Managements discussion and analysis selected financial data and supplementary financial information

Elimination of Item 301 – Selected Financial Data

Under current Item 301, registrants must disclose selected financial data in comparative columnar form for each of the registrant’s last five fiscal years and any additional fiscal years necessary to ensure the information is not misleading. Smaller reporting companies have been exempt from Item 301 disclosures, and emerging growth companies have enjoyed relief from certain aspects of Item 301. The Amendments delete Item 301, in part because the information it requires is duplicative of information required in Item 303 and information that is now easily available on EDGAR. Nonetheless, the SEC has encouraged registrants to consider whether a tabular presentation of financial information may be helpful to demonstrate material trends under Item 303. The deletion of Item 301 will be especially welcome on registered securities issuances, where it is customary for underwriters to seek comfort letter coverage of all selected financial data, meaning that issuers currently face added cost and time with their auditors in covering older years of financial data.

Streamlining of Item 302 – Supplementary Financial Information

Under current Item 302(a)(1), registrants must disclose selected quarterly financial data of specified operating results for each full quarter within the two most recent fiscal years and any subsequent period for which financial statements are included or required by Article 3 of Regulation S-X. Current Item 302(a)(2) requires disclosure of any variances in these results from those previously reported on a Form 10-Q. Current Item 302(a) does not apply to smaller reporting companies, foreign private issuers, first-time registrants conducting an initial public offering or registrants that are only required to file reports pursuant to Section 15(d) of the Securities Exchange Act of 1934, although many companies conducting initial public offerings will voluntarily include selected quarterly financial data to demonstrate trends in their operating results.

As amended, Item 302(a) will only require disclosure when there are one or more retrospective changes to a registrant’s statements of comprehensive income in any quarter within the past two fiscal years or any subsequent interim period that are, individually or in the aggregate, material. In those instances, registrants will be required to explain the reasons for such material changes and provide summarized financial information reflecting such changes. Examples of a retrospective change that may trigger disclosure under amended Item 302(a) include correction of an error, reorganization of entities under common control, certain changes in an accounting principle and the disposition of a business that is accounted for as discontinued operations.

If a registrant decides to voluntarily provide fourth quarter disclosure or disclosure of selected quarterly financial information, that information will be subject to PCAOB AS 2710 requirements for auditors to read and consider such information for material inconsistencies with the audited financial statements.

Amendments to Item 303 – MD&A

Under current Item 303, registrants must disclose information relevant to assessing their financial condition, changes in financial condition, and results of operations. A summary of the disclosure requirements under each subsection of current Item 303 is below:

The Amendments recaption current Item 303(a) as Item 303(b), which, as amended, continues to apply to all MD&A disclosure. Current Items 303(b) and 303(c) have been amended to address specific elements of MD&A. A more comprehensive list of the Amendments to Item 303 is included in Annex B, which is a modified reprinting of another useful table from the SEC’s adopting release. A summary of these Amendments and a brief discussion of changes to Items 303(a), 303(b) and 303(c) follows.

In brief, key Amendments to Item 303:

• add a new introductory section to MD&A to focus registrants on information they should discuss;
• expand the liquidity and capital resources disclosure requirement, beyond capital expenditures to require disclosure of all material cash requirements, including those arising from known contractual obligations, on a short- and long-term basis;
• eliminate the required tabular presentation of a registrant’s known contractual obligations;
• codify prior SEC guidance and clarify that critical accounting estimates disclosure should focus on why each accounting estimate is subject to uncertainty;
• eliminate the disclosure requirement for specified, separately captured material off-balance sheet arrangements and add a requirement for registrants to discuss off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on the registrant; and
• provide registrants with additional flexibility in presenting quarterly period-to-period comparisons of their results of operations.

a.  Amended Item 303(a) – Objective of MD&A

Amended Item 303(a) provides an overarching objective of MD&A and calls for the following types of MD&A disclosure:

• 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 necessarily 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 SEC has clarified that this means that registrants need to consider whether a known trend, demand, commitment, event, or uncertainty is likely to come to fruition.
• A discussion and analysis of financial statements and other statistical data that a 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.

The SEC encourages registrants to regularly revisit these three objectives when preparing their MD&A and consider ways to improve the analysis provided. According to the SEC, these objectives “provide the overarching requirements of MD&A and apply throughout amended Item 303” (emphasis added) and not just within amended Item 303(a).

b.  Amended Item 303(b) – Fiscal Year Disclosures

Amended Item 303(b) will require registrants to describe the underlying reasons for material changes in one or more line items from one period to another in quantitative and qualitative terms, including where material changes within a single line item offset one another. Amended Item 303(b)(1) expands registrants’ disclosure requirements beyond commitments for capital expenditures by requiring disclosure of material cash requirements in the short-term (i.e., 12 months following the end of the registrant’s most recent fiscal period) and long-term. A discussion of material cash requirements includes known contractual and other obligations and replaces the contractual obligation table that is currently required. Amended Item 303(b)(1) also requires a registrant to disclose anticipated sources of funds needed to satisfy its cash requirements and the general purpose of such requirements.

Amended Item 303(b)(3) codifies SEC guidance regarding the disclosure of critical accounting estimates by requiring registrants to disclose qualitative and quantitative information necessary to understand the uncertainty of each estimate and the impact the estimate has had or is reasonably likely to have on a registrant’s financial condition or results of operations to the extent the information is material and reasonably available. For each critical accounting estimate, registrants are required to disclose:

• why the estimate is subject to uncertainty;
• how much the estimate and/or assumption has changed over a relevant period; and
• the sensitivity of the reported amounts to the methods, assumptions and estimates underlying the calculation of the estimate.

c.  Amended Item 303(c) – Interim Period Disclosures

Amended Item 303(c) requires registrants, with respect to interim period financial statements, to continue to make comparisons of results of operations data for the year-to-date period to those for the same period in the preceding year. However, registrants may now make comparisons of the most recent quarter’s results of operations data to those for the prior year’s quarter or to the immediately preceding quarter, provided, that if a comparison of results of operations data is to the immediately preceding quarter, then registrants must provide or disclose the filings on EDGAR of the summary financial information for that quarter. If there is a change in the form of presentation from period to period, registrants must disclose the reasons for the change and provide both comparisons in the first filing in which the change is made. Allowing comparisons to immediately preceding quarters could be more meaningful for registrants that experience significant growth and for which year-over-year comparisons may not prove as meaningful.

Compliance Dates

The final rules will become effective 30 days after publication in the Federal Register. Registrants will be required to apply the Amendments for their first fiscal year ending on or after the date that is 210 days after publication in the Federal Register (the Mandatory Compliance Date). Registrants will be required to apply the Amendments 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.

Before the Mandatory Compliance Date but after the effective date, registrants may provide disclosure consistent with the Amendments so long as they provide disclosure responsive to an amended item in its entirety. The SEC provides the following example: “upon effectiveness of the final amendments, a registrant may immediately cease providing disclosure pursuant to former Item 301 and may voluntarily provide disclosure pursuant to amended Item 303 before its mandatory compliance date. In this case, the registrant must provide disclosure pursuant to each provision of amended Item 303 in its entirety and must begin providing such disclosure in any applicable filings going forward.”

It is not clear when the Amendments will become effective. It is unlikely that registrants with a December 31 fiscal year-end will be able to implement the Amendments in their 2020 Form 10-Ks, but those registrants should be prepared for the ability to implement the changes in time for 2021 first quarter reporting.

Please click here for the related annexes.

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