SEC Amends MD&A and Financial Disclosure Requirements

On November 19, 2020, the Securities and Exchange Commission (SEC) voted 3-2 to adopt additional amendments to Regulation S-K for public companies, including Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A). These amendments reflect the latest development in the SEC’s ongoing disclosure effectiveness initiative, which seeks to modernize and streamline public company disclosure requirements. According to the SEC, the latest amendments are also designed to improve the readability and navigability of SEC disclosure documents and discourage repetition and disclosure of immaterial information. As discussed below for calendar-year companies, the amendments will take effect beginning with annual reports for the year ending December 31, 2021, but the SEC will permit voluntary earlier adoption.

Summary of the Amendments

The amendments primarily affect Items 301, 302, and 303 of Regulation S-K by eliminating Item 301 (Selected Financial Data) and modernizing Item 302(a) (Supplementary Financial Information) and Item 303 (MD&A).

In brief, the amendments will:

• revise Item 302(a) to replace the current requirement for quarterly tabular disclosure with a principles-based requirement for material retrospective changes;
• add a new Item 303(a), Objective, to require companies to state the principal objectives of MD&A;
• amend current Item 303(a)(1) and (2) (amended Item 303(b)(1)) to modernize disclosure requirements for Liquidity and Capital Resources, with an emphasis on the ability to generate and obtain sufficient cash to meet short-term and long-term needs;
• amend current Item 303(a)(3) (amended Item 303(b)(2)) to streamline disclosure requirements for Results of Operations by requiring, among other things, a company to disclose (1) any known trends or uncertainties that have had or are “reasonably likely” to have a material impact on revenues or income, and (2) any known events that are “reasonably likely” to cause a material change in the relationship between costs and revenues;
• add a new Item 303(b)(3), Critical Accounting Estimates, to clarify and codify prior SEC guidance on critical accounting estimates;
• replace current Item 303(a)(4), Off-Balance Sheet Arrangements, with an instruction to discuss these obligations in the broader context of MD&A;
• eliminate current Item 303(a)(5), Tabular Disclosure of Contractual Obligations, in light of the amended disclosure requirements for Liquidity and Capital Resources and overlap with other information now required in the financial statements; and
• amend current Item 303(b), Interim Periods (amended Item 303(c)), to modernize the item and allow for flexibility in the comparison of interim periods by providing a company with the option to compare its most recent quarter to the immediately preceding quarter rather than to the same quarter of the prior year.

Effective Date and Transition

The amended rules will become effective 30 days after publication in the Federal Register. Public companies will be required to comply with the rules beginning with the first fiscal year ending on or after the date that is 210 days after publication in the Federal Register. For calendar-year companies, the rules will therefore apply to annual reports for the year ending December 31, 2021. Although public companies will not be required to apply the amended rules until the mandatory compliance date, they may voluntarily comply with the final amendments any time after the effective date, so long as they provide disclosure responsive to an amended item in its entirety. For example, if a company wished to stop providing the contractual obligations table in MD&A before the mandatory compliance date, it could do so, but the company would also be required to comply with all of the other amended Item 303 disclosure requirements as well – it could not pick and choose some of the old and some of the new.