[Federal Register Volume 85, Number 40 (Friday, February 28, 2020)]
[Proposed Rules]
[Pages 12068-12117]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-02313]
[[Page 12067]]
Vol. 85
Friday,
No. 40
February 28, 2020
Part II
Securities and Exchange Commission
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17 CFR Parts 210, 229, 239, et al.
Management's Discussion and Analysis, Selected Financial Data, and
Supplementary Financial Information; Proposed Rule
Federal Register / Vol. 85 , No. 40 / Friday, February 28, 2020 /
Proposed Rules
[[Page 12068]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 210, 229, 239, 240, and 249
[Release No. 33-10750; 34-88093; IC-33795; File No. S7-01-20]
RIN 3235-AM48
Management's Discussion and Analysis, Selected Financial Data,
and Supplementary Financial Information
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: We are proposing amendments to modernize, simplify, and
enhance certain financial disclosure requirements in Regulation S-K.
Specifically, we are proposing to eliminate Item 301 of Regulation S-K,
Selected Financial Data and Item 302 of Regulation S-K, Supplementary
Financial Information because they are largely duplicative of other
requirements and to amend Item 303 of Regulation S-K, Management's
Discussion & Analysis of Financial Condition and Results of Operations
(``MD&A'') to modernize and enhance MD&A disclosures. In combination,
the proposed amendments are intended to eliminate duplicative
disclosures and modernize and enhance MD&A disclosures for the benefit
of investors, while simplifying compliance efforts for registrants.
DATES: Comments should be received by April 28, 2020.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's internet comment forms (https://www.sec.gov/rules/proposed.shtml); or
Send an email to [email protected]. Please include
File Number S7-01-20 on the subject line.
Paper Comments
Send paper comments to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.
All submissions should refer to File Number S7-01-20. This file number
should be included in the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
website (https://www.sec.gov/rules/proposed.shtml). Comments also are
available for website viewing and printing in the Commission's Public
Reference Room, 100 F Street NE, Room 1580, Washington, DC 20549, on
official business days between the hours of 10 a.m. and 3 p.m. All
comments received will be posted without change. Persons submitting
comments are cautioned that we do not redact or edit personal
identifying information from comment submissions. You should submit
only information that you wish to make available publicly.
We or the staff may add studies, memoranda, or other substantive
items to the comment file during this rulemaking. A notification of the
inclusion in the comment file of any such materials will be made
available on our website. To ensure direct electronic receipt of such
notifications, sign up through the ``Stay Connected'' option at
www.sec.gov to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Angie Kim, Special Counsel, or
Courtney Lindsay, Special Counsel, Office of Rulemaking, at (202) 551-
3430, or Ryan Milne, Associate Chief Accountant, Office of the Chief
Accountant, at (202) 551-3400 in the Division of Corporation Finance,
U.S. Securities and Exchange Commission, 100 F Street NE, Washington,
DC 20549.
SUPPLEMENTARY INFORMATION: The Commission is proposing to remove and
reserve 17 CFR 229.301 (``Item 301'') and 17 CFR 229.302 (``Item 302'')
of Regulation S-K under the Securities Act of 1933 (the ``Securities
Act'') and the Securities Exchange Act of 1934 (the ``Exchange Act'').
The Commission is also proposing to amend 17 CFR 210.1-02(bb) of
Regulation S-X (``Rule 1-02(bb)''); 17 CFR 229.303 (``Item 303'') and
17 CFR 229.914 (``Item 914'') of Regulation S-K under the Securities
Act and the Exchange Act; 17 CFR 229.1112 (``Item 1112''), 17 CFR
229.1114 (``Item 1114'') and 17 CFR 229.1115 (``Item 1115'') of
Regulation AB (a subpart of Regulation S-K) under the Securities Act
and the Exchange Act; 17 CFR 239.11 (``Form S-1''), 17 CFR 239.20
(``Form S-20''), 17 CFR 239.25 (``Form S-4''), 17 CFR 239.31 (``Form F-
1'') and 17 CFR 239.34 (``Form F-4'') under the Securities Act; 17 CFR
240.14a-101 (``Schedule 14A'') under the Exchange Act; and 17 CFR
249.220f (``Form 20-F''), 17 CFR 249.240f (``Form 40-F''), and 17 CFR
249.308 (``Form 8-K'') under the Exchange Act.
Table of Contents
I. Introduction
A. Background
B. Overview of the Proposed Amendments
II. Description of the Proposed Amendments
A. Selected Financial Data (Item 301)
B. Supplementary Financial Information (Item 302)
1. Supplementary Financial Information (Item 302(a))
2. Information About Oil and Gas Producing Activities (Item
302(b))
C. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Item 303)
1. Restructuring and Streamlining (Item 303(a))
2. Capital Resources (Item 303(a)(2))
3. Results of Operations--Known Trends or Uncertainties (Item
303(a)(3)(ii))
4. Results of Operations--Net Sales and Revenues (Item
303(a)(3)(iii))
5. Results of Operations--Inflation and Price Changes (Item
303(a)(3)(iv), and Instructions 8 and 9 to Item 303(a))
6. Off-Balance Sheet Arrangements (Item 303(a)(4))
7. Contractual Obligations Table (Item 303(a)(5))
8. Critical Accounting Estimates
9. Interim Period Discussion (Item 303(b))
10. Safe Harbor for Forward-Looking Information (Item 303(c))
11. Smaller Reporting Companies (Item 303(d))
D. Application to Foreign Private Issuers
1. Form 20-F
2. Form 40-F
3. Item 303 of Regulation S-K
E. Additional Conforming Amendments
1. Roll-up Transactions--Item 914 of Regulation S-K
2. Regulation AB--Items 1112, 1114, and 1115
3. Summary Prospectus in Forms S-1 and F-1
4. Business Combinations--Form S-4, Form F-4 and Schedule 14A
5. Form S-20
F. Compliance Date
III. General Request for Comments
IV. Economic Analysis
A. Introduction
B. Baseline and Affected Parties
C. Potential Benefits and Costs of the Proposed Amendments
1. Overall Potential Benefits and Costs
2. Benefits and Costs of Specific Proposed Amendments
D. Anticipated Effects on Efficiency, Competition, and Capital
Formation
E. Alternatives
V. Paperwork Reduction Act
A. Summary of the Collections of Information
B. Summary of the Proposed Amendments' Effects on the
Collections of Information
C. Incremental and Aggregate Burden and Cost Estimates for the
Proposed Amendments
VI. Small Business Regulatory Enforcement Fairness Act
VII. Regulatory Flexibility Act Certification
VIII. Statutory Authority
I. Introduction
A. Background
We are proposing certain amendments to Regulation S-K, and related
rules and forms. Specifically, we are proposing (1)
[[Page 12069]]
to eliminate Item 301, Selected Financial Data and Item 302,
Supplementary Financial Information; and (2) to modernize, simplify,
and enhance the disclosure requirements in Item 303, MD&A.\1\ We are
also proposing certain parallel amendments applicable to financial
disclosures provided by foreign private issuers (``FPIs'').\2\
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\1\ Concurrent with this release we are issuing guidance on key
performance indicators and metrics in MD&A. See Commission Guidance
on Management's Discussion and Analysis of Financial Condition and
Results of Operations, Release No. 33-10751 (Jan. 30, 2020) (the
``Companion Guidance'').
\2\ See Section II.D below. An FPI is any foreign issuer other
than a foreign government, except for an issuer that (1) has more
than 50% of its outstanding voting securities held of record by U.S.
residents; and (2) any of the following: (i) A majority of its
officers or directors are citizens or residents of the United
States; (ii) more than 50% of its assets are located in the United
States; or (iii) its business is principally administered in the
United States. See 17 CFR 230.405. See also 17 CFR 240.3b-4(c).
While the disclosure requirements for Item 9 of Form 1-A for
Regulation A issuers are similar to the MD&A requirements under Item
303, we are not proposing to amend Form 1-A at this time. See
Amendments for Small and Additional Issues Exemptions Under the
Securities Act (Regulation A), Release No. 33-9741 (Mar. 25, 2015)
[80 FR 21805 (Apr. 20, 2015)], at 21830. With that said, in the
preparation of Part II of Form 1-A, Regulation A issuers have the
option of disclosing either the information required by (i) the
Offering Circular format (including Item 9 referenced above) or (ii)
Part I of Forms S-1 or S-11 (except for the financial statements,
selected financial data, and supplementary information called for by
those forms). Thus, even though the proposed changes would not amend
Item 9 of Form 1-A, they would still impact Regulation A issuers
that choose to disclose the information required by Part I of Forms
S-1 or S-11. See Section (a)(1)(ii) of Part II of Form 1-A.
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Based on a recommendation in the Report on Review of Disclosure
Requirements in Regulation S-K (``S-K Study''),\3\ Commission staff
initiated a comprehensive evaluation of the Commission's disclosure
requirements, which included an assessment of the information our rules
require registrants to disclose, how and where this information is
presented, and how we can better leverage technology as part of these
efforts (collectively, the ``Disclosure Effectiveness Initiative'').\4\
The objective of the Disclosure Effectiveness Initiative is to improve
our disclosure regime for the benefit of both investors and
registrants. In connection with the S-K Study and the launch of the
Disclosure Effectiveness Initiative, Commission staff received public
input on how to improve registrant disclosures.\5\ Additionally, in a
concept release issued in 2016,\6\ the Commission solicited comment on
the business and financial disclosure requirements in Regulation S-K.
Specifically, the Commission solicited comment on whether these
requirements provide the material information that investors need to
make informed investment and voting decisions, and whether any of our
rules have become outdated or unnecessary, or could otherwise be
improved. These proposals also are informed by the objectives of the
Fixing America's Surface Transportation Act (the ``FAST Act''), which,
among other things, required the Commission to study ways that
Regulation S-K could be modernized and simplified.\7\ The JOBS Act and
the FAST Act, and the work on the Disclosure Effectiveness Initiative
and the S-K Study, have focused on modernizing and improving disclosure
to reduce costs and burdens while continuing to provide investors with
all material information. These proposals continue that work with a
particular focus on performance and financial disclosure.
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\3\ See Report on Review of Disclosure Requirements in
Regulation S-K (Dec. 2013), available at https://www.sec.gov/news/studies/2013/reg-sk-disclosure-requirements-review.pdf. The report
was mandated by Section 108 of the Jumpstart Our Business Startups
Act (``JOBS Act''). Public Law 112-106, Sec. 108, 126 Stat. 306
(2012). Section 108 required the Commission to conduct a review of
Regulation S-K to comprehensively analyze the current registration
requirements and to determine how such requirements can be updated
to modernize and simplify the registration process and to reduce the
costs and other burdens associated with these requirements for
emerging growth companies. Section 108 also required the Commission
to provide a report on this review to Congress.
\4\ See SEC Spotlight on Disclosure Effectiveness, available at
https://www.sec.gov/spotlight/disclosure-effectiveness.shtml.
\5\ In connection with the S-K Study, the Commission received
public comments on regulatory initiatives to be undertaken in
response to the JOBS Act. See Comments on SEC Regulatory Initiatives
Under the JOBS Act: Title I--Review of Regulation S-K, available at
http://www.sec.gov/comments/jobs-title-i/reviewreg-sk/reviewreg-sk.shtml.
Similarly, to facilitate public input on the Disclosure
Effectiveness Initiative, members of the public were invited to
submit comments. See Request for Public Comment, available at http://www.sec.gov/spotlight/disclosure-effectiveness.shtml. Public
comments received to date on the Disclosure Effectiveness Initiative
are available on our website. See Comments on Disclosure
Effectiveness, available at https://www.sec.gov/comments/disclosure-effectiveness/disclosureeffectiveness.shtml.
\6\ See Business and Financial Disclosure Required by Regulation
S-K, Release No. 33-10064 (Apr. 13, 2016) [81 FR 23915 (Apr. 22,
2016)] (``Concept Release''). Comment letters related to the Concept
Release are available at https://www.sec.gov/comments/s7-06-16/s70616.htm. Unless otherwise indicated, comments cited in this
release are to the public comments on the Concept Release.
\7\ Public Law 114-94, Sec. 72003, 129 Stat. 1311 (2015)
(requiring, among other things, that the SEC conduct a study, issue
a report, and issue a proposed rule on the modernization and
simplification of Regulation S-K). Among other things, the FAST Act
directed the Commission to study Regulation S-K to: Determine how to
best modernize and simplify such requirements in a manner that
reduces costs and burdens on registrants while continuing to provide
all material information; emphasize a company-by-company approach
that allows relevant and material information to be disseminated
without boilerplate language or static requirements while preserving
completeness and comparability of information across registrants;
and evaluate methods of information delivery and presentation and
explore methods for discouraging repetition and the disclosure of
immaterial information. In 2016, the staff published the Report on
Modernization and Simplification of Regulation S-K (the ``FAST Act
Report''). See Report on Modernization and Simplification of
Regulation S-K (Nov. 23, 2016), available at https://www.sec.gov/reportspubs/sec-fast-act-report-2016.pdf. Comment letters received
in response to the FAST Act Report are available at https://www.sec.gov/comments/fast/fast.htm.
In connection with the FAST Act Report, the Commission proposed
and then adopted certain amendments to Regulation S-K. See FAST Act
Modernization and Simplification of Regulation S-K, Release No. 33-
10425 (Oct. 11, 2017) [82 FR 50988 (Nov. 2, 2017)] (``FAST Act
Proposing Release'') and FAST Act Modernization and Simplification
of Regulation S-K, Release No. 33-10618 (Mar. 20, 2019) [84 FR 12674
(Apr. 20, 2019)] (``FAST Act Adopting Release'').
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In developing the proposed amendments, we considered input from
comment letters the Commission received on the initiatives described
above. We also took into account the staff's experience with Regulation
S-K arising from the Division of Corporation Finance's disclosure
review program and changes in the regulatory and business landscape
since the adoption of Regulation S-K over 40 years ago. Regulation S-K
was adopted in 1977 to foster uniform and integrated disclosure for
registration statements under both the Securities Act and the Exchange
Act, and other Exchange Act filings, including periodic and current
reports.\8\ In 1982, the Commission expanded and reorganized Regulation
S-K to be the central repository for its non-financial statement
disclosure requirements.\9\ The Commission's goals in adopting
integrated disclosure were to revise or eliminate overlapping or
unnecessary disclosure requirements wherever possible, thereby reducing
burdens on registrants and enhancing readability
[[Page 12070]]
without affecting the provision of material information to
investors.\10\ The amendments we are proposing in this release would
continue to advance these goals.
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\8\ The Commission adopted the initial version of Regulation S-K
following issuance of the report by the Advisory Committee on
Corporate Disclosure led by former Commissioner A.A. Sommer, Jr.,
which recommended adoption of a single integrated disclosure system.
See H. Comm. on Interstate and Foreign Commerce, Report of the
Advisory Committee on Corporate Disclosure to the Securities and
Exchange Commission, 95th Cong., 1st Sess., at 95-29 (Comm. Print
1977), available at http://3197d6d14b5f19f2f440-5e13d29c4c016cf96cbbfd197c579b45.r81.cf1.rackcdn.com/collection/papers/1970/1977_1103_AdvisoryDisclosure.pdf. This version of
Regulation S-K included only two disclosure requirements--a
description of business and a description of properties.
\9\ See Adoption of Integrated Disclosure System, Release No.
33-6383 (Mar. 3, 1982) [47 FR 11380 (Mar. 16, 1982)] (``1982
Integrated Disclosure Adopting Release'').
\10\ See id.
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Additionally, we reviewed Items 301, 302, and 303 in light of
advancements in technology (in particular the availability of past
financial statements and other disclosure made in filings on the
Commission's Electronic Data Gathering, Analysis, and Retrieval
(``EDGAR'') system) and changes in requirements under U.S. Generally
Accepted Accounting Principles (``U.S. GAAP''). We also considered the
benefits and appropriateness of a principles-based approach in
reviewing these Items and our proposals are intended to promote the
principles-based nature of MD&A.\11\
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\11\ See Concept Release on Management's Discussion and Analysis
of Financial Condition and Operations, Release No. 33-6711 (Apr. 23,
1987) [52 FR 13715 (Apr. 24, 1987)] (stating that when the
Commission adopted MD&A as a separate disclosure requirement, the
rules remained intentionally general in nature: ``The Commission
believed that a flexible approach would elicit more meaningful
disclosure and avoid boilerplate discussions which a more specific
approach could foster. Further, the Commission reasoned that,
because each registrant is unique, no one checklist could be
fashioned to cover all registrants comprehensively.'').
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B. Overview of the Proposed Amendments
We are proposing changes to Items 301, 302, and 303 of Regulation
S-K that would reduce duplicative disclosure and focus on material
information. Specifically, we propose to eliminate:
Item 301--Selected Financial Data;
Item 302--Supplementary Financial Information; and
Item 303(a)(5)--MD&A, Tabular disclosure of contractual
obligations.
We are also proposing changes to modernize, simplify, and enhance
disclosure requirements in Item 303 in order to improve these
disclosures for investors and simplify compliance efforts for
registrants. Specifically, these proposed revisions would:
Add a new Item 303(a), Objective, to state the principal
objectives of MD&A;
Amend Item 303(a), Full fiscal years (proposed Item
303(b)) and Item 303(b), Interim periods (proposed Item 303(c)) to
modernize, clarify, and streamline the items;
Replace Item 303(a)(4), Off-balance sheet arrangements,
with an instruction regarding the need to discuss such obligations in
the broader context of MD&A;
Add a new Item 303(b)(4), Critical accounting estimates,
to clarify and codify Commission guidance on critical accounting
estimates; \12\
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\12\ See Commission Guidance Regarding Management's Discussion
and Analysis of Financial Condition and Results of Operation,
Release No. 33-8350 (Dec. 19, 2003) [68 FR 75056 (Dec. 29, 2003)]
(the ``2003 MD&A Interpretive Release'').
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Eliminate current Item 303(c), Safe harbor, in light of
the proposed replacement of Item 303(a)(4) and elimination of Item
303(a)(5); and
Eliminate Item 303(d), Smaller reporting companies \13\ in
light of the proposed elimination of Items 303(a)(3)(iv) and 303(a)(5).
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\13\ Item 10 of Regulation S-K defines a smaller reporting
company (``SRC'') as a registrant that is not an investment company,
an asset-backed issuer, or a majority-owned subsidiary of a parent
that is not an SRC that: Had a public float of less than $250
million; or had annual revenues of less than $100 million, and
either no public float or a public float of less than $700 million.
Business development companies (``BDCs'') do not fall within the SRC
definition and are a type of closed-end investment company that is
not registered under the Investment Company Act.
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We are also proposing certain parallel amendments to Forms 20-F and
40-F, including Item 3.A of Form 20-F (Selected Financial Information),
Item 5 of Form 20-F (Operating and Financial Review and Prospects),
General Instruction B.(11) of Form 40-F (Off-Balance Sheet
Arrangements), and General Instruction B.(12) of Form 40-F (Tabular
Disclosure of Contractual Arrangements).\14\ The following table
summarizes some of the changes we are proposing, as described more
fully in Section II (Proposed Amendments): \15\
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\14\ We discuss our proposals that would affect FPIs in Section
II.D below.
\15\ The information in this table is not comprehensive and is
intended only to highlight some of the more significant aspects of
the current rules and proposed amendments. It does not reflect all
of the proposed amendments or all of the rules and forms that are
affected. All changes are discussed in their entirety below. As
such, this table should be read together with the referenced
sections and the complete text of this release.
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Summary
Current item or issue description of Principal Corresponding FPI Discussed below
proposal objective(s) change(s)? in section
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Item 301, Selected financial Registrants would Modernize Yes................. II.A & II.D.1.
data. no longer be disclosure
required to requirement in
provide 5 years light of
of selected technological
financial data. developments and
simplify
disclosure
requirements.
Item 302(a), Supplementary Registrants would Reduce repetition N/A................. II.B.1.
financial information. no longer be and focus
required to disclosure on
provide 2 years material
of selected information.
quarterly Modernize
financial data. disclosure
requirement in
light of
technological
developments.
Item 303(a), MD&A.............. Clarify the Simplify and Yes................. II.C.1 & II.D.1.
objective of MD&A enhance the
and streamline purpose of MD&A.
the fourteen
instructions.
Item 303(a)(2), Capital Registrants would Modernize and Yes................. II.C.2 & II.D.1.
resources. disclose material enhance
cash disclosure
requirements, requirements to
including account for
commitments for capital
capital expenditures that
expenditures, as are not
of the latest necessarily
fiscal period, capital
the anticipated investments.
source of funds
needed to satisfy
such cash
requirements, and
the general
purpose of such
requirements.
Item 303(a)(3)(ii), Results of Registrants would Clarify item Yes................. II.C.3 & II.D.1.
operations. disclose known requirement by
events that are using a
reasonably likely disclosure
to cause a threshold of
material change ``reasonably
in the likely,'' which
relationship is consistent
between costs and with the
revenues, such as Commission's
known or interpretative
reasonably likely guidance on
future increases forward-looking
in costs of labor statements.
or materials or
price increases
or inventory
adjustments.
Item 303(a)(3)(iii), Results of Clarify that a Clarify MD&A Yes................. II.C.4 & II.D.1.
operations. discussion of the disclosure
reasons requirements by
underlying codifying
material changes existing
in net sales or Commission
revenues is guidance.
required.
[[Page 12071]]
Item 303(a)(3)(iv), Results of The item and Encourage Yes................. II.C.5.
operations. instructions registrants to
Instructions 8 and 9 (Inflation would be focus on material
and price changes). eliminated. information that
Registrants would is tailored to a
still be required registrant's
to discuss these businesses,
matters if they facts, and
are part of a circumstances.
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), Off-balance The item would be Prompt registrants Yes................. II.C.6, II.D.1, &
sheet arrangements. replaced by a new to consider and II.D.2.
instruction added integrate
to Item 303. disclosure of off-
Under the new balance sheet
instruction, arrangements
registrants would within the
be required to context of their
discuss MD&A.
commitments or
obligations,
including
contingent
obligations,
arising from
arrangements with
unconsolidated
entities or
persons that
have, or are
reasonably likely
to have, a
material current
or future effect
on such
registrant's
financial
condition,
changes in
financial
condition,
revenues or
expenses, results
of operations,
liquidity, cash
requirements, or
capital resources
even when the
arrangement
results in no
obligation being
reported in the
registrant's
consolidated
balance sheets.
Item 303(a)(5), Contractual Registrants would Promote the Yes................. II.C.7, II.D.1, &
obligations. no longer be principles-based II.D.2.
required to nature of MD&A
provide a and simplify
contractual disclosures by
obligations table. reducing
redundancy.
