# Management's Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/fr%3A2020-02313

## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** February 28, 2020
- **Citation:** 85 FR 12068

## Text

SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 210, 229, 239, 240, and 249
[Release No. 33-10750; 34-88093; IC-33795; File No. S7-01-20]
RIN 3235-AM48
Management's Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information

AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rule.

SUMMARY:

We are proposing amendments to modernize, simplify, and enhance certain financial disclosure requirements in Regulation S-K. Specifically, we are proposing to eliminate Item 301 of Regulation S-K, Selected Financial Data and Item 302 of Regulation S-K, Supplementary Financial Information because they are largely duplicative of other requirements and to amend Item 303 of Regulation S-K, Management's Discussion & Analysis of Financial Condition and Results of Operations (“MD&A”) to modernize and enhance MD&A disclosures. In combination, the proposed amendments are intended to eliminate duplicative disclosures and modernize and enhance MD&A disclosures for the benefit of investors, while simplifying compliance efforts for registrants.

DATES:

Comments should be received by April 28, 2020.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's internet comment forms (
https://www.sec.gov/rules/proposed.shtml
); or

• Send an email to
rule-comments@sec.gov.
Please include File Number S7-01-20 on the subject line.

Paper Comments

• Send paper comments to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-01-20. This file number should be included in the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's website (
https://www.sec.gov/rules/proposed.shtml
). Comments also are available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Room 1580, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly.

We or the staff may add studies, memoranda, or other substantive items to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on our website. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at
www.sec.gov
to receive notifications by email.

FOR FURTHER INFORMATION CONTACT:

Angie Kim, Special Counsel, or Courtney Lindsay, Special Counsel, Office of Rulemaking, at (202) 551-3430, or Ryan Milne, Associate Chief Accountant, Office of the Chief Accountant, at (202) 551-3400 in the Division of Corporation Finance, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

The Commission is proposing to remove and reserve 17 CFR 229.301 (“Item 301”) and 17 CFR 229.302 (“Item 302”) of Regulation S-K under the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). The Commission is also proposing to amend 17 CFR 210.1-02(bb) of Regulation S-X (“Rule 1-02(bb)”); 17 CFR 229.303 (“Item 303”) and 17 CFR 229.914 (“Item 914”) of Regulation S-K under the Securities Act and the Exchange Act; 17 CFR 229.1112 (“Item 1112”), 17 CFR 229.1114 (“Item 1114”) and 17 CFR 229.1115 (“Item 1115”) of Regulation AB (a subpart of Regulation S-K) under the Securities Act and the Exchange Act; 17 CFR 239.11 (“Form S-1”), 17 CFR 239.20 (“Form S-20”), 17 CFR 239.25 (“Form S-4”), 17 CFR 239.31 (“Form F-1”) and 17 CFR 239.34 (“Form F-4”) under the Securities Act; 17 CFR 240.14a-101 (“Schedule 14A”) under the Exchange Act; and 17 CFR 249.220f (“Form 20-F”), 17 CFR 249.240f (“Form 40-F”), and 17 CFR 249.308 (“Form 8-K”) under the Exchange Act.

Table of Contents

I. Introduction

A. Background

B. Overview of the Proposed Amendments

II. Description of the Proposed Amendments

A. Selected Financial Data (Item 301)

B. Supplementary Financial Information (Item 302)

1. Supplementary Financial Information (Item 302(a))

2. Information About Oil and Gas Producing Activities (Item 302(b))

C. Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 303)

1. Restructuring and Streamlining (Item 303(a))

2. Capital Resources (Item 303(a)(2))

3. Results of Operations—Known Trends or Uncertainties (Item 303(a)(3)(ii))

4. Results of Operations—Net Sales and Revenues (Item 303(a)(3)(iii))

5. Results of Operations—Inflation and Price Changes (Item 303(a)(3)(iv), and Instructions 8 and 9 to Item 303(a))

6. Off-Balance Sheet Arrangements (Item 303(a)(4))

7. Contractual Obligations Table (Item 303(a)(5))

8. Critical Accounting Estimates

9. Interim Period Discussion (Item 303(b))

10. Safe Harbor for Forward-Looking Information (Item 303(c))

11. Smaller Reporting Companies (Item 303(d))

D. Application to Foreign Private Issuers

1. Form 20-F

2. Form 40-F

3. Item 303 of Regulation S-K

E. Additional Conforming Amendments

1. Roll-up Transactions—Item 914 of Regulation S-K

2. Regulation AB—Items 1112, 1114, and 1115

3. Summary Prospectus in Forms S-1 and F-1

4. Business Combinations—Form S-4, Form F-4 and Schedule 14A

5. Form S-20

F. Compliance Date

III. General Request for Comments

IV. Economic Analysis

A. Introduction

B. Baseline and Affected Parties

C. Potential Benefits and Costs of the Proposed Amendments

1. Overall Potential Benefits and Costs

2. Benefits and Costs of Specific Proposed Amendments

D. Anticipated Effects on Efficiency, Competition, and Capital Formation

E. Alternatives

V. Paperwork Reduction Act

A. Summary of the Collections of Information

B. Summary of the Proposed Amendments' Effects on the Collections of Information

C. Incremental and Aggregate Burden and Cost Estimates for the Proposed Amendments

VI. Small Business Regulatory Enforcement Fairness Act

VII. Regulatory Flexibility Act Certification

VIII. Statutory Authority

I. Introduction

A. Background

We are proposing certain amendments to Regulation S-K, and related rules and forms. Specifically, we are proposing (1)

to eliminate Item 301, Selected Financial Data and Item 302, Supplementary Financial Information; and (2) to modernize, simplify, and enhance the disclosure requirements in Item 303, MD&A.
1

We are also proposing certain parallel amendments applicable to financial disclosures provided by foreign private issuers (“FPIs”).
2

1
Concurrent with this release we are issuing guidance on key performance indicators and metrics in MD&A.
See
Commission Guidance on Management's Discussion and Analysis of Financial Condition and Results of Operations, Release No. 33-10751 (Jan. 30, 2020) (the “Companion Guidance”).

2

See
Section II.D below. An FPI is any foreign issuer other than a foreign government, except for an issuer that (1) has more than 50% of its outstanding voting securities held of record by U.S. residents; and (2) any of the following: (i) A majority of its officers or directors are citizens or residents of the United States; (ii) more than 50% of its assets are located in the United States; or (iii) its business is principally administered in the United States.
See
17 CFR 230.405.
See also
17 CFR 240.3b-4(c).

While the disclosure requirements for Item 9 of Form 1-A for Regulation A issuers are similar to the MD&A requirements under Item 303, we are not proposing to amend Form 1-A at this time.
See
Amendments for Small and Additional Issues Exemptions Under the Securities Act (Regulation A), Release No. 33-9741 (Mar. 25, 2015) [80 FR 21805 (Apr. 20, 2015)], at 21830. With that said, in the preparation of Part II of Form 1-A, Regulation A issuers have the option of disclosing either the information required by (i) the Offering Circular format (including Item 9 referenced above) or (ii) Part I of Forms S-1 or S-11 (except for the financial statements, selected financial data, and supplementary information called for by those forms). Thus, even though the proposed changes would not amend Item 9 of Form 1-A, they would still impact Regulation A issuers that choose to disclose the information required by Part I of Forms S-1 or S-11.
See
Section (a)(1)(ii) of Part II of Form 1-A.

Based on a recommendation in the
Report on Review of Disclosure Requirements in Regulation S-K
(“S-K Study”),
3

Commission staff initiated a comprehensive evaluation of the Commission's disclosure requirements, which included an assessment of the information our rules require registrants to disclose, how and where this information is presented, and how we can better leverage technology as part of these efforts (collectively, the “Disclosure Effectiveness Initiative”).
4

The objective of the Disclosure Effectiveness Initiative is to improve our disclosure regime for the benefit of both investors and registrants. In connection with the S-K Study and the launch of the Disclosure Effectiveness Initiative, Commission staff received public input on how to improve registrant disclosures.
5

Additionally, in a concept release issued in 2016,
6

the Commission solicited comment on the business and financial disclosure requirements in Regulation S-K. Specifically, the Commission solicited comment on whether these requirements provide the material information that investors need to make informed investment and voting decisions, and whether any of our rules have become outdated or unnecessary, or could otherwise be improved. These proposals also are informed by the objectives of the Fixing America's Surface Transportation Act (the “FAST Act”), which, among other things, required the Commission to study ways that Regulation S-K could be modernized and simplified.
7

The JOBS Act and the FAST Act, and the work on the Disclosure Effectiveness Initiative and the S-K Study, have focused on modernizing and improving disclosure to reduce costs and burdens while continuing to provide investors with all material information. These proposals continue that work with a particular focus on performance and financial disclosure.

3

See Report on Review of Disclosure Requirements in Regulation S-K
(Dec. 2013), available at
https://www.sec.gov/news/studies/2013/reg-sk-disclosure-requirements-review.pdf.
The report was mandated by Section 108 of the Jumpstart Our Business Startups Act (“JOBS Act”). Public Law 112-106, Sec. 108, 126 Stat. 306 (2012). Section 108 required the Commission to conduct a review of Regulation S-K to comprehensively analyze the current registration requirements and to determine how such requirements can be updated to modernize and simplify the registration process and to reduce the costs and other burdens associated with these requirements for emerging growth companies. Section 108 also required the Commission to provide a report on this review to Congress.

4

See SEC Spotlight on Disclosure Effectiveness,
available at
https://www.sec.gov/spotlight/disclosure-effectiveness.shtml.

5
In connection with the S-K Study, the Commission received public comments on regulatory initiatives to be undertaken in response to the JOBS Act.
See
Comments on SEC Regulatory Initiatives Under the JOBS Act: Title I—Review of Regulation S-K, available at
http://www.sec.gov/comments/jobs-title-i/reviewreg-sk/reviewreg-sk.shtml.

Similarly, to facilitate public input on the Disclosure Effectiveness Initiative, members of the public were invited to submit comments.
See
Request for Public Comment, available at
http://www.sec.gov/spotlight/disclosure-effectiveness.shtml.
Public comments received to date on the Disclosure Effectiveness Initiative are available on our website.
See
Comments on Disclosure Effectiveness, available at
https://www.sec.gov/comments/disclosure-effectiveness/disclosureeffectiveness.shtml.

6

See Business and Financial Disclosure Required by Regulation S-K,
Release No. 33-10064 (Apr. 13, 2016) [81 FR 23915 (Apr. 22, 2016)] (“Concept Release”). Comment letters related to the Concept Release are available at
https://www.sec.gov/comments/s7-06-16/s70616.htm.
Unless otherwise indicated, comments cited in this release are to the public comments on the Concept Release.

7
Public Law 114-94, Sec. 72003, 129 Stat. 1311 (2015) (requiring, among other things, that the SEC conduct a study, issue a report, and issue a proposed rule on the modernization and simplification of Regulation S-K). Among other things, the FAST Act directed the Commission to study Regulation S-K to: Determine how to best modernize and simplify such requirements in a manner that reduces costs and burdens on registrants while continuing to provide all material information; emphasize a company-by-company approach that allows relevant and material information to be disseminated without boilerplate language or static requirements while preserving completeness and comparability of information across registrants; and evaluate methods of information delivery and presentation and explore methods for discouraging repetition and the disclosure of immaterial information. In 2016, the staff published the Report on Modernization and Simplification of Regulation S-K (the “FAST Act Report”).
See Report on Modernization and Simplification of Regulation S-K
(Nov. 23, 2016), available at
https://www.sec.gov/reportspubs/sec-fast-act-report-2016.pdf.
Comment letters received in response to the FAST Act Report are available at
https://www.sec.gov/comments/fast/fast.htm.

In connection with the FAST Act Report, the Commission proposed and then adopted certain amendments to Regulation S-K.
See FAST Act Modernization and Simplification of Regulation S-K,
Release No. 33-10425 (Oct. 11, 2017) [82 FR 50988 (Nov. 2, 2017)] (“FAST Act Proposing Release”) and
FAST Act Modernization and Simplification of Regulation S-K,
Release No. 33-10618 (Mar. 20, 2019) [84 FR 12674 (Apr. 20, 2019)] (“FAST Act Adopting Release”).

