By Bill Flook
The SEC on November 19, 2020, issued final rules to streamline requirements in management’s discussion and analysis (MD&A) of financial condition and results of operation, along with some other changes easing requirements in Regulation S-K.
The SEC’s two Democratic commissioners dissented, issuing a joint statement praising some of the changes but criticizing the removal of certain tabular information on contractual obligations and the lack of standardized disclosure requirements on climate risk.
The SEC issued the rules in Release No. 33-10890, Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information. The changes become effective 30 days after publication in the Federal Register.
The SEC, with the final rules, said it adopted the majority of the amendments proposed in January in Release No. 33-10750, Management’s Discussion and Analysis, Selected Financial Data, and Supplementary Financial Information, with some changes intended to address comments received.
The rules make a long list of changes to Item 303 of Reg S-K, which pertains to the MD&A. The amendments also eliminate outright Item 301, removing the need for companies to provide five years of selected financial data.
In its January proposal, the SEC had also proposed to scrap Item 302, which requires companies to provide two years of selected quarterly financial data. In the final rules, the SEC instead revised Item 302, to replace the current requirements for tabular disclosure “with a principles-based requirement for material retrospective changes,” according to Release No. 33-10890.
Among other amendments, Release No. 33-10890 also replaces Item 303(a)(4), Off-balance sheet arrangements, with a new instruction that will “prompt registrants to consider and integrate disclosure of off-balance sheet arrangements within the context of their MD&A.”
And with the elimination of Item 303(a)(5), registrants will no longer need to provide a contractual obligations table. Instead, the SEC said that “a discussion of material contractual obligations will remain required through an enhanced principles-based liquidity and capital resources requirement focused on material short- and long-term cash requirements from known contractual and other obligations.”
Crenshaw and Lee, in their statement, warned that the changes eliminate disclosure on contractual information “that currently provides investors with critical insight into supply chain and risk management.” While proponents argue that the changes will simply eliminate duplicative disclosure of information found in other filings, the two commissioners noted that purchase obligations – one category of obligations included in the table – “is not always required by U.S. GAAP and does not consistently appear elsewhere in filings.”
“Purchase obligation disclosures provides information about the amount and timing of payments due in future periods, providing insight into corporate supply chain risk management, financial hedging, and anticipated increases in product demand,” Lee and Crenshaw wrote.
The two commissioners noted that the contractual obligations table had aided researchers in understanding the effect of the novel coronavirus pandemic on the cruise industry.
Crenshaw, who was confirmed and sworn in in August, was not on the SEC at the time of the proposal in January. Lee had dissented from the proposal in Release No. 33-10750 partly because it ignored “the elephant in the room” of climate disclosures.
In their joint statement, Lee and Crenshaw continued on that theme, warning that the rule “fails completely to address climate risk” the same as the SEC’s other disclosure modernization rulemakings.
“The modernization rulemakings afforded the Commission the opportunity to issue standardized disclosure requirements that would facilitate efficient comparisons of how companies manage these risks and assets,” the two commissioners wrote. “The Commission, instead, chose to rely heavily on principles-based disclosure requirements.”
Release No. 33-10750 is part of a barrage of deregulation-focused rulemakings by the SEC under outgoing Chairman Jay Clayton, who plans to step down at the end of the year.
In a statement, Clayton said that the rules “will improve the quality and accessibility of the disclosure that companies provide their investors, including, importantly giving investors greater insight into the information management uses to monitor and manage the business.”
“The improved approach to these disclosures reflects the broad diversity of issuers in our public markets and will allow investors to make better capital allocation decisions, while reducing compliance burdens and costs and maintaining strong investor protection,” Clayton said.
This article originally appeared in the November 23, 2020 edition of Accounting & Compliance Alert, available on Checkpoint.
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