SEC Amends MD&A and Financial Disclosure Rules

Client Alert
December 8, 2020

In November 2020, the SEC adopted amendments to Regulation S-K to modernize and simplify certain disclosure requirements related to Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) and other financial disclosures. These amendments reflect substantial changes to the applicable Regulation S-K items and represent a continued attempt by the SEC to update, modernize and streamline Regulation S-K and eliminate duplicative disclosures. The changes are intended to result in specifically tailored disclosures using a principles-based model that will allow investors to better understand a company’s business, as seen and analyzed through the lens of management.

Specifically, amendments will (1) eliminate Item 301 of Regulation S-K, Selected Financial Data, (2) streamline Item 302 of Regulation S-K, Supplementary Financial Information; and (3) amend Item 303 of Regulation S-K, MD&A and Results of Operations.

Item 301: Selected Financial Data – Eliminated

The amendments eliminate Item 301 of Regulation S-K that previously required certain public companies to supply selected financial data reflecting comparative tables for each of the company’s prior five fiscal years. The original intent for Item 301 disclosures was to elicit disclosure of material trends when displaying the five years of financial data; however, such material trends are now required to be discussed under Item 302, as explained further below.

Item 302(a): Supplementary Financial Information – Mostly Eliminated

The amendments to Item 302(a) eliminate a company’s obligation to disclose selected quarterly financial data reflecting specific operating results in a tabular disclosure covering the prior two years of financial information (often currently located within a company’s audited financial statements rather than separately in an annual report or registration statement). However, if there are one or more retrospective material changes to the statements of comprehensive income for any of the quarters within the two most recent fiscal years, the amendments require companies to provide an explanation of the reasons for the material changes and to disclose summarized financial information for the income statement and earnings per share reflecting the material changes. The remaining requirements of Item 302 will not be required for smaller reporting companies (SRCs).

Item 303: MD&A Generally

Item 303, which covers MD&A, requires disclosure of information relevant to assessing a company’s financial condition, changes in financial condition and results of operations. The amendments to Item 303, as further described below, are intended to modernize, simplify, and enhance the MD&A disclosures for investors, while reducing compliance burdens for companies. Many of the changes formalize prior SEC interpretive or policy statements and, therefore, for companies that have been following those informal positions should not result in significant additional disclosures.

Item 303(a): Objective of MD&A - New

The amendments create a new Item 303(a) to remind companies as they prepare their MD&A disclosure that they should provide both a historical and prospective analysis of the company’s financial condition and results of operations, with particular emphasis on the company’s prospects for the future as reviewed and analyzed from management’s perspective. This overview largely replaces existing instructions and formalizes SEC policies regarding the purposes of MD&A but will not have any specific or new "line item" requirements.

The new Item 303(a) will encourage companies to provide a detailed discussion of the underlying reasons that may be contributing to material changes in line items and avoid simply reciting amounts of changes.

The amendments to Item 303(a) disclosures include a discussion of:

These objectives will provide the overarching MD&A general requirements and are intended to apply to all the disclosures in Item 303. The objectives are intended to remind companies that MD&A should provide a principles-based analysis that encompasses short term results, future prospects, materiality and trend disclosures.

Contractual Obligations Table - Current Item 303(a)(5) and Amended Item 303(b)(1)

Pursuant to the amendments, companies will no longer be required to provide a table describing contractual obligations inclusive of liquidity and capital resources as they will be described elsewhere in Item 303. Under this approach, companies will be relieved of the burden associated with the current prescriptive table and be afforded more flexibility to integrate a discussion of contractual obligations in the broader context of its liquidity and capital resources disclosures. The aim is to remove certain overlap of information that is required in the financial statements, and to promote the principles-based nature of MD&A.

Liquidity and Capital Resources – Material Cash Requirements - New Item 303(b)(1) and Amended Item 303(b)(1)(ii)

Although the contractual obligations table has been eliminated, companies will still be required to disclose material cash requirements from known contractual and other obligations. The amendments specify that such disclosures must include the type of obligation and the relevant time period for the related cash requirements, instead of focusing only on disclosure of material commitments for capital expenditures, as the current rule provides.