In developing the proposed amendments, we considered input from comment letters the Commission received on the initiatives described above. We also took into account the staff's experience with Regulation S-K arising from the Division of Corporation Finance's disclosure review program and changes in the regulatory and business landscape since the adoption of Regulation S-K over 40 years ago. Regulation S-K was adopted in 1977 to foster uniform and integrated disclosure for registration statements under both the Securities Act and the Exchange Act, and other Exchange Act filings, including periodic and current reports.
8

In 1982, the Commission expanded and reorganized Regulation S-K to be the central repository for its non-financial statement disclosure requirements.
9

The Commission's goals in adopting integrated disclosure were to revise or eliminate overlapping or unnecessary disclosure requirements wherever possible, thereby reducing burdens on registrants and enhancing readability

without affecting the provision of material information to investors.
10

The amendments we are proposing in this release would continue to advance these goals.

8
The Commission adopted the initial version of Regulation S-K following issuance of the report by the Advisory Committee on Corporate Disclosure led by former Commissioner A.A. Sommer, Jr., which recommended adoption of a single integrated disclosure system.
See H. Comm. on Interstate and Foreign Commerce, Report of the Advisory Committee on Corporate Disclosure to the Securities and Exchange Commission,
95th Cong., 1st Sess., at 95-29 (Comm. Print 1977), available at
http://3197d6d14b5f19f2f440-5e13d29c4c016cf96cbbfd197c579b45.r81.cf1.rackcdn.com/collection/papers/1970/1977_1103_AdvisoryDisclosure.pdf.
This version of Regulation S-K included only two disclosure requirements—a description of business and a description of properties.

9

See Adoption of Integrated Disclosure System,
Release No. 33-6383 (Mar. 3, 1982) [47 FR 11380 (Mar. 16, 1982)] (“1982 Integrated Disclosure Adopting Release”).

10

See id.

Additionally, we reviewed Items 301, 302, and 303 in light of advancements in technology (in particular the availability of past financial statements and other disclosure made in filings on the Commission's Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) system) and changes in requirements under U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). We also considered the benefits and appropriateness of a principles-based approach in reviewing these Items and our proposals are intended to promote the principles-based nature of MD&A.
11

11

See Concept Release on Management's Discussion and Analysis of Financial Condition and Operations,
Release No. 33-6711 (Apr. 23, 1987) [52 FR 13715 (Apr. 24, 1987)] (stating that when the Commission adopted MD&A as a separate disclosure requirement, the rules remained intentionally general in nature: “The Commission believed that a flexible approach would elicit more meaningful disclosure and avoid boilerplate discussions which a more specific approach could foster. Further, the Commission reasoned that, because each registrant is unique, no one checklist could be fashioned to cover all registrants comprehensively.”).

B. Overview of the Proposed Amendments

We are proposing changes to Items 301, 302, and 303 of Regulation S-K that would reduce duplicative disclosure and focus on material information. Specifically, we propose to eliminate:

• Item 301—Selected Financial Data;

• Item 302—Supplementary Financial Information; and

• Item 303(a)(5)—MD&A,
Tabular disclosure of contractual obligations.

We are also proposing changes to modernize, simplify, and enhance disclosure requirements in Item 303 in order to improve these disclosures for investors and simplify compliance efforts for registrants. Specifically, these proposed revisions would:

• Add a new Item 303(a),
Objective,
to state the principal objectives of MD&A;

• Amend Item 303(a),
Full fiscal years
(proposed Item 303(b)) and Item 303(b),
Interim periods
(proposed Item 303(c)) to modernize, clarify, and streamline the items;

• Replace Item 303(a)(4),
Off-balance sheet arrangements,
with an instruction regarding the need to discuss such obligations in the broader context of MD&A;

• Add a new Item 303(b)(4),
Critical accounting estimates,
to clarify and codify Commission guidance on critical accounting estimates;
12

12

See Commission Guidance Regarding Management's Discussion and Analysis of Financial Condition and Results of Operation,
Release No. 33-8350 (Dec. 19, 2003) [68 FR 75056 (Dec. 29, 2003)] (the “2003 MD&A Interpretive Release”).

• Eliminate current Item 303(c),
Safe harbor,
in light of the proposed replacement of Item 303(a)(4) and elimination of Item 303(a)(5); and

• Eliminate Item 303(d),
Smaller reporting companies

13

in light of the proposed elimination of Items 303(a)(3)(iv) and 303(a)(5).

13
Item 10 of Regulation S-K defines a smaller reporting company (“SRC”) as a registrant that is not an investment company, an asset-backed issuer, or a majority-owned subsidiary of a parent that is not an SRC that: Had a public float of less than $250 million; or had annual revenues of less than $100 million, and either no public float or a public float of less than $700 million. Business development companies (“BDCs”) do not fall within the SRC definition and are a type of closed-end investment company that is not registered under the Investment Company Act.

We are also proposing certain parallel amendments to Forms 20-F and 40-F, including Item 3.A of Form 20-F (Selected Financial Information), Item 5 of Form 20-F (Operating and Financial Review and Prospects), General Instruction B.(11) of Form 40-F (Off-Balance Sheet Arrangements), and General Instruction B.(12) of Form 40-F (Tabular Disclosure of Contractual Arrangements).
14

The following table summarizes some of the changes we are proposing, as described more fully in Section II (Proposed Amendments):
15

14
We discuss our proposals that would affect FPIs in Section II.D below.

15
The information in this table is not comprehensive and is intended only to highlight some of the more significant aspects of the current rules and proposed amendments. It does not reflect all of the proposed amendments or all of the rules and forms that are affected. All changes are discussed in their entirety below. As such, this table should be read together with the referenced sections and the complete text of this release.

Current item or issue
Summary description of proposal
Principal objective(s)
Corresponding FPI change(s)?

Discussed below in
section

Item 301,
Selected financial data

Registrants would no longer be required to provide 5 years of selected financial data
Modernize disclosure requirement in light of technological developments and simplify disclosure requirements
Yes
II.A & II.D.1.

Item 302(a),
Supplementary financial information

Registrants would no longer be required to provide 2 years of selected quarterly financial data
Reduce repetition and focus disclosure on material information. Modernize disclosure requirement in light of technological developments
N/A
II.B.1.

Item 303(a),
MD&A

Clarify the objective of MD&A and streamline the fourteen instructions
Simplify and enhance the purpose of MD&A
Yes
II.C.1 & II.D.1.

Item 303(a)(2),
Capital resources

Registrants would disclose 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
Yes
II.C.2 & II.D.1.

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

Registrants would 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
Yes
II.C.3 & II.D.1.

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

Clarify that a discussion of the
reasons
underlying material
changes
in net sales or revenues is required

Clarify MD&A disclosure requirements by codifying existing Commission guidance
Yes
II.C.4 & II.D.1.

Item 303(a)(3)(iv),
Results of operations
Instructions 8 and 9 (Inflation and price changes)

The item and instructions would be eliminated. Registrants would 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
Yes
II.C.5.

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

The item would be replaced by a new instruction added to Item 303. Under the new instruction, registrants would 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
Yes
II.C.6, II.D.1, & II.D.2.

Item 303(a)(5),
Contractual obligations

Registrants would no longer be required to provide a contractual obligations table
Promote the principles-based nature of MD&A and simplify disclosures by reducing redundancy
Yes
II.C.7, II.D.1, & II.D.2.

Instruction 4 (Material changes in line items)
Incorporate a portion of the instruction into proposed Item 303(b). Clarify 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
Yes
II.C.1 & II.D.1.

Item 303(b),
Interim periods

Registrants would 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 would be afforded the same flexibility
Allow for flexibility in comparison of interim periods to enhance the disclosure provided to investors
N/A
II.C.9.

Critical Accounting Estimates
Explicitly require disclosure of 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
Yes
II.C.8 & II.D.1.

We discuss the proposed amendments below in the order that each Item appears in Regulation S-K. We welcome feedback and encourage interested parties to submit comments on any or all aspects of the proposals. When commenting, it would be most helpful if you include the reasoning behind your position or recommendation.

II. Description of the Proposed Amendments

A. Selected Financial Data (Item 301)

Item 301
16

requires registrants to furnish selected financial data in comparative tabular form for each of the registrant's last five fiscal years and any additional fiscal years necessary to keep the information from being misleading. Instruction 1 to Item 301 states that the purpose of the item is to supply in a convenient and readable format selected financial data that highlights certain significant trends in the registrant's financial condition and results of operations. Instruction 2 to Item 301 lists specific items that must be included, subject to appropriate variation to conform to the nature of the registrant's business, and provides that registrants may include additional items they believe would enhance an understanding of, and highlight, other trends in their financial condition or results of operations.
17

16

See also
Section II.D below for a discussion of related amendments to Form 20-F.

17
Instruction 2 to Item 301 of Regulation S-K states that, subject to appropriate variation to conform to the nature of the registrant's business, the following items shall be included in the table of financial data: Net sales or operating revenues; income (loss) from continuing operations; income (loss) from continuing operations per common share; total assets; long-term obligations and redeemable preferred stock (including long-term debt, capital leases, and redeemable preferred stock); and cash dividends declared per common share.

SRCs are not required to provide Item 301 information.
18

Emerging growth companies (“EGCs”)
19

that are providing the information called for by Item 301 in a Securities Act registration statement, need not present selected financial data for any period prior to the earliest audited financial statements presented in connection with the EGC's initial public offering (“IPO”) of its common equity securities.
20

In addition, an EGC that is providing the information called for by Item 301 in a registration statement, periodic report, or other report filed under the Exchange Act need not present selected financial

data for any period prior to the earliest audited financial statements presented in connection with its first registration statement that became effective under the Exchange Act or Securities Act.
21

18
Item 301(c) of Regulation S-K [17 CFR 229.301(c)].

19
An EGC is defined as a company that has total annual gross revenues of less than $1.07 billion during its most recently completed fiscal year and, as of December 8, 2011, had not sold common equity securities under a registration statement. A company continues to be an EGC for the first five fiscal years after it completes an IPO, unless one of the following occurs: Its total annual gross revenues are $1.07 billion or more; it has issued more than $1 billion in non-convertible debt in the past three years; or it becomes a “large accelerated filer,” as defined in Exchange Act Rule 12b-2.
See
Securities Act Rule 405 and Exchange Act Rule 12b-2.

20
Item 301(d)(1) of Regulation S-K.

21
Item 301(d)(2) of Regulation S-K.

In the Concept Release, the Commission solicited comment on whether to retain, modify, or eliminate Item 301.
22

The Commission also solicited comment on the cost of this disclosure and whether information on the earliest two of the last five fiscal years is available without unreasonable cost or expense. Additionally, the Commission solicited comment on the utility of this disclosure.

22

See
Concept Release, at 23940.

Many commenters recommended eliminating Item 301 completely or questioned its usefulness.
23

One of these commenters stated that “absent a requirement to provide narrative discussions of trends, the current requirement under [Item 301] seems less useful in an electronic era where historical financial information is easily accessible.”
24

Another commenter stated that it did not believe that presenting five years of information is useful to an investor and similarly noted that the information is accessible through EDGAR.
25

An additional commenter questioned whether selected financial data was necessary in light of data-tagged financial statements.
26

A number of commenters recommended revising the item to reduce burdens, if retained.
27

23

See, e.g.,
letters from New York State Society of Certified Public Accountants (July 19, 2016) (“NYSSCPA”), Aflac, Inc. (July 19, 2016) (“AFLAC”), Ernst & Young LLP (July 21, 2016) (“E&Y”), PNC Financial Services Group (July 21, 2016) (“PNC”), Edison Electric Institute and American Gas Association (July 21, 2016) (“EEI and AGA”), XBRL US, Inc. (July 21, 2016), Chevron Corporation (July 22, 2016) (“Chevron”), Fenwick West LLP (Aug. 1, 2016) (“Fenwick”), Grant Thornton LLP (July 21, 2016) (“Grant Thornton”), Northrop Grumman Corporation (Sept. 27, 2016) (“Northrop Grumman”), General Motors Company (Sept. 30, 2016) (“General Motors”), and Financial Executives International (Oct. 3, 2016) (“FEI”).