Instruction 4 (Material changes Incorporate a Enhance analysis Yes................. II.C.1 & II.D.1.
in line items). portion of the in MD&A. Clarify
instruction into MD&A disclosure
proposed Item requirements by
303(b). Clarify codifying
that where there existing
are material Commission
changes in a line guidance on the
item, including importance of
where material analysis in MD&A.
changes within a
line item offset
one another,
disclosure of the
underlying
reasons for these
material changes
in quantitative
and qualitative
terms is required.
Item 303(b), Interim periods... Registrants would Allow for N/A................. II.C.9.
be permitted to flexibility in
compare their comparison of
most recently interim periods
completed quarter to enhance the
to either the disclosure
corresponding provided to
quarter of the investors.
prior year or to
the immediately
preceding
quarter.
Registrants
subject to Rule 3-
03(b) of
Regulation S-X
would be afforded
the same
flexibility.
Critical Accounting Estimates.. Explicitly require Facilitate Yes................. II.C.8 & II.D.1.
disclosure of compliance and
critical improve resulting
accounting disclosure.
estimates. Eliminate
disclosure that
duplicates the
financial
statement
discussion of
significant
policies. Promote
meaningful
analysis of
measurement
uncertainties.
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We discuss the proposed amendments below in the order that each
Item appears in Regulation S-K. We welcome feedback and encourage
interested parties to submit comments on any or all aspects of the
proposals. When commenting, it would be most helpful if you include the
reasoning behind your position or recommendation.
II. Description of the Proposed Amendments
A. Selected Financial Data (Item 301)
Item 301 \16\ requires registrants to furnish selected financial
data in comparative tabular form for each of the registrant's last five
fiscal years and any additional fiscal years necessary to keep the
information from being misleading. Instruction 1 to Item 301 states
that the purpose of the item is to supply in a convenient and readable
format selected financial data that highlights certain significant
trends in the registrant's financial condition and results of
operations. Instruction 2 to Item 301 lists specific items that must be
included, subject to appropriate variation to conform to the nature of
the registrant's business, and provides that registrants may include
additional items they believe would enhance an understanding of, and
highlight, other trends in their financial condition or results of
operations.\17\
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\16\ See also Section II.D below for a discussion of related
amendments to Form 20-F.
\17\ Instruction 2 to Item 301 of Regulation S-K states that,
subject to appropriate variation to conform to the nature of the
registrant's business, the following items shall be included in the
table of financial data: Net sales or operating revenues; income
(loss) from continuing operations; income (loss) from continuing
operations per common share; total assets; long-term obligations and
redeemable preferred stock (including long-term debt, capital
leases, and redeemable preferred stock); and cash dividends declared
per common share.
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SRCs are not required to provide Item 301 information.\18\ Emerging
growth companies (``EGCs'') \19\ that are providing the information
called for by Item 301 in a Securities Act registration statement, need
not present selected financial data for any period prior to the
earliest audited financial statements presented in connection with the
EGC's initial public offering (``IPO'') of its common equity
securities.\20\ In addition, an EGC that is providing the information
called for by Item 301 in a registration statement, periodic report, or
other report filed under the Exchange Act need not present selected
financial
[[Page 12072]]
data for any period prior to the earliest audited financial statements
presented in connection with its first registration statement that
became effective under the Exchange Act or Securities Act.\21\
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\18\ Item 301(c) of Regulation S-K [17 CFR 229.301(c)].
\19\ An EGC is defined as a company that has total annual gross
revenues of less than $1.07 billion during its most recently
completed fiscal year and, as of December 8, 2011, had not sold
common equity securities under a registration statement. A company
continues to be an EGC for the first five fiscal years after it
completes an IPO, unless one of the following occurs: Its total
annual gross revenues are $1.07 billion or more; it has issued more
than $1 billion in non-convertible debt in the past three years; or
it becomes a ``large accelerated filer,'' as defined in Exchange Act
Rule 12b-2. See Securities Act Rule 405 and Exchange Act Rule 12b-2.
\20\ Item 301(d)(1) of Regulation S-K.
\21\ Item 301(d)(2) of Regulation S-K.
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In the Concept Release, the Commission solicited comment on whether
to retain, modify, or eliminate Item 301.\22\ The Commission also
solicited comment on the cost of this disclosure and whether
information on the earliest two of the last five fiscal years is
available without unreasonable cost or expense. Additionally, the
Commission solicited comment on the utility of this disclosure.
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\22\ See Concept Release, at 23940.
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Many commenters recommended eliminating Item 301 completely or
questioned its usefulness.\23\ One of these commenters stated that
``absent a requirement to provide narrative discussions of trends, the
current requirement under [Item 301] seems less useful in an electronic
era where historical financial information is easily accessible.'' \24\
Another commenter stated that it did not believe that presenting five
years of information is useful to an investor and similarly noted that
the information is accessible through EDGAR.\25\ An additional
commenter questioned whether selected financial data was necessary in
light of data-tagged financial statements.\26\ A number of commenters
recommended revising the item to reduce burdens, if retained.\27\
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\23\ See, e.g., letters from New York State Society of Certified
Public Accountants (July 19, 2016) (``NYSSCPA''), Aflac, Inc. (July
19, 2016) (``AFLAC''), Ernst & Young LLP (July 21, 2016) (``E&Y''),
PNC Financial Services Group (July 21, 2016) (``PNC''), Edison
Electric Institute and American Gas Association (July 21, 2016)
(``EEI and AGA''), XBRL US, Inc. (July 21, 2016), Chevron
Corporation (July 22, 2016) (``Chevron''), Fenwick West LLP (Aug. 1,
2016) (``Fenwick''), Grant Thornton LLP (July 21, 2016) (``Grant
Thornton''), Northrop Grumman Corporation (Sept. 27, 2016)
(``Northrop Grumman''), General Motors Company (Sept. 30, 2016)
(``General Motors''), and Financial Executives International (Oct.
3, 2016) (``FEI'').
\24\ See letter from Grant Thornton.
\25\ See letter from NYSSCPA.
\26\ See letter from E&Y. This commenter also suggested that the
Commission ``encourage registrants to include tables of selected
financial data in the summary section of their annual reports if the
information would highlight the key content and developments
disclosed in the full report.''
\27\ See, e.g., letters from NYSSCPA, AFLAC, E&Y, Fenwick,
General Motors, and FEI. These commenters suggested: Limiting the
disclosure requirement to two or three years (letters from NYSSCPA
and AFLAC); making disclosure of the earlier years voluntary and
allowing all registrants to adopt a ``build up'' approach to Item
301 similar to the option available to EGCs (letters from E&Y and
Fenwick); making the selected financial data table voluntary and
permitting registrants to present only a retroactive accounting
change for the periods presented in the financial statements if the
periods prior to those presented in the financial statements cannot
be recast without unreasonable effort or cost (letter from General
Motors); and allowing hyperlinks to access five-year data if placed
within a separate `company profile' section of EDGAR (letter from
FEI).
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One of these commenters noted the potentially significant costs in
public offerings for comfort letters associated with this
disclosure.\28\ This commenter stated that where prior years have been
audited by a different accounting firm, companies typically incur
significant additional costs, both in terms of direct costs and
internal resources, to obtain comfort letters. Additionally, this
commenter stated that if Item 301 information is required for periods
where no audited financial statements are otherwise required, the costs
can be much more substantial.
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\28\ See letter from Fenwick.
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Another commenter encouraged the Commission to ask investors
whether the utility of the information provided in response to Item 301
justify the costs of presenting it.\29\ This commenter stated that,
while this required disclosure is limited to a small number of line
items, certain of these items effectively require preparation of a full
income statement and balance sheet to derive information for the
earlier two years.
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\29\ See letter from PricewaterhouseCoopers LLP (July 21, 2016)
(``PWC'') (stating that providing the earliest two years can be time
consuming and costly, such as in circumstances where the information
has not been previously provided (e.g., in an initial registration
statement)).
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Many commenters recommended revising Item 301 to allow registrants
to omit the earliest two years.\30\ Some of these commenters noted that
providing disclosure of the earliest two years often creates challenges
for registrants, including non-EGC issuers conducting IPOs.\31\ A few
of these commenters recommended a practicability exception allowing
registrants to omit the earliest two years when the information cannot
be provided without unreasonable cost or expense.\32\ Others
recommended that the earliest two years should be required only when
necessary to make the current financial data not misleading,\33\ or to
illustrate material trends.\34\
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\30\ See, e.g., letters from Deloitte & Touche LLP (July 15,
2016) (``Deloitte''), BDO USA, LLP (July 20, 2016) (``BDO''), U.S.
Chamber of Commerce (Jul. 20, 2016) (``Chamber''), FedEx Corporation
(``FedEx'') (Jul. 21, 2016), Corporate Governance Coalition for
Investor Value (July 20, 2016) (``CGCIV''), Center for Audit Quality
(July 21, 2016) (``CAQ''), Securities Industry and Financial Markets
Association (July 21, 2016) (``SIFMA''), National Association of
Real Estate Investment Trusts (July 21, 2016) (``NAREIT''), Allstate
Insurance Company (July 21, 2016) (``Allstate''), Davis Polk &
Wardwell LLP (July 22, 2016) (``Davis Polk''), Stephen Percoco (July
24, 2016) (``S. Percoco''), and Shearman & Sterling LLP (Aug. 31,
2016) (``Shearman'').
\31\ See, e.g., letters from Deloitte and CAQ.
\32\ See, e.g., letters from BDO, Davis Polk, and S. Percoco.
\33\ See, e.g., letters from Chamber, FedEx, and CGCIV.
\34\ See, e.g., letters from NAREIT and SIFMA.
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A few commenters supported retaining Item 301.\35\ Some of these
commenters stated that having the information in one place keeps
investors from having to review multiple sources to obtain this
information,\36\ with one of these commenters noting that investors
sometimes rely on printed copies.\37\ Two of the commenters also stated
that requiring this disclosure for five years is an appropriate
timeframe,\38\ with one stating that five years is more likely to
capture the effects that business cycles may have on a registrant.\39\
Another stated that Item 301 information should be easy for companies
to disclose because the information is already in company records.\40\
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\35\ See, e.g., letters from R.G. Associates, Inc. (July 6,
2016) (``RGA''), California Public Employees' Retirement System
(July 21, 2016) (``CalPERS''), California State Teachers' Retirement
System (July 21, 2016), and CFA Institute (Oct. 6, 2016).
\36\ See letters from RGA and CFA Institute.
\37\ See letter from RGA.
\38\ See letters from CalPERS and CFA Institute.
\39\ See letter from CFA Institute.
\40\ See letter from CalPERs.
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We propose to eliminate Item 301. When the precursor to Item 301
was adopted in 1970, prior annual reports were not quickly and easily
accessible.\41\ Today, the information required by Item 301 can be
readily accessed and compiled through prior filings on EDGAR.\42\ In
addition, this information is tagged using eXtensible Business
Reporting Language (``XBRL'') data format. As noted above, there are
currently certain exceptions to Item 301 for EGC and SRC
registrants.\43\ Our proposals would not affect these exceptions or
result in any further loss of information from these registrants.\44\
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\41\ Before adopting the precursor to Item 301, the Commission
implemented a microfiche system in 1968 that supplemented its hard
copy reproduction service and was intended to ``facilitate wider,
more economical and more rapid distribution'' of Exchange Act
reports. See Disclosure to Investors--A Reappraisal of Federal
Administrative Policies under the '33 and '34 Acts, Policy Study,
Mar. 27, 1969, available at http://www.sechistorical.org/museum/galleries/tbi/gogo_d.php, at 313.
\42\ In addition, filings are generally available on
registrants' websites and other third-party websites.
\43\ We recognize an exception to this accessibility would be
SRCs and EGCs that are either filing an initial registration
statement or those that have not been public for at least two fiscal
years following their initial registration statement.
\44\ Based on Ives Group's Audit Analytics data, during the
period from April 5, 2012 through December 31, 2018, EGC issuers
accounted for approximately 1,267 out of 1,440, or approximately
88%, of priced exchange-listed IPOs (excluding deals identified as
mergers, spin-offs, or fund offerings). SRCs are often also EGCs so
these statistics of IPOs conducted by EGCs likely encompass the
majority of IPOs conducted by SRCs. In addition, for reasons
discussed in this release, registrants would still be required to
discuss and analyze material trends, which was one of the intended
purposes of Item 301. Accordingly, in the majority of instances, we
believe that our proposal would not result in a loss of disclosure.
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[[Page 12073]]
In adding the requirement for selected financial data to Regulation
S-K, the Commission stated that Item 301 was ``relevant primarily where
it can be related to trends in the registrant's continuing
operations.'' \45\ However, Item 303 specifically calls for disclosure
of material trend information.\46\ In addition, since Item 301 has been
incorporated into Regulation S-K, the Commission has issued guidance
emphasizing trend disclosure in MD&A.\47\ In light of the requirement
for discussion and analysis of trends in Item 303, we believe requiring
five years of selected financial data is not necessary to achieve the
original purpose of providing trend disclosure. Registrants may,
however, continue to include a tabular presentation of relevant
financial or other information discussed in MD&A, to the extent they
believe that such a presentation would be useful to an understanding of
the disclosure. We believe that eliminating Item 301 would continue to
allow registrants the flexibility to present a meaningful MD&A
discussing material trend information, while easing compliance burdens
on registrants.
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\45\ Amendments to Annual Report Form, Related Forms, Rules,
Regulations, and Guides; Integration of Securities Acts Disclosure
Systems, Release No. 33-6231 (Sept. 2, 1980) [45 FR 63630 (Sept. 25,
1980)] (``1980 Form 10-K Adopting Release'').
\46\ See, e.g., Item 303(a)(3).
\47\ See, e.g., Management's Discussion and Analysis of
Financial Condition and Results of Operations; Certain Investment
Company Disclosures, Release No. 33-6835 (May 18, 1989) [54 FR 22427
(May 24, 1989)] (the ``1989 MD&A Interpretative Release'') and 2003
MD&A Interpretive Release.
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We acknowledge that some commenters suggested we revise Item 301 to
require only presentation of the same number of years as included in
the financial statements, or otherwise provide accommodations to limit
the number of years presented. However, we believe that such an
approach would result in disclosure that would be largely duplicative
of information in the financial statements, and therefore may have
limited utility. We also acknowledge that some commenters recommended
that we retain Item 301 without any revisions or enhance the item
requirement. We believe, however, that the incremental utility of
having a full five years of selected financial information is not
justified by the cost to prepare such disclosures, particularly since
Item 303 already requires disclosure of material trends and such other
information necessary to an understanding of the registrant's financial
conditions, changes in financial condition, and results of
operations.\48\
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\48\ See Item 303(a).
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Request for Comment
1. Should we eliminate Item 301, as proposed? Would eliminating
Item 301 result in the loss of material information that is otherwise
not available to investors, such as through prior filings on EDGAR? If
so, what information would be lost, and are there alternatives we
should consider that would capture this information?
2. Is the option for investors to compile selected financial
information from current or prior filings an adequate substitute for
the separate presentation of that information in Item 301? Do current
XBRL-tagging requirements facilitate compilation and comparison of
selected financial information?
3. Are the requirements of Item 303 sufficient to provide investors
with necessary disclosure regarding trends in a registrant's results of
operations and financial condition?
4. Alternatively, if Item 301 should be retained, should
registrants be allowed to provide less than five years of selected
financial data? If so, what is the appropriate number of years that
should be provided, and in what circumstances?
5. What are the costs to registrants of providing five years of
selected financial data? Would those costs significantly decrease if
the Commission limited selected financial data to only those years
presented in the filing's historical financial statements?
6. How do market participants use the selected financial data
disclosures? Do market participants rely on any particular fiscal year
or years more than others (e.g., the most recent two or three years)?
Would there be a cost to obtain selected financial data disclosures
elsewhere and, if so, what would that cost be?
7. Would registrants continue to provide selected financial data
even if they are no longer required to do so? If so, for how many
years?
8. If we were to retain Item 301, should we modify the line items
required to be included in the presentation pursuant to Instruction 2?
\49\ For example, should we allow registrants more discretion regarding
which line items to present?
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\49\ See Instruction 2 to Item 301, supra note 17.
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9. The Commission recently proposed to extend to BDCs the
requirement for registered closed-end investment companies to disclose
``financial highlights.'' \50\ The disclosure required by Item 301 and
the financial highlights requirement is similar in many respects. If we
were to adopt the financial highlights requirement and retain Item 301,
should we specifically exclude BDCs from the Item 301 requirement?
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\50\ See Securities Offering Reform for Closed-End Investment
Companies, Release No. 33-10619 (Mar. 20, 2019) [84 FR 14448 (Apr.
10, 2019)], at 14472.
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B. Supplementary Financial Information (Item 302)
1. Supplementary Financial Information (Item 302(a))
Item 302(a)(1) requires disclosure of selected quarterly financial
data of specified operating results \51\ and Item 302(a)(2) requires
disclosure of variances in these results from amounts previously
reported on a Form 10-Q.\52\ Item 302(a) does not apply to SRCs or FPIs
and, because it only applies to companies that already have a class of
securities registered under Section 12 of the Exchange Act at the time
of filing, it does not apply to first time registrants conducting an
IPO and registrants who are only required to file reports pursuant to
Section 15(d) of the Exchange Act.\53\ When Item 302(a) applies, it
requires certain information for each full quarter within the two most
recent fiscal years and any subsequent period for which financial
statements are included or required by Article 3 of Regulation S-X.\54\
Item 302(a)(3) requires a description of the effect of any discontinued
operations and unusual or infrequently occurring items recognized in
each quarter, as well as the aggregate effect and the nature of year-
end or other adjustments that are material to the results of that
quarter.\55\
[[Page 12074]]
If a registrant's financial statements have been reported on by an
accountant, Item 302(a)(4) requires that accountant to follow
appropriate professional standards and procedures regarding the data
required by Item 302(a).\56\
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\51\ Item 302(a)(1) of Regulation S-K [17 CFR 229.302(a)(1)].
Item 302(a)(1) specifies disclosure of: Net sales; gross profit (net
sales less costs and expenses associated directly with or allocated
to products sold or services rendered); income (loss) from
continuing operations; per share data based upon income (loss) from
continuing operations; net income (loss); and net income (loss)
attributable to the registrant.
\52\ Item 302(a)(2) of Regulation S-K [17 CFR 229.302(a)(2)].
When the data supplied pursuant to Item 302(a) varies from amounts
previously reported on the Form 10-Q filed for any quarter, such as
when a combination between entities under common control occurs or
where an error is corrected, the registrant must reconcile the
amounts given with those previously reported and describe the reason
for the difference.
\53\ Item 302(a)(5) and (c) of Regulation S-K [17 CFR
229.302(a)(5) and (c)].
\54\ Item 302(a)(1) and (a)(3) [17 CFR 229.302(a)(1) and
(a)(3)].
\55\ Item 302(a)(3) of Regulation S-K [17 CFR 229.302(a)(3)].
The requirement applies to items recognized in each full quarter
within the two most recent fiscal years and any subsequent interim
period for which financial statements are included or are required
to be included.
\56\ Item 302(a)(4) of Regulation S-K [17 CFR 229.302(a)(4)].
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In the Concept Release, the Commission solicited input on whether
to retain, eliminate, or modify Item 302(a). The Commission also
solicited input on the importance of information required by Item
302(a) that is not duplicative of previously provided information, such
as a separate presentation of certain fourth quarter information and
the effect of a retrospective change in the earliest of the two
years.\57\ The Commission also sought input on the costs and benefits
of this disclosure item.
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\57\ Because Item 302(a)(2) requires disclosure of variances in
results from amounts previously reported for the two most recent
fiscal years, the effect of a retrospective change in any quarter
for which a Form 10-Q is filed in the more recent of the two fiscal
years will be disclosed in the selected quarterly data. However,
absent Item 302(a)(2), this variance would not be specifically
required to be disclosed until the following year in the
corresponding fiscal quarter in which the retrospective change
occurred. Additionally, disclosure in the Form 10-Q for this
corresponding fiscal quarter would not include the effects of this
change in the earliest of the two years presented in the Form 10-K,
as this Form 10-Q would be limited to the current and prior-year
interim periods.
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A few commenters recommended retaining and expanding Item
302(a).\58\ One of these commenters stated that it ``sense[d] that
investors find it useful to see fourth quarter results presented
discretely, rather than having to infer them based on the annual
results and the interim results through the third quarter.'' \59\ The
commenter also stated that, where the data changes from what was
previously reported, having the revised data in an annual report allows
investors to understand the effects of the changes sooner. Another of
these commenters noted the importance of fourth quarter data, stating
that, in the absence of a Form 8-K filing containing such information,
analysts must derive the information from the annual report and the
three previously filed quarterly reports and that ``any numbers derived
from this method are at best approximate.'' \60\ This commenter stated
that, ``if a requirement to file a full fourth-quarter report is too
onerous . . . [Item 302(a)] could be enhanced to include more data from
the income statement beyond revenues, net income, and earnings per
share.'' Yet another commenter recommended that Item 302(a) be revised
to ensure the information is presented in a consistent manner across
registrants.\61\
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\58\ See letters from BDO, Bloomberg LP (July 21, 2016)
(``Bloomberg''), and CFA Institute.
\59\ See letter from BDO.
\60\ See letter from Bloomberg.
\61\ See letter from CFA Institute.
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Multiple commenters recommended streamlining Item 302(a).\62\
Several of these commenters recommended revising Item 302(a)(5) to
accommodate newly reporting registrants in an annual report or a
follow-on offering where the registrant would be required to provide
Item 302(a) data for interim periods prior to those presented in the
IPO registration statement.\63\ Another commenter recommended only
requiring Item 302(a) disclosure when there is a material retrospective
change in the financial statements that has not been previously
filed.\64\ The commenter also stated that some companies voluntarily
provide fourth quarter data in earnings releases.
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\62\ See, e.g., letters from Fenwick, Deloitte, CAQ, E&Y, Grant
Thornton, and PWC.
\63\ See, e.g., letters from Deloitte, CAQ, E&Y, Grant Thornton,
and PWC. Suggested accommodations included: Requiring registrants to
begin presenting selected quarterly data in their second annual
report (see letters from E&Y, PWC, and CAQ); and allowing new
registrants to present supplementary financial data in registration
statements and annual reports that ``build'' from the quarterly
information that has been separately filed in Exchange Act reports
subsequent to an IPO (see letters from Deloitte, CAQ, E&Y, Grant
Thornton, and PWC).
