Through the eyes of the SEC: SEC adopts amendments to MD&A disclosure requirements

Eversheds Sutherland (US) LLP

Eversheds Sutherland (US) LLPOn November 19, 2020, the United States Securities and Exchange Commission (the SEC) adopted amendments (the Adopted Amendments)1 to Items 301 (selected financial data), 302 (supplementary financial data), and 303 (Management’s Discussion & Analysis of Financial Condition and Results of Operations (the MD&A)) of Regulation S-K.

According to the SEC, the Adopted Amendments modernize, simplify and enhance disclosures called for by Regulation S‑K. The Adopted Amendments could reduce registrants’ (including business development companies (BDCs)) disclosure burden and associated compliance costs by eliminating duplicative disclosure requirements and by modernizing and simplifying Item 303 disclosure requirements while still providing material information to investors. To the extent the Adopted Amendments result in more tailored and informative disclosure, the Adopted Amendments could reduce the information asymmetry between registrants and investors, which could enhance the investment decision process, improve registrant’s liquidity, and decrease the cost of capital. The Adopted Amendments also make certain disclosure requirements clearer by codifying existing SEC guidance on the MD&A that will, among other things, require registrants to provide a narrative explanation of the financial statements that enables investors to see a registrant “through the eyes of management.”2 New disclosures may be required, however, to comply with the increased focus in the Adopted Amendments on quantitative and qualitative information to address the underlying reasons for materials changes in financial statements. The Adopted Amendments would be applicable to BDC disclosure as SEC public reporting companies. BDCs should consider if and how these Adopted Amendments would impact their MD&A disclosure.

The Adopted Amendments will become effective 30 days after they are published in the Federal Register (the “Effective Date”). Registrants will be required to comply with the Adopted Amendments beginning with the first fiscal year ending on or after the date that is 210 days after publication in the Federal Register (“Mandatory Compliance Date”). For example, if the Adopted Amendments are posted in the Federal Register by January 2, 2021 then registrants with a fiscal year ending on or after July 31, 2021 will have to comply with the Adopted Amendments.

The chart below summarizes key changes made by the Adopted Amendments.

Current Item

Adopted Amendments

Expected Impact

Item 301, Selected Financial Data – Provide a table of certain operating and balance sheet information for the registrant's five most recent fiscal years (or the life of the registrant and its predecessors, if less).

Eliminate Item 301 – Registrants will no longer be required to provide 5 years of selected financial data.

Reduce burden on registrants by simplifying disclosure requirements. Data that was previously required by Item 301, including trend information and historical financial data, can still be found in registrants’ MD&A disclosures and periodic reports.

Item 302(a), Supplementary Financial

Information – Disclose the following information for each full quarter within the two most recently completed fiscal years: (a) Net sales; (b) Gross profit; (c) Income or loss from continuing operations; (d) Per share data based on income or loss from continuing operations; (e) Net income or loss; (f)

Per share data based upon net income or loss; and (g) Net income or loss attributable to the registrant.

Item 302(a), Supplementary Financial Information – Replace the current requirement for quarterly tabular disclosure with a principles-based requirement for material retrospective changes.

Reduce repetition and focus disclosure on material information. 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 that are material, either individually or in the aggregate. The Adopted Amendments will require registrants to provide an explanation of the reasons for such material changes and to disclose summarized financial information related to the statements of comprehensive income and earnings per share reflecting such changes.

Item 303(a), Full Fiscal Year – Discuss the registrant's financial condition, changes in financial condition and results of operations for completed fiscal years.

Item 303(a), Objective – Clarifies the objectives of the MD&A and streamlines the 14 corresponding instructions.

New Item 303(a) states broad objectives for the MD&A, emphasizes a registrant’s future prospects and highlights the importance of materiality and trend disclosures.

Item 303(a), Full Fiscal Year 

Item 303(b), Full Fiscal Year – Provides three main requirements for full fiscal year disclosure (see below for discussion of 303(b)(1), (2), and (3)). Also streamlines current Item 303(a) by eliminating unnecessary cross-references to industry guides in Instructions 13 and 14.

While eliminating the cross-reference to industry guides in Instructions 13 and 14, the SEC notes that registrants who apply industry guides may still need to consider the guides when preparing their disclosures.

Item 303(a)(1), Liquidity; Item 303(a)(2), Capital Resources – Disclose: (a) the registrant's material commitments to capital expenditures at the end of the latest fiscal period, and the general purpose of those commitments and anticipated source of funds and (b) known material trends in capital resources, and expected material changes in the mix and relative cost of resources. Disclosure should consider changes between equity, debt and off-balance sheet financing arrangements.