24

See
letter from Grant Thornton.

25

See
letter from NYSSCPA.

26

See
letter from E&Y. This commenter also suggested that the Commission “encourage registrants to include tables of selected financial data in the summary section of their annual reports if the information would highlight the key content and developments disclosed in the full report.”

27

See, e.g.,
letters from NYSSCPA, AFLAC, E&Y, Fenwick, General Motors, and FEI. These commenters suggested: Limiting the disclosure requirement to two or three years (letters from NYSSCPA and AFLAC); making disclosure of the earlier years voluntary and allowing all registrants to adopt a “build up” approach to Item 301 similar to the option available to EGCs (letters from E&Y and Fenwick); making the selected financial data table voluntary and permitting registrants to present only a retroactive accounting change for the periods presented in the financial statements if the periods prior to those presented in the financial statements cannot be recast without unreasonable effort or cost (letter from General Motors); and allowing hyperlinks to access five-year data if placed within a separate `company profile' section of EDGAR (letter from FEI).

One of these commenters noted the potentially significant costs in public offerings for comfort letters associated with this disclosure.
28

This commenter stated that where prior years have been audited by a different accounting firm, companies typically incur significant additional costs, both in terms of direct costs and internal resources, to obtain comfort letters. Additionally, this commenter stated that if Item 301 information is required for periods where no audited financial statements are otherwise required, the costs can be much more substantial.

28

See
letter from Fenwick.

Another commenter encouraged the Commission to ask investors whether the utility of the information provided in response to Item 301 justify the costs of presenting it.
29

This commenter stated that, while this required disclosure is limited to a small number of line items, certain of these items effectively require preparation of a full income statement and balance sheet to derive information for the earlier two years.

29

See
letter from PricewaterhouseCoopers LLP (July 21, 2016) (“PWC”) (stating that providing the earliest two years can be time consuming and costly, such as in circumstances where the information has not been previously provided (
e.g.,
in an initial registration statement)).

Many commenters recommended revising Item 301 to allow registrants to omit the earliest two years.
30

Some of these commenters noted that providing disclosure of the earliest two years often creates challenges for registrants, including non-EGC issuers conducting IPOs.
31

A few of these commenters recommended a practicability exception allowing registrants to omit the earliest two years when the information cannot be provided without unreasonable cost or expense.
32

Others recommended that the earliest two years should be required only when necessary to make the current financial data not misleading,
33

or to illustrate material trends.
34

30

See, e.g.,
letters from Deloitte & Touche LLP (July 15, 2016) (“Deloitte”), BDO USA, LLP (July 20, 2016) (“BDO”), U.S. Chamber of Commerce (Jul. 20, 2016) (“Chamber”), FedEx Corporation (“FedEx”) (Jul. 21, 2016), Corporate Governance Coalition for Investor Value (July 20, 2016) (“CGCIV”), Center for Audit Quality (July 21, 2016) (“CAQ”), Securities Industry and Financial Markets Association (July 21, 2016) (“SIFMA”), National Association of Real Estate Investment Trusts (July 21, 2016) (“NAREIT”), Allstate Insurance Company (July 21, 2016) (“Allstate”), Davis Polk & Wardwell LLP (July 22, 2016) (“Davis Polk”), Stephen Percoco (July 24, 2016) (“S. Percoco”), and Shearman & Sterling LLP (Aug. 31, 2016) (“Shearman”).

31

See, e.g.,
letters from Deloitte and CAQ.

32

See, e.g.,
letters from BDO, Davis Polk, and S. Percoco.

33

See, e.g.,
letters from Chamber, FedEx, and CGCIV.

34

See, e.g.,
letters from NAREIT and SIFMA.

A few commenters supported retaining Item 301.
35

Some of these commenters stated that having the information in one place keeps investors from having to review multiple sources to obtain this information,
36

with one of these commenters noting that investors sometimes rely on printed copies.
37

Two of the commenters also stated that requiring this disclosure for five years is an appropriate timeframe,
38

with one stating that five years is more likely to capture the effects that business cycles may have on a registrant.
39

Another stated that Item 301 information should be easy for companies to disclose because the information is already in company records.
40

35

See, e.g.,
letters from R.G. Associates, Inc. (July 6, 2016) (“RGA”), California Public Employees' Retirement System (July 21, 2016) (“CalPERS”), California State Teachers' Retirement System (July 21, 2016), and CFA Institute (Oct. 6, 2016).

36

See
letters from RGA and CFA Institute.

37

See
letter from RGA.

38

See
letters from CalPERS and CFA Institute.

39

See
letter from CFA Institute.

40

See
letter from CalPERs.

We propose to eliminate Item 301. When the precursor to Item 301 was adopted in 1970, prior annual reports were not quickly and easily accessible.
41

Today, the information required by Item 301 can be readily accessed and compiled through prior filings on EDGAR.
42

In addition, this information is tagged using eXtensible Business Reporting Language (“XBRL”) data format. As noted above, there are currently certain exceptions to Item 301 for EGC and SRC registrants.
43

Our proposals would not affect these exceptions or result in any further loss of information from these registrants.
44

41
Before adopting the precursor to Item 301, the Commission implemented a microfiche system in 1968 that supplemented its hard copy reproduction service and was intended to “facilitate wider, more economical and more rapid distribution” of Exchange Act reports.
See Disclosure to Investors—A Reappraisal of Federal Administrative Policies under the '33 and '34 Acts, Policy Study,
Mar. 27, 1969, available at
http://www.sechistorical.org/museum/galleries/tbi/gogo_d.php,
at 313.

42
In addition, filings are generally available on registrants' websites and other third-party websites.

43
We recognize an exception to this accessibility would be SRCs and EGCs that are either filing an initial registration statement or those that have not been public for at least two fiscal years following their initial registration statement.

44
Based on Ives Group's Audit Analytics data, during the period from April 5, 2012 through December 31, 2018, EGC issuers accounted for approximately 1,267 out of 1,440, or approximately 88%, of priced exchange-listed IPOs (excluding deals identified as mergers, spin-offs, or fund offerings). SRCs are often also EGCs so these statistics of IPOs conducted by EGCs likely

encompass the majority of IPOs conducted by SRCs. In addition, for reasons discussed in this release, registrants would still be required to discuss and analyze material trends, which was one of the intended purposes of Item 301. Accordingly, in the majority of instances, we believe that our proposal would not result in a loss of disclosure.

In adding the requirement for selected financial data to Regulation S-K, the Commission stated that Item 301 was “relevant primarily where it can be related to trends in the registrant's continuing operations.”
45

However, Item 303 specifically calls for disclosure of material trend information.
46

In addition, since Item 301 has been incorporated into Regulation S-K, the Commission has issued guidance emphasizing trend disclosure in MD&A.
47

In light of the requirement for discussion and analysis of trends in Item 303, we believe requiring five years of selected financial data is not necessary to achieve the original purpose of providing trend disclosure. Registrants may, however, continue to include a tabular presentation of relevant financial or other information discussed in MD&A, to the extent they believe that such a presentation would be useful to an understanding of the disclosure. We believe that eliminating Item 301 would continue to allow registrants the flexibility to present a meaningful MD&A discussing material trend information, while easing compliance burdens on registrants.

45

Amendments to Annual Report Form, Related Forms, Rules, Regulations, and Guides; Integration of Securities Acts Disclosure Systems,
Release No. 33-6231 (Sept. 2, 1980) [45 FR 63630 (Sept. 25, 1980)] (“1980 Form 10-K Adopting Release”).

46

See, e.g.,
Item 303(a)(3).

47

See, e.g., Management's Discussion and Analysis of Financial Condition and Results of Operations; Certain Investment Company Disclosures,
Release No. 33-6835 (May 18, 1989) [54 FR 22427 (May 24, 1989)] (the “1989 MD&A Interpretative Release”) and 2003 MD&A Interpretive Release.

We acknowledge that some commenters suggested we revise Item 301 to require only presentation of the same number of years as included in the financial statements, or otherwise provide accommodations to limit the number of years presented. However, we believe that such an approach would result in disclosure that would be largely duplicative of information in the financial statements, and therefore may have limited utility. We also acknowledge that some commenters recommended that we retain Item 301 without any revisions or enhance the item requirement. We believe, however, that the incremental utility of having a full five years of selected financial information is not justified by the cost to prepare such disclosures, particularly since Item 303 already requires disclosure of material trends and such other information necessary to an understanding of the registrant's financial conditions, changes in financial condition, and results of operations.
48

48

See
Item 303(a).

Request for Comment

1. Should we eliminate Item 301, as proposed? Would eliminating Item 301 result in the loss of material information that is otherwise not available to investors, such as through prior filings on EDGAR? If so, what information would be lost, and are there alternatives we should consider that would capture this information?

2. Is the option for investors to compile selected financial information from current or prior filings an adequate substitute for the separate presentation of that information in Item 301? Do current XBRL-tagging requirements facilitate compilation and comparison of selected financial information?

3. Are the requirements of Item 303 sufficient to provide investors with necessary disclosure regarding trends in a registrant's results of operations and financial condition?

4. Alternatively, if Item 301 should be retained, should registrants be allowed to provide less than five years of selected financial data? If so, what is the appropriate number of years that should be provided, and in what circumstances?

5. What are the costs to registrants of providing five years of selected financial data? Would those costs significantly decrease if the Commission limited selected financial data to only those years presented in the filing's historical financial statements?

6. How do market participants use the selected financial data disclosures? Do market participants rely on any particular fiscal year or years more than others (
e.g.,
the most recent two or three years)? Would there be a cost to obtain selected financial data disclosures elsewhere and, if so, what would that cost be?

7. Would registrants continue to provide selected financial data even if they are no longer required to do so? If so, for how many years?

8. If we were to retain Item 301, should we modify the line items required to be included in the presentation pursuant to Instruction 2?
49

For example, should we allow registrants more discretion regarding which line items to present?

49

See
Instruction 2 to Item 301,
supra
note 17.

9. The Commission recently proposed to extend to BDCs the requirement for registered closed-end investment companies to disclose “financial highlights.”
50

The disclosure required by Item 301 and the financial highlights requirement is similar in many respects. If we were to adopt the financial highlights requirement and retain Item 301, should we specifically exclude BDCs from the Item 301 requirement?

50

See Securities Offering Reform for Closed-End Investment Companies,
Release No. 33-10619 (Mar. 20, 2019) [84 FR 14448 (Apr. 10, 2019)], at 14472.

B. Supplementary Financial Information (Item 302)

1. Supplementary Financial Information (Item 302(a))

Item 302(a)(1) requires disclosure of selected quarterly financial data of specified operating results
51

and Item 302(a)(2) requires disclosure of variances in these results from amounts previously reported on a Form 10-Q.
52

Item 302(a) does not apply to SRCs or FPIs and, because it only applies to companies that already have a class of securities registered under Section 12 of the Exchange Act at the time of filing, it does not apply to first time registrants conducting an IPO and registrants who are only required to file reports pursuant to Section 15(d) of the Exchange Act.
53

When Item 302(a) applies, it requires certain information 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.
54

Item 302(a)(3) requires a description of the effect of any discontinued operations and unusual or infrequently occurring items recognized in each quarter, as well as the aggregate effect and the nature of year-end or other adjustments that are material to the results of that quarter.

55

If a registrant's financial statements have been reported on by an accountant, Item 302(a)(4) requires that accountant to follow appropriate professional standards and procedures regarding the data required by Item 302(a).
56

51
Item 302(a)(1) of Regulation S-K [17 CFR 229.302(a)(1)]. Item 302(a)(1) specifies disclosure of: Net sales; gross profit (net sales less costs and expenses associated directly with or allocated to products sold or services rendered); income (loss) from continuing operations; per share data based upon income (loss) from continuing operations; net income (loss); and net income (loss) attributable to the registrant.

52
Item 302(a)(2) of Regulation S-K [17 CFR 229.302(a)(2)]. When the data supplied pursuant to Item 302(a) varies from amounts previously reported on the Form 10-Q filed for any quarter, such as when a combination between entities under common control occurs or where an error is corrected, the registrant must reconcile the amounts given with those previously reported and describe the reason for the difference.

