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SEC Amends MD&A and Other Financial Disclosure Rules
Friday, February 5, 2021

In November 2020, the Securities and Exchange Commission (the “SEC”) adopted amendments to management’s discussion and analysis of financial condition and results of operations (“MD&A”) and other financial disclosure requirements. The stated purpose of these changes is to benefit investors with an increased focus on material financial information and simultaneously streamline the requirements imposed upon reporting companies. The SEC notes that these changes are part of an effort to modernize and simplify the requirements of Regulation S-K.

These amendments will become effective on February 10, 2021. Registrants are required to comply with the new rules beginning with their first fiscal year ending on or after August 9, 2021 (referred to as the “mandatory compliance date”), which for a December 31 year-end company will be its annual report for the year ended December 31, 2021. Registrants will be required, however, 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 the mandatory compliance date. Although registrants will not be required to apply the amended rules until their mandatory compliance date, they may comply with the final amendments any time after February 10, 2021, so long as they provide disclosure responsive to an amended item in its entirety.

Below is a summary of the key changes that will be implemented by these amendments, and a chart highlighting the amendments is included in the attached Appendix A.

Selected Financial Data

The amendments eliminate selected financial information disclosure requirements under Item 301 of Regulation S-K. Item 301 currently requires registrants, other than smaller reporting companies, to present selected financial data from up to the last five fiscal years in a comparative table and, if applicable, data from additional fiscal years in order to prevent five-year data from being misleading.

The SEC decided to eliminate the disclosure requirements of Item 301 because this information is readily available in previous filings on the SEC’s website through its Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”). In addition, Item 303 of Regulation S-K, discussed below, continues to require trend data, so comparative information will still be available to investors.

Supplementary Financial Information

The amendments streamline the requirements of Item 302(a) of Regulation S-K in an effort to avoid duplicative disclosure. Currently, Item 302(a) requires registrants, other than smaller reporting companies and foreign private issuers, to disclose two years of selected quarterly financial data, including, but not limited to, net sales, gross profit, and income or loss from continuing operations, as well as an explanation of the effects of any unusual events or discontinued operations during the same period.

The amendments simplify the requirements of Item 302(a) by “requir[ing] disclosure only when there are one or more retrospective changes that pertain to the statements of comprehensive income for any of the quarters within the two most recent fiscal years and any subsequent interim period for which financial statements are included [in the filing] or required by Article 3 of Regulation S-X and that, individually or in the aggregate, are material.” The registrant will need to explain the material changes and provide a summary of the financial data for each affected quarter as well as the fourth quarter of the affected fiscal year. Depending on the situation, disclosure may only be required for a single quarter or the effects may impact multiple quarterly periods within the required reporting period. This amendment to Item 302(a) eliminates potential duplicate disclosure that would be required even when there were no retrospective changes or these changes were not material and were also disclosed in a Form 10-Q or elsewhere in a Form 10-K.

In a change from the current Item, the new Item 302(a) will apply to newly reporting registrants beginning with their first filing on Form 10-K after a registrant’s initial registration of securities under sections 12(b) or 12(g) of the Exchange Act.


Item 303 of Regulation S-K sets forth the information registrants need to disclose in their MD&A. Item 303 currently requires disclosure of financial information for full fiscal years related to liquidity, capital resources, results of operations, off-balance sheet arrangements, and tabular disclosure of contractual obligations as well as any material changes to previous disclosures. The amendments to Item 303 summarized below are intended to modernize, simplify, and enhance the MD&A disclosures for investors while reducing compliance burdens for registrants.

New Item 303(a): Objectives of MD&A

The new Item 303(a) sets forth the objectives of MD&A in order to clarify what type of information is required to be disclosed under the amended item, with an emphasis on reporting short-term results alongside long-term projections. The amendment clarifies that the purpose of MD&A is to allow investors to view the registrant from the same perspective as its management. The new item calls for disclosure of:

  • 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.

