Friday, November 20. 2020
As part of a continuing, comprehensive evaluation of disclosure requirements to improve the existing disclosure regime for both investors and companies, the SEC first proposed these amendments on January 30th, 2020. The final changes reflect the SEC’s consideration of comment letters received in response to the proposal as experience with Regulation S-K that has arisen from the Division of Corporation Finance’s disclosure review program. The amendments also take into account changes in the regulatory and business landscape since the adoption of Regulation S-K.
Specifically, the SEC has made modifications to Items 301, 302, and 303 of Regulation S-K that should drive better focus on material information by:
- Eliminating Item 301 (Selected Financial Data); and
- Modernizing, simplifying and streamlining Item 302(a) (Supplementary Financial Information) and Item 303 (MD&A) through:
- Revising Item 302(a) to replace the current requirement for quarterly tabular disclosure with a principles-based requirement for material retrospective changes
- Adding a new Item 303(a), Objective, where registrants will state the principal objectives of MD&A
- Amending current Item 303(a)(1) and (2) (amended Item 303(b)(1)) to modernize, enhance and clarify disclosure requirements for liquidity and capital resources
- Amending current Item 303(a)(3) (amended Item 303(b)(2)), which will clarify, modernize, and streamline disclosure requirements for results of operations
- Adding a new Item 303(b)(3), Critical accounting estimates, which will clarify and codify SEC guidance on critical accounting estimates
- Replacing current Item 303(a)(4), Off-balance sheet arrangements, with a new instruction to discuss such obligations in the broader context of MD&A
- Eliminating current Item 303(a)(5), Tabular disclosure of contractual obligations, in light of the amended disclosure requirements for liquidity and capital resources and given overlap with information required in the financial statements
- Amending current Item 303(b), Interim periods (amended Item 303(c)), to modernize, clarify, and streamline the item and allow for flexibility when comparing interim periods. This will help registrants provide a more meaningful analysis that is relevant to their business cycles.
The SEC has also adopted parallel amendments to the financial disclosure requirements applicable to foreign private issuers, including making changes to Forms 20-F and 40-F. Other conforming amendments to the SEC rules and forms have been approved as appropriate.
The following list outlines the affected forms and indicates the impact on preparer burden:
Item 301: Selected Financial Data
Affected forms: Forms 10, 10-K, S-1, S-4, S-11, N-2, SF-1, SF-3, and Schedule 14A
- Elimination of Item 301 would decrease the paperwork burden by reducing repetitive information about a registrant’s historical performance.
- Replacing the reference to Item 301 with a reference to Rule 1-02(bb) of Regulation S-X in Items 1112, 1114, and 1115 of Regulation AB would generally result in similar disclosure being presented under these Items, and therefore not affect the burden estimate.
Item 302(a): Supplementary Financial Information
Affected forms: Forms 10, 10-K, S-1, S-4, S-11, N-2, and Schedule 14A
- Streamlining Item 302(a) to eliminate disclosure requirements except when there are one or more retrospective changes to the statements of comprehensive income for any of the quarters within the two most recent fiscal years and any subsequent interim period for which financial statements are included or required to be included by Article 3 of Regulation S-X that, individually or in the aggregate, are material.
Item 303(a): Full Fiscal Years
Affected forms: Forms 10, 10-K, 10-Q, S-1, S-4, S-11, 1-A, N-2, and Schedule 14A
Restructuring and Streamlining:
- Establishing a new paragraph Item 303(a) to emphasize the purpose of the MD&A section at the outset is expected to have a minimal impact on the paperwork burden.
- Amendments to streamline the text of new Item 303 would have no effect on the paperwork burden because these amendments are clarifications of existing requirements.
Liquidity and Capital Resources:
- Expanding Item 303(b)(1)(ii) (current Item 303(a)(2)) to require a discussion of material cash requirements would increase the paperwork burden.
- Clarifying the liquidity and capital resources disclosure requirements of Item 303(b)(1), including to require disclosure of material cash requirements from known contractual and other obligations, would increase preparer burden.
Results of Operations – Known Trends or Uncertainties:
- Amending Item 303(b)(2)(ii) (current Item 303(a)(3)(ii)) to clarify that a registrant should disclose reasonably likely changes in the relationship between costs and revenues would increase the paperwork burden, although this effect is expected to be minimal because the amendment is consistent with existing guidance.
Results of Operations – Net Sales, Revenues, and Line Item Changes:
- Amending Item 303(b) (current Item 303(a)(3), Item 303(a)(3)(iii) and Instruction 4 to Item 303(a)) to clarify 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 could marginally increase the paperwork burden
Results of Operations – Inflation and Price Changes:
- Eliminating the specific reference to inflation within current Item 303(a)(3)(iv) for issuers should marginally reduce the paperwork burden, although such decrease is expected to be minimal.
Off-Balance Sheet Arrangements:
- Replacing current Item 303(a)(4) with an instruction emphasizing a more principles-based approach with respect to off-balance sheet arrangement disclosures should reduce duplicative disclosures and decrease the paperwork burden.
- Amending Items 2.03 and 2.04 of Form 8-K to retain the definition of “off-balance sheet arrangements” that is in current Item 303(a)(4) would not result in any changes in reporting obligations under Item 2.03 and Item 2.04 of Form 8-K.
Contractual Obligations Table:
- Eliminating current Item 303(a)(5) would reduce duplicative disclosures and decrease the paperwork burden.
Critical Accounting Estimates:
- Adopting Item 303(b)(3) to explicitly require disclosure of critical accounting estimates would provide more clarity on the uncertainties involved in creating an accounting policy and how significant accounting policies of registrants may differ. This would increase the paperwork burden.
Item 303(c): Interim Periods
Affected forms: Forms 10, 10-K, 10-Q, S-1, S-4, S-11, 1-A, N-2, and Schedule 14A
- Amending Item 303(c) (current Item 303(b)) to allow for more flexibility in interim periods compared and eliminating certain instructions and providing cross-references to similar instructions to Item 303(b) would decrease the paperwork burden.
Effects on FPIs
Affected forms: Forms 20-F, 40-F, F-1, and F-4
- Eliminating Item 3.A and generally conforming Item 5 of Form 20-F to the final amendments to Item 303 would reduce the paperwork burden.
- Eliminating the contractual obligations disclosure requirement and replacing the off-balance sheet disclosure requirements in Forms 20-F and 40-F with a principles-based instruction would reduce the paperwork burden.
- Amending current Instruction 11 to Item 303 to conform to the hyperinflation disclosure requirements of Form 20-F would not affect the paperwork burden.
These amendments will become effective 30 days after they are published in the Federal Register. Registrants will be required to comply with the rule beginning with the first fiscal year ending on or after the date that is 210 days after publication in the Federal Register. Registrants must apply the amended rules in a registration statement and prospectus that, on its initial filing date, is required to contain financial statements for a period on or after this mandatory compliance date. Registrants may elect for early compliance with the final amendments any time after the effective date so long disclosure responsive to an amended item is provided in its entirety.