53
Item 302(a)(5) and (c) of Regulation S-K [17 CFR 229.302(a)(5) and (c)].

54
Item 302(a)(1) and (a)(3) [17 CFR 229.302(a)(1) and (a)(3)].

55
Item 302(a)(3) of Regulation S-K [17 CFR 229.302(a)(3)]. The requirement applies to items recognized in each full quarter within the two most

recent fiscal years and any subsequent interim period for which financial statements are included or are required to be included.

56
Item 302(a)(4) of Regulation S-K [17 CFR 229.302(a)(4)].

In the Concept Release, the Commission solicited input on whether to retain, eliminate, or modify Item 302(a). The Commission also solicited input on the importance of information required by Item 302(a) that is not duplicative of previously provided information, such as a separate presentation of certain fourth quarter information and the effect of a retrospective change in the earliest of the two years.
57

The Commission also sought input on the costs and benefits of this disclosure item.

57
Because Item 302(a)(2) requires disclosure of variances in results from amounts previously reported for the two most recent fiscal years, the effect of a retrospective change in any quarter for which a Form 10-Q is filed in the more recent of the two fiscal years will be disclosed in the selected quarterly data. However, absent Item 302(a)(2), this variance would not be specifically required to be disclosed until the following year in the corresponding fiscal quarter in which the retrospective change occurred. Additionally, disclosure in the Form 10-Q for this corresponding fiscal quarter would not include the effects of this change in the earliest of the two years presented in the Form 10-K, as this Form 10-Q would be limited to the current and prior-year interim periods.

A few commenters recommended retaining and expanding Item 302(a).
58

One of these commenters stated that it “sense[d] that investors find it useful to see fourth quarter results presented discretely, rather than having to infer them based on the annual results and the interim results through the third quarter.”
59

The commenter also stated that, where the data changes from what was previously reported, having the revised data in an annual report allows investors to understand the effects of the changes sooner. Another of these commenters noted the importance of fourth quarter data, stating that, in the absence of a Form 8-K filing containing such information, analysts must derive the information from the annual report and the three previously filed quarterly reports and that “any numbers derived from this method are at best approximate.”
60

This commenter stated that, “if a requirement to file a full fourth-quarter report is too onerous . . . [Item 302(a)] could be enhanced to include more data from the income statement beyond revenues, net income, and earnings per share.” Yet another commenter recommended that Item 302(a) be revised to ensure the information is presented in a consistent manner across registrants.
61

58

See
letters from BDO, Bloomberg LP (July 21, 2016) (“Bloomberg”), and CFA Institute.

59

See
letter from BDO.

60

See
letter from Bloomberg.

61

See
letter from CFA Institute.

Multiple commenters recommended streamlining Item 302(a).
62

Several of these commenters recommended revising Item 302(a)(5) to accommodate newly reporting registrants in an annual report or a follow-on offering where the registrant would be required to provide Item 302(a) data for interim periods prior to those presented in the IPO registration statement.
63

Another commenter recommended only requiring Item 302(a) disclosure when there is a material retrospective change in the financial statements that has not been previously filed.
64

The commenter also stated that some companies voluntarily provide fourth quarter data in earnings releases.

62

See, e.g.,
letters from Fenwick, Deloitte, CAQ, E&Y, Grant Thornton, and PWC.

63

See, e.g.,
letters from Deloitte, CAQ, E&Y, Grant Thornton, and PWC. Suggested accommodations included: Requiring registrants to begin presenting selected quarterly data in their second annual report (
see
letters from E&Y, PWC, and CAQ); and allowing new registrants to present supplementary financial data in registration statements and annual reports that “build” from the quarterly information that has been separately filed in Exchange Act reports subsequent to an IPO (
see
letters from Deloitte, CAQ, E&Y, Grant Thornton, and PWC).

64

See
letter from Fenwick. In this commenter's view, outside of such situations, quarterly financial information in a registrant's annual report is redundant with information available on EDGAR.
See also
letter from Crowe.

Most commenters recommended eliminating Item 302(a) altogether,
65

with many of these commenters stating that this item is duplicative of disclosures provided in prior filings.
66

Two of these commenters stated that “the disclosure required under Item 302(a) is yet another example of duplicative information that unnecessarily complicates and lengthens disclosure documents, while increasing burdens for registrants and offering little value to investors.”
67

Another commenter stated that, though the original intent of the item was “to help investors understand the pattern of corporate activities throughout a fiscal year,” not all businesses are seasonal and the information provided by Item 302(a) is already available in Form 10-Qs.
68

This commenter supported a flexible approach for Item 302(a) disclosure that would allow registrants to determine when and if this disclosure would be relevant and enhance an investor's understanding of the business throughout the year. This commenter also stated that fourth quarter data can be easily derived from prior filings without needing to separately reference the fourth quarter information.

65

See, e.g.,
letters from AFLAC, Chamber, FedEx, CGCIV, UnitedHealth Group, Inc. (July 21, 2016) (“United Health”), SIFMA, PNC, EEI and AGA, NAREIT, Davis Polk, S. Percoco, National Investor Relations Institute (“NIRI”), Northrop Grumman, FEI, and General Motors.

66

See, e.g.,
letters from AFLAC, Chamber, FedEx, CGCIV, UnitedHealth Group, SIFMA, PNC, EEI and AGA, NAREIT, NIRI, Northrop Grumman, FEI, and General Motors.

67

See
letters from Chamber and CGCIV.

68

See
letter from FEI.

We propose to eliminate Item 302(a). Like many commenters, we believe that this prescriptive requirement largely results in duplicative disclosures. The precursor to Item 302 was adopted at a time when quarterly data was “reported on an extremely abbreviated basis.”
69

The item was intended to help investors understand the pattern of corporate activities throughout a fiscal period by disclosing trends over quarterly periods to reflect seasonal patterns.
70

Today, most of the financial data required by Item 302(a) can be found in prior quarterly reports, which are readily available on EDGAR. While Item 302(a) requires separate disclosure of certain fourth quarter information, which is not otherwise required to be disclosed, we believe this data generally can be calculated from a registrant's Form 10-K and third quarter Form 10-Q. We believe that eliminating this prescriptive requirement will encourage registrants to take a more principles-based approach to presenting information called for by Item 302(a) in their filings and specifically, in MD&A.

69

See Interim Financial Data: Proposals to Increase Disclosure,
Release No. 34-11142 (Dec. 19, 1974) [40 FR 1079 (Jan. 6, 1975)], at 1080.

70

See Interim Financial Reporting: Increased Disclosures,
Release No. 33-5611 (Sept. 10, 1975) [40 FR 46107 (Oct. 6, 1975)], at 46108.

Eliminating Item 302(a) may result in the loss of a separate presentation of certain fourth quarter information and, where applicable, the effect of a retrospective change in the earliest of the two years.
71

Where fourth quarter results are material or there is a material retrospective change, existing requirements would still elicit this disclosure. Specifically, Item 303 requires registrants to discuss unusual events that materially affected reported income and other matters that are necessary to understand their results of operations.
72

The item also requires

registrants to discuss known trends and uncertainties that have had or that registrants reasonably expect to have an impact on net sales, revenues, or operating income.
73

Also, U.S. GAAP requires disclosure of disposals of components of an entity and unusual or infrequently occurring items recognized for the fourth quarter if interim data and disclosures are not separately reported for the fourth quarter.
74

Additionally, Item 101(c)(1)(v) of Regulation S-K requires disclosure of the extent to which a business is seasonal.
75

71

See supra
note 51.

72
Item 303(a)(3)(i) requires registrants to describe any unusual or infrequent events or transactions or any significant economic changes that materially affected the amount of reported income from continuing operations and indicate the extent to which income was so affected. In addition, the item requires registrants to describe any other significant

components of revenues or expenses that, in the registrant's judgment, should be described in order to understand the registrant's results of operations.

73
Item 303(a)(3)(ii) requires registrants to 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 (such as known future increases in costs of labor or materials or price increases or inventory adjustments), the change in the relationship must be disclosed.

74
ASC 270-10-50-2 requires the disclosure of certain information if interim data and disclosures are not separately reported for the fourth quarter. This information includes “disposals of components of an entity and unusual, or infrequently occurring items recognized in the fourth quarter, as well as the aggregate effect of year end adjustments that are material to the results of that quarter.”

75
Item 101(c)(1)(v) [17 CFR 229.101(c)(1)(v)]. The Commission recently proposed changes to Item 101 and proposed retaining Item 101(c)(1)(v).
See Modernization of Regulation S-K Items 101, 103, and 105,
Release No. 33-10668 (Aug. 8, 2019) [84 FR 44358 (Aug. 23, 2019)].

Request for Comment

10. Should we eliminate Item 302(a), as proposed? Would eliminating Item 302(a) result in the loss of material information that is otherwise not available to investors, such as through prior filings on EDGAR? If so, what material information would be lost, and are there alternatives we should consider that would capture this information?

11. Do market participants find Item 302(a) disclosures to be helpful? If so, how do market participants use the disclosures? Does the utility of the disclosures vary by industry or business? If so, for which industries or businesses are Item 302(a) disclosures helpful?

12. Is the option for investors to compile supplemental financial information through searches of prior filings an adequate substitute for Item 302(a)? Do current XBRL-tagging requirements reliably facilitate compilation and comparison of supplemental financial information? Would there be a cost to investors of compiling and/or calculating information presented in Item 302(a) from other sources and, if so, what would that cost be?

13. What are the burdens on registrants to provide the information required by Item 302(a)?

14. Is a separate presentation of certain fourth quarter data material to investors? If so, is such information material for all companies or industries? Are investors able to readily calculate this fourth quarter data from a registrant's Form 10-K and related third quarter Form 10-Q? What are the challenges to making such calculations?

15. Would registrants continue to provide fourth quarter data in the absence of a requirement to do so (
e.g.,
through voluntary earnings releases)? If we eliminate Item 302(a), should we require registrants to disclose certain fourth quarter data elsewhere in an annual report, such as in MD&A? What would be the cost of this approach? Should we require registrants to disclose any variances to its previously issued quarterly information that would inhibit the calculation of fourth quarter data by market participants? What would be the costs of this approach?

16. Should we retain Item 302(a) but allow a newly reporting registrant to exclude Item 302(a) data for interim periods prior to those presented in its IPO registration statement?
76

76

See supra
note 63 and corresponding text.

2. Information About Oil and Gas Producing Activities (Item 302(b))

Item 302(b)
77

requires registrants engaged in oil and gas producing activities, other than SRCs, to disclose information about those activities for each period presented. The disclosure called for by Item 302(b) is also required by U.S. GAAP.
78

However, unlike the U.S. GAAP requirement, Item 302(b) incrementally requires that the disclosure be provided for each period presented.

77

See
Item 302(b) of Regulation S-K [17 CFR 229.302(b)].

78

See
ASC 932-235-50.

In 2018, the Commission referred certain of its disclosure requirements to the FASB for potential incorporation into U.S. GAAP because these items largely overlapped with, but required information incremental to, U.S. GAAP.
79

Item 302(b) was among the items referred to the FASB.
80

79

See Disclosure Update and Simplification,
Release No. 33-10532 (Aug. 17, 2018) [83 FR 50234 (Oct. 4, 2018)].

80

See id.

On May 6, 2019, the FASB issued proposed Accounting Standards Update,
Disclosure Improvements: Codification Amendments in Response to the SEC's Disclosure Update and Simplification,
81

which would amend U.S. GAAP to require the incremental disclosure called for by Item 302(b), disclosure of oil and gas producing activities for each period presented. If FASB adopts amendments consistent with those it proposed, upon effectiveness of the amendments to U.S. GAAP, the requirements of Item 302(b) will be duplicative of U.S. GAAP. Therefore, we propose to eliminate Item 302(b), subject to the FASB finalizing its related amendments to U.S. GAAP.
82

81
FASB, File Reference No. 2019-600, available at
https://www.fasb.org/jsp/FASB/Document_C/DocumentPage&cid=1176172611572.

