As part of their Disclosure Effectiveness Initiative, the Securities and Exchange Commission (SEC) recently proposed interpretive guidance to eliminate some disclosures in Regulation S-K and to amend other requirements to better focus on material information in Item 303, “Management’s Discussion and Analysis.”
More specifically, the SEC’s proposal would eliminate duplicative disclosures and modernize “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” (known as MD&A) to benefit investors and to simplify compliance for issuers. The proposed amendments are part of a comprehensive evaluation of the SEC’s disclosure requirements intended to improve the SEC’s overall disclosure regime. Specifically, the proposed amendments would eliminate Item 301 of Regulation S-K, “Selected Financial Data,” and Item 302 of Regulation S-K, “Supplementary Financial Information,” as the information is largely duplicative of other requirements.
In addition, Item 303 of Regulation S-K, “Management’s Discussion and Analysis of Financial Conditions and Results of Operations,” would be amended to streamline the required disclosures and focus on material information. We note that the proposed amendments to Item 303 are in addition to amendments recently adopted, which allow registrants to exclude a discussion of the earliest year when financial statements included in a filing cover the latest three years.
Specifically, the proposals include:
- Item 301: As it now stands, Item 301 calls for registrants to furnish selected financial data for each of the registrant’s last five fiscal years and for any additional fiscal years necessary to keep the information from being misleading. As proposed, Item 301 would be eliminated in its entirety.
- Item 302: Currently, the Supplementary Financial Information in Item 302(a) generally requires disclosure of selected quarterly financial data for each full quarter within the two most recent fiscal years. It also requires 1) a reconciliation of any differences between quarterly data and amounts previously reported on Form 10-Q for any quarter, and 2) a description of the effect of any discontinued operations and unusual or infrequently occurring items recognized in each quarter and the aggregate effect and nature of year-end or other adjustments material to the results of that quarter. Item 302(a) is proposed to be eliminated in its entirety, since most of the financial data required by Item 302(a) can be found in prior quarterly reports on Form 10-Q. As for fourth-quarter data, which is not otherwise required to be disclosed in a Form 10-Q, the SEC notes that such data can be calculated from a registrant’s Form 10-K and its third quarter Form 10-Q.
- Item 303: The SEC is proposing to make substantive amendments to Item 303, which include those to clarify and emphasize the objectives of the MD&A by requiring a narrative explanation of the financial statements that enables investors to see a registrant through “the eyes of management.”
Registrants would be required to add descriptions for a number of other matters (when deemed material to understand the business as a whole), including a description of the causes of material changes from year-to-year in financial statement line items and disclosure of events that are reasonably likely to cause a material change in the relationship between costs and revenues.
And, while the SEC is proposing to eliminate the requirement in its entirety to discuss the effect of inflation and changing prices, registrants would still be expected to discuss the impact of inflation or changing prices if they are part of a known trend or uncertainty that is expected to have a material favorable or unfavorable impact on net sales, revenue or income from continuing operations.
The proposal also modifies the requirement to disclose off-balance sheet arrangements by eliminating the definition of such arrangements and instead requiring a discussion of commitments or obligations, including contingent obligations, arising from arrangements with unconsolidated entities. And, lastly, the proposal would eliminate the requirement to present a table of contractual obligations, as much of the required information overlaps with U.S. GAAP.
For more information about the SEC’s disclosure effectiveness initiatives, visit www.sec.gov/spotlight/disclosure-effectiveness.shtml.
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