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SEC Proposes Significant Changes to Disclosure Requirements for MD&A

Client Updates

On January 30, 2020, the U.S. Securities and Exchange Commission proposed amendments to Regulation S-K in an effort to eliminate redundant disclosures and modernize and enhance financial disclosures in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”). The SEC believes the proposed changes, which are summarized below, will both benefit investors and simplify compliance efforts for companies.

As a companion to the Proposing Release, available here, the SEC also issued guidance, available here, regarding key performance indicators and metrics in MD&A. This guidance will be effective upon publication in the Federal Register and therefore will be applicable to annual reports on Form 10-K and Form 20-F that companies are currently preparing. We discuss the new guidance on MD&A in a separate Client Alert available here.


Over several years, the SEC has been conducting a comprehensive evaluation of its disclosure requirements, which it began in part at the direction of Congress. The proposed amendments stem from that effort.

The SEC has worked to evaluate the information its rules require companies to disclose, how this information is presented, where this information is disclosed, and how the SEC can better leverage technology as part of these efforts. The overall objective of the SEC’s initiative is to improve its disclosure regime for both investors and companies, replacing outdated line-item requirements with a principles-based approach. At the end of this Client Alert, we have included links to other Client Alerts related to this initiative.

Highlights of Proposed Amendments

The SEC is proposing changes to Items 301, 302 and 303 of Regulation S-K to reduce duplicative disclosure and focus on material information.

Specifically, the SEC has proposed to eliminate:

  • Item 301 – Selected Financial Data, meaning that companies would no longer be required to provide five years (or the life of the registrant, if less, subject to limited relief for emerging growth companies) of selected financial data.
    • The SEC noted that when the precursor to Item 301 was adopted in 1970, prior annual reports were not quickly and easily accessible. Today, however, the information required by Item 301 can be readily accessed through prior filings on EDGAR and is tagged using the eXtensible Business Reporting Language (XBRL) data format. The SEC also noted that the incremental utility of having a full five years of selected financial information is not justified by the cost to prepare such disclosures, particularly since Item 303 – MD&A already requires disclosure of material trends and such other information necessary to an understanding of the company’s financial condition, changes in financial condition, and results of operations. However, companies may continue to include such a tabular presentation to the extent they believe it would be useful to an investor.

  • Item 302 – Supplementary Financial Information, meaning that companies would no longer be required to provide two years of selected quarterly financial data or related disclosure of variances in these results from those previously reported in the notes to the financial statements.
    • The SEC believes that the requirements of this item largely result in duplicative disclosures, given that the information can be found in prior periodic reports, which are readily available on EDGAR. The SEC noted that the precursor to Item 302 was adopted at a time when quarterly data was reported on an extremely abbreviated basis and that Item 302 was intended to help investors understand the pattern of corporate activities throughout a fiscal period by disclosing trends over quarterly periods to reflect seasonal patterns.
    • The SEC believes that eliminating this item will encourage companies to take a more principles-based approach to presenting the information called for by Item 302(a) in their MD&A.
    • Item 302(b), Information About Oil and Gas Producing Activities would be eliminated, subject to the Financial Accounting Standards Board’s amendment of GAAP, to require the oil and gas disclosure called for by Item 302(b). The amendments to GAAP would require the incremental disclosure currently called for by Item 302(b).

  • Item 303(a)(5) – MD&A, Tabular Disclosure of Contractual Obligations, meaning that companies would no longer be required to provide a contractual obligations table.
    • The SEC believes that eliminating this requirement would not result in a loss of material information to investors, given the overlap with information required in accordance with GAAP. However, because some of the information in the contractual obligations table is not specifically called for under GAAP, the SEC has proposed expansion of Item 303(a)(2), Capital Resources, as discussed further below, requiring companies to discuss material cash requirements, which would include material contractual obligations.

In addition, the SEC proposed the following changes, among others, to disclosure requirements in Item 303 – MD&A, which generally requires disclosure of information relevant to assessing a company’s financial condition, changes in financial condition, and results of operations: 

  • New Item 303(a), Objective. A new item would be added to clarify the objective and purposes of MD&A disclosure and codify SEC guidance that states that a company should provide a narrative explanation of its financial statements that enables investors to see the company “through the eyes of management.”
    • The SEC notes that the proposal is intended to remind registrants that the general purpose of MD&A is 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.”
    • The SEC believes that this principles-based approach will help to “elicit disclosure about complex and often rapidly evolving areas, without the need to continuously amend the text of the rule to impose bright-line or prescriptive requirements.”

