December 10, 2020

SEC Amends MD&A and Other Financial Disclosure Rules

The U.S. Securities and Exchange Commission (“SEC”) has adopted amendments to several of the financial disclosure requirements in Regulation S-K. Continuing the SEC’s efforts to modernize and streamline its disclosure requirements, these amendments will (1) revise Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A,” Regulation S-K Item 303) to clarify and streamline MD&A disclosure, (2) streamline Supplemental Financial Information (Item 302) and (3) eliminate the contractual obligations table (Regulation S-K Item 303(a)(5)) and the Selected Financial Data table (Item 301). The final amendments generally follow the amendments proposed in January 2020. In a departure from the proposals, the SEC has modified rather than eliminated Item 302, Supplemental Financial Information. Companies with a calendar year-end will not be required to comply with the amendments until 2022. However, the SEC will permit companies to apply the amendments starting 30 days after publication in the Federal Register, as long as the company complies with the amended disclosure item in its entirety. Companies with December 31 fiscal years are likely to be able to choose to comply with the amendments in their Form 10-K annual report for 2020.

The amendments will make a large number of changes in the financial disclosures required by Item 301 (Selected Financial Data), Item 302 (Supplementary Financial Information) and Item 303 (MD&A) of Regulation S-K. This alert highlights these changes. Consistent with earlier amendments to Regulation S-K and related forms and disclosure rules adopted in August 2018, March 2019 and August 2020, the SEC intends the amendments to simplify and streamline existing disclosure requirements, and does not expect the amendments to significantly change the amount of time required to comply with the amended rules. The changes include conforming amendments that will apply to smaller reporting companies and to the rules and forms that apply to foreign private issuers, including Form 20-F and Form 40-F.

What Companies Should Do Now

Because the SEC has expressly permitted companies to comply with the amendments starting 30 days after publication in the Federal Register, companies that may be interested in doing so should begin reviewing the amendments internally and with their auditors and legal counsel as soon as possible. Companies that do so must comply with the amended item in its entirety. Companies with December 31 fiscal year ends are likely to be able to choose to comply with one or more of the amended items beginning in mid- to late January 2021. This would allow these companies to comply with the amendments in their Form 10-K annual reports for the year ended December 31, 2020, to be filed in February or March 2021.

Effective Date, Compliance Date and Voluntary Early Compliance

The amendments will be effective 30 days after publication in the Federal Register. Companies must comply with the amendments beginning with the first fiscal year that ends on or after the date that is 210 days after publication in the Federal Register. For calendar year-end companies, this means that compliance will not be required until 2022. Companies may voluntarily comply with the requirements of one or more of the amended disclosure items at any time after the effective date, as long as the company complies with the amended disclosure item in its entirety. Registration statements must comply with the amendments if they are required to contain financial statements for a period ending on or after the compliance date at the time of initial filing.

To assist companies with the transition to the amended disclosure requirements of Items 301-303, we have prepared a redline comparison showing the changes in current requirements that will result from the amendments. This may be particularly useful when companies evaluate the amendments to MD&A (Item 303).

Selected Financial Data – Item 301

The amendments eliminate Item 301, the five year selected financial data table, as proposed. All of the information presented in the table is available in a company’s prior filings on the SEC’s EDGAR system. Further, disclosure about trends is required in a company’s MD&A discussion, which the SEC has clarified in the amendments to Item 303, making Item 301 largely redundant.

Supplementary Financial Information – Item 302

The SEC proposed to eliminate Item 302, which requires tabular disclosure of selected quarterly financial information for the preceding two year period, in addition to any subsequent quarterly periods. In response to comments, the SEC adopted amendments that will require this disclosure only when there have been one or more retrospective changes for any quarter in the last two fiscal years or any subsequent interim period that are material, individually or in the aggregate. The adopting release included a non-exhaustive list of examples of retrospective changes that that could require disclosure, if material:

  • Correction of an error;
  • Disposition of a business accounted for as discontinued operations;
  • Reorganization of entities under common control; and
  • A change in accounting principles.

As amended, Item 302 will require companies to explain any material changes and provide summarized financial information for each affected quarter and the fourth quarter in the relevant fiscal year. For IPO companies, this requirement will not apply until the company has filed its first Form 10-K annual report after its IPO. This change will eliminate the requirement that an IPO company seeking to make a follow-on offering before it has filed its first Form 10-K must prepare quarterly disclosure reviewed by its auditors.

MD&A – Item 303

Overall, the amendments to Item 303 are not likely to significantly change existing disclosure. Many of the amendments simplify Item 303 (for example, moving disclosure requirements currently contained in instructions to Item 303 to the related substantive disclosure requirement) or provide greater flexibility for companies (for example, elimination of the contractual obligations table). Other amendments codify current SEC guidance or clarify the principles-based approach to MD&A disclosure that the SEC has emphasized in recent years. The amended MD&A requirements, which are summarized in more detail below, include the following changes:

  • Contractual obligations table disclosure is eliminated, with a more flexible principles-based disclosure requirement integrated into liquidity and capital resources:
  • Off-balance sheet arrangements are eliminated as a disclosure item required to be separately captioned, with broader and more flexible principles-based disclosure requirements integrated into other MD&A sections;
  • Critical accounting estimates disclosure is specifically required, consistent with prior SEC guidance;
  • Known trend, event or uncertainty disclosure standard is clarified in a manner that differs from the SEC’s historical two-step disclosure test; and
  • Discussion of material changes in quarterly results of operations may be based on a comparison to either the corresponding prior year period or the immediately preceding sequential quarter.