  • 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 of future financial condition. This includes descriptions and amounts of matters that have had a material impact on reported operations as well as matters that are reasonably likely based on management’s assessment to have a material impact on future operations.

  • The material financial and statistical data that the registrant believes will enhance a reader’s understanding of the registrant’s financial condition, cash flows and other changes in financial condition, and results of operations.

New Item 303(b): Full Fiscal Year Disclosure/Segment and Subdivision Information

With the addition of new Item 303(a), current Item 303(a) will be re-captioned under new Item 303(b). Further, new Item 303(b) “clarif[ies] that MD&A requires a narrative discussion of the ‘reasons underlying’ material changes rather than only the ‘causes’ for material changes.” The goal of this amendment is to remind registrants that the discussion within MD&A should complement the numbers included in the financial data reported, instead of simply restating such information. The amendments to Item 303(b) also specifically require disclosure of “reportable” segment and other subdivision information when necessary to an understanding of the registrant’s business. The amendments provide that a subdivision could include geographic areas and product lines.

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

Currently, Item 303(a)(2) requires registrants to describe material commitments for capital expenditures as of the end of the latest fiscal period and state the general purpose of these commitments. Registrants must also describe known material trends in their capital resources.

New Item 303(b)(1) requires a registrant to describe its material cash “requirements,” including commitments for capital expenditures, instead of only its material commitments. Although the SEC does not expect this update to cause a substantial shift in reporting practices for registrants, it stated the purpose of this change is to more closely align the rule with the intended purpose of MD&A. The amendment also modernizes current Item 303(a)(2) by not limiting material cash commitments to capital expenditures. The SEC recognized that, while capital expenditures remain important in many industries, certain expenditures and cash commitments that are not necessarily capital investments in property, plant, and equipment may be increasingly important to companies, especially those for which human capital or intellectual property are key resources.

In addition, in connection with the elimination of the contractual obligation table discussed below, new Item 303(b)(1) now also:

  • provides for the overarching requirements for liquidity and capital resources disclosures;

  • incorporates the definition of liquidity as currently included in Instruction 5 to Item 303(a);

  • explains that short-term liquidity and capital resources covers cash needs up to the next 12 months, in comparison to long-term resources, which extends beyond 12 months;

  • requires disclosure to include both a long-term and short-term basis;

  • includes an analysis of material cash requirements from known contractual and other obligations, noting the specific type of obligation and relevant time periods;

  • includes a new instruction that explains the discussion of material cash requirements from known contractual obligations could reflect certain liabilities reflected on the registrant’s balance sheet, such as a lease; and

  • includes an additional new instruction explaining that disclosure required under Item 303(b) should be organized in a manner that is easy to understand and eliminates any disclosure provided elsewhere in the filing.

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

Under current Item 303(a)(3)(ii), a registrant must describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations. If the registrant knows of events that will cause a material change in the relationship between costs and revenues, the change in the relationship shall be disclosed.

The amended Item 303(b)(2)(ii) updates the requirement above to include anything that the registrant believes is reasonably likely to cause a material impact, instead of limiting the reporting requirement to only what it believes will in fact cause these changes. This amendment will allow Item 303(b)(2)(ii) to better align with the disclosure requirements of the rest of Item 303. In response to comments that it may be unclear what is considered “reasonably likely,” the SEC provided the clarification below:

“The ‘reasonably likely’ threshold does not require disclosure of any event that is known but for which fruition may be remote, nor does it set a bright-line percentage threshold by which disclosure is triggered. Rather, this threshold requires a thoughtful analysis that applies an objective assessment of the likelihood that an event will occur balanced with a materiality analysis regarding the need for disclosure regarding such event…If such known trend, demand, commitment, event, or uncertainty would reasonably by likely to have a material effect on the registrant’s future results or financial condition, disclosure is required. Known trends, demands, commitments, events or uncertainties that are not remote or where management cannot make an assessment as to the likelihood that they will come to fruition, and that would be reasonably likely to have a material effect on the registrant’s future results or financial condition, were they to come to fruition, should be disclosed if a reasonable investor would consider omission of the information as significantly altering the mix of information made available in the registrant’s disclosures.”