\64\ See letter from Fenwick. In this commenter's view, outside
of such situations, quarterly financial information in a
registrant's annual report is redundant with information available
on EDGAR. See also letter from Crowe.
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Most commenters recommended eliminating Item 302(a) altogether,\65\
with many of these commenters stating that this item is duplicative of
disclosures provided in prior filings.\66\ Two of these commenters
stated that ``the disclosure required under Item 302(a) is yet another
example of duplicative information that unnecessarily complicates and
lengthens disclosure documents, while increasing burdens for
registrants and offering little value to investors.'' \67\ Another
commenter stated that, though the original intent of the item was ``to
help investors understand the pattern of corporate activities
throughout a fiscal year,'' not all businesses are seasonal and the
information provided by Item 302(a) is already available in Form 10-
Qs.\68\ This commenter supported a flexible approach for Item 302(a)
disclosure that would allow registrants to determine when and if this
disclosure would be relevant and enhance an investor's understanding of
the business throughout the year. This commenter also stated that
fourth quarter data can be easily derived from prior filings without
needing to separately reference the fourth quarter information.
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\65\ See, e.g., letters from AFLAC, Chamber, FedEx, CGCIV,
UnitedHealth Group, Inc. (July 21, 2016) (``United Health''), SIFMA,
PNC, EEI and AGA, NAREIT, Davis Polk, S. Percoco, National Investor
Relations Institute (``NIRI''), Northrop Grumman, FEI, and General
Motors.
\66\ See, e.g., letters from AFLAC, Chamber, FedEx, CGCIV,
UnitedHealth Group, SIFMA, PNC, EEI and AGA, NAREIT, NIRI, Northrop
Grumman, FEI, and General Motors.
\67\ See letters from Chamber and CGCIV.
\68\ See letter from FEI.
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We propose to eliminate Item 302(a). Like many commenters, we
believe that this prescriptive requirement largely results in
duplicative disclosures. The precursor to Item 302 was adopted at a
time when quarterly data was ``reported on an extremely abbreviated
basis.'' \69\ The item was intended to help investors understand the
pattern of corporate activities throughout a fiscal period by
disclosing trends over quarterly periods to reflect seasonal
patterns.\70\ Today, most of the financial data required by Item 302(a)
can be found in prior quarterly reports, which are readily available on
EDGAR. While Item 302(a) requires separate disclosure of certain fourth
quarter information, which is not otherwise required to be disclosed,
we believe this data generally can be calculated from a registrant's
Form 10-K and third quarter Form 10-Q. We believe that eliminating this
prescriptive requirement will encourage registrants to take a more
principles-based approach to presenting information called for by Item
302(a) in their filings and specifically, in MD&A.
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\69\ See Interim Financial Data: Proposals to Increase
Disclosure, Release No. 34-11142 (Dec. 19, 1974) [40 FR 1079 (Jan.
6, 1975)], at 1080.
\70\ See Interim Financial Reporting: Increased Disclosures,
Release No. 33-5611 (Sept. 10, 1975) [40 FR 46107 (Oct. 6, 1975)],
at 46108.
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Eliminating Item 302(a) may result in the loss of a separate
presentation of certain fourth quarter information and, where
applicable, the effect of a retrospective change in the earliest of the
two years.\71\ Where fourth quarter results are material or there is a
material retrospective change, existing requirements would still elicit
this disclosure. Specifically, Item 303 requires registrants to discuss
unusual events that materially affected reported income and other
matters that are necessary to understand their results of
operations.\72\ The item also requires
[[Page 12075]]
registrants to discuss known trends and uncertainties that have had or
that registrants reasonably expect to have an impact on net sales,
revenues, or operating income.\73\ Also, U.S. GAAP requires disclosure
of disposals of components of an entity and unusual or infrequently
occurring items recognized for the fourth quarter if interim data and
disclosures are not separately reported for the fourth quarter.\74\
Additionally, Item 101(c)(1)(v) of Regulation S-K requires disclosure
of the extent to which a business is seasonal.\75\
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\71\ See supra note 51.
\72\ Item 303(a)(3)(i) requires registrants to describe any
unusual or infrequent events or transactions or any significant
economic changes that materially affected the amount of reported
income from continuing operations and indicate the extent to which
income was so affected. In addition, the item requires registrants
to describe any other significant components of revenues or expenses
that, in the registrant's judgment, should be described in order to
understand the registrant's results of operations.
\73\ Item 303(a)(3)(ii) requires registrants to describe any
known trends or uncertainties that have had or that the registrant
reasonably expects will have a material favorable or unfavorable
impact on net sales or revenues or income from continuing
operations. If the registrant knows of events that will cause a
material change in the relationship between costs and revenues (such
as known future increases in costs of labor or materials or price
increases or inventory adjustments), the change in the relationship
must be disclosed.
\74\ ASC 270-10-50-2 requires the disclosure of certain
information if interim data and disclosures are not separately
reported for the fourth quarter. This information includes
``disposals of components of an entity and unusual, or infrequently
occurring items recognized in the fourth quarter, as well as the
aggregate effect of year end adjustments that are material to the
results of that quarter.''
\75\ Item 101(c)(1)(v) [17 CFR 229.101(c)(1)(v)]. The Commission
recently proposed changes to Item 101 and proposed retaining Item
101(c)(1)(v). See Modernization of Regulation S-K Items 101, 103,
and 105, Release No. 33-10668 (Aug. 8, 2019) [84 FR 44358 (Aug. 23,
2019)].
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Request for Comment
10. Should we eliminate Item 302(a), as proposed? Would eliminating
Item 302(a) result in the loss of material information that is
otherwise not available to investors, such as through prior filings on
EDGAR? If so, what material information would be lost, and are there
alternatives we should consider that would capture this information?
11. Do market participants find Item 302(a) disclosures to be
helpful? If so, how do market participants use the disclosures? Does
the utility of the disclosures vary by industry or business? If so, for
which industries or businesses are Item 302(a) disclosures helpful?
12. Is the option for investors to compile supplemental financial
information through searches of prior filings an adequate substitute
for Item 302(a)? Do current XBRL-tagging requirements reliably
facilitate compilation and comparison of supplemental financial
information? Would there be a cost to investors of compiling and/or
calculating information presented in Item 302(a) from other sources
and, if so, what would that cost be?
13. What are the burdens on registrants to provide the information
required by Item 302(a)?
14. Is a separate presentation of certain fourth quarter data
material to investors? If so, is such information material for all
companies or industries? Are investors able to readily calculate this
fourth quarter data from a registrant's Form 10-K and related third
quarter Form 10-Q? What are the challenges to making such calculations?
15. Would registrants continue to provide fourth quarter data in
the absence of a requirement to do so (e.g., through voluntary earnings
releases)? If we eliminate Item 302(a), should we require registrants
to disclose certain fourth quarter data elsewhere in an annual report,
such as in MD&A? What would be the cost of this approach? Should we
require registrants to disclose any variances to its previously issued
quarterly information that would inhibit the calculation of fourth
quarter data by market participants? What would be the costs of this
approach?
16. Should we retain Item 302(a) but allow a newly reporting
registrant to exclude Item 302(a) data for interim periods prior to
those presented in its IPO registration statement? \76\
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\76\ See supra note 63 and corresponding text.
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2. Information About Oil and Gas Producing Activities (Item 302(b))
Item 302(b) \77\ requires registrants engaged in oil and gas
producing activities, other than SRCs, to disclose information about
those activities for each period presented. The disclosure called for
by Item 302(b) is also required by U.S. GAAP.\78\ However, unlike the
U.S. GAAP requirement, Item 302(b) incrementally requires that the
disclosure be provided for each period presented.
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\77\ See Item 302(b) of Regulation S-K [17 CFR 229.302(b)].
\78\ See ASC 932-235-50.
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In 2018, the Commission referred certain of its disclosure
requirements to the FASB for potential incorporation into U.S. GAAP
because these items largely overlapped with, but required information
incremental to, U.S. GAAP.\79\ Item 302(b) was among the items referred
to the FASB.\80\
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\79\ See Disclosure Update and Simplification, Release No. 33-
10532 (Aug. 17, 2018) [83 FR 50234 (Oct. 4, 2018)].
\80\ See id.
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On May 6, 2019, the FASB issued proposed Accounting Standards
Update, Disclosure Improvements: Codification Amendments in Response to
the SEC's Disclosure Update and Simplification,\81\ which would amend
U.S. GAAP to require the incremental disclosure called for by Item
302(b), disclosure of oil and gas producing activities for each period
presented. If FASB adopts amendments consistent with those it proposed,
upon effectiveness of the amendments to U.S. GAAP, the requirements of
Item 302(b) will be duplicative of U.S. GAAP. Therefore, we propose to
eliminate Item 302(b), subject to the FASB finalizing its related
amendments to U.S. GAAP.\82\
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\81\ FASB, File Reference No. 2019-600, available at https://www.fasb.org/jsp/FASB/Document_C/DocumentPage&cid=1176172611572.
\82\ Item 302(c) of Regulation S-K states that SRCs do not have
to provide the information required by the Item. Since we are
proposing to eliminate Items 302(a) and (b), we are likewise
proposing to eliminate Item 302(c) since it will no longer be
applicable.
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Request for Comment
17. As proposed, should we eliminate Item 302(b) if the FASB amends
U.S. GAAP to require substantially similar disclosure?
C. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Item 303)
Item 303 of Regulation S-K requires disclosure of information
relevant to assessing a registrant's financial condition, changes in
financial condition, and results of operations. The disclosure
requirements for full fiscal years in Item 303(a) specify five
components: Liquidity, capital resources, results of operations, off-
balance sheet arrangements, and contractual obligations.\83\ Item
303(b) covers interim period disclosures and requires registrants to
discuss material changes in the items listed in Item 303(a) (including
the instructions), other than the impact of inflation and changing
prices on operations and tabular disclosure of contractual
obligations.\84\ Item 303(c) acknowledges the application of a
statutory safe harbor for forward-looking information provided in off-
balance sheet arrangements and contractual obligations disclosures.
Item 303(d) provides certain accommodations for SRCs.
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\83\ Item 303(a)(1)-(5) of Regulation S-K [17 CFR 229.303(a)(1)-
(5)].
\84\ See Item 303(b) and Instruction 7 to Item 303(b) of
Regulation S-K [17 CFR 229.303(b)].
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The Concept Release solicited comment on the overall objectives of
the current MD&A requirements, as well as specific subsections of Item
303, including how to improve the content and focus of MD&A. Many
commenters responded to the Commission's request
[[Page 12076]]
for input with a variety of suggestions, which we discuss below. The
Commission recently addressed some of the Item 303(a) disclosure
requirements referenced in the Concept Release and by commenters when
it adopted amendments to modernize and simplify certain disclosure
requirements in Regulation S-K.\85\
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\85\ See FAST Act Adopting Release. Specifically, the Commission
amended Item 303 to: Revise Instruction 1 to Item 303(a) to allow
registrants that provide financial statements covering three years
in a filing to omit discussion of the earliest of the three years if
such discussion was already included in the registrant's prior
filings on EDGAR; eliminate the reference to year-over-year
comparisons in Instruction 1 to Item 303(a); and eliminate the
reference to five-year selected financial data in Instruction 1 to
Item 303(a).
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We propose further amendments to Item 303 of Regulation S-K that
are intended to modernize, simplify, and enhance the MD&A disclosures
for investors while reducing compliance burdens for registrants.\86\
Specifically, we are proposing to:
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\86\ We discuss below in Section II.D our proposals to make
certain parallel amendments to Item 5 of Form 20-F (Operating and
Financial Review and Prospects), General Instruction B.(11) of Form
40-F (Off-Balance Sheet Arrangements), and General Instruction
B.(12) of Form 40-F (Tabular Disclosure of Contractual Obligations).
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Establish a new paragraph 303(a) that incorporates much of
the substance of Instructions 1, 2, and 3 to current Item 303(a) to
emphasize the objective of MD&A for both full fiscal years and interim
periods;
Recaption current Item 303(a) as Item 303(b), and make the
following additional changes:
[cir] Streamline current Item 303(a) by eliminating unnecessary
cross-references to industry guides in Instructions 13 and 14; \87\
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\87\ See 17 CFR 229.802.
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[cir] Amend current Item 303(a)(2) to modernize and enhance the
current requirement, which is limited to capital expenditures, to
specifically require a discussion of material cash requirements;
[cir] Amend current Item 303(a)(3)(ii) to clarify that a registrant
should disclose reasonably likely changes in the relationship between
costs and revenues;
[cir] Amend current Item 303(a)(3)(iii) and Instruction 4 to Item
303(a) to enhance analysis in MD&A by clarifying 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;
[cir] Eliminate current Item 303(a)(3)(iv), which requires
registrants to discuss the impact of inflation and changing prices
where material, along with the related Instructions 8 and 9 to Item
303(a);
[cir] Replace current Item 303(a)(4), the requirement that
registrants provide off-balance sheet arrangement disclosures in a
separately captioned section, with an instruction emphasizing the
importance of discussing these obligations in the broader context of
MD&A disclosure when such obligations have or are reasonably likely to
have a material current or future effect on a registrant's financial
condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, cash requirements or capital
resources; and
[cir] Eliminate current Item 303(a)(5), the requirement that
registrants provide a tabular disclosure of contractual obligations;
Recaption Item 303(b) as Item 303(c) and:
[cir] Amend current Item 303(b) to allow for more flexibility in
interim periods compared; and
[cir] Simplify current Item 303(b) by eliminating certain
instructions and providing cross-references to similar instructions in
Item 303(a); and
Eliminate current Items 303(c) and (d) as conforming
changes.
The following table outlines the current and proposed structure of
Item 303: \88\
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\88\ The information in this table is not comprehensive and is
intended only to highlight the general structure of the current
rules and proposed amendments. It does not reflect all of the
substance of the proposed amendments or all of the rules and forms
that may be affected. All changes are discussed in their entirety
throughout this release. As such, this table should be read together
with the referenced sections and the complete text of this release.
----------------------------------------------------------------------------------------------------------------
Current structure Proposed structure Discussed in section(s)
----------------------------------------------------------------------------------------------------------------
Item 303(a), Full fiscal years........ Item 303(a), Objective........ II.C.1.
Item 303(a) (combined liquidity and Instruction 2 to Item 303(b).. II.C.1.
capital resources discussions).
Item 303(a)(1), Liquidity............. Item 303(b)(1), Liquidity..... II.C.2.
Item 303(a)(2), Capital resources..... Item 303(b)(2), Capital II.C.2.
resources.
(i) Capital expenditures.......... (i) Capital expenditures...
(ii) Known material trends........ (ii) Known material trends.
Item 303(a)(3), Results of operations. Item 303(b)(3), Results of II.C.3, II.C.4, & II.C.5.
operations.
(i) Unusual or infrequent events.. (i) Unusual or infrequent
events.
(ii) Known trends or uncertainties (ii) Known trends or
uncertainties.
(iii) Material increases.......... (iii) Material changes.....
(iv) Inflation and changing prices
Item 303(a)(4), Off-balance sheet Replace with Instruction 8 to II.C.6.
arrangements. Item 303(b).
Instructions 1, 2, 3, 4, and 5 to Replace with Instruction 8 to II.C.6.
Item 303(a)(4). Item 303(b).
Item 303(a)(5), Contractual Eliminate..................... II.C.7.
obligations.
2003 MD&A Interpretative Release, Item 303(b)(4), Critical II.C.8.
Critical accounting estimates. accounting estimates.
Instruction 1 to Item 303(a)...... Instruction 1 to Item II.C.1.
303(b)(with amendments).
Instruction 2 to Item 303(a)...... Eliminate (with content II.C.1.
incorporated into
Objective).
Instruction 3 to Item 303(a)...... Eliminate (with content II.C.1.
incorporated into
Objective).
Instruction 4 to Item 303(a)...... Instruction 3 to Item II.C.4.
303(b)(with amendments and
some content incorporated
into Item 303(b)).
Instruction 5 to Item 303(a)...... Instruction 4 to Item II.C.1.
303(b).
Instruction 6 to Item 303(a)...... Instruction 5 to Item II.C.1.
303(b).
[[Page 12077]]
1Instruction 7 to Item 303(a)..... Instruction 6 to Item II.C.1.
303(b).
1Instruction 8 to Item 303(a)..... Eliminate.................. II.C.5.
1Instruction 9 to Item 303(a)..... Eliminate.................. II.C.5.
1Instruction 10 to Item 303(a).... Instruction 7 to Item II.C.1.
303(b).
1Instruction 11 to Item 303(a).... Instruction 9 to Item II.D.3.
303(b)(with amendments).
1Instruction 12 to Item 303(a).... Instruction 10 to Item II.C.1.
303(b).
1Instruction 13 to Item 303(a).... Eliminate.................. II.C.1.
1Instruction 14 to Item 303(a).... Eliminate.................. II.C.1.
Item 303(b), Interim periods.......... Item 303(c), Interim periods.. II.C.9.
(1) Material changes in financial (1) Material changes in
condition. financial condition.
(2) Material changes in results of (2) Material changes in
operations, Rule 3-03(b) of results of operations.
Regulation S-X matters. (i) Material changes in
results of operations (year-
to-date).
(ii) Material changes in
results of operations
(quarter comparisons).
Instruction 1 to Item 303(b)...... Instruction 1 to Item II.C.9.
303(c) (with amendments to
reference Instructions 3,
6, 8, and 11 to proposed
Item 303(b)).
Instruction 2 to Item 303(b)...... Eliminate.................. II.C.9.
Instruction 3 to Item 303(b)...... Eliminate.................. II.C.9.
Instruction 4 to Item 303(b)...... Instruction 2 to Item II.C.9.
303(c).
Instruction 5 to Item 303(b)...... Eliminate.................. II.C.9.
Instruction 6 to Item 303(b)...... Eliminate.................. II.C.9.
Instruction 7 to Item 303(b)...... Eliminate.................. II.C.9.
Instruction 8 to Item 303(b)...... Instruction 11 to Item II.C.9.
303(b).
Item 303(c), Safe harbor.............. Eliminate..................... II.C.10.
Item 303(d), Smaller reporting Eliminate..................... II.C.11.
companies.
----------------------------------------------------------------------------------------------------------------
1. Restructuring and Streamlining (Item 303(a))
The first paragraph of current Item 303(a) instructs registrants to
discuss their financial condition, changes in financial condition, and
results of operations for full fiscal years.\89\ The paragraph then
sets forth the items that must be included in this discussion,
including liquidity, capital resources, results of operations, off-
balance sheet arrangements, contractual obligations, and any other
information a registrant believes would be necessary to understand its
financial condition, changes in financial condition, and results of
operations. The paragraph also instructs that discussions of capital
resources and liquidity may be combined when the topics are
interrelated. Finally, the paragraph states that a registrant must
provide a discussion of business segments and/or of subdivisions when,
in the registrant's judgment, such a discussion would be appropriate
for understanding its business. This discussion must focus on each
relevant, reportable segment and/or other subdivision of the business
and on the registrant as a whole. In addition to the text, there are
fourteen instructions to Item 303(a).
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\89\ Item 303(a) of Regulation S-K [17 CFR 229.303(a)].
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We are proposing multiple changes that are intended to streamline
and clarify the purposes of Item 303.\90\ First, we propose adding a
new Item 303(a) to succinctly state the purposes of MD&A by
incorporating a portion of the substance of Instruction 1, and much of
the substance of Instructions 2 and 3 into the item. Specifically, we
propose to incorporate each of the following portions of current
Instructions 1, 2, and 3 to describe the objectives of MD&A, which is
for companies to provide disclosure regarding:
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\90\ These proposed changes, along with the other proposed
amendments and eliminations discussed elsewhere in this release,
would result in some changes in the subsection labeling and
headings.
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Material information relevant to an assessment of the
financial condition and results of operations of the registrant,
including an evaluation of the amounts and certainty of cash flows from
operations and from outside sources.
The material financial and statistical data that the
registrant believes will enhance a reader's understanding of the
registrant's financial condition, changes in financial condition, and
results of operations.\91\
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\91\ The remainder of the instruction also specifies periods
that the discussion must cover, which our proposed amendments would
retain.
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Material events and uncertainties known to management that
would cause reported financial information not to be necessarily
indicative of future operating results or of future financial
condition. This would include descriptions and amounts of matters that:
(i) Would have a material impact on future operations and have not had
an impact in the past, and (ii) have had a material impact on reported
operations and are not expected to have an impact on future operations.
We are also proposing to codify Commission guidance that states
that a registrant should provide a narrative explanation of its
financial statements that enables investors to see a registrant
``through the eyes of management'' \92\ into the description of MD&A
objectives. We believe that emphasizing the purpose of MD&A at the
outset of the Item will provide clarity and focus to registrants as
they consider what information to discuss and analyze. Our intent is to
facilitate a thoughtful discussion and analysis, and encourage
management to disclose factors specific to the registrant's business,
which management is in the best position to know, and underscore
materiality as the overarching principle of MD&A.\93\ Our proposal is
intended to serve as a reminder to registrants as they prepare their
MD&A that the general purpose of the disclosure is to provide both a
historical and prospective analysis of the registrant's financial
condition and
[[Page 12078]]
results of operations, with particular emphasis on the registrant's
prospects for the future.\94\ This principles-based approach is also
well-suited to elicit disclosure about complex and often rapidly
evolving areas, without the need to continuously amend the text of the
rule to impose bright-line or prescriptive requirements.\95\
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\92\ See 2003 MD&A Interpretative Release, at 75056. See also
1989 Interpretative Release, at 22428.
\93\ See, e.g., FAST Act Adopting Release, at 12679 (emphasizing
that ``[m]ateriality remains, as always, the primary consideration''
of MD&A) and the 2003 MD&A Interpretative Guidance, at 75060 (noting
that ``it is increasingly important for companies to focus their
MD&A on material information. In preparing MD&A, companies should
evaluate issues presented in previous periods and consider reducing
or omitting discussion of those that may no longer be material or
helpful, or revise discussions where a revision would make the
continuing relevance of an issue more apparent.'').
\94\ See 1989 MD&A Interpretive Release (``In preparing MD&A
disclosure, registrants should be guided by the general purpose of
the MD&A requirements: To give investors an opportunity to look at
the registrant through the eyes of management by providing a
historical and prospective analysis of the registrant's financial
condition and results of operations, with particular emphasis on the
registrant's prospects for the future.'').
\95\ See, e.g., Commission Guidance Regarding Disclosure Related
to Climate Change, Release No. 33-9106 (Feb. 2, 2010) [75 FR 6290
(Feb. 8, 2010)] and Commission Statement and Guidance on Public
Company Cybersecurity Disclosures (Feb. 21, 2018) [83 FR 8166 (Feb.