82
Item 302(c) of Regulation S-K states that SRCs do not have to provide the information required by the Item. Since we are proposing to eliminate Items 302(a) and (b), we are likewise proposing to eliminate Item 302(c) since it will no longer be applicable.

Request for Comment

17. As proposed, should we eliminate Item 302(b) if the FASB amends U.S. GAAP to require substantially similar disclosure?

C. Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 303)

Item 303 of Regulation S-K requires disclosure of information relevant to assessing a registrant's financial condition, changes in financial condition, and results of operations. The disclosure requirements for full fiscal years in Item 303(a) specify five components: Liquidity, capital resources, results of operations, off-balance sheet arrangements, and contractual obligations.
83

Item 303(b) covers interim period disclosures and requires registrants to discuss material changes in the items listed in Item 303(a) (including the instructions), other than the impact of inflation and changing prices on operations and tabular disclosure of contractual obligations.
84

Item 303(c) acknowledges the application of a statutory safe harbor for forward-looking information provided in off-balance sheet arrangements and contractual obligations disclosures. Item 303(d) provides certain accommodations for SRCs.

83
Item 303(a)(1)-(5) of Regulation S-K [17 CFR 229.303(a)(1)-(5)].

84

See
Item 303(b) and Instruction 7 to Item 303(b) of Regulation S-K [17 CFR 229.303(b)].

The Concept Release solicited comment on the overall objectives of the current MD&A requirements, as well as specific subsections of Item 303, including how to improve the content and focus of MD&A. Many commenters responded to the Commission's request

for input with a variety of suggestions, which we discuss below. The Commission recently addressed some of the Item 303(a) disclosure requirements referenced in the Concept Release and by commenters when it adopted amendments to modernize and simplify certain disclosure requirements in Regulation S-K.
85

85

See
FAST Act Adopting Release. Specifically, the Commission amended Item 303 to: Revise Instruction 1 to Item 303(a) to allow registrants that provide financial statements covering three years in a filing to omit discussion of the earliest of the three years if such discussion was already included in the registrant's prior filings on EDGAR; eliminate the reference to year-over-year comparisons in Instruction 1 to Item 303(a); and eliminate the reference to five-year selected financial data in Instruction 1 to Item 303(a).

We propose further amendments to Item 303 of Regulation S-K that are intended to modernize, simplify, and enhance the MD&A disclosures for investors while reducing compliance burdens for registrants.
86

Specifically, we are proposing to:

86
We discuss below in Section II.D our proposals to make certain parallel amendments to Item 5 of Form 20-F (Operating and Financial Review and Prospects), General Instruction B.(11) of Form 40-F (Off-Balance Sheet Arrangements), and General Instruction B.(12) of Form 40-F (Tabular Disclosure of Contractual Obligations).

• Establish a new paragraph 303(a) that incorporates much of the substance of Instructions 1, 2, and 3 to current Item 303(a) to emphasize the objective of MD&A for both full fiscal years and interim periods;

• Recaption current Item 303(a) as Item 303(b), and make the following additional changes:

○ Streamline current Item 303(a) by eliminating unnecessary cross-references to industry guides in Instructions 13 and 14;
87

87

See
17 CFR 229.802.

○ Amend current Item 303(a)(2) to modernize and enhance the current requirement, which is limited to capital expenditures, to specifically require a discussion of material cash requirements;

○ Amend current Item 303(a)(3)(ii) to clarify that a registrant should disclose reasonably likely changes in the relationship between costs and revenues;

○ Amend current Item 303(a)(3)(iii) and Instruction 4 to Item 303(a) to enhance analysis in MD&A by clarifying that a registrant should include in its MD&A a discussion of the reasons underlying material changes from period-to-period in one or more line items;

○ Eliminate current Item 303(a)(3)(iv), which requires registrants to discuss the impact of inflation and changing prices where material, along with the related Instructions 8 and 9 to Item 303(a);

○ Replace current Item 303(a)(4), the requirement that registrants provide off-balance sheet arrangement disclosures in a separately captioned section, with an instruction emphasizing the importance of discussing these obligations in the broader context of MD&A disclosure when such obligations 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

○ Eliminate current Item 303(a)(5), the requirement that registrants provide a tabular disclosure of contractual obligations;

• Recaption Item 303(b) as Item 303(c) and:

○ Amend current Item 303(b) to allow for more flexibility in interim periods compared; and

○ Simplify current Item 303(b) by eliminating certain instructions and providing cross-references to similar instructions in Item 303(a); and

• Eliminate current Items 303(c) and (d) as conforming changes.

The following table outlines the current and proposed structure of Item 303:
88

88
The information in this table is not comprehensive and is intended only to highlight the general structure of the current rules and proposed amendments. It does not reflect all of the substance of the proposed amendments or all of the rules and forms that may be affected. All changes are discussed in their entirety throughout this release. As such, this table should be read together with the referenced sections and the complete text of this release.

Current structure
Proposed structure
Discussed in section(s)

Item 303(a),
Full fiscal years

Item 303(a),
Objective

II.C.1.

Item 303(a) (combined liquidity and capital resources discussions)
Instruction 2 to Item 303(b)
II.C.1.

Item 303(a)(1),
Liquidity

Item 303(b)(1),
Liquidity

II.C.2.

Item 303(a)(2),
Capital resources

Item 303(b)(2),
Capital resources

II.C.2.

(i) Capital expenditures
(i) Capital expenditures

(ii) Known material trends
(ii) Known material trends

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

Item 303(b)(3),
Results of operations

II.C.3, II.C.4, & II.C.5.

(i) Unusual or infrequent events
(i) Unusual or infrequent events

(ii) Known trends or uncertainties
(ii) Known trends or uncertainties

(iii) Material increases
(iii) Material changes

(iv) Inflation and changing prices

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

Replace with Instruction 8 to Item 303(b)
II.C.6.

Instructions 1, 2, 3, 4, and 5 to Item 303(a)(4)
Replace with Instruction 8 to Item 303(b)
II.C.6.

Item 303(a)(5),
Contractual obligations

Eliminate
II.C.7.

2003 MD&A Interpretative Release, Critical accounting estimates

Item 303(b)(4),
Critical accounting estimates

II.C.8.

Instruction 1 to Item 303(a)
Instruction 1 to Item 303(b)(with amendments)
II.C.1.

Instruction 2 to Item 303(a)

Eliminate (with content incorporated into
Objective
)

II.C.1.

Instruction 3 to Item 303(a)

Eliminate (with content incorporated into
Objective
)

II.C.1.

Instruction 4 to Item 303(a)
Instruction 3 to Item 303(b)(with amendments and some content incorporated into Item 303(b))
II.C.4.

Instruction 5 to Item 303(a)
Instruction 4 to Item 303(b)
II.C.1.

Instruction 6 to Item 303(a)
Instruction 5 to Item 303(b)
II.C.1.

Instruction 7 to Item 303(a)
Instruction 6 to Item 303(b)
II.C.1.

Instruction 8 to Item 303(a)
Eliminate
II.C.5.

Instruction 9 to Item 303(a)
Eliminate
II.C.5.

Instruction 10 to Item 303(a)
Instruction 7 to Item 303(b)
II.C.1.

Instruction 11 to Item 303(a)
Instruction 9 to Item 303(b)(with amendments)
II.D.3.

Instruction 12 to Item 303(a)
Instruction 10 to Item 303(b)
II.C.1.

Instruction 13 to Item 303(a)
Eliminate
II.C.1.

Instruction 14 to Item 303(a)
Eliminate
II.C.1.

Item 303(b),
Interim periods

Item 303(c),
Interim periods

II.C.9.

(1) Material changes in financial condition
(1) Material changes in financial condition

(2) Material changes in results of operations, Rule 3-03(b) of Regulation S-X matters

(2) Material changes in results of operations
(i) Material changes in results of operations (year-to-date)
(ii) Material changes in results of operations (quarter comparisons)

Instruction 1 to Item 303(b)
Instruction 1 to Item 303(c) (with amendments to reference Instructions 3, 6, 8, and 11 to proposed Item 303(b))
II.C.9.

Instruction 2 to Item 303(b)
Eliminate
II.C.9.

Instruction 3 to Item 303(b)
Eliminate
II.C.9.

Instruction 4 to Item 303(b)
Instruction 2 to Item 303(c)
II.C.9.

Instruction 5 to Item 303(b)
Eliminate
II.C.9.

Instruction 6 to Item 303(b)
Eliminate
II.C.9.

Instruction 7 to Item 303(b)
Eliminate
II.C.9.

Instruction 8 to Item 303(b)
Instruction 11 to Item 303(b)
II.C.9.

Item 303(c),
Safe harbor

Eliminate
II.C.10.

Item 303(d),
Smaller reporting companies

Eliminate
II.C.11.

1. Restructuring and Streamlining (Item 303(a))

The first paragraph of current Item 303(a) instructs registrants to discuss their financial condition, changes in financial condition, and results of operations for full fiscal years.
89

The paragraph then sets forth the items that must be included in this discussion, including liquidity, capital resources, results of operations, off-balance sheet arrangements, contractual obligations, and any other information a registrant believes would be necessary to understand its financial condition, changes in financial condition, and results of operations. The paragraph also instructs that discussions of capital resources and liquidity may be combined when the topics are interrelated. Finally, the paragraph states that a registrant must provide a discussion of business segments and/or of subdivisions when, in the registrant's judgment, such a discussion would be appropriate for understanding its business. This discussion must focus on each relevant, reportable segment and/or other subdivision of the business and on the registrant as a whole. In addition to the text, there are fourteen instructions to Item 303(a).

89
Item 303(a) of Regulation S-K [17 CFR 229.303(a)].

We are proposing multiple changes that are intended to streamline and clarify the purposes of Item 303.
90

First, we propose adding a new Item 303(a) to succinctly state the purposes of MD&A by incorporating a portion of the substance of Instruction 1, and much of the substance of Instructions 2 and 3 into the item. Specifically, we propose to incorporate each of the following portions of current Instructions 1, 2, and 3 to describe the objectives of MD&A, which is for companies to provide disclosure regarding:

90
These proposed changes, along with the other proposed amendments and eliminations discussed elsewhere in this release, would result in some changes in the subsection labeling and headings.

• 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.

• The material financial and statistical data that the registrant believes will enhance a reader's understanding of the registrant's financial condition, changes in financial condition, and results of operations.
91

91
The remainder of the instruction also specifies periods that the discussion must cover, which our proposed amendments would retain.

• Material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition. This would include descriptions and amounts of matters that: (i) Would have a material impact on future operations and have not had an impact in the past, and (ii) have had a material impact on reported operations and are not expected to have an impact on future operations.

We are also proposing to codify Commission guidance that states that a registrant should provide a narrative explanation of its financial statements that enables investors to see a registrant “through the eyes of management”
92

into the description of MD&A objectives. We believe that emphasizing the purpose of MD&A at the outset of the Item will provide clarity and focus to registrants as they consider what information to discuss and analyze. Our intent is to facilitate a thoughtful discussion and analysis, and encourage management to disclose factors specific to the registrant's business, which management is in the best position to know, and underscore materiality as the overarching principle of MD&A.
93

Our proposal is intended to serve as a reminder to registrants as they prepare their MD&A that the general purpose of the disclosure is to provide both a historical and prospective analysis of the registrant's financial condition and

results of operations, with particular emphasis on the registrant's prospects for the future.
94

This principles-based approach is also well-suited to elicit disclosure about complex and often rapidly evolving areas, without the need to continuously amend the text of the rule to impose bright-line or prescriptive requirements.
95

92

See
2003 MD&A Interpretative Release, at 75056.
See also
1989 Interpretative Release, at 22428.

93

See, e.g.,
FAST Act Adopting Release, at 12679 (emphasizing that “[m]ateriality remains, as always, the primary consideration” of MD&A) and the 2003 MD&A Interpretative Guidance, at 75060 (noting that “it is increasingly important for companies to focus their MD&A on material information. In preparing MD&A, companies should evaluate issues presented in previous periods and consider reducing or omitting discussion of those that may no longer be material or helpful, or revise discussions where a revision would make the continuing relevance of an issue more apparent.”).

