item basis, once they have been published in the Federal Register.