26, 2018)]. Commission staff has also provided its views on the
application of our principles-based disclosure requirements to
emerging issues. See, e.g., Staff Statement on LIBOR Transition
(July 12, 2019), available at https://www.sec.gov/news/public-statement/libor-transition.
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In light of our proposal to add new Item 303(a), we propose to re-
caption current Item 303(a) as Item 303(b), which will continue to
apply to all MD&A disclosures.\96\ As proposed, the introductory
paragraph would retain the current language that outlines what is to be
covered in the discussion of a registrant's financial condition,
changes in financial condition, and results of operations.\97\
Additionally, we propose to add product lines as an example of other
subdivisions of a registrant's business that should be discussed where,
in the registrant's judgment, such a discussion would be necessary to
an understanding of the registrant's business.\98\ We believe that this
added example would provide registrants with additional clarity on the
types of subdivisions that may require separate disclosure, though it
is not intended to complete the list.
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\96\ For interim periods, current Item 303(b) of Regulation S-K
requires a ``discussion of material changes in those items
specifically listed in [Item 303(a)], except that the impact of
inflation and changing prices on operations for interim periods need
not be addressed.'' See 1989 MD&A Interpretive Release at n. 38 and
39 and corresponding text (``The second sentence of Item 303(b)
states that MD&A relating to interim period financial statements
`shall include a discussion of material changes in those items
specifically listed in paragraph (a) of this Item, except that the
impact of inflation and changing prices on operations for interim
periods need not be addressed.' As this sentence indicates, material
changes to each and every specific disclosure requirement contained
in paragraph (a), with the noted exception, should be discussed.'');
2003 MD&A Interpretive Release (``Disclosure in MD&A in quarterly
reports is complementary to that made in the most recent annual
report and in any intervening quarterly reports.'').
\97\ See Item 303(a).
\98\ The current relevant Item 303(a) language states that
where, in the registrant's judgment, a discussion of segment
information and/or of other subdivisions (e.g., geographic areas) of
the registrant's business would be appropriate to an understanding
of such business, the discussion shall focus on each relevant
segment and/or other subdivision of the business and on the
registrant as a whole.
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We also propose to move to proposed Item 303(b) the portion of
current Instruction 4 to Item 303(a) that requires a description of the
causes of material changes from year-to-year in line items of the
financial statements to the extent necessary to an understanding of the
registrant's business as a whole.\99\ In response to general requests
for comment on Item 303 in the Concept Release, a few commenters
provided recommendations on how to revise Item 303(a) to facilitate a
more meaningful analysis.\100\ One commenter suggested amending Item
303 to require a description of material factors that contributed to
any material change in results, and that quantitative and qualitative
factors could be listed as examples of the types of factors that could
be discussed in MD&A.\101\
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\99\ Instruction 4 to Item 303(a) of Regulation S-K [17 CFR
229.303(a)].
\100\ See, e.g., letters from Fenwick, Maryland State Bar
Association (July 21, 2016) (``Maryland Bar Securities Committee''),
S. Percoco, and NYSSCPA.
\101\ See letter from Fenwick.
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Similarly, another commenter recommended revising Item 303(a)(3) to
require a description of the major factors that caused changes in line
items (e.g., economic trends, industry conditions and sales and costs
related to key products and services).\102\ Yet another commenter
stated that Item 303(a) and Instruction 4 should be revised to
``clearly instruct'' registrants that discussions about material
changes should address quantitative and qualitative factors underlying
the changes.\103\ One commenter also noted that it would be preferable
for the requirements to indicate that registrants cannot present line
item changes without providing ``meaningful explanations.'' \104\
Finally, another commenter recommended revising Instruction 4 to Item
303(a) to allow registrants to omit financial statement line item
changes to the extent such an omission would not materially impair an
investor's understanding of a registrant's results of operations.\105\
This revision, the commenter stated, would allow registrants and
investors to focus on line items that had the most impact on its
results of operations.
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\102\ See letter from S. Percoco.
\103\ See letter from Maryland Bar Securities Committee.
\104\ See letter from NYSSCPA. This commenter also expressed its
belief that a significant number of registrants were providing
narratives that did not allow an investor to view performance
``through the eyes of management.'' According to this commenter,
such discussions ``generally [become] an exercise where management
provides a quantitative analysis, which most investors can
recompute--if they chose to--from the financial statements.''
\105\ See letter from Davis Polk.
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We propose to amend the language of Instruction 4 to Item
303(a),\106\ which would be moved to proposed Item 303(b), to clarify
that MD&A requires a narrative discussion of the ``underlying reasons''
for material changes from period-to-period in one or more line items in
quantitative and qualitative terms, rather than only the ``cause'' for
material changes. We are also proposing to amend the language to
clarify that registrants should discuss material changes within a line
item even when such material changes offset each other.\107\ We believe
our proposals would enhance analysis in MD&A, and accordingly, would be
responsive to concerns raised by commenters. We also believe the
proposals would clarify MD&A's requirements by codifying some of the
Commission's prior guidance on the importance of analysis in MD&A. The
Commission has previously emphasized the importance of providing an
analysis in MD&A and stated that a thorough analysis often will involve
discussing both the intermediate effects of known material trends,
events, demands, commitments, and uncertainties and the reasons
underlying those intermediate effects.\108\ Commission guidance has
also stated that MD&A should include both qualitative and quantitative
analysis.\109\ We believe the proposed amendments would encourage
registrants to provide a more nuanced discussion of the underlying
reasons that may be contributing to material changes in line items.
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\106\ Proposed to be renumbered as Instruction 3 to Item 303(b).
\107\ See, e.g., 1989 MD&A Interpretive Release (providing an
example of material changes in revenue and in so doing, describing
the effects of offsetting developments: ``Revenue from sales of
single-family homes for 1987 increased 6 percent from 1986. The
increase resulted from a 14 percent increase in the average sales
price per home, partially offset by a 6 percent decrease in the
number of homes delivered. Revenues from sales of single-family
homes for 1986 increased 2 percent from 1985. The average sales
price per home in 1986 increased 6 percent, which was offset by a 4
percent decrease in the number of homes delivered.'').
\108\ See, e.g., 2003 MD&A Interpretive Release.
\109\ See, e.g., 2003 MD&A Interpretive Release and 1989 MD&A
Interpretive Release.
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We also are proposing several amendments to further streamline the
text of Item 303:
[[Page 12079]]
We propose to move the text in current Item 303(a) stating
that registrants may combine their discussions of liquidity and capital
resources when the topics are interrelated to an instruction to the
item.\110\ We believe this language is an instruction given that it is
not a substantive requirement or accommodation, but rather a
clarification of how registrants may structure their disclosures.
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\110\ Proposed Instruction 2 to Item 303(b).
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Instruction 8 to current Item 303(b) indicates that the
term ``statement of comprehensive income'' is defined by Rule 1-02 of
Regulation S-X.\111\ We are proposing to move this language to proposed
Instruction 11 to proposed Item 303(b) to clarify that the instruction
applies to both full fiscal year and interim period MD&A disclosure.
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\111\ [17 CFR 210.1-02(cc)]. Rule 1-02 defines a ``statement of
comprehensive income'' as follows: ``[t]he term statement(s) of
comprehensive income means a financial statement that includes all
changes in equity during a period except those resulting from
investments by owners and distributions to owners. . . . A statement
of operations or variations thereof may be used in place of a
statement of comprehensive income if there was no other
comprehensive income during the period.'' Thus, references to a
statement of comprehensive income would include a statement of
operations prepared by certain issuers, such as BDCs.
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We also propose to eliminate current Instructions 13 and
14 to Item 303(a) as simplifying amendments. These instructions call
the attention of bank holding companies and property-casualty insurance
companies to Guide 3 \112\ and Guide 6,\113\ respectively. Registrants
should still consider the Guides in preparing their disclosures
generally, but we do not believe the cross-reference is necessary to an
understanding of the requirements of Item 303.
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\112\ [17 CFR 229.801(c) and 17 CFR 229.802(c)]. We recently
proposed rules relating to Guide 3. See Update of Statistical
Disclosures for Bank and Savings and Loan Registrants, Release No.
33-10688 (Sept. 17, 2019) [84 FR 52936 (Oct., 3, 2019)]. The
proposed rules would update the disclosures that investors receive,
codify certain Guide 3 disclosures and eliminate other Guide 3
disclosures that overlap with Commission rules, U.S. GAAP, or
International Financial Reporting Standards (``IFRS''). In addition,
the Commission proposed to relocate the codified disclosures to a
new subpart of Regulation S-K and to rescind Guide 3.
\113\ [17 CFR 229.801(f)].
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Request for Comment
18. Should we adopt proposed Item 303(a)? Would proposed Item
303(a) clarify the purpose of MD&A disclosures for registrants and
others? Would the proposed amendments aid registrants in determining
what to disclose in their MD&A?
19. Should we incorporate the language from current Instruction 4
to Item 303(a) into proposed Item 303(b), as proposed? Should we amend
this language to require disclosure of the underlying reasons for
material changes in quantitative and qualitative terms, including
material changes within a line item, as proposed?
20. Are there any instructions that we are proposing to delete or
move that we should retain or leave as is? Are there any other current
instructions that we should revise or clarify?
21. Should we eliminate Instructions 13 and 14 to Item 303(a) that
reference Guides 3 and 6, as proposed? Should we instead include
additional instructions to reference the other industry guides?
2. Capital Resources (Item 303(a)(2))
Item 303(a)(2) requires a registrant to discuss its material
commitments for capital expenditures as of the end of the latest fiscal
period, and to indicate the general purpose of such commitments and the
anticipated sources of funds needed to fulfill such commitments.\114\ A
registrant also must discuss any known material trends, favorable or
unfavorable, in its capital resources, and indicate any expected
material changes in the mix and relative cost of such resources.\115\
The discussion must consider changes between equity, debt, and any off-
balance sheet financing arrangements.\116\
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\114\ Item 303(a)(2)(i) of Regulation S-K [17 CFR
229.303(a)(2)(i)].
\115\ Item 303(a)(2)(ii) [17 CFR 229.303(a)(2)(ii)].
\116\ Id.
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When adopting disclosure requirements for capital resources, the
Commission recognized that the term ``capital resources'' lacked
precision, but stated that ``additional specificity would decrease the
flexibility needed by management for a meaningful discussion.'' \117\
To that end, Item 303 does not define ``capital resources.'' \118\ The
current capital resources disclosure requirements in Item 303(a)(2)
have remained largely the same since 1980.\119\ Item 303(a)(2)
specifies that registrants must disclose material commitments for
capital expenditures, which generally relate to physical assets, such
as buildings and equipment. Some registrants include disclosure beyond
capital expenditures, which the Commission's guidance has
encouraged.\120\
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\117\ 1980 Form 10-K Adopting Release, at 63636.
\118\ Instruction 5 to Item 303(a) of Regulation S-K [17 CFR
229.303(a)]. See also 1980 Form 10-K Adopting Release, supra note
45, at 63636.
\119\ See 1980 Form 10-K Adopting Release.
\120\ See 2003 MD&A Interpretive Release, at 75062.
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The Concept Release solicited comment on how the Commission could
revise Item 303(a) to elicit a more meaningful analysis of a
registrant's capital resources while maintaining flexibility.\121\ The
Concept Release also requested comment on how registrants interpret the
term ``capital resources'' and whether defining the term would be
helpful to registrants.\122\
---------------------------------------------------------------------------
\121\ See Concept Release, at 23947.
\122\ See id.
---------------------------------------------------------------------------
Some commenters observed differences in how registrants apply the
term ``capital resources.'' \123\ One of these commenters stated that
the Commission should adopt a definition of capital resources that is
broader than currently implied by Item 303(a)(2)(i).\124\ This
commenter stated that registrants interpret ``capital resources'' as
material commitments for capital expenditures and the source of funds
related to such commitments. Another commenter stated that some
registrants interpret ``capital resources'' to require ``disclosure of
a registrant's sources of capital, while others interpret it to require
disclosure of the sources of capital assets used in a registrant's
business.'' \125\
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\123\ See letters from NYSSCPA and BDO.
\124\ See letter from NYSSCPA.
\125\ See letter from BDO.
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Some commenters supported the Commission's current approach to the
term ``capital resources.'' \126\ One commenter urged the Commission
not to depart from the existing policy of recognizing the term
``capital resources'' as a general term in a manner that might decrease
the flexibility needed by management for a meaningful discussion.\127\
Another commenter recommended that the Commission not further define
the term ``capital resources'' beyond its current general use.\128\
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\126\ See letters from Davis Polk and FEI.
\127\ See letter from Davis Polk.
\128\ See letter from FEI (``As noted above, we believe it would
be helpful to consolidate the guidance on MD&A into a single source.
In doing so, we recommend that the SEC not expand prescriptive
requirements with respect to liquidity and capital resources,
including not further defining the terms ``liquidity'' and ``capital
resources'' beyond their current general terms.'').
---------------------------------------------------------------------------
We continue to believe that disclosure of capital resources is
critical to an assessment of a registrant's prospects for the future
and likelihood of its survival.\129\ Therefore, we propose to
[[Page 12080]]
amend current Item 303(a)(2) \130\ to specify, consistent with the
Commission's 2003 MD&A Interpretive Release, that a registrant should
broadly disclose material cash commitments, including but not limited
to capital expenditures. Specifically, our proposed amendment would
require a registrant to describe its 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 such requirements.\131\
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\129\ See 2003 MD&A Interpretive Release at note 41 and
corresponding text. Much of the Commission's prior guidance has
focused on enhancing disclosure of liquidity and capital resources.
See, e.g., 1989 MD&A Interpretive Release and 2003 MD&A Interpretive
Release.
\130\ Proposed to be renumbered as Item 303(b)(2).
\131\ See 2003 MD&A Interpretive Release, at 75063.
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This proposal is intended to require registrants to identify and
disclose known material cash requirements. Depending on the registrant,
this could include items such as: Funds necessary to maintain current
operations, complete projects underway, and achieve stated objectives
or plans; or commitments for capital or other expenditures.\132\ This
proposal is also intended to modernize Item 303(a)(2) by specifically
requiring disclosure of material cash requirements in addition to
capital expenditures. While capital expenditures remain important in
many industries, we recognize that certain expenditures and cash
commitments that are not necessarily capital investments in property,
plant, and equipment may be increasingly important to companies,
especially those for which human capital or intellectual property are
key resources. Our proposals are intended to encompass these and other
material cash requirements.
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\132\ See id.
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These proposals, alongside the current requirement for registrants
to discuss their ability to generate cash,\133\ are intended to enhance
disclosure and provide investors with a clear picture of a registrant's
ability to meet its material cash requirements. We acknowledge the
commenters who suggested that we define ``capital resources.'' We have
decided, however, not to propose a definition of the term to allow for
continued flexibility and business-specific discussions of the
topic.\134\ Lastly, and as discussed in Section II.C.7, our proposal to
enhance discussion of capital resources is also intended to complement
our proposed deletion of the contractual obligations table.
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\133\ See Item 303(a)(1) and Instruction 5 of Item 303(a). See
also 2003 MD&A Interpretive Release, at 75062-75064.
\134\ See 1980 Form 10-K Adopting Release.
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Request for Comment
22. Should we amend Item 303(a)(2), as proposed? Would the proposed
amendments continue to allow management flexibility to provide a
meaningful discussion of capital resources?
23. Are there other aspects of Item 303(a)(2) we should revise? If
so, which aspects?
3. Results of Operations--Known Trends or Uncertainties (Item
303(a)(3)(ii))
Item 303(a)(3)(ii) requires a registrant to describe any known
trends or uncertainties that have had or that the registrant reasonably
expects will have a material impact (favorable or unfavorable) on net
sales or revenues or income from continuing operations.\135\ In
addition, if the registrant knows of events that will cause a material
change in the relationship between costs and revenues, the change in
the relationship must be disclosed.\136\
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\135\ Item 303(a)(3)(ii) of Regulation S-K [17 CFR
229.303(a)(3)(ii)].
\136\ Examples given include known future increases in costs of
labor or materials or price increases or inventory adjustments. See
id.
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We propose to amend Item 303(a)(3)(ii) \137\ to provide that when a
registrant knows of events that are reasonably likely to cause (as
opposed to will cause) a material change in the relationship between
costs and revenues, such as known or reasonably likely future increases
in costs of labor or materials or price increases or inventory
adjustments, the reasonably likely change must be disclosed. This
proposed amendment would conform the language in this paragraph to
other Item 303 disclosure requirements for known trends,\138\ and align
Item 303(a)(3)(ii) with the Commission's guidance on forward-looking
disclosure.\139\
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\137\ To be renumbered as Item 303(b)(3)(ii).
\138\ See, e.g., Item 303(a)(1), which requires registrants to
``[i]dentify any known trends or any known demands, commitments,
events or uncertainties that will result in or that are reasonably
likely to result in the registrant's liquidity increasing or
decreasing in any material way.'' Item 303(a)(1) to Regulation S-K
[17 CFR 229.303(a)(1)].
\139\ See 1989 MD&A Interpretive Release, at 22430, where the
Commission articulated a two-step test for assessing when forward-
looking disclosure is required in MD&A:
``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
evaluate objectively 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.''
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Request for Comment
24. Should we amend Item 303(a)(3)(ii) to provide that registrants
must disclose events reasonably likely to cause a material change in
the relationship between costs and revenue, as proposed? Are there
other areas in Item 303 where we should provide a similar requirement?
4. Results of Operations--Net Sales and Revenues (Item 303(a)(3)(iii))
Item 303(a)(3)(iii) specifies that, to the extent financial
statements disclose material increases in net sales or revenues, a
registrant must provide a narrative discussion of the extent to which
such increases are attributable to increases in prices, or to increases
in the volume or amount of goods or services being sold, or to the
introduction of new products or services.\140\ The Commission
previously clarified that a results of operations discussion should
describe not only increases but also decreases in net sales or
revenues.\141\ Accordingly, we propose to amend Item 303(a)(3)(iii) to
codify this guidance and clarify the requirement by tying the required
disclosure to ``material changes'' in net sales or revenues, rather
than solely to ``material increases'' in these line items.
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\140\ Item 303(a)(3)(iii) of Regulation S-K [17 CFR
229.303(a)(3)(iii)].
\141\ See 1989 MD&A Interpretative Release, at n. 36 (``Although
Item 303(a)(3)(iii) speaks only to material increases, not
decreases, in net sales or revenues, the Commission interprets Item
303(a)(3)(i) and Instruction 4 as seeking similar disclosure for
material decreases in net sales or revenues.'').
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Request for Comment
25. Should we revise Item 303(a)(3)(iii), as proposed?
26. Are there reasons other than changes in prices, or changes in
volume or amount of goods or services being sold, or the introduction
of new products or services that can contribute to changes in revenue
or net sales, or other line items? If so, what are they? Would
enumerating other reasons aid registrants in determining what
information may be necessary to understand material changes in line
items, or would this result in a de facto prescriptive or minimum
disclosure standard?
[[Page 12081]]
5. Results of Operations--Inflation and Price Changes (Item
303(a)(3)(iv), and Instructions 8 and 9 to Item 303(a))
Item 303(a)(3)(iv) \142\ generally requires registrants, for the
three most recent fiscal years, or for those fiscal years in which the
registrant has been engaged in business, whichever period is shortest,
to discuss the impact of inflation and price changes on their net
sales, revenue, and income from continuing operations. Instruction 8 to
Item 303(a) clarifies that a registrant must provide a discussion of
the effects of inflation and other changes in prices only to the extent
it is material. The instruction further states that the discussion may
be made in whatever manner appears appropriate under the circumstances
and that no specific numerical financial data is required, except as
required by Rule 3-20(c) of Regulation S-X,\143\ which applies to FPIs.
Instruction 9 to Item 303(a) states that registrants that elect to
disclose supplementary information on the effects of changing prices
may combine such disclosures with the Item 303(a) discussion and
analysis or provide it separately (with an appropriate cross-
reference).\144\
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\142\ Item 303(a)(3)(iv) of Regulation S-K [17 CFR
229.303(a)(3)(iv)].
\143\ Rules 3-20(c) and 3-20(d) of Regulation S-X provide the
situations when a registrant must discuss hyperinflation. Rule 3-
20(d) generally describes a hyperinflationary environment as one
that has cumulative inflation of approximately 100 percent or more
over the most recent three-year period.
\144\ Instruction 9 to Item 303(a).
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The precursors to Item 303(a)(3)(iv) and Instructions 8 and 9 were
adopted in 1980,\145\ during a period of rapid domestic inflation.\146\
At that time, the Commission was concerned with the adequacy of
disclosures about the effect of inflation and changing prices on
registrants.\147\ Several years later, the Commission amended the
instructions to, among other things, clarify that disclosure of
inflation is only required if material.\148\
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\145\ 1980 Form 10-K Adopting Release.
\146\ See One Hundred Years of Price Change: The Consumer Price
Index and the American Inflation Experience (Apr. 2014) available at
https://www.bls.gov/opub/mlr/2014/article/one-hundred-years-of-price-change-the-consumer-price-index-and-the-american-inflation-experience.htm (stating ``the period from 1968 to 1983 stands out as
the definitive era of sustained inflation in the 20th-century United
States'' and that during this time period, the largest 12-month
increase in inflation of 14.8 percent occurred between March 1979 to
March 1980).
\147\ See 1980 Form 10-K Adopting Release (``[T]he Commission
believes that Management's Discussion and Analysis should contain
information which changes the potentially confusing situation
involving inflation impact disclosure into a meaningful discussion
of the effects of changing prices on the registrant's business.'').
\148\ At that time, the Commission amended Instructions 8 and 9
to conform the requirement to the then-recently adopted SFAS No. 89
(Financial Reporting and Changing Prices) and stated ``Item 303(a)
does not require registrants to discuss the impact of inflation when
such impact does not materially affect the financial statements.''
See Disclosure of the Effects of Inflation and Changes in Prices,
Release No. 33-6681 (Dec. 18, 1986), [51 FR 47026 (Dec. 30, 1986)),
adopted in Release No. 33-6728 (Aug. 7, 1987), [52 FR 30917 (Aug.
18, 1987)].
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Although Instruction 8 to Item 303(a) specifies that a discussion
of inflation and other changes in prices is required only when such
matters are considered material, we believe that the reference to
inflation and changing prices may give undue attention to the topic,
even when such information is not necessary to an understanding of a
registrant's financial condition or results of operations. In order to
encourage registrants to focus their MD&A on material information that
is tailored to their respective facts and circumstances, we propose to
eliminate Item 303(a)(3)(iv) and current Instruction 8 and Instruction
9 to Item 303(a).