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

Amended Item 303(b)(2)(iii) modifies the current requirement under Item 303(a)(3)(iii) to provide a narrative discussion if any material increase in net sales or revenues is the result of an increase in price, volume, or amount of services or goods, or the introduction of new services or goods. Instead of limiting this disclosure requirement to increases, the amendment changes the requirement to “material changes” in order to also encompass any relevant decreases.

Current Item 303(a)(3)(iv): Results of Operations – Inflation and Price Changes

The amendments eliminate the current Item 303(a)(3)(iv) and related instructions, which require registrants to discuss the impact of inflation and changing prices for the relevant reporting period partially because Item 303 already requires registrants to discuss the impact of inflation or price change as it relates to “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.”

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

The SEC is replacing current Item 303(a)(4), which calls for specific disclosure requirements related to off-balance sheet arrangements, with a principles-based new Instruction 8 to Item 303(b). The new instruction requires registrants 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 a registrant’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements, or capital resources and also identifies types of off-balance sheet arrangements. The addition of the instruction is intended to remove the overlap of disclosure required by both Item 303(a)(4) and U.S. GAAP, often resolved through cross-references to notes in the registrant’s financial statements. The instruction should be considered when a registrant is preparing its disclosure of liquidity and capital resources.

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

The amendments eliminate current Item 303(a)(5), which requires registrants to disclose contractual obligations in a tabular format. While the table will no longer be a requirement, the SEC maintains that this amendment will not result in the loss of any financial information, as it is paired with the amendments to Item 303(b)(1) regarding capital resources and material cash requirements discussed above.

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

To align with and codify prior SEC guidance on critical accounting estimates and judgments, new Item 303(b)(3) will specifically require registrants to disclose in their MD&A critical accounting estimates. Critical accounting estimates are defined as “those 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 registrant’s financial condition or results of operations.” This new item will require that registrants disclose, to the extent material, why the estimate is subject to uncertainty, how much each estimate has changed during the reporting period, and the sensitivity of the reported amounts to the methods, assumptions, and estimates underlying the estimate’s calculation. Such disclosure should include a quantitative analysis in addition to a qualitative one when the quantitative data is reasonably available and would prove material to investors. New Item 303(b)(3) specifies that the “material and reasonably available” standard applies to the entire discussion related to a critical accounting estimate. Registrants will also need to disclose the extent to which an estimate or assumption has changed over a period of time so that investors can gain more insight into the level of uncertainty associated with these estimates. To allow registrants flexibility in determining the appropriate period of disclosure, new Item 303(b)(3) requires the discussion of a “relevant period,” as opposed to a “reporting period.”

Amended Item 303(c): Interim Disclosure Requirements

Currently, Item 303(b) requires, among other things, registrants to provide MD&A disclosure for interim periods that enables market participants to assess material changes in financial condition and results of operations between certain specified periods, including a discussion of any material change in financial condition from the end of the preceding fiscal year to the date of the most recent interim balance sheet and in their results of operations for the most recent fiscal year-to-date period presented in their income statement, along with a similar discussion of the corresponding year-to-date period of the preceding fiscal year. The amendments will renumber current Item 303(b) as Item 303(c) and update the disclosure obligations. The amended Item 303(c) provides registrants flexibility in determining interim reporting periods for MD&A disclosure, allowing a comparison between their most recently completed quarter to the corresponding quarter from the previous year, as noted in the current item, or instead, to the immediately preceding quarter. If a registrant chooses the latter, it will need to provide the relevant summary financial information for that quarter or otherwise reference an EDGAR filing with the same information. Lastly, if a registrant changes its interim reporting periods, it will need to explain the rationale behind the change and include both comparisons in the filing. The purpose of this update is to allow interim disclosure requirements to be presented in a more useful way to investors based on the nature of the registrant’s business.

