Continuing its modernization and simplification of Regulation S-K as mandated by the JOBS and FAST Acts, the SEC, on January 30, 2020, proposed amendments to certain financial disclosure requirements of Regulation S-K, particularly Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A). The proposed amendments are intended to eliminate overlapping or unnecessary disclosure requirements, to revise requirements in light of advancements in technology (such as the availability of past financial statements and disclosure documents on EDGAR) and to further promote the “principles-based” nature of MD&A disclosure.

The proposed amendments would “modernize, simplify, and enhance disclosure requirements in Item 303” of Regulation S-K as follows:

• Item 301 (proposed to be deleted) — Registrants would no longer be required to provide five years of selected financial data.
• Item 302 (proposed to be deleted) — Registrants would no longer be required to provide two years of selected quarterly financial data.
• Item 303, Generally — Item 303 would be reorganized, with some provisions eliminated and others added, as summarized below.
• Item 303(a) — The principal objectives of MD&A disclosure would be clarified.
• Item 303(a)(2) — To address inconsistent disclosure regarding “capital resources,” registrants would be required to broadly disclose material cash requirements, including commitments for capital expenditures, as of the latest fiscal period, the anticipated source of funds needed to satisfy such cash requirements, and the general purpose of those requirements.
• Item 303(a)(3)(ii) — Registrants would be required to disclose known events that are reasonably likely to cause (as opposed to will cause) a material change in the relationship between costs and revenues.
• Item 303(a)(3)(iii) — A codification of existing guidance would require a discussion of the reasons underlying material changes in net sales or revenues, instead of material increases.
• Item 303(a)(3)(iv) — Registrants would be required to discuss the effect of inflation and other changes in prices only if they are part of a known trend or uncertainty that has had, or the registrant reasonably expects to have, a material favorable or unfavorable impact on net sales, or revenue, or income from continuing operations.
• Item 303(a)(4) (proposed to be deleted) — Registrants would no longer present off-balance sheet arrangements in a separately-captioned section, and instead would integrate that disclosure within the broader MD&A disclosures covering liquidity and capital resources.
• Item 303(a)(5) (proposed to be deleted) — Registrants would no longer be required to provide a contractual obligations table.
• Item 303(a), Instruction 4 — A codification of existing guidance would require disclosure of the underlying reasons for material changes in a line item (including when material changes within a line item offset one another).
• Item 303(b) — Registrants would be permitted to compare their most recently completed quarter to either the corresponding quarter of the prior year (as is currently required) or to the immediately preceding quarter.
• Item 303(b)(4) (proposed to be added) — A codification of existing guidance would explicitly require disclosure of critical accounting estimates and seek to eliminate duplicative disclosure of significant accounting policies.

Interestingly, the proposed amendments would for the first time provide guidance about the use of metrics.  Again, according to the SEC Release regarding the proposed amendments:

“The guidance provides that, where companies disclose metrics, they should consider whether additional disclosures are necessary and gives examples of such disclosures. The guidance also reminds companies of the requirements in Exchange Act Rules 13a-15 and 15d-15 to maintain disclosure controls and procedures and that companies should consider these requirements when disclosing metrics.”

The SEC is soliciting comments on the proposed amendments for a period of 60 days after publication in the Federal Register. The complete SEC Release regarding the proposed amendments is available here.