The amendments are "intended to clarify the requirements while continuing to emphasize a principles-based approach focused on material short and long-term liquidity and capital resources needs, while also specifying that material cash requirements from known contractual and other obligations should be considered as part of these disclosures."

The amendments related to Items 303(b)(1) and 303(b)(1)(ii):

Though the amendments allow companies flexibility in discussing material cash requirements, to the extent that GAAP requires companies to assess currently prescribed categories of contractual obligations and those obligations are material, such contractual obligations must be discussed in MD&A.

Results of Operations – Known Trends or Uncertainties – Amended Item 303(b)(2)(ii)

The SEC amended Item 303(a)(3)(ii), now Item 303(b)(2)(ii), to require disclosure when a company knows of (1) any trends or uncertainties that have had or are reasonably likely to have a material impact on revenues or income and (2) events that are reasonably likely to cause (as opposed to will cause) a material change in the relationship between costs and revenues. The SEC considers an analysis of whether a trend, uncertainty or event is "reasonably likely" to require an objective assessment of the likelihood that an event will occur balanced with a materiality analysis regarding the need for disclosure. This amendment conforms the general language regarding Item 303 disclosure requirements oriented towards a description of known trends based on management assessments and aligns the disclosure requirement with the SEC’s guidance on forward-looking disclosure.

Results of Operations – Net Sales and Revenues - Amended Item 303(b)(2)(iii)

The amendments to Item 303(a)(3)(iii), now Item 303(b)(2)(iii), require a narrative discussion of the certain factors that led to material changes from period to period in net sales or revenues in the statement of comprehensive income. The discussion is intended to illustrate the underlying reasons for material changes in quantitative and qualitative terms. The amendments clarify the current requirement, which focuses on "material increases in net sales or revenue" in the "financial statements" to instead require disclosure of "material changes from period to period in one or more line items" in the "statement of comprehensive income."

Results of Operations – Inflation and Price Changes - Current Item303(a)(3)(iv), and Current Instructions 8 and 9 to Item 303(a)

The amendments eliminate Item 303(a)(3)(iv) and Instructions 8 and 9 which require the company to specifically discuss the impact of inflation and related material change prices on their net sales, revenue and income. However, consistent with the amended Item 303 approach, companies will be required to discuss the impact of inflation or changing prices if it is 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.

Off-Balance Sheet Arrangements - New Instruction 8 to Item 303(b)

The amendments to Item 303(b) eliminate the previous requirement to disclose off-balance sheet arrangements under a separate caption. Instead, the amended Item 303(b) includes a principles-based instruction prompting companies to discuss off-balance sheet arrangements in the broader context of MD&A when those obligations have had, or are reasonably likely to have, a material effect on a company’s financial condition, revenues or expenses, results of operations, liquidity, cash requirements or capital resources.

Critical Accounting Estimates - New Item 303(b)(3)

The amendments add a new annual disclosure requirement to Item 303 (updated quarterly for any material changes), Item 303(b)(3) Critical Accounting Estimates, to explicitly require disclosure of critical accounting estimates, which are defined as estimates made in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the company’s financial condition or results of operations. Previously, this disclosure was "required" under SEC interpretive guidance but not formally contained within Regulation S-K.

For each critical accounting estimate, the amendments require companies to disclose why the estimate is subject to uncertainty and, to the extent information is material and reasonably available, how much each estimate and/or assumption has changed during the relevant period, and the sensitivity of the reported amounts to the methods, assumptions and estimates underlying the estimate’s calculation.

New Item 303(b)(3) also requires quantitative as well as qualitative information necessary to understand the estimation uncertainty and the impact the estimate has had or is reasonably likely to have on the company’s financial condition or results of operations, to the extent the information is reasonably available and material.

In the adopting release, the SEC notes that companies often repeat the information in the financial statement footnotes about significant accounting policies and that the amendments are intended to eliminate duplicative disclosures and, instead, promote enhanced analysis of measurement uncertainties to supplement the disclosure in the financial statements.

