On November 19, the Securities and Exchange Commission announced that it adopted amendments (the Amendments) to certain financial disclosure requirements in Regulation S-K, including with respect to Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A). The Amendments are part of an effort to modernize and simplify Regulation S-K requirements and follow recent amendments to other Regulation S-K items — including those related to business, legal proceedings and risk factor disclosure previously discussed in the August 31, 2020 edition of the Corporate & Financial Weekly Digest. According to the SEC, the Amendments are designed to reduce compliance burdens while also improving the quality and accessibility of disclosure to investors, particularly by providing more insight into the information management uses to monitor and manage the business.

The Amendments were adopted generally as proposed on January 30 and previously discussed in the February 7, 2020 edition of the Corporate & Financial Weekly Digest. The SEC’s vote on the Amendments was split 3-2, with two commissioners dissenting on grounds that the Amendments (1) eliminate certain disclosures and tabular presentation of contractual information that they believe provide important insight into supply chain and risk management, and (2) fail to address climate risk and other factors impacting registrants’ long-term sustainability, such as human capital management.

As highlighted in the fact sheet included with the press release, the Amendments, among other things:

1. Eliminate Item 301 Selected Financial Data

The requirement that registrants provide five years of selected financial data has been eliminated, in an effort to modernize and simplify disclosure requirements in light of technological developments since the item’s adoption in 1970 that now allow for easy investor access to the historic information otherwise required by this item and contained in the five year table on the SEC’s Electronic Data Gathering, Analysis and Retrieval system (EDGAR). The SEC noted that, notwithstanding the elimination of the requirement to provide five years of selected financial data, registrants are encouraged to consider whether trend information for periods earlier than those presented in the financial statements are necessary to satisfy MD&A’s objective to provide relevant material information for an assessment of the registrant’s financial condition and results or operations and whether a tabular presentation of relevant financial or other information, as part of an introductory section or overview, including to demonstrate material trends, may be helpful to a reader’s understanding of MD&A.

2. Revise Item 302 Supplementary Financial Information

Registrants will no longer be required to provide two years of tabular selected quarterly financial data, in order to reduce repetition and focus disclosure on material information. This item has instead been replaced with a “principles-based” requirement for disclosure only when there are material retrospective changes that pertain to income statements for any quarters within the two most recent fiscal years and any subsequent interim period for which financial statements are included or required to be included.

3. Amend Item 303 Management’s Discussion and Analysis of Financial Condition and Results of Operations

The SEC adopted various amendments to the MD&A requirements, including:

• Adding a new Item 303(a) to succinctly state the objectives of MD&A and streamline the various instructions to MD&A, with a goal of providing clarity and focus to registrants as they consider what information to discuss and analyze. New Item 303(a) sets forth objectives stating the overarching requirements of MD&A that apply throughout the amended Item 303. It calls for MD&A to include disclosure of (1) material information relevant to an assessment of the financial condition and results of operations of the registrant, (2) material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be indicative of future operating results or future financial condition and (3) the material financial and statistical data that the registrant believes will enhance a reader’s understanding of its financial condition, cash flows and other changes in financial condition and results of operations;

• Amending current Item 303(a)(2) (Capital Resources) to require registrants to provide expanded disclosure of all material cash requirements, including, but no longer 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 amended item is designed to capture disclosure relating to expenditures, beyond conventional capital expenditures, that are increasingly important to companies, such as those for which human capital or intellectual property are key resources;

• Amending current Item 303(a)(3)(ii) (Results of Operations) to clarify the item requirement relating to costs and revenues, now requiring disclosure of known events that are “reasonably likely” to cause (rather than those that “will cause”) a material change in the relationship between costs and revenue, such as known or reasonably likely future increases in costs of labor or materials or price increases or inventory adjustments. This amendment conforms the language to other Item 303 disclosure requirements for known trends and aligns the item with the SEC’s existing guidance on forward-looking disclosure;

• Amending current Item 303(a)(3)(iii) (Results of Operations) to require a discussion in MD&A of material changes in net sales or revenue, rather than only of material increases in net sales or revenue;

• Eliminating Item 303(a)(3)(iv) (Results of Operations), relating to inflation and price changes. The SEC noted registrants are already expected to disclose in MD&A generally the impact of inflation and price changes, if they are part of a known trend or uncertainty that has had or is reasonably expected to have a material impact on net sales, revenue or income from continuing operations;

• Replacing the requirement that a registrant discuss off-balance sheet arrangements with a new requirement for registrants to integrate disclosure of off-balance sheet arrangements within the context of their MD&A (Item 303(a)(4) (Off-Balance Sheet Arrangements)). The new rule requires registrants to discuss commitments or obligations, including contingent obligations, that arise from arrangements with unconsolidated entities or persons that have a material current or future effect on a registrant’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements or capital resources;

• Eliminating the requirement to disclose, in tabular format, all known contractual obligations (Item 303(a)(5) (Contractual Obligations)). The SEC stated that eliminating this requirement would not result in a loss of material information to investors given the overlap with information required in the financial statements and in light of the concurrent expansion of the capital resources requirement of amended Item 303(a)(2) discussed above;

• Permitting registrants, when discussing interim results, to compare the most recently completed quarter to either the corresponding quarter of the prior year, as currently mandated, or to the immediately preceding quarter (Item 303(b) (Interim Periods)). If in a subsequent Form 10-Q, a registrant changes the comparison from the comparison presented in the immediately prior Form 10-Q, the registrant would be required to explain the reason for the change and present both comparisons in the filing where the change is announced; and

• Adding a new Item 303(b)(3) (Critical Accounting Estimates) to clarify and codify the SEC’s guidance requiring the disclosure of critical accounting estimates. Registrants must consider whether they have made accounting estimates or assumptions where the nature of such estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, and whether the impact of the estimates and assumptions on financial condition or operating performance is material. In its discussion in the final rule, the SEC notes that any such disclosure should supplement, not duplicate, the description of accounting policies that are already disclosed in the notes to the financial statements and provide greater insight into the quality and variability of information regarding financial condition and operating performance.

Amendments Relating to Foreign Private Issuers

The SEC also adopted parallel amendments to the financial disclosure requirements applicable to foreign private issuers (FPIs). Corresponding changes were made to the applicable sections of Forms 20-F and 40-F, such that MD&A requirements for FPIs continue to mirror the substantive MD&A requirements in Item 303 of Regulation S-K.

The Amendments will become effective 30 days after they are published in the Federal Register. Registrants will be required to comply with the Amendments beginning with their first fiscal year that ends on or after the date that is 210 days after publication in the Federal Register. For domestic registrants with a December 31 fiscal year end, this means that mandatory compliance is expected to commence with their Annual Report on Form 10-K for the year ended December 31, 2021 to be filed in 2022. Registrants may early adopt compliance with any or all of the items covered by the Amendments any time after the effective date, so long as they provide disclosure responsive to such amended item(s) in their entirety and provide the same disclosure in any applicable filings going forward.  For example, if a registrant wishes to adopt early compliance with Item 303(a)(3)(iv), related to inflation and price changes, the registrant must also adopt early compliance with respect to all of the requirements of amended Item 303.

The full text of the final rule is available here.

The full text of the press release is available here.