SEC Adopts Amendments to Modernize, Simplify, and Enhance Financial Disclosure Requirements in Regulation S-K
The Situation: In an effort to further modernize, simplify, and enhance certain financial disclosure requirements in Regulation S-K, the U.S. Securities and Exchange Commission ("SEC") amended selected requirements on November 19, 2020.
The Result: The amendments, among other things, eliminate the Selected Financial Data disclosures, streamline 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: Registrants are required to comply with the amended rules beginning with the first fiscal year ending on or after the date that is 210 days after their publication in the Federal Register (the "mandatory compliance date"). Registrants 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 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 30 days after their publication, so long as they provide disclosure responsive to an amended item in its entirety.
In January 2020, the SEC proposed amendments to modernize, simplify, and enhance certain financial disclosure requirements in Regulation S-K. On November 19, 2020, the SEC adopted the amendments, substantially in the form that was proposed, eliminating Item 301 (Selected Financial Data) and modernizing, simplifying, and streamlining Item 302(a) (Supplementary Financial Information) and Item 303 (MD&A). The SEC noted that the amendments are intended to enhance the focus of financial disclosures on material information for the benefit of investors, while simplifying compliance efforts for registrants.
Among other changes, the amendments contemplate the following modifications to Regulation S-K:
- Item 301 (Selected Financial Data): Registrants are no longer required to provide selected financial data in comparative tabular form for each of the registrant's last five fiscal years.
- Item 303(a)(3) (MD&A—Results of Operations): Registrants are no longer 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.
- Item 303(a)(5) (MD&A—Tabular Disclosure of Contractual Obligations): Registrants are no longer required to provide a contractual obligations table.
- Item 302(a) (Supplementary Financial Information—Selected Quarterly Financial Data): The requirement for registrants to provide disclosure of selected quarterly financial data of specified operating results and disclosure of variances in these results from previously reported amounts is replaced with a principles-based requirement for disclosures of material retrospective changes.
- Item 303(a) (MD&A—Objective): MD&A disclosure will be 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 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.
- Item 303(a)(3) (MD&A—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.
- Item 303(a)(4) (MD&A—Off-Balance Sheet Arrangements): The item is replaced by a new instruction to Item 303. Under the new instruction, registrants are 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.
- Item 303(a) (MD&A—Critical Accounting Estimates): Registrants are explicitly required to provide disclosure of critical accounting estimates in MD&A.
- Item 303(b) (MD&A—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.
Smaller Reporting Companies
- Because the amendments eliminate Items 303(a)(3)(iv) (discussion of the impact of inflation and price changes) and (a)(5) (contractual obligations table), the SEC adopted amendments to Item 303(d), which specifically and exclusively references these two disclosure requirements for smaller reporting companies.
Foreign Private Issuers
- The SEC adopted conforming amendments that apply to foreign private issuers, including to Form 20-F and Form 40-F.
The full release detailing the amendments can be found on the SEC's website, which includes a summary description of the amended rules and principal objective(s). Click here to view a summary comparison table. The amendments will become effective 30 days after they are published in the Federal Register.
Two Key Takeaways
- The amendments are intended to modernize, simplify, and enhance certain financial disclosure requirements in Regulation S-K, as well as eliminate duplicative disclosures, thereby enhancing overall readability.
- The amendments, in most instances, reflect a continued shift toward a more principles-based, registrant-specific approach to disclosure, encouraging registrants to exercise judgment when deciding what disclosures to provide.
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