Interim Period Discussion - Amended Item 303(c)

The amendment will change current Item 303(b), now Item 303(c), to allow for flexibility in comparisons of interim periods. Specifically, under Item 303(c), companies are still required to discuss any material changes in their statements of comprehensive income for (1) the most recent year-to-date period and (2) the corresponding year-to-date period of the preceding fiscal year. However, with respect to quarterly periods, companies will now have the option to compare their results with the most recent fiscal quarter rather than the corresponding quarter of the preceding fiscal year. If a company switches the basis of comparison, the company will be required to discuss the reasons for the change and provide both comparisons when the change is first made.

Safe Harbor for Forward-Looking Information - Current Item 303(c) – Eliminated

Current Item 303(c) states that the safe harbors provided in Section 27A of the Securities Act and 21E of the Securities Exchange Act apply to all forward-looking information provided in response to Item 303(a)(4) (off-balance sheet arrangements) and Item 303(a)(5) (contractual obligations), provided such disclosure is made by certain enumerated persons.

The amendments will eliminate this item to conform to the elimination of Items 303(a)(4) and (a)(5). As discussed above, the amendments replace the current prescriptive off-balance sheet disclosure required by these items with more principles-based requirements located in other paragraphs of Item 303.

Smaller Reporting Companies - Current Item 303(d) – Eliminated

To conform to the elimination of the requirements of Item 303(a)(3)(iv) and (a)(5), regarding inclusion of Contractual Obligations in tabular format, the amendments will eliminate Item 303(d) for SRC. The elimination of Item 303(d) disclosures will subject SRCs to the newly adopted requirements in Item 303(b), namely, a principles-based liquidity and capital resources disclosure requirement that includes a requirement to discuss material contractual obligations in the context of that disclosure.

Application to Foreign Private Issuers

The amendments adopt parallel amendments for financial disclosures provided by foreign private issuers (FPIs). The corresponding amendments apply to FPIs using Form 20-F or Form 40-F, as well as to current Instruction 11 to Item 303, which specifically applies to FPIs that choose to file on domestic forms. Instruction 11 has also been amended to incorporate the requirement for FPIs to discuss hyperinflation in a hyperinflationary economy.

The amendments to the disclosure requirements of Form 20-F include eliminating the requirement to provide five years of selected financial data and the related instructions and amending Item 5, Operating and Financial Review and Prospects, to ensure that MD&A requirements for FPIs continue to mirror the substantive MD&A requirements in Item 303 of Regulation S-K.

The amendments to Item 5 include also include eliminating the requirement to provide a contractual obligations table and shifting to principles-based liquidity and capital resources disclosure and providing additional guidance to issuers regarding the purpose of MD&A and related disclosure considerations. Certain corresponding amendments will also apply to eligible Canadian FPIs providing disclosure required by Form 40-F that use Canadian disclosure documents to satisfy the SEC’s registration and disclosure requirements.


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The amendments will become effective in early 2021. However, companies are not required to comply with the amended rules until the first fiscal year ending on or after the date that is 210 days after publication in the Federal Register. As such, for calendar year fiscal year end companies, these rules will not be mandatory for their 2020 annual reports on 10-K or 20-F.

Companies will be required to apply the amended rules in a registration statement and prospectus that on its initial filing date is required to contain financial statements for a period on or after that initial compliance date.

Although companies will not be required to apply the amended rules until their mandatory compliance date, they may comply with the amendments any time after the effective date, so long as they provide disclosure responsive to an amended item in its entirety. In other words, companies may now choose to (1) eliminate selected data required by Item 301 or (2) eliminate the quarterly data required by Item 302, as well as (3) make the various changes under Item 303 (but only if all such Item 303 changes are made) before the rules become mandatory.

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If you would like further information regarding the above referenced amendments or their impact on your company’s disclosures, please contact the lawyer at Sullivan & Worcester LLP with whom you regularly consult, or any of the lawyers listed above.

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