What Is SEC Release No. 33-10890?
This rule simplifies reporting by removing redundant data and enhances it by requiring more insightful, principles-based analysis from management.
The U.S. Securities and Exchange Commission (SEC) issued Release No. 33-10890 to modernize and simplify disclosure requirements for public companies. The release’s goal is to enhance the Management’s Discussion and Analysis (MD&A) section of financial reports, making it more useful for investors. It achieves this by amending items within Regulation S-K, the rules that dictate the content of SEC filings. The release targets Items 301, 302, and 303 of Regulation S-K to reduce repetitive information and focus disclosures on material insights.
Elimination of Specific Disclosure Requirements
A significant change from SEC Release No. 33-10890 is the removal of certain data tables from annual reports. The release eliminated Item 301, which mandated a five-year table of selected financial data. This table included figures like net sales, income from continuing operations, and total assets. The SEC removed this requirement because the information is duplicative, as the data is already available within a company’s audited financial statements.
The release also addressed Item 302 of Regulation S-K, which required a table of selected quarterly financial data for the two most recent fiscal years. This disclosure included information such as net sales, gross profit, and net income for each quarter. The SEC eliminated this tabular requirement because the same information is already disclosed in a company’s quarterly reports on Form 10-Q. Instead of the table, the rule now requires disclosure of any material retrospective changes that would impact the quarterly data.
Core Revisions to Management’s Discussion and Analysis (MD&A)
The most substantial changes are in the amendments to Item 303 of Regulation S-K, which governs the MD&A. A new objective now frames the section, requiring companies to provide a narrative explanation of their financial condition and results of operations through the eyes of management. This enables investors to see the company from the same perspective as those who manage it. The focus is on a clear analysis of performance and prospects, not just a recitation of financial figures.
The amendments streamline the discussion of liquidity and capital resources. Instead of a mechanical listing of cash sources and uses, the new approach requires a discussion of material cash requirements from known obligations. Companies must specify the anticipated sources of funds to meet these requirements and the purpose of such obligations. This change also eliminated the separate contractual obligations table, integrating this discussion into the broader liquidity analysis.
A revision impacts the discussion of results of operations. Previously, companies were required to provide a year-over-year comparison for each of three years. The new rule allows companies to focus their discussion on material changes between the most recent fiscal year and the preceding year. A discussion of the earliest of the three years is now only required if management believes it is necessary for a complete understanding of the company’s financial condition.
The release also eliminated the separate disclosure section for off-balance sheet arrangements. This does not mean such arrangements are no longer disclosed. Instead, companies must integrate any material discussion of these arrangements into the most relevant sections of their MD&A. For example, if an off-balance sheet arrangement impacts liquidity, it should be discussed within the liquidity and capital resources section.
An addition is a new, distinct disclosure section within MD&A focused on critical accounting estimates. This codifies previous SEC guidance and requires a discussion of the accounting estimates most important to their financial condition. For each critical estimate, the company must disclose why the estimate is critical, the assumptions made, and the potential sensitivity of reported financial results to changes in those assumptions. This provides investors with deeper insight into financial reporting uncertainties.
The release also formalizes guidance for the disclosure of Key Performance Indicators (KPIs). Companies presenting KPIs, which are metrics not defined by U.S. Generally Accepted Accounting Principles (GAAP), must adhere to specific disclosure requirements. When a KPI is included in the MD&A, the company must provide a clear definition of the metric, explain why it is useful to investors, and describe how management calculates it.
Preparing for Compliance with the New Rules
To adopt the changes, companies should conduct a gap analysis. This process involves comparing the company’s most recent MD&A and other financial disclosures against the new requirements. Management should identify which historical disclosures can be eliminated, such as the selected financial data table. They must also pinpoint areas that require modification and determine what new information is needed for the critical accounting estimates section.
A step in preparation is updating the company’s Disclosure Controls and Procedures (DC&P). These internal controls are the processes that ensure the accuracy of information in SEC filings. The DC&P must be revised to support the new disclosure framework, including establishing procedures to collect and validate data for critical accounting estimates and ensuring that any KPIs presented are consistently calculated.
Compliance requires close collaboration between a company’s management, legal counsel, and independent auditors. The principles-based nature of the new rules necessitates careful judgment. Legal counsel can provide guidance on whether the new disclosures meet SEC objectives. Independent auditors help assess the reasonableness of judgments made, especially concerning critical accounting estimates.