On November 19, 2020, the Securities and Exchange Commission (SEC) adopted final rules to update the core financial disclosure requirements of Regulation S-K – relating to Selected Financial Data, Supplementary Financial Information and Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) – to efficiently provide investors with material financial information and ease the compliance burden for registrants.¹ As noted in our client alert on the proposed rules earlier this year, these final rules are part of the broader initiative by the SEC to modernize and simplify disclosure requirements.

Highlights of the rules include the following:

Eliminate Item 301 (Selected Financial Data)

• Registrants will no longer be required to provide five years of selected financial data.

Simplify Item 302(a) (Supplementary Financial Information)

• Replace the current requirement in Item 302(a) to provide two years of tabular selected quarterly financial data with a principles-based requirement for material retrospective changes.

• Specifically, disclosure will only be required under Item 302(a) when there are one or more retrospective changes to the statements of comprehensive income for any of the quarters within the two most recent fiscal years or any subsequent interim periods for which financial statements are included or required to be included that are, individually or in the aggregate, material. 

Restructure and Streamline Item 303 (MD&A) 

• Add a new Item 303(a) to clarify the objective of MD&A and streamline the instructions.

  • The objective clarifies that the disclosure is to provide material information relevant to an assessment of the financial condition and results of operations of the registrant, including an evaluation of the amounts and certainty of cash flows from operations and from outside sources. The disclosure is expected to better allow investors to view the registrant from management’s perspective. 

• Amend current Item 303(a)(1) and (2) (amended Item 303(b)(1)) to enhance disclosure requirements for liquidity and capital resources.

  • The amended rules elicit enhanced analysis, by encouraging registrants to provide a more meaningful discussion of the reasons underlying material changes in line items (and discouraging registrants from simply reciting amounts of changes). 

  • Registrants will need to provide material cash requirements, including 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.

• Amend current Item 303(a)(3) (amended Item 303(b)(2)) to simplify disclosure requirements for results of operations.

  • Registrants will need to disclose known events that are reasonably likely to cause a material change in the relationship between costs and revenues, such as known or reasonably likely future increases in costs of labor or materials or price increases or inventory adjustments.

  • Registrants will also need to discuss material changes in net sales or revenue (as opposed to just material increases).

  • Although the specific disclosure requirement with respect to the impact of inflation and price changes (Item 303(a)(3)(iv)) will be eliminated, registrants will still be required to discuss these topics if they are 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.

• Add a new Item 303(b)(3) to clarify and codify SEC guidance on critical accounting estimates.

  • Registrants will also be required to disclose, to the extent that the information is material and reasonably available, how much an estimate and/or assumption has changed over a relevant period, and the sensitivity of the reported amount to the methods, assumptions and estimates underlying its calculation. 

• Replace current Item 303(a)(4) regarding off-balance sheet arrangements with an instruction to discuss such obligations in the broader context of MD&A.

  • Registrants will be required to discuss commitments or obligations, including contingent obligations, arising from arrangements with unconsolidated entities or persons that have, or are reasonably likely to have, a material current or future effect on the registrant’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements, or capital resources even when the arrangement results in no obligation being reported in the registrant’s consolidated balance sheets.

• Eliminate current Item 303(a)(5) regarding tabular disclosure of contractual obligations.

  • Registrants must still disclose material contractual obligations as part of an enhanced principles-based liquidity and capital resources requirement focused on material short- and long-term cash requirements from known contractual and other obligations.

• Amend Instruction 4 to Item 303(a) (amended Item 303(b)) to clarify disclosure of material changes in line items.

  • Where there are material changes in a line item, including where material changes within a line item offset one another, registrants must disclose the underlying reasons for these material changes in quantitative and qualitative terms.

• Amend current Item 303(b) (amended Item 303(c)) to allow for flexibility in the comparison of interim periods.

  • Registrants will be permitted to compare their most recently completed quarter to either the corresponding quarter of the prior year or to the immediately preceding quarter to provide a more tailored and meaningful analysis that is relevant to their specific business cycles.

What’s Next?

The final rules will become effective 30 days after they are published in the Federal Register, and registrants 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 such publication date. Following the effective date, however, registrants may provide disclosure consistent with the final amendments, as long as registrants provide disclosure responsive to an amended item in its entirety. For example, following the effective date, a registrant with a calendar year-end may omit disclosure to comply with Item 301 in its Annual Report on Form 10-K to be filed in early 2021, and may provide disclosure to comply with amended Item 303 in such report, if the registrant provides disclosure pursuant to each provision of amended Item 303 in its entirety in such report. 

¹ See “Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information,” SEC Release No. 33-10890 (Nov. 19, 2020), available here.