SEC Proposes Amendments to Modernize and Enhance Financial Disclosures
The Situation: In an effort to modernize, simplify, and enhance certain financial disclosure requirements in Regulation S-K, the U.S. Securities and Exchange Commission ("SEC") proposed certain amendments on January 30, 2020.
The Result: The proposed amendments, among other things, eliminate the Selected Financial Data disclosures, eliminate the Supplementary Financial Information disclosures, and amend the disclosures required by Management's Discussion & Analysis of Financial Condition and Results of Operations ("MD&A").
Looking Ahead: All Exchange Act filers will need to consider the proposed amendments, if adopted, when preparing future SEC reports. The proposed amendments seek to eliminate duplicative disclosures and modernize and enhance MD&A disclosures for the benefit of investors and simplify compliance efforts for registrants.
The Proposed Amendments
Among other changes, the proposed amendments contemplate the following modifications to Regulation S-K:
- Item 301 (Selected Financial Data): Registrants would no longer be required to provide selected financial data in comparative tabular form for each of the registrant's last five fiscal years;
- Item 302(a) (Supplementary Financial Information—Selected Quarterly Financial Data): Registrants would no longer be required to provide disclosure of selected quarterly financial data of specified operating results and disclosure of variances in these results from previously reported amounts (i.e., no longer required to provide two years of selected quarterly financial data);
- Item 302(b) (Supplementary Financial Information—Information About Oil and Gas Producing Activities): Subject to the Financial Accounting Standards Board finalizing related amendments to U.S. Generally Accepted Accounting Principles, registrants would no longer be required to disclose information about certain oil and gas activities for each period presented because this requirement would be duplicative of such amendments, if finalized;
- Item 303(a)(5) (MD&A—Results of Operations): Registrants would no longer be required to discuss the impact of inflation and price changes on their net sales, revenue, and income from continuing operations unless they are part of a known trend or uncertainty that has had, or the registrant reasonably believes will have, a material favorable or unfavorable impact on such items ; and
- Item 303(a)(5) (MD&A—Tabular Disclosure of Contractual Obligations): Registrants would no longer be required to provide a contractual obligations table.
- Item 303(a) (MD&A—Objective): MD&A disclosure would be generally guided by a new Item 303(a) that more succinctly states the purposes of MD&A, streamlines the MD&A instructions, and codifies certain SEC guidance on MD&A disclosures (for example, the MD&A narrative should permit investors to see a registrant "through the eyes of management" and provide a narrative discussion of the "underlying reasons" for material changes from period-to-period);
- Item 303(a)(2) (MD&A—Capital Resources): Registrants would be required to identify and disclose known material cash requirements, including commitments for capital expenditures, as of the latest fiscal period, the anticipated source of funds to satisfy such cash requirements, and the general purpose of such requirements;
- Item 303(a)(3) (MD&A—Results of Operations): Registrants would be required to describe known trends or uncertainties that are reasonably likely to cause (as opposed to will cause) a material change in the relationship between costs and revenues and clarify that a discussion of the reasons underlying material changes in net sales or revenues is required;
- Item 303(a)(4) (MD&A—Off-Balance Sheet Arrangements): Registrants would be required to comply with a principles-based instruction (previously, a prescriptive instruction) that does not define "off-balance sheet arrangements" when discussing applicable commitments or obligations and calls for discussion of such obligations in the broader context of MD&A;
- Item 303(a) (MD&A—Critical Accounting Estimates): Registrants would be explicitly required to provide disclosure of critical accounting estimates in MD&A; and
- Item 303(b) (MD&A—Interim Periods): In addition to generally simplified disclosure requirements, registrants would be permitted to compare their most recently completed quarter to either the corresponding quarter of the prior year (as is currently required under Item 303(c)) or to the immediately preceding quarter.
Smaller Reporting Companies
- Because the proposal seeks to eliminate Item 303(a)(3)(iv) and (a)(5), the SEC proposes to eliminate Item 303(d), which specifically and exclusively references these two disclosure requirements for smaller reporting companies.
Foreign Private Issuers
- The SEC is largely proposing conforming amendments that would apply to foreign private issuers, including Form 20-F and Form 40-F.
The full release detailing the proposed amendments can be found on the SEC's website. Comments on the proposed amendments are due 60 days after publication in the Federal Register.
Two Key Takeaways
- The proposed amendments are intended to modernize, simplify, and enhance certain financial disclosure requirements in Regulation S-K, as well as eliminate duplicative disclosures.
- The proposed amendments, in most instances, reflect a continued shift toward a more principles-based disclosure framework, encouraging registrants to exercise judgment when deciding what disclosures to provide.
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