To prepare for compliance with the amended MD&A requirements, companies should review Item 303, as amended, carefully to ensure that their disclosure will reflect the amended requirements.

Item 303(a) – Objective

The amendments add a new introductory section that states the principles that apply to MD&A disclosure. The new section generally codifies existing SEC guidance and moves several of the current instructions for Item 303 into the text of Item 303(a), in both cases with some changes from current requirements. Item 303(a) includes the following among the objectives of MD&A disclosure:

  • Provide readers with material information relevant to assessment of the financial condition and results of operations of the company, including amounts and certainty of cash flows from operations and outside sources;
  • Focus on material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be necessarily indicative of future operating results or financial condition; and
  • Discussion and analysis from management’s perspective of material financial and statistical information that will enhance a reader’s understanding of the company’s financial condition, cash flows and other changes in financial condition and results of operations.

The adopting release states that the amendments, and particularly the new section that states the objectives of MD&A, is intended to “emphasize a registrant’s future prospects and highlight the importance of materiality and trend disclosures to a thoughtful MD&A” and “to remind registrants that MD&A should provide an analysis that encompasses short term results as well as future prospects.” The amendments largely codify the SEC’s long-standing guidance on the need to disclose information currently known by management about events, trends or uncertainties that may have future impacts on the company. When the SEC proposed the amendments, it intended to incorporate its 1989 guidance on forward-looking disclosure. The final amendments incorporate a slightly different formulation of the SEC’s two-step disclosure test. This is discussed below under “Item 303 – Disclosure of Known Trends, Demands, Commitments, Events and Uncertainties.”

Item 303(b) – Full Fiscal Years

Section 303(b), as amended, contains specific requirements for disclosure of liquidity and capital resources, results of operations and critical accounting estimates. Item 303(b) will require companies to describe the underlying reasons for material changes in one or more line items from one period to another in quantitative and qualitative terms, including where material changes within a single line item offset each other. The instructions continue to provide that:

  • A line-by-line analysis of the financial statements as a whole is neither required nor generally appropriate;
  • Companies need not recite the amounts of changes from period to period if they are readily computable from the financial statements; and
  • The discussion must not merely repeat numerical data contained in the financial statements.

The amendments add product lines to geographic areas as examples of required disclosure of segment and/or subdivision information if necessary to understand the company’s business. 


The amendments refine, but do not significantly change, current disclosure requirements of liquidity and capital resources. As amended, Item 303(b)(1) requires analysis of a company’s ability to generate and obtain adequate amounts of cash to meet its requirements and its plans for cash in the short-term and in the long-term. The amendments explicitly state that “short-term” means the 12 months following the end of the company’s most recent fiscal period required to be presented.

Item 303(b)(1) will also require discussion and analysis of a company’s material cash requirements from known contractual and other obligations, specifying the type of obligation and the time period for the cash requirements. This requirement replaces the contractual obligations table that is currently required by Item 303(a)(5). Unlike the current disclosure requirement for contractual obligations, the amendments do not require disclosure of specific categories of contractual obligations in a mandated format. Instead, the amendments will allow companies to determine which contractual obligations are material to the company and tailor their disclosures accordingly.

As described in more detail below, discussion of off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on a company’s liquidity, cash requirements or capital resources must also be included as part of the company’s disclosure of liquidity and capital resources.  


The amendments modify the current requirement to describe known trends or uncertainties. Currently, disclosure is required of a known trend or uncertainty that the company expects will have a material impact. The amendments change the disclosure threshold from “the company reasonably expects will” to “are reasonably likely to,” which conforms to the formulation used in Item 303(b)(1). The amendments make the same change in the disclosure threshold for material changes in the relationship between costs and revenues, resulting in a consistent standard for disclosure in Item 303. The amendments also clarify that material “changes” not just material “increases” in net sales or revenue will require a description of the extent to which such changes are attributable to changes in prices, changes in the volume or amount of goods or services being sold or to the introduction of new products or services. 


The amendments generally codify SEC guidance about disclosure of critical accounting estimates, which are estimates made in accordance with generally accepted accounting principles (“GAAP”) that involve significant uncertainty and that have had (or are reasonable likely to have) a material impact on a company’s financial condition or results of operations. Companies are required to provide qualitative and quantitative information necessary to understand the uncertainty of each estimate and the impact the estimate has had or is reasonably likely to have on financial condition or results of operations to the extent the information is material and reasonably available. This information should include:

  • Why each critical accounting estimate is subject to uncertainty;
  • How much each estimate or assumption has changed over the relevant period, to the extent material and reasonably available; and
  • The sensitivity of the reported amount to the methods, assumptions and estimates that underly the company’s calculation, to the extent material and reasonably available.