We do not believe that these proposed changes would result in a
loss of material information. Despite these proposed deletions,
registrants would still be expected to discuss the impact of inflation
or changing prices 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.\149\ The Commission has also specifically
encouraged registrants to consider disclosure of economic or industry-
wide factors where relevant.\150\
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\149\ See Item 303(a)(3)(ii) [CFR 229.303(a)(3)(ii)] and
proposed Item 303(b)(3)(ii).
\150\ See 2003 MD&A Interpretive Release, at 75059.
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In addition, the proposed amendments to current Item 303(a)(3)(iii)
\151\ would require registrants to provide the reasons underlying
material changes from period-to-period in one or more line items in the
statement of comprehensive income.\152\ Similarly, our proposed
amendment to Instruction 4 to Item 303(a) would require that, where the
financial statements reveal material changes in one or more line items,
registrants would be required to disclose the underlying reasons for
material changes in quantitative and qualitative terms. If there are
material changes from inflation or changing prices, registrants would
be required to discuss those reasons under both current Item 303 and
amended Item 303, as proposed.
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\151\ Proposed to be renumbered as Item 303(b)(3)(iii).
\152\ See supra Section II.C.4.
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Request for Comment
27. Should we eliminate the references to inflation disclosure by
eliminating Item 303(a)(3)(iv) and Instructions 8 and 9 to Item 303(a),
as proposed? Would there be a loss of material information if we
eliminate these provisions?
6. Off-Balance Sheet Arrangements (Item 303(a)(4))
Item 303(a)(4)\153\ requires, in a separately-captioned section, a
discussion of a registrant's off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on a
registrant's financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital
expenditures, or capital resources that is material to investors.\154\
Generally, Item 303(a)(4)(ii) defines off-balance sheet arrangements as
certain guarantees, retained or contingent interests in assets
transferred to an unconsolidated entity, obligations under certain
derivative instruments,\155\ and variable interests in any
unconsolidated entity. To the extent necessary to an understanding of
such arrangements and effect, registrants must disclose the following
items and such other information that the registrant believes is
necessary for such an understanding:
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\153\ Item 5.E. of Form 20-F and General Instruction B.(11) of
Form 40-F contain requirements for issuers that use those forms that
are virtually identical to the requirements of Item 303(a)(4).
\154\ Item 303(a)(4) of Regulation S-K [17 CFR 229.303(a)(4)].
\155\ For registrants whose financial statements are prepared in
accordance with U.S. GAAP, the definition includes a contract that
would be accounted for as a derivative instrument, except that it is
both indexed to the registrant's own stock and classified in the
registrant's statement of stockholders' equity. See ASC 815-10-15-
74. For other registrants, the definition includes derivative
instruments that are both indexed to the registrant's own stock and
classified in stockholders' equity, or not reflected, in the
registrant's statement of financial position. See Item 5.E.2.(c) of
Form 20-F.
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The nature and business purpose of such off-balance sheet
arrangements; \156\
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\156\ Item 303(a)(4)(i)(A) of Regulation S-K [17 CFR
229.303(a)(4)(i)(A)].
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The importance to the registrant of such off-balance sheet
arrangements in respect of its liquidity, capital resources, market
risk support, credit risk support, or other benefits; \157\
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\157\ Item 303(a)(4)(i)(B) of Regulation S-K [17 CFR
229.303(a)(4)(i)(B)].
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The amounts of revenues, expenses, and cash flows arising
from such arrangements; the nature and amounts of any interests
retained, securities
[[Page 12082]]
issued, and other indebtedness incurred in connection with such
arrangements; and the nature and amounts of any other obligations or
liabilities (including contingent obligations or liabilities) of the
registrant arising from such arrangements that are or are reasonably
likely to become material and the triggering events or circumstances
that could cause them to arise; \158\ and
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\158\ Item 303(a)(4)(i)(C) of Regulation S-K [17 CFR
229.303(a)(4)(i)(C)].
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Any known event, demand, commitment, trend, or uncertainty
that will result in or is reasonably likely to result in the
termination, or material reduction in availability, of a registrant's
off-balance sheet arrangements that provide material benefits, and the
course of action that the registrant has taken or proposes to take in
response to any such circumstances.\159\
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\159\ Item 303(a)(4)(i)(D) of Regulation S-K [17 CFR
229.303(a)(4)(i)(D)].
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In 2002, the Commission issued a statement that the quality of
disclosure of off-balance sheet arrangements in MD&A should be
improved.\160\ The Commission also noted that off-balance sheet
arrangements often are integral to both liquidity and capital resources
and that registrants should ``consider all of these items together, as
well as individually,'' when drafting MD&A disclosure.\161\ The
Commission further noted that off-balance sheet arrangements and
transactions with unconsolidated, limited purpose entities should be
discussed pursuant to Item 303(a) when they are ``reasonably likely to
affect materially liquidity or the availability of or requirements for
capital resources.'' \162\
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\160\ See Commission Statement about Management's Discussion and
Analysis of Financial Condition and Results of Operations, Release
No. 33-8056 (Jan. 22, 2002) [67 FR 3746 (Jan. 25, 2002)] (``2002
Commission Statement'').
\161\ See id. at 3748.
\162\ See id.
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The 2002 Commission Statement was consistent with Commission rules
and guidance at the time. For example, Item 303(a)(2)(ii) specifically
requires registrants to disclose off-balance sheet financing
arrangements in their discussion of capital resources.\163\ Similarly,
the 1989 MD&A Interpretive Release indicated that a registrant's
discussion of long-term liquidity and long-term capital resources must
address demands or commitments, including any off-balance sheet
items.\164\
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\163\ Item 303(a)(2)(ii) of Regulation S-K [17 CFR
229.303(a)(2)(ii)]. The item specifies that the discussion shall
consider changes between equity, debt, and any off-balance sheet
financing arrangements.
\164\ See 1998 MD&A Interpretive Release at 22431 (``The
discussion of long-term liquidity and long-term capital resources
must address material capital expenditures, significant balloon
payments or other payments due on long-term obligations, and other
demands or commitments, including any off-balance sheet items, to be
incurred beyond the next 12 months, as well as the proposed sources
of funding required to satisfy such obligations.'').
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Several months after the 2002 Commission Statement, the Sarbanes-
Oxley Act \165\ was enacted and added Section 13(j) to the Exchange
Act, which required the Commission to adopt rules providing that each
annual and quarterly financial report required to be filed with the
Commission disclose all material off-balance sheet arrangements.\166\
To implement Section 13(j), in 2003 the Commission adopted specific
disclosure requirements for off-balance sheet arrangements in current
Item 303(a)(4).\167\ When adopting Item 303(a)(4), the Commission
reiterated that, while at that time only one item in Item 303
specifically identified off-balance sheet arrangements,\168\ other
requirements ``clearly require[d] disclosure of off-balance sheet
arrangements if necessary to an understanding of a registrant's
financial condition, changes in financial condition or results of
operations.'' \169\ The 2003 amendments supplemented and clarified the
disclosures that registrants must make about off-balance sheet
arrangements and required registrants to provide those disclosures in a
separately designated section of MD&A.\170\
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\165\ Sarbanes-Oxley Act of 2002, Public Law 107-204, 116 Stat
745 (Jul. 2002) (``Sarbanes-Oxley Act'').
\166\ Section 401(a) of the Sarbanes-Oxley Act added Section
13(j) to the Exchange Act [15 U.S.C. 78m(j)], which directed the
Commission to adopt rules requiring each annual and quarterly
financial report filed with the Commission to disclose ``all
material off-balance sheet transactions, arrangements, obligations
(including contingent obligations), and other relationships of the
issuer with unconsolidated entities or other persons, that may have
a material current or future effect on financial condition, changes
in financial condition, results of operations, liquidity, capital
expenditures, capital resources, or significant components of
revenues or expenses.''
\167\ See Disclosure in Management's Discussion and Analysis
about Off-Balance Sheet Arrangements and Aggregate Contractual
Obligations, Release No. 33-8182 (Jan. 28, 2003), [68 FR 5981(Feb.
5, 2003)] (``Off-Balance Sheet Arrangements and Contractual
Obligations Adopting Release''), at 5983.
\168\ Item 303(a)(2)(ii) of Regulation S-K [17 CFR
229.303(a)(2)(ii)].
\169\ See Off-Balance Sheet Arrangements and Contractual
Obligations Adopting Release, at 5983.
\170\ See id.
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In the release proposing Item 303(a)(4), the Commission recognized
that parts of the proposed off-balance sheet disclosure requirements
might overlap with disclosure presented in the footnotes to the
financial statements.\171\ The Commission stated, however, that the
proposed rules were designed to provide more comprehensive information
and analysis in MD&A than the disclosure that U.S. GAAP required in
footnotes to financial statements.\172\
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\171\ See Disclosure in Management's Discussion and Analysis
About Off-Balance Sheet Arrangements, Contractual Obligations and
Contingent Liabilities and Commitments, Release No. 33-8144 (Nov. 4,
2002) 67 FR 68054 (Nov. 8, 2002), at n.72.
\172\ See id.
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Since the adoption of Item 303(a)(4), the FASB has issued
additional requirements that have caused U.S. GAAP to further overlap
with the item.\173\ For example, U.S. GAAP now requires disclosure in
the notes to the financial statements of the nature and amount of a
guarantee,\174\ retained or contingent interests in assets transferred
to unconsolidated entities,\175\ pertinent information of derivative
instruments that are classified as stockholders' equity under U.S.
GAAP,\176\ and obligations under variable interests in unconsolidated
entities.\177\ In the Commission staff's experience, this overlap often
leads to registrants providing cross-references to the relevant notes
to their financial statements or providing disclosure that is
duplicative of information in the notes in response to Item 303(a)(4).
Nevertheless, while many of the requirements in Item 303(a)(4) overlap
with U.S. GAAP, some of the requirements related to the location,
presentation, and nature of the disclosure are not the same.
Additionally, Item 303(a)(4) disclosure is not audited. Below we
discuss these differences in greater detail.
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\173\ In June 2009, the FASB Issued SFAS No. 166, Accounting for
Transfers of Financial Assets an amendment of FASB Statement No.
140, which requires enhanced disclosures about transfers of
financial assets and a transferor's continuing involvement with
transfers of financial assets accounted for as sales. Also in June
2009, the FASB issued SFAS No. 167, Amendments to FASB
Interpretation No. 46(R), which requires enhanced disclosures about
an enterprise's involvement in a variable interest entity, including
unconsolidated entities. SFAS No. 166 and 167 have been codified as
ASC Topics 860 (Transfers and Servicing) and 810 (Consolidation),
respectively. See also Section II.D.1.b and note 315 below for a
discussion of IFRS requirements that overlap with Item 5.E of Form
20-F.
\174\ See ASC 460-10-50.
\175\ See ASC 860-10-50-3, ASC 860-20-50.
\176\ See ASC 815-40-50-5, ASC 505-10-50.
\177\ See ASC 810-10-50-4.
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Location of Disclosure. Item 303(a)(4)(i) specifies that off-
balance sheet arrangements should be discussed in a separately-
captioned section. The instructions to Item 303(a)(4) permit that
discussion to cross-reference information in the footnotes to the
financial statements, rather than repeat it, provided that the MD&A
disclosure
[[Page 12083]]
integrates the substance of the footnotes in a manner designed to
inform readers of the significance of the information that is cross-
referenced.\178\ By contrast, U.S. GAAP does not prescribe the location
of these disclosures, which may be dispersed throughout the notes to
the financial statements. However, the submission of this information
in interactive data format, which is required in periodic reports on
Forms 10-K, 10-Q, 20-F, 40-F and reports on Forms 8-K and 6-K that
contain revised or updated financial statements, allows investors to
isolate disclosures about off-balance sheet arrangements even when it
is dispersed throughout the notes to the financial statements.
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\178\ Instruction 5 to Item 303(a)(4) of Regulation S-K [17 CFR
229.303(a)(4)].
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Presentation of Disclosure. Item 303(a)(4) requires disclosure for
the most recent period and a discussion of changes from the previous
year where necessary to an understanding of the disclosure.\179\ U.S.
GAAP does not require discussion of changes from the previous year.
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\179\ Instruction 4 to Item 303(a)(4) of Regulation S-K [17 CFR
229.303(a)(4)].
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Nature of Disclosures. While Item 303(a)(4) and U.S. GAAP both
require disclosure of the nature and amounts associated with off-
balance sheet arrangements, Item 303(a)(4)(i)(A) requires additional
disclosure about the business purpose of the off-balance sheet
arrangement and the importance of the off-balance sheet arrangement to
the registrant's liquidity and capital resources. Item 303(a)(4) also
requires disclosure of any known event, demand, commitment, trend, or
uncertainty that will result in or is reasonably likely to result in
the termination or material reduction in the availability of material
off-balance sheet arrangements to the registrant and the course of
action the registrant has taken or proposes to take to address such
circumstances. U.S. GAAP does not require this disclosure.
In the Concept Release, the Commission solicited comment on the
importance of disclosure elicited by Item 303(a)(4) and whether and how
we should amend the requirements. Some commenters supported retaining
the requirements.\180\ One of these commenters stated that without this
disclosure requirement, ``a registrant could create significant off-
balance sheet liabilities that have the potential to impair its
financial condition without investors knowing of it.'' \181\ Another
commenter stated that off-balance sheet arrangements disclosure
requirements should be retained and expanded, and stated that it was
comfortable with duplications between the financial statements and MD&A
disclosures.\182\ This commenter indicated that an executive overview
analyzing the risks associated with off-balance sheet arrangements
would be beneficial.
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\180\ See, e.g., letters from CFA, CalPERS, and S. Percoco.
\181\ See letter from CFA.
\182\ See letter from CalPERS.
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Several commenters encouraged the Commission to eliminate or amend
Item 303(a)(4), stating that the requirements substantially overlap
with U.S. GAAP.\183\ Some commenters suggested that the Commission
apply the principles-based disclosure framework in MD&A to off-balance
sheet arrangements.\184\ Other commenters recommended that the
Commission make clear that no disclosure is required related to off-
balance sheet arrangements that are not material.\185\
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\183\ See. e.g., letters from Chamber, CGCIV, Davis Polk, E&Y,
KPMG LLP (July 21, 2016) (``KPMG''), Arthur J. Radin, Janover LLC
(``A. Radin''), and SIFMA.
\184\ See, e.g., letters from CGCIV, Chamber, and PWC.
\185\ See letters from Davis Polk and Fenwick.
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In light of the updates made to U.S. GAAP that result in
substantial overlap between U.S. GAAP and Item 303(a)(4) of Regulation
S-K, and consistent with our other proposed amendments intended to
promote the principles-based nature of MD&A, we believe that the
current more prescriptive off-balance sheet arrangement definition and
related disclosure requirement in Item 303(a)(4) should be replaced
with a principles-based instruction. Specifically, we propose to
replace current Item 303(a)(4) with a new Instruction to Item 303(b)
that would require registrants to discuss commitments or obligations,
including contingent obligations, arising from arrangements with
unconsolidated entities or persons that have, or are reasonably likely
to have, a material current or future effect on a registrant's
financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, cash requirements, or
capital resources.\186\ This proposed instruction would build on the
current requirement in Item 303(a)(2) that specifically requires
consideration of off-balance sheet financing arrangements as part of
the capital resources discussion.\187\
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\186\ See proposed Instruction 8 to Item 303(b).
\187\ See Item 303(a)(2)(ii) of Regulation S-K [17 CFR
302(a)(2)(ii)].
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The proposed amendment should result in greater integration of
material off-balance sheet arrangements disclosure within the context
of broader MD&A disclosures as those arrangements enumerated in Item
303(a)(4) may be discussed more cohesively with other off-balance sheet
arrangements that are not enumerated in Item 303(a)(4). We believe this
could result in more effective discussion of the impact of these
arrangements. Commission staff and commenters have observed that the
current requirements often result in boilerplate disclosure or a
duplication of disclosures in the financial statements. Further, Item
303(a)(4)'s requirement for disclosure in a separately captioned
section often results in a disjointed presentation of off-balance sheet
arrangements that may lack the necessary context of how these
obligations should be considered in light of a registrant's overall
financial condition. We believe that the proposed amendment would
result in disclosure that would be more useful to understanding the
impact of off-balance sheet arrangements, and may help avoid
boilerplate or disjointed disclosure.
We acknowledge that, as discussed above, certain Item 303(a)(4)
requirements related to the location, presentation, and nature of the
disclosure do not overlap with U.S. GAAP. However, we believe that
proposed Instruction 8 would mitigate any potential loss of information
by requiring a discussion of material matters of liquidity, capital
resources, and financial condition as they relate to off-balance sheet
arrangements. Below, we seek comment on what material information, if
any, may be lost if we adopt the proposed amendments.
Unlike Item 303(a)(4), the proposed instruction would not define
``off-balance sheet arrangements.'' Rather, it states that discussion
of commitments or obligations, including contingent obligations, of the
registrant arising from arrangements with unconsolidated entities or
persons that have or are reasonably likely to have a material current
or future effect on a registrant's financial condition, changes in
financial condition, revenues or expenses, results of operations,
liquidity, cash requirements, or capital resources shall be provided
even when the arrangement results in no obligations being reported in
the registrant's consolidated balance sheets. The instruction provides
examples of such arrangements that are substantially the same as those
included in the current definition of off-balance sheet arrangements in
Item 303(a)(4), including: Guarantees; retained or contingent interests
in assets transferred; contractual arrangements that support the
credit, liquidity, or market risk for assets transferred; obligations
that arise or could arise from variable interests held in an
[[Page 12084]]
unconsolidated entity; or obligations related to derivative instruments
that are both indexed to and classified in a registrant's own equity
under U. S. GAAP and are therefore not presented as liabilities on a
registrant's balance sheet.
While the examples in the proposed instruction are substantially
the same as those in the current off-balance sheet arrangements
definition in Item 303(a)(4), the examples do not include references to
specific paragraphs in U.S. GAAP. Despite the elimination of these
cross-references, the amendments are not intended to broaden the types
of arrangements for which MD&A disclosure would be required. In this
regard, under existing MD&A requirements, registrants are required to
discuss in MD&A any known demands, commitments, events or uncertainties
that will result in or that are reasonably likely to result in the
registrant's liquidity decreasing in any material way, even if the
known demand did not meet the definition of an off-balance sheet
arrangement in Item 303(a)(4). Under the proposed amendments, those
same arrangements would continue to be required to be discussed in
MD&A. For the same reason, the proposed amendments also would not
narrow the scope of what would be required to be disclosed in MD&A. The
primary difference from what is currently required, and would be
required under the proposed amendments, is that the discussion would no
longer occur in a separately-captioned section; but rather, it would be
made in the context of a more holistic, principles-based analysis.
We considered whether our proposal is consistent with Section 13(j)
of the Exchange Act, as added by Section 401(a) of the Sarbanes-Oxley
Act, which required the Commission to adopt rules providing that each
annual and quarterly financial report required to be filed with the
Commission shall disclose all material off-balance sheet arrangements.
We believe that Section 13(j) remains satisfied because, under proposed
Instruction 8 to Item 303(b), disclosure of all material off-balance
sheet arrangements would continue to be required in annual and
quarterly reports. As discussed above, although a discussion of off-
balance sheet arrangements would no longer be required to be provided
in a separately captioned section, registrants would still be required
to discuss such arrangements in the broader context of their MD&A
disclosures.
We also propose to amend Items 2.03 and 2.04 of Form 8-K to include
the definition of ``off-balance sheet arrangements'' that is currently
in Item 303(a)(4). Currently, Form 8-K defines off-balance sheet
arrangements by cross reference to Item 303(a)(4)(ii).\188\ This
proposed amendment would not result in any changes in reporting
obligations under Item 2.03 and Item 2.04 of Form 8-K.\189\
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\188\ See Item 2.03(d) and Item 2.04(d) of Form 8-K. In 2004, as
part of a broader effort to expand the events that registrants must
report on a current basis, the Commission adopted additional
requirements for disclosing off-balance sheet arrangements on Form
8-K. These provisions require registrants to file a Form 8-K upon
the creation of a direct financial obligation or an obligation under
an off-balance sheet arrangement (Item 2.03) and to file a Form 8-K
if a triggering event occurs that causes the increase or
acceleration of such an obligation and the consequences of the event
are material to the registrant (Item 2.04). While the Form 8-K
requirements rely on the definition of ``off-balance sheet
arrangement'' in Item 303(a)(4)(ii), the purpose of the disclosure
is different. Unlike Item 303(a)(4), Form 8-K does not require
registrants to provide an analysis of off-balance sheet arrangements
or their importance to the registrant.
\189\ We believe it is appropriate to retain the current,
prescriptive definition of ``off-balance sheet arrangements'' in
Form 8-K in light of its four business day filing requirement. See
Instruction B.1 and Instructions to Item 2.03 of Form 8-K. Our
intent is that a prescriptive definition will provide registrants
with greater certainty when filing a Form 8-K.
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Request for Comment
28. Should we amend the off-balance sheet arrangements disclosure
requirement by replacing Item 303(a)(4) with Instruction 8 to Item
303(b), as proposed? Is the proposed instruction a sufficient
replacement for the current requirement for a separately-captioned
presentation of off-balance sheet arrangements?
29. Are there alternative approaches we should consider to address
the potential for boilerplate or duplicative disclosure?
30. Would the proposed amendments result in the loss of material
information to investors that would not be disclosed elsewhere? If so,
what information would be lost? Are the proposed amendments
sufficiently tailored to avoid discussion of immaterial off-balance
sheet arrangements?
31. Would the proposed amendments result in more meaningful MD&A
disclosures about off-balance sheet arrangements? Are the proposed
amendments likely to reduce boilerplate or duplicative disclosure?
32. Should we amend Items 2.03 and 2.04 of Form 8-K to incorporate
the definition of ``off-balance sheet arrangements'' that is currently
in Item 303(a)(4), as proposed? Would the proposed amendments create
any confusion as to when a reporting obligation under Item 2.03 or Item
2.04 of Form 8-K would be triggered?
7. Contractual Obligations Table (Item 303(a)(5))
Under Item 303(a)(5),\190\ registrants other than SRCs must
disclose in tabular format their known contractual obligations. The
item requires a registrant to arrange its table to disclose contracts
by type of obligations,\191\ the overall payments due, and by four
prescribed periods.\192\ A registrant may disaggregate the categories
of obligations, but it must disclose all obligations falling within the
prescribed five categories and for the prescribed time periods. A
registrant may provide footnotes to the table to the extent such
information is necessary to understand the disclosures in the
contractual obligations table. There is no materiality threshold for
this item, meaning registrants must disclose all contractual
obligations falling within the prescribed four categories.