Item 303(b)(1), Liquidity and Capital Resources – Require disclosure of material cash requirements, including commitments for capital expenditures, as of the latest fiscal year, the anticipated source of funds needed to satisfy such cash requirements, and the general purpose of known contractual and other obligations to enhance liquidity and capital resources discussion.

Changes require registrants to disclose material cash requirements in addition to capital expenditures and discuss both short- and long-term liquidity and capital resources. The SEC notes that the intended purpose is to account for capital expenditures that are not necessarily capital investments.

Item 303(a)(3)(ii), Results of Operations – Describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations. If the registrant knows of events that will cause a material change in the relationship between costs and revenues (such as known future increases in costs of labor or materials or price increases or inventory adjustments), the change in the relationship shall be disclosed.

Item 303(b)(2)(ii), Results of Operations –Clarify the requirements of this Item by using the disclosure threshold of “reasonably likely.”

Registrants must disclose known events that are reasonably likely to cause (as opposed to will cause) a material change in the relationship between costs and revenues (e.g., future costs of labor or materials). Registrants should consider whether a known trend, demand, commitment, event, or uncertainty

is likely to come to fruition. If such known trend, demand, commitment, event or uncertainty would reasonably be likely to have a material effect on the registrant’s future results or financial condition, disclosure is required. Whether a matter is reasonably likely to have a material impact on future operations is based on management’s assessment. This change is consistent with the 1989 MD&A Interpretative Release’s position on forward-looking statements.3

Item 303(a)(3)(iii), Results of Operations – To the extent that the financial statements disclose material increases in net sales or revenues, provide a narrative discussion of the extent to which such increases are attributable to increases in prices or to increases in the volume or amount of goods or services being sold or to the introduction of new products or services.

Item 303(b)(2)(iii), Results of Operations – Clarify that a discussion of the reasons underlying material changes in net sales or revenue is required rather than a discussion of only material increases (which will codify the 1989 MD&A Interpretative Release).4 

Clarify MD&A disclosure requirements by codifying the 1989 MD&A Interpretative Release.

Item 303(a)(3)(iv), Results of Operations (Inflation and Price Changes) – For the three most recent fiscal years of the registrant or for those fiscal years in which the registrant has been engaged in business, whichever period is shortest, discuss the impact of inflation and changing prices on the registrant's net sales and revenues and on income from continuing operations.

Instruction 8 – Registrants are only required to discuss the effects of inflation and other changes in prices when considered material.

Instruction 9  – Registrants that elect to disclose supplementary information on the effects of changing prices may combine such explanations with the discussion and analysis required pursuant to this Item or may supply such information separately with appropriate cross reference.

Eliminate Item 303(a)(3)(iv) and Instructions 8 and 9 – Note that registrants are still required to discuss inflation and price change matters if they are part of a known trend or uncertainty that has had, or the registrant reasonably expects to have, a material favorable or unfavorable impact on net sales, revenue or income from continuing operations. 

Encourage registrants to focus on material information that is tailored to a registrant’s businesses, facts, and circumstances.

Item 303(a)(4), Off-balance sheet arrangements – Disclose off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Eliminate current Item 303(a)(4) and replace with new Instruction to Item 303(b) – Require registrants to consider and integrate disclosure of off-balance sheet arrangements within the broader context of their MD&A. 

Registrants will no longer be required to provide off-balance sheet arrangement disclosure in a separately captioned section, rather the SEC expects registrants to incorporate its discussion of off-balance sheet financing arrangements into its broader discussion of liquidity and capital resources. However, registrants may still retain a separately captioned section if they prefer to do so.

Item 303(a)(5), Contractual Obligations – In the form of the table specified, disclose the payments due under the registrant's known contractual obligations, broken out by the following future periods: (a) total; (b) less than one year; (c) one to three years; (d) three to five years; and (e) more than five years.

Eliminate Item 303(a)(5) – Registrants are no longer required to provide a contractual obligations table. A discussion of material contractual obligations will remain required through an enhanced principles-based liquidity and capital resources requirement focused on material short- and long-term cash requirements from known contractual and other obligations.

The SEC believes that eliminating the requirement would not result in a loss of material information to investors given the overlap with information required in the financial statements and in light of the concurrent proposed expansion of the capital resources requirement.

Instruction 4 (Material changes in Line Items) – Where the consolidated financial statements reveal material changes from year to year in one or more line items, the causes for the changes shall be described to the extent necessary to an understanding of the registrant's businesses as a whole.

