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SEC Adopts Significant Amendments to Disclosure Requirements for MD&A and Other Financial Disclosures

Client Updates

On November 19, 2020, the U.S. Securities and Exchange Commission, by a 3-2 vote, adopted amendments to Regulation S-K designed to modernize, simplify and enhance certain financial disclosure requirements. Specifically, the SEC eliminated the requirement for Selected Financial Data, streamlined the requirement to disclose Supplementary Financial Information and amended the disclosure obligations for Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), including eliminating the tabular presentation of contractual obligations. As the SEC explained in its press release, the amendments seek to “enhance the focus of financial disclosures on material information for the benefit of investors, while simplifying compliance efforts for registrants.”

The SEC’s adopting release is available here. The amendments are generally consistent with the SEC’s January 2020 proposals, which we discussed in a prior Client Update.

The amendments will be effective 30 days after the publication in the Federal Register but compliance with the amended rules will not be required until a company’s first fiscal year ending on or after the date that is 210 days after publication in the Federal Register. Accordingly, for calendar-year companies, mandatory compliance with the amended requirements will begin with their fiscal year 2021 Form 10-K that is filed in 2022. Companies may provide disclosures consistent with the amendments at any time after the effective date; however, their disclosures must be responsive to an amended item in its entirety.

In a joint statement in connection with the adoption of these amendments, the dissenting Commissioners, Allison Herren Lee and Caroline Crenshaw, noted two aspects of the rules that they did not support. First, they opposed the elimination of the tabular presentation of contractual obligations. Second and perhaps more importantly, they criticized the SEC’s failure to use the opportunity provided by these amendments to standardize disclosure requirements with respect to climate risk. We anticipate that standardizing climate-related disclosures will be a priority for the SEC during the Biden Administration, and we expect that companies will follow such rulemaking processes closely.



Over several years, the SEC has been conducting a comprehensive evaluation of its disclosure requirements, consistent with its commitment to a “principles-based, registrant-specific approach to disclosure.” The overall objective of the SEC’s initiative is to improve the disclosure regime for both investors and companies, providing investors with material information about companies and allowing investors to understand companies from management’s perspective.


Overview of the Amendments

The SEC adopted amendments to Items 301, 302 and 303 of Regulation S-K to increase the focus on material information and eliminate redundancies.

Specifically, the SEC has eliminated:

  • Item 301 – Selected Financial Data, meaning that companies will no longer be required to provide a table with five years (or the life of the registrant, if less, subject to limited relief for emerging growth companies) of selected financial data. However, companies may continue to include such a tabular presentation to the extent they believe it would be useful to an investor.

  • Item 303(a)(5) – MD&A, Tabular Disclosure of Contractual Obligations, meaning that companies will no longer be required to provide a contractual obligations table. This requirement was eliminated due to the significant overlap with the amended requirements for Liquidity and Capital Resources, as discussed further below.

In addition, the SEC made the following changes, among others, to disclosure requirements in Item 302(a) and Item 303 of Regulation S-K:

Item 302(a), Supplementary Financial Information. This item was amended to replace the current requirement to provide quarterly tabular disclosure of certain financial information for the prior two years with a new principles-based requirement. As amended, companies will need to explain only retrospective changes to the statements of comprehensive income for any of the quarters within the two most recent fiscal years or any subsequent period that individually or in the aggregate are material.

The SEC believes that this amendment will reduce duplicate disclosures, better highlight material retrospective changes and further aid investors’ understanding of the reasons for material retrospective changes and the related quantitative effect on the quarterly periods affected.

New Item 303(a), Objective. A new item is added to clarify the objectives of MD&A.

Purpose of MD&A. This item explains the overarching requirements of MD&A and apply throughout amended Item 303. These requirements “emphasize a registrant’s future prospects and highlight the importance of materiality and trend disclosures to a thoughtful MD&A” and apply throughout the disclosures called for by Item 303. The SEC encourages companies to revisit this objective as they prepare MD&A. Specifically, Item 303(a) requires that companies:

  • Provide 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.

  • Discuss and analyze the financial statements and other statistical data that the company believes will enhance a reader’s understanding of the company’s financial condition, cash flows and other changes in financial condition and results of operations.

  • New Item 303(a) also incorporates the current guidance that MD&A is intended to provide disclosures from “management’s perspective.”

Reasonably Likely Standard. New Item 303(a) adopts a “reasonably likely” disclosure threshold for MD&A. Companies must focus their MD&A disclosure on material events and uncertainties known to management that are “reasonably likely” to cause reported financial information not to be necessarily indicative of future results or financial condition. The SEC explained that the reasonably likely threshold “requires a thoughtful analysis that applies an objective assessment of the likelihood that an event will occur balanced with a materiality analysis regarding the need for disclosure regarding such event.”

Applying this standard, the SEC explained that disclosure would be required:

  • If a 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”; or

  • Where known trends, demands, commitments, events or uncertainties that are not remote or where management cannot make an assessment as to the likelihood that they will come to fruition, and that would be reasonably likely to have a material effect on the registrant’s future results or financial condition, were they to come to fruition, should be disclosed if “a reasonable investor would consider omission of the information as significantly altering the mix of information made available in the registrant’s disclosures.”