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\190\ Item 303(a)(5) of Regulation S-K [17 CFR 229.303(a)(5)].
\191\ The types of obligations include long-term debt
obligations, capital lease obligations, operating lease obligations,
purchase obligations, and other long-term liabilities reflected on
the registrant's balance sheet under GAAP.
\192\ The payment obligations must be disclosed for the
following timeframes: Less than one year; one to three years; three
to five years; and more than five years.
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When the Commission implemented this disclosure requirement, its
purpose was to ensure that aggregated information about contractual
obligations was presented in one place.\193\ This was intended to aid
investors in determining the effect such obligations would have in the
context of off-balance sheet arrangements.\194\ Commission guidance
that followed the implementation of this requirement encouraged
registrants to include narratives to the table to provide more context
and analysis for the numbers presented.\195\
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\193\ See Off-Balance Sheet Arrangements and Contractual
Obligations Adopting Release at 5990.
\194\ See id.
\195\ See Commission Guidance on Presentation of Liquidity and
Capital Resources Disclosures in Management's Discussion and
Analysis, Release No. 33-9144 (Sept. 17, 2010) [75 FR 59894 (Sept.
28, 2010)] (``2010 MD&A Interpretive Release''), at 59896.
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In the Concept Release, the Commission solicited comment on the
meaningfulness of disclosure elicited by Item 303(a)(5). Several
commenters recommended retaining and enhancing this item
requirement,\196\ with two of these commenters supporting an additional
requirement to include pension obligations.\197\ Another
[[Page 12085]]
commenter recommended enhancing this disclosure by requiring XBRL
tagging and disclosure of single, discrete years (as opposed to grouped
years).\198\ Some of these commenters recommended requiring, or at
least encouraging, registrants to provide a narrative to the
contractual obligations table.\199\
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\196\ See, e.g., letters from RGA, Bloomberg, Better Markets,
Inc. (Jul. 21, 2016) (``Better Markets''), S. Percoco, and CFA
Institute.
\197\ See letters from Bloomberg and S. Percoco.
\198\ See letter from RGA.
\199\ See, e.g., letters from Better Markets, S. Percoco, and
CFA Institute.
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Many commenters, however, recommended that we simplify or eliminate
Item 303(a)(5).\200\ Some commenters encouraged the Commission to
consider whether the contractual obligations table is necessary given
the overlap with the disclosure requirements of U.S. GAAP.\201\ One
commenter also noted that ``to the degree that elimination of
duplicative topics is unavoidable, registrants should be able to cross-
reference within a filing.'' \202\ Another commenter broadly supported
the idea of making MD&A contractual obligations disclosure more
principles-based ``to highlight material issues regarding [a
registrant's] liquidity'' and allowing the relevant factual information
to be provided in the financial statements.\203\ One commenter
questioned whether the contractual obligations table, as currently
structured, provides a complete picture of a registrant's obligations
and liquidity concerns.\204\
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\200\ See, e.g., letters from E&Y, SIFMA, BDO, EEI and AGA,
Davis Polk, General Motors, FEI, A. Radin, Deloitte, Chamber, FedEx,
CGCIV, CAQ, KPMG, PWC, Chevron, Fenwick, and Grant Thornton.
\201\ See letters from General Motors, PWC, Grant Thornton, CAQ,
and Deloitte.
\202\ See letter from General Motors.
\203\ See letter from SIFMA.
\204\ As an example, the commenter noted that a registrant can
have a large or small amount of contractual obligations, but the
disclosure of such amount does not necessarily provide investors
with information about the registrant's ability to generate
liquidity, its contractual obligations at any other point in time,
or a complete picture of its expected uses of cash. See letter from
E&Y.
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Several commenters recommended the Commission eliminate Item
303(a)(5), stating that the disclosure requirement is largely redundant
with what is required in the financial statements.\205\ One of these
commenters indicated that the Commission should eliminate disclosure
requirements that are redundant with U.S. GAAP or IFRS, as
applicable.\206\ This commenter stated that ``[i]dentical, or even
similar disclosures, to GAAP appear unnecessary considering that
accounting standards undergo a high level of scrutiny in the standards-
setting process and are subjected to ongoing FASB monitoring for needed
revisions.'' \207\ Another commenter stated that the information
provided in response to Item 303(a)(5) is largely the same as that
provided in a registrant's financial statements and questioned its
utility.\208\ The commenter went on to state that the information in
the Item 303(a)(5) contractual obligations table did not provide
insight as to whether a registrant could pay the obligations as they
became due.
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\205\ See, e.g., letters from A. Radin, Deloitte, Chamber,
FedEx, CGCIV, CAQ, KPMG, PWC, Chevron, Fenwick, E&Y, and Grant
Thornton.
\206\ See letter from KPMG.
\207\ The commenter then also included a chart that, among other
things, noted the items that overlap between Item 303(a)(5) and U.S.
GAAP requirements.
\208\ See letter from Grant Thornton.
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In the FAST Act Report, Commission staff recommended eliminating
the contractual obligations table while enhancing the liquidity
discussion requirements.\209\ Under this recommendation, registrants
would no longer be required to present contractual obligations in a
table, but registrants would have to provide a hyperlink to the
relevant information in the financial statements. One commenter on the
FAST Act Report stated that eliminating the contractual obligations
table would be a ``step backwards.'' \210\ The commenter wrote that
``[t]he table as it exists is a user-friendly, central location for the
complete display of all a firm's future cash obligations.''
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\209\ See Report on Modernization and Simplification of
Regulation S-K (Nov. 23, 2016), available at https://www.sec.gov/reportspubs/sec-fast-act-report-2016.pdf.
\210\ See letter to the FAST Act Report from Jack T. Ciesielski,
R.G. Associates, Inc. (Dec. 12, 20016), available at https://www.sec.gov/comments/fast/fast.htm.
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Although the Commission did not propose to eliminate Item 303(a)(5)
in the FAST Act Proposing Release,\211\ we now propose to eliminate
Item 303(a)(5), consistent with our objective to promote the
principles-based nature of MD&A and streamline disclosures by reducing
redundancy.\212\ We do not believe that eliminating the requirement
would result in a loss of material information to investors given the
overlap with information required in the financial statements and our
proposed expansion of the capital resources requirement, discussed
above in Section II.C.2.
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\211\ See FAST Act Proposing Release.
\212\ Item 2.03 of Form 8-K defines ``direct financial
obligation'' by cross references to Item 303(a)(5)(ii)--Definitions.
Accordingly, we are proposing to replace these cross references in
Form 8-K with the definitions from Item 303(a)(5)(ii).
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As many commenters pointed out,\213\ much of the information
presented in response to this requirement overlaps with U.S. GAAP and
is therefore included in the notes to the financial statements.\214\ As
commenters also observed, the current table does not provide insight
into the registrant's ability to pay its obligations as they become due
\215\ and may not provide a complete picture of the registrant's
expected uses of cash.\216\ Our proposals to enhance the liquidity and
capital resources discussion are intended to address some of these
commenter concerns. We recognize that some of the information in the
contractual obligations table is not specifically called for under U.S.
GAAP.\217\ However, under our capital resources proposals, described
above in Section II.C.2, registrants would be required to discuss
material cash requirements, which would include material contractual
obligations.
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\213\ See, supra note 201.
\214\ For example, the following ASC requirements overlap with
Item 303(a)(5): ASC 470-10-50 (debt); ASC 840-10-50 (leases); ASC
842 (leases); ASC 440-10-50 (purchase commitments); and ASC 410,
420, 450, and 710 (other long-term obligations).
\215\ See, e.g., letters from Grant Thornton, General Motors,
CAQ, and E&Y.
\216\ See, e.g., letters from CAQ and E&Y.
\217\ See Off-Balance Sheet Arrangements and Contractual
Obligations Adopting Release, at 5986 (``The preparation of
financial statements in accordance with GAAP already requires
registrants to assess payments under all of the above categories of
contractual obligations, except for purchase obligations.'').
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Request for Comment
33. Should we eliminate the contractual obligations disclosure
requirement, as proposed?
34. Would investors be deprived of material information under the
proposal?
35. Is the disclosure of information related to contractual
obligations in the notes to the financial statements an adequate
substitute for its separate tabular presentation in Item 303(a)(5)?
Would there be any costs or challenges to investors of compiling
information required in Item 303(a)(5) from other sources and, if so,
what would the costs or challenges be? Do current XBRL-tagging
requirements facilitate compilation and comparison of such information?
36. How do market participants use the ``payments due by period''
information in the contractual obligations table and is the disclosure
material to an investor's investment decision? If we eliminate Item
303(a)(5), should we require registrants to disclose information
regarding the time periods in which material contractual obligations
will become due?
37. If we eliminate the required table of contractual obligations,
as proposed,
[[Page 12086]]
what information about contractual obligations are registrants likely
to provide in their MD&A?
38. Should we retain the contractual obligations disclosure
requirement in a modified form (e.g., with a materiality threshold, but
not require a tabular presentation, etc.)? If so, what modifications
should we make to the requirement?
39. If we retain the current contractual obligations disclosure
requirement, should we revise it to enhance the information provided to
investors (e.g., should we expressly require a narrative to the
contractual obligations table)?
8. Critical Accounting Estimates
While not specified in Item 303, the Commission in prior guidance
has stated that, while preparing MD&A, registrants should consider
whether accounting estimates and judgments could materially affect
reported financial information.
Specifically, in 2001, the Commission reminded registrants that,
under the existing MD&A disclosure requirements, a registrant should
address material implications of uncertainties associated with the
methods, assumptions, and estimates underlying the registrant's
critical accounting measurements.\218\ The Commission also encouraged
companies to explain the effects of the critical accounting policies
applied and the judgments made in their application.\219\ In 2002, the
Commission proposed rules to require disclosure of critical accounting
estimates, but it never adopted this proposal.\220\
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\218\ See Cautionary Advice Regarding Disclosure, Release No.
33-8040 (Dec. 12, 2001) [66 FR 65013 (Dec. 17, 2001)] (``Cautionary
Advice Release'').
\219\ See id.
\220\ See Disclosure in Management's Discussion and Analysis
about the Application of Critical Accounting Policies, Release No.
33-8098 (May 10, 2002) [67 FR 35620 (May 20, 2002)] (``2002 Critical
Accounting Policies Proposal''). See also, Concept Release, at
239452, for a summary of the 2002 Critical Accounting Policies
Proposal.
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In the 2003 MD&A Interpretive Release, the Commission addressed
critical accounting estimates.\221\ The Commission stated that when
preparing MD&A disclosure, companies should consider whether they have
made accounting estimates or assumptions where the nature of the
estimates or assumptions is material due to the levels of subjectivity
and judgment necessary to account for highly uncertain matters or the
susceptibility of such matters to change; and the impact of the
estimates and assumptions on financial condition or operating
performance is material.\222\ This guidance further stated that if
critical accounting estimates or assumptions are identified, a
registrant should analyze, to the extent material, factors such as how
it arrived at the estimate, how accurate the estimate/assumption has
been in the past, how much the estimate/assumption has changed in the
past, and whether the estimate/assumption is reasonably likely to
change in the future. This guidance also stated that a registrant
should analyze its specific sensitivity to change based on other
outcomes that are reasonably likely to occur. Any disclosure should
supplement, not duplicate, the description of accounting policies that
are already disclosed in the notes to the financial statements, and
provide greater insight into the quality and variability of information
regarding financial condition and operating performance.\223\
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\221\ See 2003 MD&A Interpretive Release.
\222\ See id.
\223\ See id.
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U.S. GAAP does not require a similar disclosure of estimates and
assumptions in the notes to financial statements except in a limited
number of circumstances.\224\ Instead, U.S. GAAP requires disclosure of
the accounting principles followed and the methods of applying those
principles that materially affect the determination of financial
position, cash flows, or results of operations.\225\ Unlike U.S. GAAP,
any discussion in MD&A should present a registrant's analysis of the
uncertainties involved in applying the principles.\226\ IFRS requires
disclosures regarding sources of estimation uncertainty and judgments
made in the process of applying accounting policies that have the most
significant effect on the amounts recognized in the financial
statements.\227\
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\224\ For example, ASC 820-10-50-1C requires similar disclosure
related to fair value measurements.
\225\ See ASC 235-10-50-3.
\226\ See 2003 MD&A Interpretive Release, at 75064.
\227\ International Accounting Standard (``IAS'') 1, paragraphs
122 to 133.
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In the Concept Release, the Commission noted that, despite its
guidance, many registrants repeat the discussion of significant
accounting policies from the notes to the financial statements in MD&A
and provide limited additional discussion of the critical accounting
estimates.\228\ The Commission solicited comment on how to improve the
discussion of critical accounting estimates in MD&A.
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\228\ See Concept Release, at 23953.
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The Commission received a range of comments on critical accounting
estimates. Many commenters acknowledged that registrants typically
provide disclosure that is duplicative of their accounting policies or
does not otherwise provide meaningful analysis of the estimates and
assumptions involved.\229\ Several commenters recommended revising Item
303 to include a critical accounting estimate requirement,\230\ with
some of these commenters suggesting this may improve the resulting
disclosure.\231\ While some of the commenters that recommended revising
Item 303 supported a prescriptive rule for critical accounting
estimates,\232\ others suggested revising the item to provide a
principles-based framework for critical accounting estimates.\233\ One
commenter stated that a critical accounting estimate requirement in
Item 303 should specifically state that the disclosure is meant to
supplement, and not duplicate, the description of accounting policies
in the footnotes to the financial statements.\234\ This same commenter
also recommended that Item 303 require a discussion about the judgments
and assumptions that management must make in order to prepare its
financial statements and that have the most significant impact on such
financial statements.
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\229\ See, e.g., letters from A. Radin, NYSSCPA, Deloitte, PWC,
Investment Program Association (Jul. 21, 2016), Davis Polk, Fenwick,
CalPERS, NAREIT and American Bar Association (Dec. 15, 2017)
(``ABA'').
\230\ See, e.g., letters from Deloitte, NYSSCPA, BDO, CAQ, Grant
Thornton, PWC, CalPERS, S. Percoco, and ABA.
\231\ See, e.g., letters from Deloitte, BDO, and Grant Thornton.
\232\ See, e.g., letters from NYSSCPA and CalPERS.
\233\ See letters from Deloitte, Grant Thornton, BDO, PWC, and
CAQ.
\234\ See letter from ABA.
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Some commenters suggested that, if Item 303 is revised to address
critical accounting estimates specifically, the Commission should not
codify the Commission's guidance on disclosure of critical accounting
estimates and related disclosure requirements as set forth in the 2003
MD&A Interpretive Release.\235\ One commenter suggested that disclosure
of critical accounting estimates should be required when: (i) It is at
least reasonably possible that the estimate of the effect on the
financial statements of a condition, situation, or set of circumstances
that existed at the date of the financial statements will change in the
near term due to one or more future confirming events; and (ii) the
effect of the change would be material to the financial
statements.\236\ Two commenters stated that the
[[Page 12087]]
disclosures should describe the process employed in creating the
estimate.\237\
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\235\ See, e.g., letters from A. Radin, CalPERS, NAREIT, and S.
Percoco.
\236\ See letter from KPMG (citing KPMG, LLP letter (Dec. 9,
2002) to the 2002 Critical Accounting Policies Proposal).
\237\ See letters from CAQ and CalPERS.
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Other commenters suggested that the Commission coordinate with the
FASB to enhance U.S. GAAP so that it requires these disclosures.\238\
Yet others suggested that the Commission eliminate guidance related to
critical accounting estimates because they believe the disclosures are
not useful and the dynamic nature of uncertainties makes it overly
challenging to quantify the reasonably likely range of outcomes with a
solid basis for investor reliance.\239\ A few commenters stated that
current Commission guidance is sufficient but recommended that the
Commission provide additional illustrative guidance.\240\ Two of these
commenters opposed revising Item 303 to require disclosure of critical
accounting estimates and opposed adopting a ``strict definition'' of
critical accounting estimates; these commenters stated that any
clarification in this area should be done through a revised
interpretive release.\241\
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\238\ See, e.g., letters from E&Y, Northrop Grumman, and KPMG.
\239\ See letters from A. Radin, Davis Polk, and Fenwick.
\240\ See, e.g., letters from Chevron, CGCIV, and Chamber.
\241\ See letter from Chamber and CGCIV.
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We propose to amend Item 303(a) \242\ to explicitly require
disclosure of critical accounting estimates.\243\ We are persuaded by
commenters who stated that a requirement in Item 303 would facilitate
compliance and may improve the resulting disclosure.\244\ As stated by
many commenters, registrants often repeat the information in the
financial statement footnotes about significant accounting policies. By
proposing to codify this requirement, our intent is to eliminate
disclosure that duplicates the financial statement discussion of
significant accounting policies and, instead, promote enhanced analysis
of measurement uncertainties.
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\242\ Proposed to be renumbered as Item 303(b).
\243\ See proposed Item 303(b)(6).
\244\ See, e.g., letters from Deloitte, BDO and Grant Thornton.
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Our proposed amendments are also intended to clarify for
registrants the required disclosures related to critical accounting
estimates. To this end, our proposals define a critical accounting
estimate as an estimate made in accordance with generally accepted
accounting principles that involves a significant level of estimation
uncertainty and has had or is reasonably likely to have a material
impact on the registrant's financial condition or results of
operations. By focusing the definition on estimation uncertainties, we
intend to avoid any unnecessary repetition of significant accounting
policy footnotes. For each critical accounting estimate, the proposed
amendments would require registrants to disclose, to the extent
material, why the estimate is subject to uncertainty, how much each
estimate has changed during the reporting period, the sensitivity of
the reported amounts to the material methods, assumptions, and
estimates underlying the estimate's calculation.\245\
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\245\ These disclosure requirements are similar to those found
in IFRS. See IAS 1, paragraph 129.
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We believe the proposed amendments would clarify for registrants
the disclosures required to address any critical accounting estimates,
help avoid boilerplate or duplicative disclosures, and provide
investors with material information regarding critical accounting
estimates. We also believe that the disclosure elicited by the proposed
amendments would facilitate further understanding of an analysis of
amounts reported in the financial statements by providing greater
insight on the uncertainties involved in creating and applying an
accounting policy and how significant accounting policies of
registrants faced with similar facts and circumstances may differ.
We recognize that some of the disclosure that would be required
under our proposals may be provided already under U.S. GAAP \246\ or
IFRS.\247\ To discourage duplicative disclosures, we are proposing, as
suggested by one commenter, to also include an instruction specifying
that the disclosure of critical accounting estimates shall supplement,
but not duplicate, the description of accounting policies or other
disclosures in the notes to the financial statements.\248\
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\246\ For example, with respect to recurring fair value
measurements categorized with Level 3 of the fair value, ASC 820-10-
50-2 requires a narrative description of the sensitivity of the fair
value measurement to changes in unobservable inputs if a change in
those inputs to a different amount might result in a significantly
higher or lower fair value measurement. We are not proposing to
eliminate any requirement that this information be provided.
\247\ See IAS 1, paragraphs 125 to 133.
\248\ See letter from ABA.
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We considered the potential for overlap with auditor communications
of critical audit matters.\249\ A critical audit matter is defined as
``any matter arising from the audit of the financial statements that
was communicated or required to be communicated to the audit committee
and that: (1) Relates to accounts or disclosures that are material to
the financial statements; and (2) involved especially challenging,
subjective, or complex auditor judgment.'' \250\ Beginning with audits
of fiscal years ending on or after June 30, 2019,\251\ audit reports
are required, among other things, to include a description of ``the
principal considerations that led the auditor to determine that the
matter is a critical audit matter.'' \252\ The communications auditors
are expected to provide on critical audit matters in an audit report
have a different objective than disclosures related to critical
accounting estimates. In this regard, critical audit matters provide
insight into matters that are especially challenging, subjective, and
complex to audit from the perspective of the auditor. On the other
hand, critical accounting estimates disclosure should provide
management's insights into estimation uncertainties that have had or
are reasonably likely to have a material impact on reported financial
statements. A critical accounting estimate may not be a critical audit
matter because it may not involve especially challenging, subjective,
or complex auditor judgment, but it would still require analysis in
MD&A. Likewise, a critical audit matter that would require reporting in
the audit report may not necessarily be a critical accounting estimate,
as proposed, because it may not involve estimation uncertainty that can
materially affect reported amounts.\253\ For these reasons, we do
[[Page 12088]]
not believe that proposed Item 303(a)(4) would necessarily result in
duplicative disclosure.
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\249\ See PCAOB Standard AS 3101, The Auditor's Report on an
Audit of Financial Statements When the Auditor Expresses an
Unqualified Opinion (``AS 3101''). See also letter from Grant
Thornton (stating that ``[w]hile the two concepts have different
meanings, there may be some confusion amongst stakeholders as to the
relationship between the two.'').
\250\ See AS 3101.
\251\ The requirements related to critical audit matters in AS
3101 apply to reports of independent registered public accounting
firms that are included in certain registrant filings. These
requirements are effective for audits of fiscal years ending on or
after June 30, 2019 for large accelerated filers; and for fiscal
years ending on or after December 15, 2020, for all other companies
to which the requirements apply. See Public Company Accounting
Oversight Board; Order Granting Approval of Proposed Rules on the
Auditor's Report on an Audit of Financial Statements When the
Auditor Expresses an Unqualified Opinion, and Departures from
Unqualified Opinions and Other Reporting Circumstances, and Related
Amendments to Auditing Standards, Release No. 33-81916 (Oct. 23,
2017) [82 FR 49886 (Oct. 27, 2017)].
\252\ See paragraph 14 of AS 3101.
\253\ See e.g., ``Implementation of Critical Audit Matters: A
Deeper Dive on the Determination of CAMS'' (Mar. 18, 2019), at 6
available at https://pcaobus.org/Standards/Documents/Implementation-of-Critical-Audit-Matters-Deeper-Dive.pdf.
Additionally, our proposal to require critical accounting
estimates would apply to EGCs. In contrast, disclosure of critical
audit matters is not required for audits of EGCs. See paragraph 5 of
AS 3101.
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Request for Comment
40. Should we amend Item 303 to require disclosure of critical
accounting estimates, as proposed?
41. Is the proposed definition of critical accounting estimates
sufficiently clear? Are there alternative definitions that we should
consider?
42. Should any registrants, such as SRCs, EGCs, or IPO issuers, be
exempted from this proposed requirement? If so, which registrants, and
should there be a time limitation on such an accommodation?