Incorporate a portion of Instruction 4 into amended Item 303(b) and clarify, where there are material changes in line items (including where material changes within a line item offset each other), disclosure of the underlying reasons for these material changes in quantitative and qualitative terms is required.

Enhance analysis in the MD&A. Clarify MD&A disclosure requirements by codifying the 1989 MD&A Interpretative Release on the importance of analysis in the MD&A.

Item 303(b), Interim Periods – Discussion of financial condition and results of operations to enable assessment of material changes in the registrant's: (a) financial condition from the end of the last fiscal year to the date of the most recent interim balance sheet and (b) results of operations for the quarterly and fiscal year-to-date periods and the corresponding periods of the last fiscal year.

Item 303(c), Interim Periods – Registrants would be permitted to choose whether to compare their most recently completed quarter to either the corresponding quarter of the prior year or to the immediately preceding quarter. If a registrant opts to use the immediately preceding quarter for comparison, it must provide summary financial information for that quarter or identify the relevant SEC filing where the information can be found.

Requires registrants to explain the reasons for a change in comparison from prior periods and provide both comparisons when there is such a change. The Adopted Amendment allows for flexibility in comparison of interim periods to help registrants provide a more tailored and meaningful analysis relevant to their business cycles.

Critical Accounting Estimates – Describe the registrant's most important accounting policies, assumptions and estimates. A critical accounting policy is one that: (a) is very important for describing the registrant's financial condition and results of operations and (b) requires management to make difficult or subjective judgments or estimates.

Item 303(b)(3), Critical Accounting Estimates – Codify the requirement to disclose critical accounting estimates (CAEs).

Previously, the requirement to disclose CAEs derived from the SEC’s 2003 MD&A guidance.5 The Adopted Amendments differs slightly from the Proposed Amendments in that it makes clear that: (i) the application of the material and reasonably available qualifier applies to all parts of the disclosure; (ii) the discussion on how much each estimate has changed may also be met through a discussion of changes in the assumptions during the period; and (iii) disclosure of changes in estimate/assumptions cover a “relevant period,” rather than a “reporting period.”


The Adopted Amendments push forward the SEC’s goal to modernize the MD&A disclosure requirements through a principles-based, registrant-specific approach that focuses on disclosure of material information while reducing the costs and burdens imposed on registrants by eliminating redundant and unnecessary disclosure. The Adopted Amendments are also intended to allow investors to view the registrant “through the eyes of management” and improve the readability of the disclosure. Further, codification of previous SEC guidance will help provide registrants with more clarity when preparing the MD&A.

Although registrants will not be required to apply the Adopted Amendments until their Mandatory Compliance Date, they may apply the Adopted Amendments at any time after the Effective Date, as long as the disclosure is responsive to an amended item in its entirety. For example, upon the Effective Date, registrants may immediately adopt amended Items 301 and 302, but choose not to adopt amended Item 303 until the Mandatory Compliance Date. Understanding the impact of the changes to the MD&A disclosure and how to tailor disclosure to be more registrant-specific will likely take time to develop so registrants should begin to consider how the Adopted Amendments will impact the structure and scope of their MD&A disclosures in the future.


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

2 See 2003 MD&A Interpretative Release, at 75056. See also 1989 Interpretative Release, at 22428.

3 See 1989 MD&A Interpretive Release, at 22430, where the SEC articulated a two-step test for assessing when forward-looking disclosure is required in MD&A; Where a trend, demand, commitment, event or uncertainty is known, management must make two assessments: (1) Is the known trend, demand, commitment, event or uncertainty likely to come to fruition? If management determines that it is not reasonably likely to occur, no disclosure is required. (2) If management cannot make that determination, it must evaluate objectively the consequences of the known trend, demand, commitment, event or uncertainty, on the assumption that it will come to fruition. Disclosure is then required unless management determines that a material effect on the registrant’s financial condition or results of operations is not reasonably likely to occur.

4 See 1989 MD&A Interpretative Release, at n. 36 (“Although Item 303(a)(3)(iii) speaks only to material increases, not decreases, in net sales or revenues, the Commission interprets Item 303(a)(3)(i) and Instruction 4 as seeking similar disclosure for material decreases in net sales or revenues.”)

5 See Commission Guidance Regarding Management’s Discussion and Analysis of Financial Cndition and Results of Operation, Release No. 33-8350 (Dec. 19, 2003) [68 FR 75056 (Dec. 29, 2003)].

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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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