94

See
1989 MD&A Interpretive Release (“In preparing MD&A disclosure, registrants should be guided by the general purpose of the MD&A requirements: To give investors an opportunity to look at the registrant through the eyes of management by providing a historical and prospective analysis of the registrant's financial condition and results of operations, with particular emphasis on the registrant's prospects for the future.”).

95

See, e.g.,
Commission Guidance Regarding Disclosure Related to Climate Change, Release No. 33-9106 (Feb. 2, 2010) [75 FR 6290 (Feb. 8, 2010)] and Commission Statement and Guidance on Public Company Cybersecurity Disclosures (Feb. 21, 2018) [83 FR 8166 (Feb. 26, 2018)]. Commission staff has also provided its views on the application of our principles-based disclosure requirements to emerging issues.
See, e.g.,
Staff Statement on LIBOR Transition (July 12, 2019), available at
https://www.sec.gov/news/public-statement/libor-transition.

In light of our proposal to add new Item 303(a), we propose to re-caption current Item 303(a) as Item 303(b), which will continue to apply to all MD&A disclosures.
96

As proposed, the introductory paragraph would retain the current language that outlines what is to be covered in the discussion of a registrant's financial condition, changes in financial condition, and results of operations.
97

Additionally, we propose to add product lines as an example of other subdivisions of a registrant's business that should be discussed where, in the registrant's judgment, such a discussion would be necessary to an understanding of the registrant's business.
98

We believe that this added example would provide registrants with additional clarity on the types of subdivisions that may require separate disclosure, though it is not intended to complete the list.

96
For interim periods, current Item 303(b) of Regulation S-K requires a “discussion of material changes in those items specifically listed in [Item 303(a)], except that the impact of inflation and changing prices on operations for interim periods need not be addressed.”
See
1989 MD&A Interpretive Release at n. 38 and 39 and corresponding text (“The second sentence of Item 303(b) states that MD&A relating to interim period financial statements `shall include a discussion of material changes in those items specifically listed in paragraph (a) of this Item, except that the impact of inflation and changing prices on operations for interim periods need not be addressed.' As this sentence indicates, material changes to each and every specific disclosure requirement contained in paragraph (a), with the noted exception, should be discussed.”); 2003 MD&A Interpretive Release (“Disclosure in MD&A in quarterly reports is complementary to that made in the most recent annual report and in any intervening quarterly reports.”).

97

See
Item 303(a).

98
The current relevant Item 303(a) language states that where, in the registrant's judgment, a discussion of segment information and/or of other subdivisions (
e.g.,
geographic areas) of the registrant's business would be appropriate to an understanding of such business, the discussion shall focus on each relevant segment and/or other subdivision of the business and on the registrant as a whole.

We also propose to move to proposed Item 303(b) the portion of current Instruction 4 to Item 303(a) that requires a description of the causes of material changes from year-to-year in line items of the financial statements to the extent necessary to an understanding of the registrant's business as a whole.
99

In response to general requests for comment on Item 303 in the Concept Release, a few commenters provided recommendations on how to revise Item 303(a) to facilitate a more meaningful analysis.
100

One commenter suggested amending Item 303 to require a description of material factors that contributed to any material change in results, and that quantitative and qualitative factors could be listed as examples of the types of factors that could be discussed in MD&A.
101

99
Instruction 4 to Item 303(a) of Regulation S-K [17 CFR 229.303(a)].

100

See, e.g.,
letters from Fenwick, Maryland State Bar Association (July 21, 2016) (“Maryland Bar Securities Committee”), S. Percoco, and NYSSCPA.

101

See
letter from Fenwick.

Similarly, another commenter recommended revising Item 303(a)(3) to require a description of the major factors that caused changes in line items (
e.g.,
economic trends, industry conditions and sales and costs related to key products and services).
102

Yet another commenter stated that Item 303(a) and Instruction 4 should be revised to “clearly instruct” registrants that discussions about material changes should address quantitative and qualitative factors underlying the changes.
103

One commenter also noted that it would be preferable for the requirements to indicate that registrants cannot present line item changes without providing “meaningful explanations.”
104

Finally, another commenter recommended revising Instruction 4 to Item 303(a) to allow registrants to omit financial statement line item changes to the extent such an omission would not materially impair an investor's understanding of a registrant's results of operations.
105

This revision, the commenter stated, would allow registrants and investors to focus on line items that had the most impact on its results of operations.

102

See
letter from S. Percoco.

103

See
letter from Maryland Bar Securities Committee.

104

See
letter from NYSSCPA. This commenter also expressed its belief that a significant number of registrants were providing narratives that did not allow an investor to view performance “through the eyes of management.” According to this commenter, such discussions “generally [become] an exercise where management provides a quantitative analysis, which most investors can recompute—if they chose to—from the financial statements.”

105

See
letter from Davis Polk.

We propose to amend the language of Instruction 4 to Item 303(a),
106

which would be moved to proposed Item 303(b), to clarify that MD&A requires a narrative discussion of the “underlying reasons” for material changes from period-to-period in one or more line items in quantitative and qualitative terms, rather than only the “cause” for material changes. We are also proposing to amend the language to clarify that registrants should discuss material changes within a line item even when such material changes offset each other.
107

We believe our proposals would enhance analysis in MD&A, and accordingly, would be responsive to concerns raised by commenters. We also believe the proposals would clarify MD&A's requirements by codifying some of the Commission's prior guidance on the importance of analysis in MD&A. The Commission has previously emphasized the importance of providing an analysis in MD&A and stated that a thorough analysis often will involve discussing both the intermediate effects of known material trends, events, demands, commitments, and uncertainties and the reasons underlying those intermediate effects.
108

Commission guidance has also stated that MD&A should include both qualitative and quantitative analysis.
109

We believe the proposed amendments would encourage registrants to provide a more nuanced discussion of the underlying reasons that may be contributing to material changes in line items.

106
Proposed to be renumbered as Instruction 3 to Item 303(b).

107

See, e.g.,
1989 MD&A Interpretive Release (providing an example of material changes in revenue and in so doing, describing the effects of offsetting developments: “Revenue from sales of single-family homes for 1987 increased 6 percent from 1986. The increase resulted from a 14 percent increase in the average sales price per home, partially offset by a 6 percent decrease in the number of homes delivered. Revenues from sales of single-family homes for 1986 increased 2 percent from 1985. The average sales price per home in 1986 increased 6 percent, which was offset by a 4 percent decrease in the number of homes delivered.”).

108

See, e.g.,
2003 MD&A Interpretive Release.

109

See, e.g.,
2003 MD&A Interpretive Release and 1989 MD&A Interpretive Release.

We also are proposing several amendments to further streamline the text of Item 303:

• We propose to move the text in current Item 303(a) stating that registrants may combine their discussions of liquidity and capital resources when the topics are interrelated to an instruction to the item.
110

We believe this language is an instruction given that it is not a substantive requirement or accommodation, but rather a clarification of how registrants may structure their disclosures.

110
Proposed Instruction 2 to Item 303(b).

• Instruction 8 to current Item 303(b) indicates that the term “statement of comprehensive income” is defined by Rule 1-02 of Regulation S-X.
111

We are proposing to move this language to proposed Instruction 11 to proposed Item 303(b) to clarify that the instruction applies to both full fiscal year and interim period MD&A disclosure.

111
[17 CFR 210.1-02(cc)]. Rule 1-02 defines a “statement of comprehensive income” as follows: “[t]he term statement(s) of comprehensive income means a financial statement that includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. . . . A statement of operations or variations thereof may be used in place of a statement of comprehensive income if there was no other comprehensive income during the period.” Thus, references to a statement of comprehensive income would include a statement of operations prepared by certain issuers, such as BDCs.

• We also propose to eliminate current Instructions 13 and 14 to Item 303(a) as simplifying amendments. These instructions call the attention of bank holding companies and property-casualty insurance companies to Guide 3
112

and Guide 6,
113

respectively. Registrants should still consider the Guides in preparing their disclosures generally, but we do not believe the cross-reference is necessary to an understanding of the requirements of Item 303.

112
[17 CFR 229.801(c) and 17 CFR 229.802(c)]. We recently proposed rules relating to Guide 3.
See Update of Statistical Disclosures for Bank and Savings and Loan Registrants,
Release No. 33-10688 (Sept. 17, 2019) [84 FR 52936 (Oct., 3, 2019)]. The proposed rules would update the disclosures that investors receive, codify certain Guide 3 disclosures and eliminate other Guide 3 disclosures that overlap with Commission rules, U.S. GAAP, or International Financial Reporting Standards (“IFRS”). In addition, the Commission proposed to relocate the codified disclosures to a new subpart of Regulation S-K and to rescind Guide 3.

113
[17 CFR 229.801(f)].

Request for Comment

18. Should we adopt proposed Item 303(a)? Would proposed Item 303(a) clarify the purpose of MD&A disclosures for registrants and others? Would the proposed amendments aid registrants in determining what to disclose in their MD&A?

19. Should we incorporate the language from current Instruction 4 to Item 303(a) into proposed Item 303(b), as proposed? Should we amend this language to require disclosure of the underlying reasons for material changes in quantitative and qualitative terms, including material changes within a line item, as proposed?

20. Are there any instructions that we are proposing to delete or move that we should retain or leave as is? Are there any other current instructions that we should revise or clarify?

21. Should we eliminate Instructions 13 and 14 to Item 303(a) that reference Guides 3 and 6, as proposed? Should we instead include additional instructions to reference the other industry guides?

2. Capital Resources (Item 303(a)(2))

Item 303(a)(2) requires a registrant to discuss its material commitments for capital expenditures as of the end of the latest fiscal period, and to indicate the general purpose of such commitments and the anticipated sources of funds needed to fulfill such commitments.
114

A registrant also must discuss any known material trends, favorable or unfavorable, in its capital resources, and indicate any expected material changes in the mix and relative cost of such resources.
115

The discussion must consider changes between equity, debt, and any off-balance sheet financing arrangements.
116

114
Item 303(a)(2)(i) of Regulation S-K [17 CFR 229.303(a)(2)(i)].

115
Item 303(a)(2)(ii) [17 CFR 229.303(a)(2)(ii)].

116

Id.

When adopting disclosure requirements for capital resources, the Commission recognized that the term “capital resources” lacked precision, but stated that “additional specificity would decrease the flexibility needed by management for a meaningful discussion.”
117

To that end, Item 303 does not define “capital resources.”
118

The current capital resources disclosure requirements in Item 303(a)(2) have remained largely the same since 1980.
119

Item 303(a)(2) specifies that registrants must disclose material commitments for capital expenditures, which generally relate to physical assets, such as buildings and equipment. Some registrants include disclosure beyond capital expenditures, which the Commission's guidance has encouraged.
120

117
1980 Form 10-K Adopting Release, at 63636.

118
Instruction 5 to Item 303(a) of Regulation S-K [17 CFR 229.303(a)].
See also
1980 Form 10-K Adopting Release,
supra
note 45, at 63636.

119

See
1980 Form 10-K Adopting Release.

120

See
2003 MD&A Interpretive Release, at 75062.

The Concept Release solicited comment on how the Commission could revise Item 303(a) to elicit a more meaningful analysis of a registrant's capital resources while maintaining flexibility.
121

The Concept Release also requested comment on how registrants interpret the term “capital resources” and whether defining the term would be helpful to registrants.
122

121

See
Concept Release, at 23947.

122

See id.

Some commenters observed differences in how registrants apply the term “capital resources.”
123

One of these commenters stated that the Commission should adopt a definition of capital resources that is broader than currently implied by Item 303(a)(2)(i).
124

This commenter stated that registrants interpret “capital resources” as material commitments for capital expenditures and the source of funds related to such commitments. Another commenter stated that some registrants interpret “capital resources” to require “disclosure of a registrant's sources of capital, while others interpret it to require disclosure of the sources of capital assets used in a registrant's business.”
125

123

See
letters from NYSSCPA and BDO.

124

See
letter from NYSSCPA.

125

See
letter from BDO.