43. Would the proposed amendments result in disclosures that are
duplicative of U.S. GAAP or IFRS, as applicable? If so, how? Are there
alternatives we should consider to encourage registrants to provide
disclosures that will supplement, rather than duplicate, disclosures
that appear in the financial statements?
44. Would the proposed amendments provide clarity to registrants on
disclosures regarding critical accounting estimates? Would the proposed
amendments provide investors with material information regarding
critical accounting estimates?
45. Some commenters suggested we issue a revised interpretive
release addressing critical accounting estimates \254\ and others
suggested we provide illustrative examples to facilitate this
disclosure.\255\ Instead of amending Item 303, should we issue revised
guidance addressing critical accounting estimates? Should we provide
illustrative examples?
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\254\ See, e.g., letters from Chamber and CGCIV.
\255\ See, e.g., letters from PWC, KPMG, and Chevron.
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46. The Commission has previously encouraged registrants to
include, in their MD&A, explanations of the judgments and uncertainties
affecting application of their accounting policies.\256\ For example,
critical accounting judgments may include whether financial assets are
held-to-maturity investments, whether an instrument is classified as
debt or equity, or judgments made about the appropriate scope for a
transaction. Should the Commission be more prescriptive in this area
and, for example, adopt a requirement for registrants to disclose
critical accounting judgments? Would such a requirement elicit material
information that would not otherwise be provided, including as a result
of the proposed critical accounting estimates requirement? As an
alternative to a new requirement, should we refer the matter to the
FASB for potential incorporation into U.S. GAAP?
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\256\ See Cautionary Advice Release, at 65013.
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9. Interim Period Discussion (Item 303(b))
Item 303(b) requires registrants to provide MD&A disclosure for
interim periods that enables market participants to assess material
changes in financial condition and results of operations between
certain specified periods.\257\ Item 303(b)(1) requires registrants to
discuss any material change in financial condition from the end of the
preceding fiscal year to the date of the most recent interim balance
sheet.\258\ Item 303(b)(2) requires registrants to discuss any material
changes in their results of operations for the most recent fiscal year-
to-date period presented in their income statement, along with a
similar discussion of the corresponding year-to-date period of the
preceding fiscal year. If a registrant is required or elects to provide
an income statement for the most recent fiscal quarter, the discussion
must also cover material changes with respect to that fiscal quarter
and the corresponding fiscal quarter in the preceding fiscal year.\259\
Item 303(b)(2) also states that registrants subject to Rule 3-03(b) of
Regulation S-X \260\ providing statements of comprehensive income for
the twelve-month period ended as of the date of the most recent interim
balance sheet must discuss material changes of that twelve-month period
as compared to the preceding fiscal year rather than the preceding
period.
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\257\ Item 303(b) of Regulation S-K [17 CFR 229.303(b)].
\258\ If the interim financial statements include an interim
balance sheet as of the corresponding interim date of the preceding
year, the registrant must also discuss any material changes in
financial condition from that date to the date of the most recent
interim balance sheet provided. At their discretion, registrants may
combine discussions of changes from both the end and the
corresponding interim date of the preceding fiscal year when such
discussions are required. See Item 303(b)(1).
\259\ In addition, if the registrant elects to provide a
statement of comprehensive income for the twelve-month period ended
as of the date of the most recent interim balance sheet provided,
the registrant must also discuss material changes with respect to
that twelve-month period and the twelve-month period ended as of the
corresponding interim balance sheet date of the preceding fiscal
year. See Item 303(b)(2).
\260\ These registrants include those primarily engaged in: The
generation, transmission, or distribution of electricity; the
manufacture, mixing transmission, or distribution of gas; the
supplying or distribution of water; or the furnishing of telephone
or telegraph services; or in holding securities of companies engaged
in such business.
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The Commission adopted the precursor to current Item 303(b) as part
of its effort to integrate and simplify its disclosure system.\261\ The
Commission stated at the time that the amendments it was adopting
formed ``an integral part of the Commission's program to integrate the
disclosure requirements of the Exchange Act with those of the
Securities Act, and to encourage and facilitate the integration of
corporate reporting on formal Commission filings with informal
corporate communications with shareholders.'' \262\ The Commission also
noted that the amendments were complements to the annual report
amendments adopted around the same time.\263\
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\261\ See New Interim Financial Information Provisions and
Revisions of Form 10-Q for Quarterly Reporting, Release No. 33-6288
(Feb. 9, 1981), 46 FR 12480 (Feb. 17, 1981) (adopting current Item
303(b) of Regulation S-K as then Item 11(b) of Regulation S-K)
(``Item 303(b) Adopting Release''). See also 1982 Integrated
Disclosure Adopting Release (reorganizing Regulation S-K to, among
other things, move the substance of Item 11(b) of Regulation S-K to
Item 303(b) of Regulation S-K).
\262\ See Item 303(b) Adopting Release, at 12481.
\263\ Id.
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The Commission recently solicited comment on the current quarterly
reporting process and how the Commission can reduce the administrative
burdens on reporting companies associated with this process while
enhancing the investor protections associated with periodic reporting
under the Exchange Act.\264\ The Commission also sought input on the
benefits, costs, and burdens of the current quarterly reporting system,
and possible approaches to simplifying the process through which
investors access, process, and evaluate information.\265\
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\264\ Request for Comment on Earnings Releases and Quarterly
Reports, Release No. 33-10588 (Dec. 18, 2018) [83 FR 65601 (Dec. 21,
2018)] (the ``Request for Comment''). Comment letters in response to
the Request for Comment are available at https://www.sec.gov/comments/s7-26-18/s72618.htm. References to comment letters in this
Section II.C.9 are to those letters received in response to the
Request for Comment.
\265\ The request for comment also addressed other items
relating to (1) the use of earnings releases to satisfy the core
disclosure requirements of Form 10-Q, (2) the frequency of interim
reporting, and (3) earnings guidance.
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Multiple commenters responding to the Request for Comment
recommended that the Commission consider allowing more flexibility in
interim period MD&A, or otherwise streamline or eliminate certain
discussion requirements.\266\ One commenter recommended that the
Commission
[[Page 12089]]
evaluate whether registrants should only be required to discuss year-
to-date results of operations in their MD&A (and not be required to
provide a separate discussion of the results of operations of
individual quarters).\267\ Other commenters, however, recommended that
the Commission assess whether registrants should be required to discuss
year-to-date results and condition (i.e., evaluate whether registrants
should be permitted to exclude year-to-date discussions).\268\ One of
these commenters recommended that the Commission permit flexibility in
how registrants present their MD&A by allowing registrants to choose
the presentation that is most consistent with how they manage their
respective businesses (e.g., quarter over quarter vs. year over
year).\269\ Another commenter recommended the Commission consider
allowing management to exercise judgment in omitting certain year-to-
date and/or quarterly information from interim period MD&A if the
omitted information is consistent with prior trends or repeats
information provided elsewhere in a quarterly report.\270\
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\266\ See, e.g., letters in response to the Request for Comment
from Bank of America (Mar. 21, 2019) (``BoA''), BDO USA, LLP (Mar.
21, 2019) (``BDO 2''), Center for Audit Quality (Mar. 20, 2019)
(``CAQ 2''), Financial Executives International (``FEI 2''), Cleary
Gottlieb Steen & Hamilton LLP (Mar. 27, 2019) (``Cleary Gottlieb''),
and Institute of Management Accountants (Mar. 21, 2019).
\267\ See letter from Ernst & Young (Mar. 21, 2019) (``Ernst'').
\268\ See letters from BoA, BDO 2, CAQ 2, CCR, Cleary Gottlieb,
FEI 2, and IMA.
\269\ See letter from BDO.
\270\ See letter from CAQ 2.
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Other commenters noted that Form 10-Q's prescribed disclosures
ensure uniformity among registrants.\271\ One of these commenters
stated that the structured format of quarterly reports allows certain
market participants to analyze results and to produce tools that ``aid
investors to make more informed investment decisions.'' \272\ Another
commenter stated that there should be some element of uniformity in
required disclosures so that there is consistency among
registrants.\273\
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\271\ See, e.g., letters from AFL-CIO (Mar. 21, 2019), BDO 2,
Better Markets (Mar. 21, 2019), CAQ 2, CIT Group Inc. (Mar. 21,
2019) (``CIT''), Edison Electric Institute and American Gas
Association (Mar. 21, 2019), Gallagher Co. (Mar. 14, 2019),
Investment Company Institute (Mar. 21, 2019), KPMG LLP (Mar. 21,
2019), Marcum LLP (Mar. 21, 2019), Mazars USA LLP (Mar. 21, 2019),
New York City Bar Association (Apr. 10, 2019), RSM US LLP (Mar. 20,
2019) (``RSM''), T. Rowe Price (Mar. 20, 2019), Think Computer
Foundation (Mar. 20, 2019), and XBRL US (Mar. 21, 2019).
\272\ See letter from Better Markets.
\273\ See letter from CIT.
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Several commenters encouraged the Commission to conduct further
outreach with investors and companies.\274\ On July 18, 2019, the
Commission held a roundtable discussion on whether the quarterly
reporting system should be modified to address the impact of short-
termism on our capital markets.\275\ During the roundtable discussion,
multiple panelists discussed the need for streamlined MD&A disclosures,
including interim period MD&A.\276\ One panelist suggested that the
Commission allow registrants to make MD&A comparisons to the preceding
interim period or to discuss only year-to-date changes.\277\ Another
panelist noted that ``companies will want to talk about discrete
quarters'' because ``that's how they do their earnings releases.''
\278\
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\274\ See, e.g, letters from CAQ 2, FEI 2, Ernst, Grant
Thornton, RSM, and Tapestry Networks.
\275\ Roundtable on Short-term/Long-term Management of Public
Companies, our Periodic Reporting System and Regulatory Requirements
(July 18, 2019), archived at https://www.sec.gov/video/webcast-archive-player.shtml?document_id=roundtable-short-long-term-071819.
\276\ See id. at 2:40:56, Statement of Steven Jacobs. See also
id. at 3:22:20, Statement of Nicolas Grabar.
\277\ See supra note 275 at 2:48:36, Statement of Nicolas
Grabar.
\278\ See supra note 275 at 2:40:56, Statement of Steven Jacobs.
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We propose to amend Item 303(b) (to be renumbered as proposed Item
303(c)) to allow for flexibility in comparisons of interim periods and
to simplify the item.\279\ Specifically, we propose to permit
registrants 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. Under the proposal, if a
registrant elects to discuss changes from the immediately preceding
sequential quarter, the registrant must provide summary financial
information that is the subject of the discussion for that quarter or
identify the prior EDGAR filing that presents such information so that
a reader may have ready access to the prior quarter financial
information being discussed. In addition, under the proposed amendment,
if a registrant changes the comparison from the prior interim period
comparison, the registrant would be required to explain the reason for
the change and present both comparisons in the filing where the change
is announced. For example, if a registrant in its third quarter Form
10-Q decides to compare its results to the preceding quarter after the
registrant had compared such quarter to the corresponding quarter of
the previous year in its earlier report, the registrant would be
required to present both comparisons in that third quarter Form 10-Q
and explain the reasons for the change in comparison.
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\279\ The proposed changes to Item 303(a) would flow through to
Item 303(b) because Item 303(b) currently provides that the interim
discussion and analysis must include a discussion of the material
changes in items specified in Item 303(a) (with the exception of
inflation and changing prices, which we propose to eliminate).
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We believe that these changes would allow registrants additional
flexibility to provide an analysis that they believe is most relevant
to an understanding of the frequency and amplitude of past business
cycles while also ensuring that investors have appropriate information
to assess the comparisons being presented. We recognize that not all
businesses are seasonal and a comparison to the corresponding quarter
of the preceding year may not be as meaningful as a comparison to the
preceding quarter. We also believe that this proposal would respond to
commenters' concern about the need for flexibility in MD&A.\280\ These
changes are intended to provide market participants with the most
relevant information about a registrant while reducing comparisons that
may obscure the most material trends. We believe that requiring
registrants to provide both comparisons and explain the reasons for a
change in comparison from prior periods would ensure that investors and
other market participants have sufficient information to understand and
adjust to any period over period change.
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\280\ See supra note 266.
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We are also proposing amendments to simplify Item 303(b) (to be
renumbered as proposed Item 303(c)) that would:
Eliminate the text that states that registrants need not
provide a discussion of the impact of inflation and changing prices,
consistent with the proposed amendments described above; \281\ and
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\281\ See discussion, supra at Section II.C.5.
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Amend Item 303(b)(2) (proposed Item 303(c)(2)) material
changes in results of operations--to break the requirements into two
subsections:
[cir] Proposed Item 303(c)(2)(i) would continue to require
registrants to discuss any material changes in their results of
operations between the most recent year-to-date interim period(s) and
the corresponding period(s) of the preceding fiscal year for which
statements of comprehensive income are provided; and
[cir] Proposed Item 303(c)(ii) would, as discussed above, require
registrants to compare their most recently completed quarter to either
of the corresponding quarter of the prior year (as is currently
required) or to the immediately preceding quarter.\282\
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\282\ As described above, if a registrant changes the comparison
from the prior interim period comparison, the registrant would be
required to explain the reason for the change.
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We are also proposing to eliminate language requiring registrants
subject to Rule 3-03(b) of Regulation S-X \283\ that
[[Page 12090]]
elect to provide a statement of comprehensive income for the twelve-
month period ended as of the date of the most recent interim balance
sheet to discuss material changes in that twelve-month period with
respect to the preceding fiscal year, rather than the corresponding
preceding period. We propose giving these registrants the same
flexibility as other registrants to make the most meaningful
comparisons in their interim period MD&A. In addition to simplifying
Item 303, this change is meant to modernize the current Item 303
requirement. We have not observed any registrants in recent history
that provided the statements of comprehensive income in registration
statements permitted by Rule 3-03(b) of Regulation S-X. Accordingly, we
do not believe the elimination of the provisions in Item 303(b) would
cause any impact. We also believe that the additional flexibility we
are proposing for all registrants would allow registrants subject to
Rule 3-03(b) of Regulation S-X \284\ to make the most meaningful
comparisons in their MD&A.
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\283\ See supra note 260.
\284\ See d.
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Finally, we are proposing to delete Instructions 2, 3, 5, 6, 7, and
8 to current paragraph (b).\285\ We are proposing to eliminate
Instruction 2 because we no longer believe it necessary that an
instruction make explicit the presumption that readers have read or
have access to the MD&A for the preceding fiscal year. We also propose
to eliminate Instructions 3 and 6 because they duplicate current
Instructions 4 \286\ and 7 to Item 303(a), respectively.\287\ Instead,
we propose a new Instruction 1 to proposed Item 303(c) that would
cross-reference the applicable instructions in proposed Item 303(b). We
propose to eliminate Instruction 7 to Item 303(b) in light of our
proposal to eliminate Item 303(a)(5), the subsection that requires
disclosure of contractual obligations. We also propose to eliminate
Instruction 5, which is currently reserved. Finally, we propose to move
Instruction 8 to current Item 303(b) to Instruction 10 of proposed Item
303(b). The following table outlines the current and proposed structure
of Item 303(b) (proposed Item 303(c)): \288\
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\285\ Instruction 5 to Item 303(b) is currently reserved.
\286\ As discussed in Section II.C.4, we are proposing to revise
current Instruction 4 to Item 303(a) to clarify that registrants
must discuss the ``underlying reasons'' for material changes in
``quantitative and qualitative terms.'' We are also proposing to
clarify that registrants must discuss material changes within a line
item.
\287\ We also propose to move the text of Instruction 8 to a new
Instruction 11 to Item 303(a) (proposed Item 303(b)), and reference
it in proposed Instruction 1 to Item 303(c).
\288\ The information in this table is not comprehensive and is
intended only to highlight the general structure of the current
rules and proposed amendments. It does not reflect all of the
substance of the proposed amendments or all of the rules and forms
that are proposed to be affected. All changes are discussed in their
entirety throughout this release. As such, this table should be read
together with this Section II.C.9.
------------------------------------------------------------------------
Current structure Proposed structure
------------------------------------------------------------------------
Item 303(b), Interim periods........... Item 303(c), Interim periods.
(1) Material changes in financial (1) Material changes in
condition. financial condition.
(2) Material changes in results of (2) Material changes in results
operations, Rule 3-03(b) of Regulation of operations.
S-X matters. (i) Material changes in
results of operations (year-to-
date).
(ii) Material changes in
results of operations (quarter
comparisons).
Instruction 1 to Item 303(b)........... Instruction 1 to Item 303(c)
(with amendments to reference
Instructions 2, 5, 9, and 10
to proposed Item 303(b)).
Instruction 2 to Item 303(b)........... Eliminate.
Instruction 3 to Item 303(b)........... Eliminate.
Instruction 4 to Item 303(b)........... Instruction 2 to Item 303(c).
Instruction 5 to Item 303(b)........... Eliminate.
Instruction 6 to Item 303(b)........... Eliminate.
Instruction 7 to Item 303(b)........... Eliminate.
Instruction 8 to Item 303(b)........... Instruction 10 to proposed Item
303(b).
------------------------------------------------------------------------
Request for Comment
47. Should we amend the interim period disclosure requirements in
Item 303(b), as proposed? Alternatively, in order to permit registrants
flexibility to choose their presentation in the manner that is most
consistent with how their business is managed, should we allow
registrants to include a discussion of material changes in the results
of operations with respect to either the most recent fiscal year-to-
date period or the most recent fiscal quarter? Are there other
approaches we should consider?
48. What would the benefits and/or drawbacks be of allowing
registrants more flexibility regarding the interim period comparisons
they discuss in MD&A?
49. Would the ability to compare interim period information across
registrants be significantly affected by allowing flexibility for
interim period comparisons, as proposed?
50. How do market participants use Item 303(b) disclosures? What
are the benefits and drawbacks of the current period-to-period
comparisons requirements?
51. How would our proposed amendments affect registrants subject to
Rule 3-03(b) of Regulation S-X? We are not proposing to eliminate Rule
3-03(b). If adopted, would the Commission's disclosure rules and
guidance be sufficiently clear about disclosure these registrants must
provide? What would the consequences of these proposed changes be for
market participants?
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\289\ Item 303(c) of Regulation S-K [17 CFR 229.303(c)].
\290\ Such persons are the issuer; a person acting on behalf of
the issuer; an outside reviewer retained by the issuer making a
statement on behalf of the issuer; or an underwriter, with respect
to information provided by the issuer or information derived from
information provided by the issuer.
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10. Safe Harbor for Forward-Looking Information (Item 303(c))
Item 303(c) \289\ states that the safe harbors provided in Section
27A of the Securities Act and 21E of the Exchange Act (together,
``statutory safe harbors'') apply to all forward-looking information
provided in response to Item 303(a)(4) (off-balance sheet arrangements)
and Item 303(a)(5) (contractual obligations), provided such disclosure
is made by certain enumerated persons.\290\ Item 303(c) confirms
application of the statutory safe harbors to Item 303(a)(4) and Item
303(a)(5), and states that all of the required disclosures under these
two items are deemed to be ``forward-looking statements'' as that term
is defined in the statutory safe harbors,
[[Page 12091]]
except for historical facts.\291\ With respect to Item 303(a)(4), Item
303(c) further states that the ``meaningful cautionary statements''
element of the statutory safe harbors is satisfied if a registrant
satisfies all of Item 303(a)(4) requirements.\292\
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\291\ Item 303(c)(2)(i) of Regulation S-K [17 CFR
229.303(c)(2)(i)].
\292\ Item 303(c)(2)(ii) of Regulation S-K [17 CFR
229.303(c)(2)(ii)].
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The Commission added Item 303(c) in 2003 when it adopted Items
303(a)(4) and (5).\293\ Item 303(c) was intended to remove possible
ambiguity about the application of the statutory safe harbors to these
items.\294\ Since we propose to eliminate both Items 303(a)(4) and (5),
we are also proposing to eliminate Item 303(c), which specifically and
exclusively refers to those disclosure requirements.
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\293\ See Off-Balance Sheet Arrangements and Contractual
Obligations Adopting Release at 5992 (``To encourage the type of
information and analysis necessary for investors to understand the
impact of off-balance sheet arrangements and to reduce the burden of
estimating the payments due under contractual obligations, the
amendments include a safe harbor for forward-looking
information.'').
\294\ See id.
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Nevertheless, forward-looking information included in off-balance
sheet arrangement disclosures provided in response to proposed
Instruction 8 to Item 303(b), along with disclosures regarding
contractual obligations, would continue to be covered by existing safe
harbors. The proposed amendments are intended to be conforming changes
and would not alter the availability of the regulatory safe harbors in
Securities Act Rule 175 \295\ and Exchange Act Rule 3b-6,\296\ which
expressly apply to forward-looking information in MD&A disclosure.\297\
These rules establish a safe harbor for ``forward-looking statements''
and define such statements to include statements of ``future economic
performance contained in management's discussion and analysis.'' \298\
These rules were adopted with the express purpose of encouraging
forward-looking information and in response to commenters'
recommendations stating that the absence of a safe harbor could
discourage forward-looking information.\299\
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\295\ [17 CFR 230.175].
\296\ [17 CFR 240.3b-6].
\297\ Instruction 7 to Item 303(a) of Regulation S-K [17 CFR
229.303(a)], Securities Act Rule 175 [17 CFR 230.175], and Exchange
Act Rule 3b-6 [17 CFR 240.3b-6].
\298\ See Rule 175(c)(3) and Rule 3b-6(c)(3) [17 CFR
230.175(c)(3) and 17 CFR 240.3b-6(b)(3)].
\299\ See Safe Harbor Rule for Projections, Release No. 33-6084
(June 25, 1979) [44 FR 38810 (July 2, 1979)].
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Our proposed amendments are also not intended to alter the
application of the statutory safe harbor provisions of the Private
Securities Litigation Reform Act.\300\ While these provisions apply
more broadly, they also protect eligible forward-looking statements
\301\ in MD&A against private legal actions that are based on
allegations of a material misstatement or omission. We continue to
believe that the safe harbors for eligible forward-looking statements
and the safe harbor provisions of the Private Securities Litigation
Reform Act have encouraged greater disclosure of forward-looking
information that has benefited investors and our markets.
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\300\ See Sections 27A of the Securities Act and 21E of the
Exchange Act.
\301\ The statutory safe harbors by their terms do not apply to
forward-looking statements included in financial statements prepared
in accordance with generally accepted accounting principles.