  • Item 303(a), Full Fiscal Years (proposed Item 303(b)). This item would be amended to modernize, clarify, and streamline as follows:
    • Item 303(a)(2), Capital Resources. Companies would disclose material cash requirements, including commitments for capital expenditures, as of the latest fiscal period, the anticipated source of funds needed to satisfy such cash requirements, and the general purpose of such requirements to account for capital expenditures that are not necessarily capital investments. The added specificity codifies prior SEC guidance that companies should broadly disclose material cash commitments, including capital expenditures. The enhanced discussion of capital resources is intended to complement the proposed elimination of Item 303(a)(5) – MD&A, Tabular Disclosure of Contractual Obligations, as noted above.
    • Item 303(a)(3)(ii), Results of Operations – Known Trends or Uncertainties. Companies would disclose known events that are reasonably likely to cause (as opposed to will cause) a material change in the relationship between costs and revenues, such as known or reasonably likely future increases in costs of labor or materials or price increases or inventory adjustments.
    • Item 303(a)(3)(iii), Results of Operations – Net Sales and Revenues. The proposed changes would clarify that a discussion of the reasons underlying material changes, instead of only material increases, in net sales or revenues from period to period is required.
    • Item 303(a)(3)(iv), Results of Operations – Inflation and Price Changes, Instructions 8 and 9 – This item and instructions would be eliminated to encourage companies to focus on material information that is tailored to the company.
      • Companies would still be required to discuss these matters if they are part of a known trend or uncertainty that has had, or the company reasonably expects to have, a material favorable or unfavorable impact on net sales, or revenue, or income from continuing operations. The SEC has also specifically encouraged registrants to consider disclosure of economic or industry-wide factors where relevant.
    • Item 303(a)(4), Off-Balance Sheet Arrangements. This item, which currently requires disclosures about off-balance sheet arrangements in a separately captioned section, would be replaced with a principles-based instruction to prompt companies to discuss off-balance sheet arrangements in the broader context of MD&A.
      • Under the new instruction, companies would be required to discuss commitments or obligations, including contingent obligations, arising from arrangements with unconsolidated entities or persons that have, or are reasonably likely to have, a material current or future effect on such company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements, or capital resources even when the arrangement results in no obligation being reported in the company’s consolidated balance sheets.
      • The SEC noted that updates made to GAAP resulted in substantial overlap between GAAP and Item 303(a)(4), which led the SEC to believe that the current more prescriptive off-balance sheet arrangement definition and related disclosure requirement in Item 303(a)(4) should be replaced with a principles-based instruction.
    • Instruction 4 to Item 303(a) – The language of Instruction 4 to Item 303(a) would be amended to clarify that MD&A requires a narrative discussion of the “underlying reasons” for material changes from period-to-period in one or more line items in quantitative and qualitative terms, rather than only the “cause” for material changes, and that companies should discuss material changes within a line item even when such material changes offset each other.

  • New Item 303, Critical Accounting Estimates. A new item would be added to explicitly require disclosure of critical accounting estimates, codifying SEC guidance on the topic.
    • The SEC would define a critical accounting estimate as an estimate made in accordance with GAAP that involves a significant level of estimation uncertainty and has had or is reasonably likely to have a material impact on the company’s financial condition or results of operations.
    • GAAP does not require a similar disclosure of estimates and assumptions in the notes to financial statements except in limited circumstances. MD&A, on the other hand, should focus on the company’s analysis of the uncertainties involved in applying the accounting principles.
    • The SEC’s intent is to eliminate disclosure that duplicates the financial statement discussion of significant accounting policies and, instead, promote enhanced analysis of measurement uncertainties. To that end, the SEC would also include an instruction specifying that the disclosure of critical accounting estimates should supplement, but not duplicate, the description of accounting policies or other disclosures in the notes to the financial statements.

  • Item 303(b), Interim Periods (proposed Item 303(c)). This item would be amended to provide flexibility by allowing companies to compare their most recently completed quarter to either the corresponding quarter of the prior year (as is currently required) or to the immediately preceding quarter. Companies subject to Rule 3-03(b) of Regulation S-X would be afforded the same flexibility.
    • Under the proposal, if a company elects to discuss changes from the immediately preceding sequential quarter, the company must provide summary financial information that is the subject of the discussion for that quarter or identify the prior EDGAR filing that presents such information. In addition, under the proposed amendment, if a company changes the comparison from the prior interim period comparison, the company would be required to explain the reason for the change and present both comparisons in the filing where the change is announced.
    • The SEC believes that these changes would allow companies additional flexibility to provide an analysis that they believe is most relevant to an understanding of the frequency and amplitude of past business cycles while also ensuring that investors have appropriate information to assess the comparisons being presented.
    • The proposal reflects the SEC’s recognition that not all businesses are seasonal, and therefore a comparison to the corresponding quarter of the prior year may be less meaningful than a comparison to the preceding quarter. The flexibility would allow companies to provide the most relevant information and reduce comparisons that may obscure material trends.

The proposal also includes certain conforming amendments, including to Forms 20-F and 40-F, as appropriate.

Public Comment Period

The SEC will accept comments on the proposed amendments for 60 days after the Proposing Release is published in the Federal Register.

Other Baker Botts Client Alerts Related to the SEC’s Disclosure Effectiveness Initiative

SEC Proposes Amendments to Regulation S-K to Modernize Disclosure Related to Description of Business, Legal Proceedings and Risk Factors (August 15, 2019)

SEC Proposes Amendments to M&A Financial Disclosures (May 13, 2019)

Life in the “FAST” Lane – SEC Adopts Amendments to Regulation S-K (March 25, 2019)

SEC Proposes Rules to Simplify and Streamline Disclosures in Certain Credit Enhanced Registered Debt Offerings (August 31, 2018)

SEC Adopts Simplified Disclosure Requirements (August 30, 2018)

The Next Stop on the “FAST” Track: SEC Calls for Comments on Proposed Amendments to Regulation S-K (October 18, 2017)

Big Disclosure Changes Ahead? SEC Issues Concept Release Exploring Overhaul of Regulation S-K (April 18, 2016)

The FAST Act: What Does It Mean To You? (December 2015)

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