Some commenters supported the Commission's current approach to the term “capital resources.”
126

One commenter urged the Commission not to depart from the existing policy of recognizing the term “capital resources” as a general term in a manner that might decrease the flexibility needed by management for a meaningful discussion.
127

Another commenter recommended that the Commission not further define the term “capital resources” beyond its current general use.
128

126

See
letters from Davis Polk and FEI.

127

See
letter from Davis Polk.

128

See
letter from FEI (“As noted above, we believe it would be helpful to consolidate the guidance on MD&A into a single source. In doing so, we recommend that the SEC not expand prescriptive requirements with respect to liquidity and capital resources, including not further defining the terms “liquidity” and “capital resources” beyond their current general terms.”).

We continue to believe that disclosure of capital resources is critical to an assessment of a registrant's prospects for the future and likelihood of its survival.
129

Therefore, we propose to

amend current Item 303(a)(2)
130

to specify, consistent with the Commission's 2003 MD&A Interpretive Release, that a registrant should broadly disclose material cash commitments, including but not limited to capital expenditures. Specifically, our proposed amendment would require a registrant to describe its 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.
131

129

See
2003 MD&A Interpretive Release at note 41 and corresponding text. Much of the Commission's prior guidance has focused on enhancing disclosure of liquidity and capital resources.
See, e.g.,
1989 MD&A Interpretive Release and 2003 MD&A Interpretive Release.

130
Proposed to be renumbered as Item 303(b)(2).

131

See
2003 MD&A Interpretive Release, at 75063.

This proposal is intended to require registrants to identify and disclose known material cash requirements. Depending on the registrant, this could include items such as: Funds necessary to maintain current operations, complete projects underway, and achieve stated objectives or plans; or commitments for capital or other expenditures.
132

This proposal is also intended to modernize Item 303(a)(2) by specifically requiring disclosure of material cash requirements in addition to capital expenditures. While capital expenditures remain important in many industries, we recognize that 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. Our proposals are intended to encompass these and other material cash requirements.

132

See id.

These proposals, alongside the current requirement for registrants to discuss their ability to generate cash,
133

are intended to enhance disclosure and provide investors with a clear picture of a registrant's ability to meet its material cash requirements. We acknowledge the commenters who suggested that we define “capital resources.” We have decided, however, not to propose a definition of the term to allow for continued flexibility and business-specific discussions of the topic.
134

Lastly, and as discussed in Section II.C.7, our proposal to enhance discussion of capital resources is also intended to complement our proposed deletion of the contractual obligations table.

133

See
Item 303(a)(1) and Instruction 5 of Item 303(a).
See also
2003 MD&A Interpretive Release, at 75062-75064.

134

See
1980 Form 10-K Adopting Release.

Request for Comment

22. Should we amend Item 303(a)(2), as proposed? Would the proposed amendments continue to allow management flexibility to provide a meaningful discussion of capital resources?

23. Are there other aspects of Item 303(a)(2) we should revise? If so, which aspects?

3. Results of Operations—Known Trends or Uncertainties (Item 303(a)(3)(ii))

Item 303(a)(3)(ii) requires a registrant to describe any known trends or uncertainties that have had or that the registrant reasonably expects will have a material impact (favorable or unfavorable) on net sales or revenues or income from continuing operations.
135

In addition, if the registrant knows of events that will cause a material change in the relationship between costs and revenues, the change in the relationship must be disclosed.
136

135
Item 303(a)(3)(ii) of Regulation S-K [17 CFR 229.303(a)(3)(ii)].

136
Examples given include known future increases in costs of labor or materials or price increases or inventory adjustments.
See id.

We propose to amend Item 303(a)(3)(ii)
137

to provide that when a registrant knows of events that are
reasonably likely
to cause (as opposed to
will
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, the reasonably likely change must be disclosed. This proposed amendment would conform the language in this paragraph to other Item 303 disclosure requirements for known trends,
138

and align Item 303(a)(3)(ii) with the Commission's guidance on forward-looking disclosure.
139

137
To be renumbered as Item 303(b)(3)(ii).

138

See, e.g.,
Item 303(a)(1), which requires registrants to “[i]dentify any known trends or any known demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in the registrant's liquidity increasing or decreasing in any material way.” Item 303(a)(1) to Regulation S-K [17 CFR 229.303(a)(1)].

139

See
1989 MD&A Interpretive Release, at 22430, where the Commission articulated a two-step test for assessing when forward-looking disclosure is required in MD&A:

“Where a trend, demand, commitment, event or uncertainty is known, management must make two assessments:

(1) Is the known trend, demand, commitment, event or uncertainty likely to come to fruition? If management determines that it is not reasonably likely to occur, no disclosure is required.

(2) If management cannot make that determination, it must evaluate objectively the consequences of the known trend, demand, commitment, event or uncertainty, on the assumption that it will come to fruition. Disclosure is then required unless management determines that a material effect on the registrant's financial condition or results of operations is not reasonably likely to occur.”

Request for Comment

24. Should we amend Item 303(a)(3)(ii) to provide that registrants must disclose events reasonably likely to cause a material change in the relationship between costs and revenue, as proposed? Are there other areas in Item 303 where we should provide a similar requirement?

4. Results of Operations—Net Sales and Revenues (Item 303(a)(3)(iii))

Item 303(a)(3)(iii) specifies that, to the extent financial statements disclose material increases in net sales or revenues, a registrant must provide a narrative discussion of the extent to which such increases are attributable to increases in prices, or to increases in the volume or amount of goods or services being sold, or to the introduction of new products or services.
140

The Commission previously clarified that a results of operations discussion should describe not only increases but also decreases in net sales or revenues.
141

Accordingly, we propose to amend Item 303(a)(3)(iii) to codify this guidance and clarify the requirement by tying the required disclosure to “material changes” in net sales or revenues, rather than solely to “material increases” in these line items.

140
Item 303(a)(3)(iii) of Regulation S-K [17 CFR 229.303(a)(3)(iii)].

141

See
1989 MD&A Interpretative Release, at n. 36 (“Although Item 303(a)(3)(iii) speaks only to material increases, not decreases, in net sales or revenues, the Commission interprets Item 303(a)(3)(i) and Instruction 4 as seeking similar disclosure for material decreases in net sales or revenues.”).

Request for Comment

25. Should we revise Item 303(a)(3)(iii), as proposed?

26. Are there reasons other than changes in prices, or changes in volume or amount of goods or services being sold, or the introduction of new products or services that can contribute to changes in revenue or net sales, or other line items? If so, what are they? Would enumerating other reasons aid registrants in determining what information may be necessary to understand material changes in line items, or would this result in a
de facto
prescriptive or minimum disclosure standard?

5. Results of Operations—Inflation and Price Changes (Item 303(a)(3)(iv), and Instructions 8 and 9 to Item 303(a))

Item 303(a)(3)(iv)
142

generally requires registrants, for the three most recent fiscal years, or for those fiscal years in which the registrant has been engaged in business, whichever period is shortest, to discuss the impact of inflation and price changes on their net sales, revenue, and income from continuing operations. Instruction 8 to Item 303(a) clarifies that a registrant must provide a discussion of the effects of inflation and other changes in prices only to the extent it is material. The instruction further states that the discussion may be made in whatever manner appears appropriate under the circumstances and that no specific numerical financial data is required, except as required by Rule 3-20(c) of Regulation S-X,
143

which applies to FPIs. Instruction 9 to Item 303(a) states that registrants that elect to disclose supplementary information on the effects of changing prices may combine such disclosures with the Item 303(a) discussion and analysis or provide it separately (with an appropriate cross-reference).
144

142
Item 303(a)(3)(iv) of Regulation S-K [17 CFR 229.303(a)(3)(iv)].

143
Rules 3-20(c) and 3-20(d) of Regulation S-X provide the situations when a registrant must discuss hyperinflation. Rule 3-20(d) generally describes a hyperinflationary environment as one that has cumulative inflation of approximately 100 percent or more over the most recent three-year period.

144
Instruction 9 to Item 303(a).

The precursors to Item 303(a)(3)(iv) and Instructions 8 and 9 were adopted in 1980,
145

during a period of rapid domestic inflation.
146

At that time, the Commission was concerned with the adequacy of disclosures about the effect of inflation and changing prices on registrants.
147

Several years later, the Commission amended the instructions to, among other things, clarify that disclosure of inflation is only required if material.
148

145
1980 Form 10-K Adopting Release.

146

See
One Hundred Years of Price Change: The Consumer Price Index and the American Inflation Experience (Apr. 2014) available at
https://www.bls.gov/opub/mlr/2014/article/one-hundred-years-of-price-change-the-consumer-price-index-and-the-american-inflation-experience.htm
(stating “the period from 1968 to 1983 stands out as the definitive era of sustained inflation in the 20th-century United States” and that during this time period, the largest 12-month increase in inflation of 14.8 percent occurred between March 1979 to March 1980).

147

See
1980 Form 10-K Adopting Release (“[T]he Commission believes that Management's Discussion and Analysis should contain information which changes the potentially confusing situation involving inflation impact disclosure into a meaningful discussion of the effects of changing prices on the registrant's business.”).

148
At that time, the Commission amended Instructions 8 and 9 to conform the requirement to the then-recently adopted SFAS No. 89 (Financial Reporting and Changing Prices) and stated “Item 303(a) does not require registrants to discuss the impact of inflation when such impact does not materially affect the financial statements.”
See Disclosure of the Effects of Inflation and Changes in Prices,
Release No. 33-6681 (Dec. 18, 1986), [51 FR 47026 (Dec. 30, 1986)), adopted in Release No. 33-6728 (Aug. 7, 1987), [52 FR 30917 (Aug. 18, 1987)].

Although Instruction 8 to Item 303(a) specifies that a discussion of inflation and other changes in prices is required only when such matters are considered material, we believe that the reference to inflation and changing prices may give undue attention to the topic, even when such information is not necessary to an understanding of a registrant's financial condition or results of operations. In order to encourage registrants to focus their MD&A on material information that is tailored to their respective facts and circumstances, we propose to eliminate Item 303(a)(3)(iv) and current Instruction 8 and Instruction 9 to Item 303(a).

We do not believe that these proposed changes would result in a loss of material information. Despite these proposed deletions, registrants would still be expected to discuss the impact of inflation or changing prices 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.
149

The Commission has also specifically encouraged registrants to consider disclosure of economic or industry-wide factors where relevant.
150

149

See
Item 303(a)(3)(ii) [CFR 229.303(a)(3)(ii)] and proposed Item 303(b)(3)(ii).

150

See
2003 MD&A Interpretive Release, at 75059.

In addition, the proposed amendments to current Item 303(a)(3)(iii)
151

would require registrants to provide the reasons underlying material changes from period-to-period in one or more line items in the statement of comprehensive income.
152

Similarly, our proposed amendment to Instruction 4 to Item 303(a) would require that, where the financial statements reveal material changes in one or more line items, registrants would be required to disclose the underlying reasons for material changes in quantitative and qualitative terms. If there are material changes from inflation or changing prices, registrants would be required to discuss those reasons under both current Item 303 and amended Item 303, as proposed.

151
Proposed to be renumbered as Item 303(b)(3)(iii).

152

See supra
Section II.C.4.

Request for Comment

27. Should we eliminate the references to inflation disclosure by eliminating Item 303(a)(3)(iv) and Instructions 8 and 9 to Item 303(a), as proposed? Would there be a loss of material information if we eliminate these provisions?

6. Off-Balance Sheet Arrangements (Item 303(a)(4))

Item 303(a)(4)
153

requires, in a separately-captioned section, a discussion of a registrant's off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on a registrant's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.
154

Generally, Item 303(a)(4)(ii) defines off-balance sheet arrangements as certain guarantees, retained or contingent interests in assets transferred to an unconsolidated entity, obligations under certain derivative instruments,
155

and variable interests in any unconsolidated entity. To the extent necessary to an understanding of such arrangements and effect, registrants must disclose the following items and such other information that the registrant believes is necessary for such an understanding:

153
Item 5.E. of Form 20-F and General Instruction B.(11) of Form 40-F contain requirements for issuers that use those forms that are virtually identical to the requirements of Item 303(a)(4).