An instruction states that this disclosure should supplement but not duplicate the description of accounting policies and other disclosure in the financial statement notes.

Item 303(c) – Interim Periods

The amendments include a new option for a company to discuss changes from either the prior year quarter, as currently required, or the sequentially preceding quarter. If a company compares the current quarter to the sequentially preceding quarter, it must either provide summary financial information for that quarter or identify its prior filings on the SEC’s EDGAR system that present that information. If a company changes from one form of comparison to the other, it must discuss the reasons for the change and provide both comparisons in the first filing in which the change is made. Other changes resulting from the amendments generally retain current interim period disclosure requirements. An instruction to Item 303(c) states that many of the instructions to Item 303(b) apply also to Item 303(c).

Item 303 – Disclosure of Known Trends, Demands, Commitments, Events or Uncertainties

The amendments make a number of changes throughout Item 303 to conform disclosure requirements relating to known trends, demands, commitments, events or uncertainties to require disclosure in circumstances where they have had or are “reasonably likely” to have a material impact. In addition, in the adopting release, the SEC modified the historical two-step test that had originally been articulated by the SEC in 1989.

Under the historical two-step test, 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 objectively evaluate 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.

For potential future events, it can be difficult to affirmatively conclude that a particular event or uncertainty is not reasonably likely to occur. To a lesser degree, it can also be difficult to affirmatively conclude that, if a trend, event or uncertainty is assumed to occur, a material effect on the company is not reasonably likely to occur. As a result, a strict application of this historical two-step test could lead a company to conclude that disclosure in MD&A is required for many events and uncertainties that have little likelihood of occurring.

The adopting release articulates a modified test for determining whether a company must disclose a known trend, demand, commitment, event or uncertainty. Under this test, disclosure is required if a known trend, demand, commitment, event, or uncertainty (1) is likely to come to fruition and (2) would reasonably be likely to have a material effect on the company’s future results or financial condition.

Similar to the result under the existing two-step test, disclosure is not required if the known trend, demand, commitment, event, or uncertainty either (1) is not reasonably likely to occur (i.e., is remote) or (2) assuming it occurred, a material effect on the company’s future results or financial condition is not reasonably likely. The key change under the new test relates to the analysis of known trends, demands, commitments, events, or uncertainties that would be reasonably likely to have a material effect on the company’s future results or financial condition where either (1) management cannot make an assessment as to the likelihood that they will come to fruition or (2) management has not concluded that they are likely, but also cannot conclude that they are remote.

Under the original 1989 two-step test, disclosure would often be required because it could be difficult for the company to conclude that the trend, event or uncertainty was not reasonably likely to occur. The adopting release indicates that management should perform this analysis objectively, and that disclosure is only required in these circumstances if a reasonable investor would consider omission of the information as significantly altering the mix of information made available in the company’s disclosures. The SEC rejected the suggestion of a commenter that the agency adopt the probability/magnitude test of Basic v. Levinson.

Item 303 – Deleted Disclosure Requirements

Off-Balance Sheet Arrangements (Current Item 303(b)(4)) The amendments eliminate the disclosure requirement for specified, separately captioned disclosure of material off-balance sheet arrangements within MD&A. Instead, a broader instruction has been added requiring discussion within the existing sections of Item 303 of off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on the company’s financial condition, changes in financial condition, revenues or expenses, result of operations, liquidity, cash requirements or capital resources. The new instruction encompasses all arrangements with unconsolidated entities and, unlike the current requirement, is not limited to a defined set of “off-balance sheet arrangements.” The instruction cites guarantees, retained or contingent interests in assets transferred, contractual arrangements that support the credit, liquidity or market risk for transferred assets, obligations that arise or could arise from variable interests held in an unconsolidated entity, or obligations related to derivative instruments that are both indexed to and classified in a company’s own equity under GAAP as examples of these types of arrangements.

Contractual Obligations Table (Current Item 303(b)(5)) The amendments eliminate the mandatory contractual obligations table and related disclosure. These requirements have been replaced with new, more flexible principles-based disclosure requirements within liquidity and capital resources in Item 303(b)(1), discussed above.

Effects of Inflation (Current Item 303(a)(3)(iv) and Instruction 8) The amendments eliminate the specific disclosure requirement for the effects of inflation and the largely boilerplate disclosure that most companies provide in response. Any material effects that result or would be reasonably likely to result from inflation or changing prices would be required to be disclosed as a material trend or uncertainty by Item 303(b).

Safe Harbor The amendments eliminate current Item 303(c), which states that the statutory safe harbors for forward-looking statements apply to the disclosures in Item 303(b)(4), off-balance sheet arrangements, and Item 303(b)(5), the contractual obligations table. Item 303(c) was adopted in 2003, when the SEC adopted these two requirements, in order to eliminate any potential ambiguity about the application of the statutory safe harbors to these disclosures. The elimination of these separate disclosure requirements prompted the SEC to eliminate the related safe harbor statement. In the adopting release, the SEC “explicitly confirm[s]” that elimination of Item 303(c) does not alter the availability or scope of the statutory and regulatory safe harbors to all of Item 303, as amended.