SEC Proposes Amendments to Modernize and Enhance MD&A and Other Disclosures

The SEC proposed for public comment amendments to modernize, simplify, and enhance certain financial disclosure requirements in Regulation S-K. If adopted as proposed, the amendments would eliminate duplicative disclosures and modernize and enhance Management’s Discussion and Analysis (MD&A) disclosures for the benefit of investors, while simplifying compliance efforts for companies. The SEC also announced that it is providing guidance on key performance indicators and metrics in MD&A.

Proposed Amendments

The proposed amendments would eliminate Item 301 (selected financial data) and Item 302 (supplementary financial data). In addition, the proposal would amend Item 303 (MD&A). According to the SEC, the proposed amendments “are intended to modernize, simplify, and enhance the financial disclosure requirements by reducing duplicative disclosure and focusing on material information in order to improve these disclosures for investors and simplify compliance efforts for registrants.”

Among other things, the proposed amendments to MD&A would:

  • Add a new Item 303(a), Objective, to state the principal objectives of MD&A;
  • Replace Item 303(a)(4), Off-balance sheet arrangements, with a principles-based instruction to prompt registrants to discuss off-balance sheet arrangements in the broader context of MD&A;
  • Eliminate Item 303(a)(5), Tabular disclosure of contractual obligations given the overlap with information required in the financial statements and to promote the principles-based nature of MD&A;
  • Add a new disclosure requirement to Item 303, Critical accounting estimates, to clarify and codify existing Commission guidance in this area; and
  • Revise the interim MD&A requirement in Item 303(b) to provide flexibility by allowing companies to compare their most recently completed quarter to either the corresponding quarter of the prior year (as is currently required) or to the immediately preceding quarter.

The proposal will have a 60 day comment period.

Guidance on Key Performance Indicators and Metrics

The guidance provides that, where companies disclose metrics, they should consider whether additional disclosures are necessary and gives examples of such disclosures. The guidance also reminds companies of the requirements in Exchange Act Rules 13a-15 and 15d-15 to maintain disclosure controls and procedures and that companies should consider these requirements when disclosing metrics.

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