154
Item 303(a)(4) of Regulation S-K [17 CFR 229.303(a)(4)].

155
For registrants whose financial statements are prepared in accordance with U.S. GAAP, the definition includes a contract that would be accounted for as a derivative instrument, except that it is both indexed to the registrant's own stock and classified in the registrant's statement of stockholders' equity.
See
ASC 815-10-15-74. For other registrants, the definition includes derivative instruments that are both indexed to the registrant's own stock and classified in stockholders' equity, or not reflected, in the registrant's statement of financial position.
See
Item 5.E.2.(c) of Form 20-F.

• The nature and business purpose of such off-balance sheet arrangements;
156

156
Item 303(a)(4)(i)(A) of Regulation S-K [17 CFR 229.303(a)(4)(i)(A)].

• The importance to the registrant of such off-balance sheet arrangements in respect of its liquidity, capital resources, market risk support, credit risk support, or other benefits;
157

157
Item 303(a)(4)(i)(B) of Regulation S-K [17 CFR 229.303(a)(4)(i)(B)].

• The amounts of revenues, expenses, and cash flows arising from such arrangements; the nature and amounts of any interests retained, securities

issued, and other indebtedness incurred in connection with such arrangements; and the nature and amounts of any other obligations or liabilities (including contingent obligations or liabilities) of the registrant arising from such arrangements that are or are reasonably likely to become material and the triggering events or circumstances that could cause them to arise;
158

and

158
Item 303(a)(4)(i)(C) of Regulation S-K [17 CFR 229.303(a)(4)(i)(C)].

• Any known event, demand, commitment, trend, or uncertainty that will result in or is reasonably likely to result in the termination, or material reduction in availability, of a registrant's off-balance sheet arrangements that provide material benefits, and the course of action that the registrant has taken or proposes to take in response to any such circumstances.
159

159
Item 303(a)(4)(i)(D) of Regulation S-K [17 CFR 229.303(a)(4)(i)(D)].

In 2002, the Commission issued a statement that the quality of disclosure of off-balance sheet arrangements in MD&A should be improved.
160

The Commission also noted that off-balance sheet arrangements often are integral to both liquidity and capital resources and that registrants should “consider all of these items together, as well as individually,” when drafting MD&A disclosure.
161

The Commission further noted that off-balance sheet arrangements and transactions with unconsolidated, limited purpose entities should be discussed pursuant to Item 303(a) when they are “reasonably likely to affect materially liquidity or the availability of or requirements for capital resources.”
162

160

See Commission Statement about Management's Discussion and Analysis of Financial Condition and Results of Operations,
Release No. 33-8056 (Jan. 22, 2002) [67 FR 3746 (Jan. 25, 2002)] (“2002 Commission Statement”).

161

See id.
at 3748.

162

See id.

The 2002 Commission Statement was consistent with Commission rules and guidance at the time. For example, Item 303(a)(2)(ii) specifically requires registrants to disclose off-balance sheet financing arrangements in their discussion of capital resources.
163

Similarly, the 1989 MD&A Interpretive Release indicated that a registrant's discussion of long-term liquidity and long-term capital resources must address demands or commitments, including any off-balance sheet items.
164

163
Item 303(a)(2)(ii) of Regulation S-K [17 CFR 229.303(a)(2)(ii)]. The item specifies that the discussion shall consider changes between equity, debt, and any off-balance sheet financing arrangements.

164

See
1998 MD&A Interpretive Release at 22431 (“The discussion of long-term liquidity and long-term capital resources must address material capital expenditures, significant balloon payments or other payments due on long-term obligations, and other demands or commitments, including any off-balance sheet items, to be incurred beyond the next 12 months, as well as the proposed sources of funding required to satisfy such obligations.”).

Several months after the 2002 Commission Statement, the Sarbanes-Oxley Act
165

was enacted and added Section 13(j) to the Exchange Act, which required the Commission to adopt rules providing that each annual and quarterly financial report required to be filed with the Commission disclose all material off-balance sheet arrangements.
166

To implement Section 13(j), in 2003 the Commission adopted specific disclosure requirements for off-balance sheet arrangements in current Item 303(a)(4).
167

When adopting Item 303(a)(4), the Commission reiterated that, while at that time only one item in Item 303 specifically identified off-balance sheet arrangements,
168

other requirements “clearly require[d] disclosure of off-balance sheet arrangements if necessary to an understanding of a registrant's financial condition, changes in financial condition or results of operations.”
169

The 2003 amendments supplemented and clarified the disclosures that registrants must make about off-balance sheet arrangements and required registrants to provide those disclosures in a separately designated section of MD&A.
170

165
Sarbanes-Oxley Act of 2002, Public Law 107-204, 116 Stat 745 (Jul. 2002) (“Sarbanes-Oxley Act”).

166
Section 401(a) of the Sarbanes-Oxley Act added Section 13(j) to the Exchange Act [15 U.S.C. 78m(j)], which directed the Commission to adopt rules requiring each annual and quarterly financial report filed with the Commission to disclose “all material off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships of the issuer with unconsolidated entities or other persons, that may have a material current or future effect on financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenues or expenses.”

167

See Disclosure in Management's Discussion and Analysis about Off-Balance Sheet Arrangements and Aggregate Contractual Obligations,
Release No. 33-8182 (Jan. 28, 2003), [68 FR 5981(Feb. 5, 2003)] (“Off-Balance Sheet Arrangements and Contractual Obligations Adopting Release”), at 5983.

168
Item 303(a)(2)(ii) of Regulation S-K [17 CFR 229.303(a)(2)(ii)].

169

See
Off-Balance Sheet Arrangements and Contractual Obligations Adopting Release, at 5983.

170

See id.

In the release proposing Item 303(a)(4), the Commission recognized that parts of the proposed off-balance sheet disclosure requirements might overlap with disclosure presented in the footnotes to the financial statements.
171

The Commission stated, however, that the proposed rules were designed to provide more comprehensive information and analysis in MD&A than the disclosure that U.S. GAAP required in footnotes to financial statements.
172

171

See Disclosure in Management's Discussion and Analysis About Off-Balance Sheet Arrangements, Contractual Obligations and Contingent Liabilities and Commitments,
Release No. 33-8144 (Nov. 4, 2002) 67 FR 68054 (Nov. 8, 2002), at n.72.

172

See id.

Since the adoption of Item 303(a)(4), the FASB has issued additional requirements that have caused U.S. GAAP to further overlap with the item.
173

For example, U.S. GAAP now requires disclosure in the notes to the financial statements of the nature and amount of a guarantee,
174

retained or contingent interests in assets transferred to unconsolidated entities,
175

pertinent information of derivative instruments that are classified as stockholders' equity under U.S. GAAP,
176

and obligations under variable interests in unconsolidated entities.
177

In the Commission staff's experience, this overlap often leads to registrants providing cross-references to the relevant notes to their financial statements or providing disclosure that is duplicative of information in the notes in response to Item 303(a)(4). Nevertheless, while many of the requirements in Item 303(a)(4) overlap with U.S. GAAP, some of the requirements related to the location, presentation, and nature of the disclosure are not the same. Additionally, Item 303(a)(4) disclosure is not audited. Below we discuss these differences in greater detail.

173
In June 2009, the FASB Issued SFAS No. 166,
Accounting for Transfers of Financial Assets an amendment of FASB Statement No. 140,
which requires enhanced disclosures about transfers of financial assets and a transferor's continuing involvement with transfers of financial assets accounted for as sales. Also in June 2009, the FASB issued SFAS No. 167,
Amendments to FASB Interpretation No. 46(R),
which requires enhanced disclosures about an enterprise's involvement in a variable interest entity, including unconsolidated entities. SFAS No. 166 and 167 have been codified as ASC Topics 860 (Transfers and Servicing) and 810 (Consolidation), respectively.
See also
Section II.D.1.b and note 315 below for a discussion of IFRS requirements that overlap with Item 5.E of Form 20-F.

174

See
ASC 460-10-50.

175

See
ASC 860-10-50-3, ASC 860-20-50.

176

See
ASC 815-40-50-5, ASC 505-10-50.

177

See
ASC 810-10-50-4.

Location of Disclosure.
Item 303(a)(4)(i) specifies that off-balance sheet arrangements should be discussed in a separately-captioned section. The instructions to Item 303(a)(4) permit that discussion to cross-reference information in the footnotes to the financial statements, rather than repeat it, provided that the MD&A disclosure

integrates the substance of the footnotes in a manner designed to inform readers of the significance of the information that is cross-referenced.
178

By contrast, U.S. GAAP does not prescribe the location of these disclosures, which may be dispersed throughout the notes to the financial statements. However, the submission of this information in interactive data format, which is required in periodic reports on Forms 10-K, 10-Q, 20-F, 40-F and reports on Forms 8-K and 6-K that contain revised or updated financial statements, allows investors to isolate disclosures about off-balance sheet arrangements even when it is dispersed throughout the notes to the financial statements.

178
Instruction 5 to Item 303(a)(4) of Regulation S-K [17 CFR 229.303(a)(4)].

Presentation of Disclosure.
Item 303(a)(4) requires disclosure for the most recent period and a discussion of changes from the previous year where necessary to an understanding of the disclosure.
179

U.S. GAAP does not require discussion of changes from the previous year.

179
Instruction 4 to Item 303(a)(4) of Regulation S-K [17 CFR 229.303(a)(4)].

Nature of Disclosures.
While Item 303(a)(4) and U.S. GAAP both require disclosure of the nature and amounts associated with off-balance sheet arrangements, Item 303(a)(4)(i)(A) requires additional disclosure about the business purpose of the off-balance sheet arrangement and the importance of the off-balance sheet arrangement to the registrant's liquidity and capital resources. Item 303(a)(4) also requires disclosure of any known event, demand, commitment, trend, or uncertainty that will result in or is reasonably likely to result in the termination or material reduction in the availability of material off-balance sheet arrangements to the registrant and the course of action the registrant has taken or proposes to take to address such circumstances. U.S. GAAP does not require this disclosure.

In the Concept Release, the Commission solicited comment on the importance of disclosure elicited by Item 303(a)(4) and whether and how we should amend the requirements. Some commenters supported retaining the requirements.
180

One of these commenters stated that without this disclosure requirement, “a registrant could create significant off-balance sheet liabilities that have the potential to impair its financial condition without investors knowing of it.”
181

Another commenter stated that off-balance sheet arrangements disclosure requirements should be retained and expanded, and stated that it was comfortable with duplications between the financial statements and MD&A disclosures.
182

This commenter indicated that an executive overview analyzing the risks associated with off-balance sheet arrangements would be beneficial.

180

See, e.g.,
letters from CFA, CalPERS, and S. Percoco.

181

See
letter from CFA.

182

See
letter from CalPERS.

Several commenters encouraged the Commission to eliminate or amend Item 303(a)(4), stating that the requirements substantially overlap with U.S. GAAP.
183

Some commenters suggested that the Commission apply the principles-based disclosure framework in MD&A to off-balance sheet arrangements.
184

Other commenters recommended that the Commission make clear that no disclosure is required related to off-balance sheet arrangements that are not material.
185

183

See. e.g.,
letters from Chamber, CGCIV, Davis Polk, E&Y, KPMG LLP (July 21, 2016) (“KPMG”), Arthur J. Radin, Janover LLC (“A. Radin”), and SIFMA.

184

See, e.g.,
letters from CGCIV, Chamber, and PWC.

185

See
letters from Davis Polk and Fenwick.

In light of the updates made to U.S. GAAP that result in substantial overlap between U.S. GAAP and Item 303(a)(4) of Regulation S-K, and consistent with our other proposed amendments intended to promote the principles-based nature of MD&A, we believe that the current more prescriptive off-balance sheet arrangement definition and related disclosure requirement in Item 303(a)(4) should be replaced with a principles-based instruction. Specifically, we propose to replace current Item 303(a)(4) with a new Instruction to Item 303(b) that would require 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.
186

This proposed instruction would build on the current requirement in Item 303(a)(2) that specifically requires consideration of off-balance sheet financing arrangements as part of the capital resources discussion.
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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A2020-02313. Public record. Not legal advice.