An Overview of the New MD&A Rule
By George Wilson
As we discussed in this post, the SEC’s Final Rule, “Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information” was published in the Federal Register on January 11, 2021.
The Rule’s transition provisions provide a mandatory transition date but also allow voluntary early compliance. Both transition provisions are based on the Final Rule’s February 10, 2021 effective date. The mandatory transition for a company is its first fiscal year that ends after August 9, 2021, which is 210 days after the effective date. Companies may voluntarily apply the new rule, on an S-K item-by-item basis, in any filing made on or after the effective date of February 10, 2021.
This means a company that files a Form 10-K on or after February 10, 2021, has the option to selectively early implement the changes to each individual S-K item:
- Selected financial data (S-K Item 301)
- Quarterly information (S-K Item 302)
- MD&A (S-K Item 303).
In this post, we reviewed the details and pros and cons of early implementation for selected financial data (S-K Item 301) and quarterly information (S-K Item 302).
Here is an overview of the MD&A changes in S-K Item 303. In future posts we will explore each change in detail.
The Final Rule:
Adds a new Item 303(a), Objective, to make the principal writing objectives in FR 36 and FR 72 part of the core MD&A guidance;
Amends Item 303(a)(1) and (2) (amended Item 303(b)(1)) to modernize, enhance and clarify disclosure requirements for liquidity and capital resources, including an emphasis on a company’s ability to generate and obtain adequate amounts of cash and providing more details about future cash requirements;
Amends current Item 303(a)(3) (amended Item 303(b)(2)) to clarify, modernize and streamline disclosure requirements for results of operations, including a focus on describing causal factors and underlying reasons in both quantitative and qualitative terms;
Adds a new Item 303(b)(3), Critical accounting estimates, to clarify and codify previous Commission guidance in FR 72 on critical accounting estimates;
Replaces current Item 303(a)(4), Off-balance sheet arrangements, with a more principles-based requirement to disclose their impact, if material;
Eliminates current Item 303(a)(5), Tabular disclosure of contractual obligations., replacing it with a new, more principles-based, liquidity and capital disclosure requirements that include this information to the extent material;
Amends current Item 303(b), Interim periods (amended Item 303(c)) to allow for sequential-quarter analysis in Form 10-Q; and
Removes old paragraph (a)(3)(iv) about inflation disclosures as this requirement is essentially embedded in the principles-based MD&A requirements.
We will explore the details of these changes in upcoming posts.
As always, your thoughts and comments are welcome!