Smaller Reporting Companies and Foreign Private Issuers

The SEC also adopted amendments to the disclosure obligations for smaller reporting companies and foreign private issuers to conform to the new rules where appropriate.

These amendments allow registrants to focus their disclosures on material, principals-based items specific to the particular registrant opposed to a more line item, check-the-box approach. Many of the disclosure items will be nuanced for each registrant and for each reporting period and you can contact any of the Mintz securities attorneys to discuss the impact of these amendments on your disclosures.

Appendix A

Current Item or Issue

Summary Description of Amended Rules

Principal Objective(s)

Item 301, Selected financial data

Registrants will no longer be required to provide 5 years of selected financial data.

Modernize disclosure requirement in light of technological developments and simplify disclosure requirements.

Item 302(a), Supplementary financial information

Registrants will no longer be required to provide 2 years of tabular selected quarterly financial data. The item will be replaced with a principles-based requirement for material retrospective changes.

Reduce repetition and focus disclosure on material information. Modernize disclosure requirement in light of technological developments.

Item 303(a), MD&A

Clarify the objective of MD&A and streamline the fourteen instructions.

Simplify and enhance the purpose of MD&A.

Item 303(a)(2), Capital resources

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.

Modernize and enhance disclosure requirements to account for capital expenditures that are not necessarily capital investments.

Item 303(a)(3)(ii), 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.

Clarify item requirement by using a disclosure threshold of “reasonably likely,” which is consistent with the Commission’s interpretative guidance on forward-looking statements.

Item 303(a)(3)(iii), Results of operations

Clarify that a discussion of material changes in net sales or revenue is required (rather than only material increases).

Clarify MD&A disclosure requirements by codifying existing Commission guidance.

Item 303(a)(3)(iv), Results of operations

Instructions 8 and 9 (Inflation and price changes)

The item and instructions will be eliminated. Registrants will still be required to discuss these matters if they are part of a known trend or uncertainty that has had, or the registrant reasonably expects to have, a material favorable or unfavorable impact on net sales, or revenue, or income from continuing operations.

Encourage registrants to focus on material information that is tailored to a registrant’s businesses, facts, and circumstances.

Item 303(a)(4), Off-balance sheet arrangements

The item will be replaced by a new instruction to Item 303. Under the new instruction, 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 such 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.

Prompt registrants to consider and integrate disclosure of off-balance sheet arrangements within the context of their MD&A.

Item 303(a)(5), Contractual obligations

Registrants will no longer be required to provide a contractual obligations table. A discussion of material contractual obligations will remain required through an enhanced principles-based liquidity and capital resources requirement focused on material short- and long-term cash requirements from known contractual and other obligations.

Promote the principles-based nature of MD&A and simplify disclosures.

Instruction 4 to Item 303(a) (Material changes in line items)

Incorporate a portion of the instruction into amended Item 303(b). Clarify in amended Item 303(b) that where there are material changes in a line item, including where material changes within a line item offset one another, disclosure of the underlying reasons for these material changes in quantitative and qualitative terms is required.

Enhance analysis in MD&A. Clarify MD&A disclosure requirements by codifying existing Commission guidance on the importance of analysis in MD&A.

Item 303(b), 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. Registrants subject to Rule 3-03(b) of Regulation S-X will be afforded the same flexibility.

Allow for flexibility in comparison of interim periods to help registrants provide a more tailored and meaningful analysis relevant to their business cycles.

Critical Accounting Estimates

Registrants will be explicitly required to disclose critical accounting estimates.

Facilitate compliance and improve resulting disclosure. Eliminate disclosure that duplicates the financial statement discussion of significant policies. Promote meaningful analysis of measurement uncertainties.

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