SEC Adopts Amendments to MD&A Disclosure Requirements

Last week, the SEC adopted changes to financial disclosure requirements in Regulation S-K, including the elimination of the requirement to include Selected Financial Data, streamlining the requirement to disclose Supplementary Financial Information, and amending Management’s Discussion & Analysis of Financial Condition and Results of Operations (“MD&A”). Per the SEC's rule release, "[t]hese amendments are intended to eliminate duplicative disclosures and modernize and enhance MD&A disclosures for the benefit of investors, while simplifying compliance efforts for registrants."

Among other things, these amendments will:

• revise Item 302(a), to replace the current requirement for quarterly tabular disclosure of Supplementary Financial Information with a principles-based requirement for material retrospective changes;
• add a new Item 303(a), Objective, to state the principal objectives of MD&A;
• amend Item 303(a), Full fiscal years (amended Item 303(b)) and Item 303(b), Interim periods (amended Item 303(c)) to modernize, clarify, and streamline the items;
• replace Item 303(a)(4), Off-balance sheet arrangements, with an instruction to discuss these obligations in the broader context of MD&A;
• eliminate Item 303(a)(5), Tabular disclosure of contractual obligations, and amend Item 303(b)(1), Liquidity and Capital Resources, to specifically require disclosure of material cash requirements from known contractual and other obligations as part of an enhanced liquidity and capital resources discussion; and
• add a new Item 303(b)(3), Critical accounting estimates, to clarify and codify SEC guidance on critical accounting estimates.

In particular, two of these changes strike me as interesting:

Item 303(a)(2), Capital resources. Companies will need to describe their material cash requirements, including (but not limited to) 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. The adopting release notes that the use of the word “requirements” (instead of “commitments”) in the revised rules is intentional, although the SEC further does “not expect that registrants would have to deviate substantially from current practices with respect to an assessment of material cash requirements, as the amendments reflect current Commission guidance and resulting disclosure practices. Further, our amendments are limited to and address only those cash requirements that are material and accordingly, do not reflect a new threshold for these disclosures and should not require extensive or new procedures or controls.”

Item 303(a)(5), Contractual obligations. Registrants will no longer be required to provide a contractual obligations table, but will instead be required to discuss their material contractual obligations in an enhanced, principles-based, liquidity and capital resources section, focused on material short- and long-term cash requirements from known contractual and other obligations. In discussing why this table was being eliminated, the SEC notes that “[t]he Commission’s objective in adopting current Item 303(a)(5) was to provide aggregated information about contractual obligations in a single location and to improve transparency of a registrant’s short- and long-term liquidity and capital resources needs and demands. Much of the disclosure required by current Item 303(a)(5) is now provided in the financial statements, unlike when the requirement was first adopted.”

The amendments will become effective 30 days after they are published in the Federal Register (which, as of the date of this post, had not yet occurred). Companies are required to comply with the rule beginning with the first fiscal year ending on or after the date that is 210 days after publication in the Federal Register (the “mandatory compliance date”). In addition, companies will be required to apply the amended rules in registration statements and prospectuses that, on their initial filing dates, are required to contain financial statements covering a period on or after the mandatory compliance date.