At a glance
The SEC has amended Regulation S-K
to modernize, simplify, and enhance Management’s Discussion and Analysis (MD&A), streamline supplementary financial information, and eliminate the requirement to provide certain selected financial data. These changes impact many SEC filings, including Forms 10-K
, and 40-F and many registration statements. Key changes include:
enhancements and clarification of the disclosure requirements for liquidity and capital resources;
elimination of five years of Selected Financial Data;
replacement of the current requirement for two years of quarterly tabular disclosure with a principles-based requirement to provide information only when there are material retrospective changes;
codification of prior SEC guidance on critical accounting estimates;
elimination of the tabular disclosure of contractual obligations; and
conforming amendments for foreign private issuers.
The amendments reflect a principles-based, registrant-specific approach to disclosure, intended to facilitate an understanding of the company from management’s perspective. The changes are a result of the SEC’s disclosure effectiveness initiative.
The amended rules were posted to the Federal Register on January 11 and will become effective February 10. Registrants are required to comply with the new rules beginning with the first fiscal year ending on or after August 9, 2021. Registrants may early adopt the amended rules at any time after the effective date (on an item-by-item basis), as long as they provide disclosure responsive to an amended item in its entirety.
The MD&A disclosure requirements were significantly restructured and streamlined using a principles-based approach intended to improve its usability and enhance disclosures for investors while reducing compliance burdens for registrants. As SEC Chairman Jay Clayton stated, “[these] rules will improve the quality and accessibility of the disclosure that companies provide their investors, including, importantly giving investors greater insight into the information management uses to monitor and manage the business.”
The amendments are intended to remind registrants that MD&A should provide analysis that encompasses short-term results as well as future prospects. Registrants should consider only disclosing the information that is necessary to understand the business and its financial condition, changes in financial condition, and results of operations. In addition, MD&A should not duplicate the disclosures that have been included elsewhere; the discussion is intended to be additive and limit repetition if the underlying reasons for a change impacts multiple line items.
The amendments clarify that the objective of MD&A is to facilitate a discussion and analysis of material information, events, and factors specific to a registrant’s business and to enable investors to understand the business and results from “management’s perspective.” This is a guiding principle that is to be applied throughout the MD&A with a focus on material events and uncertainties known to management. In addition, registrants should provide a discussion of forward-looking perspectives and must include disclosure of matters that management believes are reasonably likely to have a material impact on future operations.
Registrants should focus on what is necessary to understand the business, results, and material changes. Disclosures should continue to include qualitative and quantitative discussion of material changes and the underlying drivers of the changes from period-to-period in one or more line items even when material changes within a line item offset each other.
The amendments also codify existing SEC guidance and require the discussion to focus on each reportable segment and/or other subdivision, if necessary to an understanding of the business. The new amendments add product lines as an example of this disaggregated analysis where the existing rules have only geographic region as an example.
Liquidity and capital resources
The amendments relating to liquidity and capital resources are principles-based and focus on material short-term (the next 12 months from the most recent period end) and long-term needs with more significant changes to off-balance sheet arrangements and contractual obligations disclosures.
A registrant should continue to provide a discussion of its material cash requirements from known contractual and other obligations by identifying and describing:
- any known trends or known demands, commitments, events, or uncertainties that are reasonably likely to impact a registrant’s liquidity in a material way;
- internal and external sources of liquidity, including any material unused sources of liquid assets;
- material cash requirements, including commitments for capital expenditures, and the anticipated source of funds to satisfy cash requirements;
- known material trends, favorable and unfavorable, impacting capital resources; and
- any reasonably likely material changes in the mix and relative cost of such resources.
Off-balance sheet arrangements
The current rules contain more prescriptive disclosure requirements for off-balance sheet arrangements and require the discussion to be included in a separate section of MD&A. The amendments provide a new principles-based instruction to integrate the discussion of off-balance sheet arrangements within the broader context of MD&A to the extent material.
In addition, the amended guidance simplifies the definition of off-balance sheet arrangements as arrangements with unconsolidated entities or persons that have or are reasonably likely to have a material current or future effect even when the arrangement results in no obligations being reported in the registrant’s consolidated balance sheets.
Elimination of contractual obligations table
Under the amended rules, registrants are no longer required to provide a contractual obligations table; however, a discussion of material cash requirements from contractual obligations is required as part of the discussion of a registrant’s liquidity and capital resources.
Results of operations
Consistent with MD&A’s principles-based approach, the amendments require discussion of underlying reasons for material changes, unusual or infrequent events or transactions or significant economic changes, and known trends or uncertainties that have had or that are reasonably likely to have a material impact on net sales or revenues or income from continuing operations. Registrants should also discuss other significant components of revenues or expenses that would be material to an understanding of the results of operations.
There is no longer a requirement to discuss the impact of inflation or changing prices unless it is part of a known trend or uncertainty that had or is reasonably likely to have a material impact on net sales, revenue, or income from continuing operations. However, if there are material changes from period to period in revenues, a registrant should describe the extent to which those changes are attributable to changes in prices or to changes in the volume or amount of goods or services being sold.
Critical accounting estimates
The amended rules largely codify existing SEC guidance relating to critical accounting estimates. Critical accounting estimates are those estimates that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations of the registrant. The amended rules require a registrant to include:
- a discussion of why each critical accounting estimate is subject to uncertainty; and
- to the extent the information is material and reasonably available, a discussion of how much each estimate and/or assumption has changed over the relevant period, and the sensitivity of the reported amount to the methods, assumptions, and estimates underlying its calculation.
The amended rules allow a registrant to tailor its discussion of material changes in its results of operations to its business cycle. In particular, the discussion of the most recent quarter can be by comparison to either (1) the corresponding quarter of the prior year (current requirement) or (2) the immediately preceding quarter. The requirement to discuss material changes in the results of operations between the most recent year-to-date interim period and the corresponding period of the preceding fiscal year is unchanged.
Elimination of selected financial data
Current Regulation S-K Item 301
requires certain registrants to provide selected financial data in comparative tabular form for each of the registrant’s last five fiscal years and any additional fiscal years necessary to keep the information from being misleading. The amended rules eliminate this requirement; however, the Commission’s adopting release encourages registrants to consider:
- whether trend information for periods earlier than those presented in the financial statements may be necessary as part of the MD&A’s objective “to provide material information relevant to an assessment of the financial condition and results of operations,” and
- whether a tabular presentation of relevant financial or other information, as part of an introductory section or overview, may be appropriate to demonstrate material trends.
In addition to acknowledging that historical information is readily available, the rule change will also substantially reduce or eliminate challenges that registrants may have encountered when, for example, preparing the tabular disclosures following a disposition treated as discontinued operations and other events requiring retrospective revisions to historical financial statements.
Streamlining of supplementary (quarterly) financial information
Regulation S-K Item 302(a)
currently requires certain registrants to disclose supplementary quarterly financial data related to specified operating results as well as changes from amounts previously reported on a Form 10-Q
. The item has been amended and streamlined to require the following disclosures 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 or any subsequent interim period for which financial statements are included by Article 3 of Regulation S-X
and that, individually or in the aggregate, are material:
- An explanation of the reasons for such material changes
- Summarized financial information related to the statements of comprehensive income as specified in Regulation S-X Rule 1-02(bb)(1)(ii) and earnings per share for each affected quarterly period and the fourth quarter in the affected year