The SEC noted that this standard was different from the probability/magnitude test established in the U.S. Supreme Court’s Basic v. Levinson opinion and that the SEC was not adopting that test for MD&A because it could result in disclosure of matters that are “potentially large in potential magnitude but low in probability.”

The threshold does not require disclosure of immaterial or remote future events, so the SEC does not expect new Item 303(a) to result in “voluminous disclosures or unnecessarily speculative information.”

Item 303(a), Full Fiscal Years (renumbered and amended as Item 303(b)). This item and its instructions were amended to modernize, clarify, and streamline disclosure. The language of the current instruction was 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 “causes for” material changes, which the SEC believes will encourage companies to provide more meaningful disclosure. Additionally, the amendments to Item 303(b) codify existing guidance that companies should discuss material changes within a line item, even when such changes offset one another.


Item 303(a)(1) and (2), Liquidity and Capital Resources – Material Cash Requirements (renumbered and amended as Item 303(b)(1)). Companies will need to provide material cash requirements, including commitments for capital expenditures, as of the end of the latest fiscal period required to be presented, the anticipated source of funds needed to satisfy such cash requirements, and the general purpose of such requirements. Amended Item 303(b)(1) also requires that this discussion address cash requirements both for the short term (i.e., the next 12 months from the most recent fiscal period end) and long term (i.e., beyond 12 months).

In new Instruction 3 and amended Instruction 4 to Item 303(b), companies are reminded to provide disclosure in a format that “facilitates easy understanding” and that the discussion of material cash requirements from known contractual obligations may include lease obligations, purchase obligations or other items that are reflected on the company’s balance sheet.


Item 303(a)(3)(iii), Results of Operations – Net Sales and Revenues (Amended Item 303(b)(2)(iii)). The amendment clarifies 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 were eliminated to encourage companies to focus on material information that is tailored to the company’s business, facts, and circumstances. However, companies will still be required to discuss these matters if they are 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.


Item 303(a)(4), Off-Balance Sheet Arrangements. This item, which prior to the amendments required disclosures about off-balance sheet arrangements in a separately captioned section, was replaced with a principles-based instruction to Item 303. The instruction prompts companies to address off-balance sheet arrangements in the broader discussion of liquidity and capital resources in MD&A.

Under the new Instruction 8, companies will 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.


New Item 303(b)(3), Critical Accounting Estimates. A new item was added to explicitly require disclosure of critical accounting estimates in order to clarify the required disclosures of critical accounting estimates, facilitate compliance and improve the resulting disclosure. The amendments codify SEC guidance from 2003.

  • For each critical accounting estimate, the SEC requires companies to disclose, to the extent material, why the estimate is subject to uncertainty, how much each estimate has changed during the relevant period, and the sensitivity of the reported amounts to the methods, assumptions, and estimates underlying the estimate’s calculation. The discussion should also provide quantitative as well as qualitative information when quantitative information is reasonably available and will provide material information to investors.

  • Critical accounting estimates are defined as those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the registrant’s financial condition or results of operations.

  • The disclosure required by this item must supplement, but not duplicate, the description of accounting policies or other disclosures in the notes to the financial statements.

Item 303(b), Interim Periods (Amended Item 303(c)). This item was 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. The SEC had considered requiring comparisons to both the prior year quarter and the immediately preceding quarter, but it declined to do so because it may be unclear to investors which time period is more representative of the company’s business and because such a requirement would increase compliance costs.

If a registrant elects to discuss changes from the immediately preceding quarter, the registrant 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 so that a reader may have ready access to the prior quarter financial information being discussed. In addition, if a company changes the comparison from the prior interim period comparison, the company will 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 the flexibility provided by these amendments will help registrants provide a more tailored and meaningful analysis that is relevant to their specific business cycles while also providing investors with material information to assess quarterly performance. Companies subject to Rule 3-03(b) of Regulation S-X (i.e., those primarily engaged in the generation, transmission, or distribution of electricity; the manufacture, mixing transmission, or distribution of gas; the supplying or distribution of water; or the furnishing of telephone or telegraph services; or in holding securities of companies engaged in such business) would be afforded the same flexibility.


Proposed Amendments Not Adopted

In January 2020, the SEC had also proposed eliminating Item 302(b), Disclosure of Oil and Gas Producing Activities, on the condition that the Financial Accounting Standards Board finalized amendments to U.S. GAAP that would require for the incremental disclosures called for by that item. However, because FASB has not yet finalized the amendments, the SEC retained Item 302(b) in its present form.


Conforming Amendments

The SEC also adopted certain parallel amendments to the financial disclosure requirements applicable to foreign private issuers, including to Forms 20-F and 40-F, as well as other conforming amendments to the SEC’s rules and forms, as appropriate.


Thanks to law clerk Elise Wang for her contributions to this Client Update.

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