Notably, the statutory safe harbors also would not apply to MD&A
disclosure if the MD&A forward-looking statements were made in
connection with: An initial public offering; a tender offer; an
offering by a partnership, limited liability company, or a direct
participation investment program, or the forward-looking statement
is made by an issuer of penny stock or is made by an issuer in
connection with an offering of securities by a blank check company,
or is made in connection with a roll-up transaction or a going
private transaction. See Section 27A(b) of the Securities Act and
Section 21E(b) of the Exchange Act. Also, the statutory safe harbors
do not, absent a rule, regulation, or Commission order, apply to
forward-looking statements by issuers covered by Section
27A(b)(1)(A) of the Securities Act and Section 21E(b)(1)(A) of the
Exchange Act. Because the statutory safe harbors only apply to
forward-looking statements made by or on behalf of an issuer that is
subject to the reporting requirements of Section 13(a) or 15(d) of
the Exchange Act, they would not apply to forward-looking statements
made in connection with an offering under Regulation A unless the
issuer is a reporting company and no other exclusions from the safe
harbor apply.
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Request for Comment
52. Should we eliminate Item 303(c), as proposed?
53. If we eliminate Item 303(c), is it necessary or helpful to
provide a specific instruction referring to the statutory safe harbors
for forward-looking statements that may apply to the proposed off-
balance sheet arrangement disclosures? Should we instead retain Item
303(c) and acknowledge that the statutory safe harbors would apply to
all of Item 303?
11. Smaller Reporting Companies (Item 303(d))
Item 303(d) \302\ states that an SRC may provide Item 303(a)(3)(iv)
information for the most recent two fiscal years if it provides
financial information on net sales and revenues and income from
continuing operations for only two years. Item 303(d) also states that
an SRC is not required to provide the contractual obligations chart
specified in Item 303(a)(5). In light of our proposals to eliminate
Item 303(a)(3)(iv) and (a)(5), we are also proposing to eliminate Item
303(d), which specifically and exclusively references these two
disclosure requirements. SRCs may continue to rely on Instruction 1 to
Item 303(a),\303\ which states that an SRC's discussion shall cover the
two-year period required in Article 8 of Regulation S-X.
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\302\ Item 303(d) of Regulation S-K [17 CFR 229.303(d)].
\303\ Proposed renumbered Item 303(b).
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Request for Comment
54. Should we eliminate Item 303(d), as proposed?
55. Are there any proposed amendments to Item 303 where we should
consider providing further accommodations to SRCs?
General Requests for Comment for Item 303
56. Are there any other changes we should consider to Item 303 to
streamline, update, or modernize MD&A disclosure requirements?
57. Should we require MD&A to be structured in Inline eXtensible
Business Reporting Language (``Inline XBRL'') format? \304\ If so,
should MD&A be structured using block tags, detail tags, or some
combination of the two? How would investors and other market
participants benefit from such a requirement, and what would be the
costs and burdens to registrants? Would the costs and burdens be
disproportionately high for any group of issuers?
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\304\ Registrants subject to the financial disclosure
requirements of Regulation S-K are either currently required or will
be required to file their financial statements and filing cover page
disclosures in the Inline XBRL format. See [17 CFR 229.601(b)(101)].
See also Inline XBRL Filing of Tagged Data, Securities Act Release
No. 10514 (June 28, 2018) [83 FR 40846 (Aug. 16, 2018), at 40851]
(``Inline XBRL Adopting Release'').
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58. Should we amend Item 9 of Form 1-A to reflect any of the
proposals in this release?
D. Application to Foreign Private Issuers
We are proposing corresponding amendments that would apply to FPIs
providing disclosure required by Form 20-F or Form 40-F.\305\ We are
also proposing amendments to current Instruction 11 to Item 303, which
specifically applies to FPIs that choose to file on domestic forms.
Similar to our discussions above and for the reasons discussed in
greater detail below, our proposals to these forms are intended to
[[Page 12092]]
modernize, clarify, and streamline these disclosure requirements.
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\305\ These proposals would also apply to those forms calling
for information in Forms 20-F, such as Form F-1.
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1. Form 20-F
a. Selected Financial Data (Item 3.A of Form 20-F)
Similar to Item 301, Item 3.A of Form 20-F requires FPIs to provide
selected historical financial data for the most recent five financial
years (or such shorter period that the company has been in operation).
Also similar to Item 301, Item 3.A specifies the information that must
be included in the selected financial data and provides that EGCs are
not required to present selected financial data for any period prior to
the earliest audited financial statements presented in connection with
the registrant's initial public offering of its common equity
securities. In a registration statement, periodic report, or other
report filed under the Exchange Act, an EGC need not present selected
financial data for any period prior to the earliest audited financial
statements presented in connection with the EGC's first registration
statement that became effective under the Exchange Act or the
Securities Act.\306\ However, unlike Item 301, Item 3.A also permits a
FPI to omit either or both of the earliest two years of data if it
represents that it cannot provide the information, or cannot provide
the information on a restated basis, without unreasonable effort or
expense.
---------------------------------------------------------------------------
\306\ See Instruction 3 to Item 3.A.
---------------------------------------------------------------------------
Given the similarities between Item 3.A and Item 301, we propose to
delete Item 3.A and the related instructions. As with Item 301, trend
disclosure elicited by Item 3.A typically would be discussed in
disclosure provided in response to Item 5 of Form 20-F, which requires
MD&A disclosure similar to Item 303. FPIs may, however, continue to
include a tabular presentation of the line items discussed in the MD&A,
to the extent they believe that such a presentation would be useful to
an understanding of the disclosure.\307\
---------------------------------------------------------------------------
\307\ See 2003 MD&A Interpretive Release (``Companies should
consider whether a tabular presentation of relevant financial or
other information may help a reader's understanding of MD&A.''). See
also footnote 1 of 2003 MD&A Interpretive Release which states that
the guidance in that release is intended to apply to FPIs.
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Request for Comment
59. Should we eliminate Item 3.A of Form 20-F, as proposed? Would
the proposed elimination of Item 3.A result in the loss of material
information that is otherwise not available to investors? If so, what
information would be lost, and are there alternatives we should
consider that would elicit this information?
60. The Commission revised Form 20-F in 1999 to conform in large
part to the international disclosure standards endorsed by the
International Organization of Securities Commissions (``IOSCO'') for
the non-financial statement portions of a disclosure document, which
have served as the basis for the disclosure requirements in several
foreign jurisdictions.\308\ One of the objectives of the IOSCO
standards was to facilitate the cross-border flow of securities and
capital by promoting the use of a single disclosure document that would
be accepted in multiple jurisdictions. If we revise Item 3.A of Form
20-F as proposed, would such revision reduce the ability of FPIs to use
a single document in multiple jurisdictions?
---------------------------------------------------------------------------
\308\ See International Disclosure Standards, Release No. 33-
7745 (Sept. 28, 1999) [64 FR 53900 (Oct. 5, 1999)].
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61. Would the proposed amendments conflict with home-country
requirements in some jurisdictions if the FPI were engaging in a cross-
border offering or listing? If so, please explain.
62. Unlike Item 301, Item 3.A provides an accommodation to FPIs for
either or both of the earliest two years of data. Given this
accommodation, should we retain this item? Does Item 3.A require
disclosure that is duplicative of the financial statements?
63. Are there any unique considerations with respect to FPIs in
this context?
64. Are the requirements of Item 5 of Form 20-F sufficient to
provide investors with necessary disclosure of trends in a registrant's
results of operations and financial condition? If we eliminate Item 3.A
as proposed, should we amend Item 5 of Form 20-F to explicitly require
a tabular presentation of line items discussed in the disclosure?
65. What are the costs to FPIs of providing required selected
financial data?
66. How do market participants use the selected financial data
disclosures provided by FPIs? Do market participants rely on any time
segment of data more than others (e.g., the most recent two or three
years)?
b. Operating and Financial Review and Prospects (Item 5 of Form 20-F)
The disclosure requirements for Item 5 of Form 20-F (Operating and
Financial Review and Prospects) are substantively comparable to the
MD&A requirements under Item 303 of Regulation S-K.\309\ To maintain a
consistent approach to MD&A for domestic registrants and FPIs, our
proposed amendments to Form 20-F generally conform to our proposed
amendments to Item 303.
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\309\ When the Commission revised the wording of Item 5 of Form
20-F in 1999, the adopting release noted that the requirements
correspond with Item 303 of Regulation S-K. See International
Disclosure Standards, Release No. 33-7745 (Sept. 28, 1999) [64 FR
53900 (Oct. 5, 1999)], at 53904 (``International Disclosure
Standards Release'').
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Some of our proposals would amend Item 5 of Form 20-F to
incorporate portions of both current and proposed Item 303.
Specifically, we are proposing to incorporate portions of current
Instructions 1 and 3 to Item 303(a) that specify the purpose of MD&A,
into the forepart of Item 5 of Form 20-F to highlight the item's
objective. Our proposals would revise Item 5 to state that the
discussion must:
Include other statistical data that will enhance a
reader's understanding of the company's financial condition, changes in
financial condition, and results of operations; and
Focus specifically on material events and uncertainties
known to management that would cause reported financial information not
to be necessarily indicative of future operating results or future
financial condition.
We are also proposing to codify into the forepart of Item 5
Commission guidance that states that a registrant should provide a
narrative explanation of its financial statements that enables
investors to see a registrant ``through the eyes of management.'' \310\
Consistent with our rationale for proposing analogous changes to Item
303,\311\ we believe that emphasizing the purpose of MD&A at the outset
of the Item will provide clarity and focus to registrants as they
consider what information to discuss and analyze. We are also proposing
to revise the forefront of Item 5 to state that, in addition to
providing information relating to all separate segments, FPIs must also
provide information relating to other subdivisions, such as geographic
areas or product lines. This proposed revision is intended to conform
Form 20-F to both current Item 303, by referencing other subdivisions
and including geographic areas as an example, and proposed Item 303, by
adding product lines as an example.\312\
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\310\ See 2003 MD&A Interpretative Release, at 75056. See also
1989 Interpretative Release, at 22428.
\311\ See Section II.C.1 above.
\312\ See footnote 98 above and corresponding sentence.
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[[Page 12093]]
For the reasons discussed above, we are proposing to:
Revise Item 5 to specify that the discussion must include
a quantitative and qualitative description of the reasons underlying
material changes, including where material changes within a line item
offset one another; \313\
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\313\ See Section II.C.4 above.
---------------------------------------------------------------------------
Revise the liquidity and capital resources requirement in
Item 5.B to specify that a registrant must broadly disclose material
cash commitments, including but not limited to capital expenditures;
\314\
---------------------------------------------------------------------------
\314\ See Sections II.C.2 and II.C.7 above.
---------------------------------------------------------------------------
Replace Item 5.E, which covers off-balance sheet
arrangements, with a principles-based instruction; \315\
---------------------------------------------------------------------------
\315\ See proposed Instruction 7 to Item 5 of Form 20-F. For
FPIs filing on Forms 20-F and 40-F that apply IFRS, the overlap
between the requirements of those Forms and IFRS are similar to the
overlap between Item 303(a)(4) and U.S. GAAP, as described in
Section II.C.6 above.
IFRS now requires the following disclosures that substantially
overlap with the requirements of Item 5.E. of Form 20-F: The nature
and amount of a guarantee (see Paragraph 35M of IFRS 7, Financial
Instruments: Disclosures (``IFRS 7'')); retained or contingent
interests in assets transferred to unconsolidated entities (see
Paragraphs 42B and 42E of IFRS 7); the significance of financial
instruments for the entity's financial position and performance; and
the nature and extent of risks arising from financial instruments to
which the entity is exposed and how the entity manages those risks
(see Paragraphs 1 of IFRS 7); and obligations under interests in
unconsolidated entities (see Paragraphs 1 and 24 to 31 of IFRS 12,
Disclosure of Interests in Other Entities).
We believe our proposed amendments to Item 5.E of Form 20-F are
consistent with the statutory mandate in Section 13(j) of the
Exchange Act for the same reasons discussed above in Section II.C.6.
---------------------------------------------------------------------------
Eliminate Item 5.F., which covers tabular disclosure of
contractual obligations; \316\ and
---------------------------------------------------------------------------
\316\ See Sections II.C.6 and II.C.7 above. Similar to our
discussion above, current IFRS requirements overlap with the
contractual obligations table. For example, IFRS 7.39(a), requires
disclosure of a maturity analysis for long-term debt obligations;
IFRS 16.58 requires disclosure of a maturity analysis of lease
obligations; and IAS 37.85 requires disclosure of the expected
timing of outflows of economic benefits related to each class of
provision. IFRS does not have a specific requirement to disclose the
timing of purchase obligations.
We are also proposing to delete the Instructions to Item 5.E and
5.F.
---------------------------------------------------------------------------
Eliminate Item 5.G, which acknowledges application of the
statutory safe harbor and specifically and exclusively applies to Item
5.E and Item 5.F.\317\
---------------------------------------------------------------------------
\317\ See Section II.C.10 above. Similar to this discussion
above, we remind FPIs of the existing regulatory and statutory safe
harbors. Additionally, Form 20-F reminds companies that forward-
looking information is expressly covered by statutory safe harbor
provisions. See Instruction 3 to Item 5 of Form 20-F.
---------------------------------------------------------------------------
Consistent with our proposal to amend Item 303 above, we are also
proposing to revise Item 5 to explicitly require disclosure of critical
accounting estimates.\318\
---------------------------------------------------------------------------
\318\ See Section II.C.8 above. As discussed in this section,
the 2003 MD&A Interpretive Release addressed critical accounting
estimates. The guidance in the 2003 MD&A Interpretive Release
applies to MD&A drafted pursuant to Item 5 of Form 20-F. See
footnote 1 of the 2003 MD&A Interpretive Release.
---------------------------------------------------------------------------
We are also proposing a change to the requirement in Form 20-F that
requires disclosure of inflation for FPIs.\319\ Item 5.A.2 requires
disclosure of the impact of inflation, if material, and hyperinflation,
if the currency in which the financial statements are presented is of a
country that has experienced hyperinflation.\320\ Instruction 1 to Item
5.A states that disclosure of hyperinflation must be provided if
hyperinflation has occurred in any of the periods for which an FPI is
required to provide audited financial statements or unaudited interim
financial statements. We believe that for FPIs in a hyperinflationary
economy, hyperinflation is a salient issue such that it merits specific
mention. As it relates to hyperinflation, we are therefore not
proposing to amend Item 5.A.2 or the related instruction. However, and
consistent with our change to Item 303,\321\ we are proposing to amend
the portion of Item 5.A.2 calling for disclosure of the impact of
inflation, if material. Some of our proposals to amend Form 20-F are
unique to this form but are consistent with MD&A's focus on
materiality. Specifically, we are proposing to:
---------------------------------------------------------------------------
\319\ See Section II.C.5 above.
\320\ Rules 3-20(c) and 3-20(d) of Regulation S-X provide the
situations when a registrant must discuss hyperinflation in a
company's financial statements. Rule 3-20(d) generally describes a
hyperinflationary environment as one that has cumulative inflation
of approximately 100 percent or more over the most recent three-year
period.
\321\ See Section II.C.5 above.
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Amend Item 5.D of Form 20-F, which requires FPIs to
identify ``the most significant recent trends,'' to instead, require
disclosure of ``material trends,'' consistent with Item 303 and MD&A's
focus on materiality; \322\ and
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\322\ See, e.g., 2003 MD&A Interpretive Release, at 75060.
---------------------------------------------------------------------------
Amend Instruction 1 to Item 5, which currently references
only the 1989 MD&A Interpretive Release, to add the 2002 Commission
Statement, 2003 MD&A Interpretive Release, 2010 MD&A Interpretive
Release \323\ and the Companion Guidance, to direct FPIs to the
Commission's guidance.
---------------------------------------------------------------------------
\323\ See 2010 MD&A Interpretive Release.
---------------------------------------------------------------------------
These and all of our proposals to Item 5 of Form 20-F are
consistent with our policy of having the existing MD&A requirements for
FPIs mirror the substantive MD&A requirements in Item 303.\324\
---------------------------------------------------------------------------
\324\ See International Disclosure Standards Release. See also
Off-Balance Sheet Arrangements and Contractual Obligations Adopting
Release.
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Request for Comment
67. Should we amend Item 5 of Form 20-F as proposed?
68. Would the proposed deletions in Item 5 result in the loss of
material information that is otherwise not available to investors? If
so, what information would be lost, and are there alternatives we
should consider that would elicit this information?
69. Would the proposed additions to Item 5 create burdens for
companies?
70. If we revise Item 5 of Form 20-F as proposed, would such
revision reduce the ability of FPIs to use a single document in
multiple jurisdictions?
71. Would the proposed amendments conflict with home-country
requirements in some jurisdictions? If so, please explain.
72. Are there any unique considerations with respect to FPIs in the
context of MD&A and Item 5 disclosures?
2. Form 40-F
Form 40-F generally permits eligible Canadian FPIs to use Canadian
disclosure documents to satisfy the Commission's registration and
disclosure requirements. As a result, the MD&A contained in Form 40-F
is largely prepared in accordance with Canadian disclosure standards.
General Instructions B.(11) and B.(12), however, were added when the
Commission adopted the off-balance sheet arrangements and contractual
obligations disclosure requirements.\325\ For the reasons discussed
above, we are proposing to eliminate the contractual obligations
disclosure requirement in B.(12) of Form 40-F.\326\ In addition, we are
also proposing to make parallel changes (as discussed above) to the
off-balance sheet disclosure requirement in Form 40-F by replacing
General Instruction B.(11) with a principles-based instruction.\327\ As
noted above, unlike Item 303 and Form 20-F, the MD&A required under
Form 40-F is defined as required by Canadian law.\328\ Accordingly, our
proposal to amend Item 40-F would only require
[[Page 12094]]
disclosure of off-balance sheet arrangements to the extent it is not
already provided under the MD&A required by Canadian law. Lastly, and
consistent with our proposals above, we are proposing to eliminate
General Instruction B.(13), which acknowledges application of the
statutory safe harbor and specifically and exclusively applies to
General Instructions B.(11) and B.(12).\329\
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\325\ See Off-Balance Sheet Arrangements and Contractual
Obligations Adopting Release.
\326\ See Section II.C.7 and footnote 316 above.
\327\ See Section II.C.6 and footnote 153 above. We believe our
proposed amendments to General Instruction B.(11) of Form 40-F is
consistent with the statutory mandate in Section 13(j) of the
Exchange Act for the same reasons discussed above in Section II.C.6.
\328\ See General Instruction B.(3) of Form 40-F.
\329\ See Section II.C.10 and footnote 317.
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Request for Comment
73. Should we amend Form 40-F, as proposed?
74. Would replacing General Instruction B.(11) of Form 40-F with a
more principles-based instruction result in the loss of material
information that is otherwise not available to investors? If so, what
information would be lost, and are there alternatives we should
consider that would elicit this information?
75. Would the proposed deletion of General Instruction B.(12) of
Form 40-F result in the loss of material information that is otherwise
not available to investors? If so, what information would be lost, and
are there alternatives we should consider that would elicit this
information?
76. If we eliminate General Instruction B.(13) of Form 40-F, is it
necessary or helpful to provide a specific instruction referring to the
statutory safe harbors for forward-looking statements that may apply to
the proposed off-balance sheet arrangement disclosures? Should we
instead retain General Instruction B.(13) of Form 40-F and acknowledge
that the statutory safe harbors would apply?
77. Are there any unique considerations with respect to eligible
Canadian FPIs in this context?
3. Item 303 of Regulation S-K
FPIs may voluntarily choose to file on forms that would require
disclosure under Item 303. Current Instruction 11 to Item 303 requires
``foreign private registrants'' to discuss briefly any pertinent
governmental economic, fiscal, monetary, or political policies or
factors that have materially affected or could materially affect,
directly or indirectly, their operations or investments by United
States nationals.\330\
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\330\ See Instruction 11 to Item 303(a) of Regulation S-K.
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For consistency with the requirements of Form 20-F,\331\ we are
proposing to amend this FPI instruction to incorporate the requirement
for FPIs to discuss hyperinflation in a hyperinflationary economy.\332\
Proposed Instruction 9 would also replace ``foreign private
registrants'' with the defined term ``foreign private issuer.'' \333\
---------------------------------------------------------------------------
\331\ See Section II.D.1.b above.
\332\ See proposed Instruction 9.
\333\ See Rule 405 and Rule 3b-4(c).
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Request for Comment
78. Should we retain and amend the FPI instruction to Item 303, as
proposed?
E. Additional Conforming Amendments
We propose additional conforming amendments that are consistent
with the proposed amendments described above.\334\
---------------------------------------------------------------------------
\334\ If the proposed amendments are adopted, the Commission
will also amend certain rules and forms to update references to the
items we are proposing to amend. Specifically, if adopted as
proposed, conforming amendments will be made to: Remove references
to Item 301 or Item 3.A of Form 20-F (Item 10 of Regulation S-K [17
CFR 229.10]; Forms S-1 [17 CFR 239.11], N-2 [17 CFR 274.11a-1], S-11
[17 CFR 239.18], S-4 [17 CFR 239.25], F-1 [17 CFR 239.31], F-4 [17
CFR 239.34], 1-A [17 CFR 239.90], 10 [17 CFR 249.208c], and 10-K [17
CFR 249.310]; Schedule 14A [17 CFR 240.14a-101]; and Exchange Act
Rule 14a-3 [17 CFR 240.14a-3]); remove references to Item 302 (Items
10 [17 CFR 229.10; Forms S-1 [17 CFR 239.11], N-2 [17 CFR 274.11a-
1], S-11 [17 CFR 239.18], S-4 [17 CFR 239.25], 1-A [17 CFR 239.90],
10 [17 CFR 249.208c], and 10-K [17 CFR 249.310]; Schedule 14A [17
CFR 240.14a-101]; Securities Act Rule 175 [17 CFR 230.175]; Exchange
Act Rules 3b-6 [17 CFR 240.3b-6] and 14a-3 [17 CFR 240.14a-3]; and
Trust Indenture Act of 1939 Rule 0-11 [17 CFR 260.0-11].); and
update references to subparagraphs of Item 303 (Securities Act Rule
419 [17 CFR 230.419]).
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1. Roll-Up Transactions--Item 914 of Regulation S-K
We propose to delete references to Items 301 and 302 in Item 914(a)
of Regulation S-K. This item applies to roll-up transactions, which
generally involve the combination or reorganization of one or more
partnerships, directly or indirectly, where some or all of the
investors in any such partnerships will receive new securities, or
securities in another entity.\335\ Item 914(a) provides that, for each
partnership to be included in a roll-up transaction, certain financial
information, including disclosure under Item 301 and Item 302, must be
provided.
---------------------------------------------------------------------------
\335\ See Rule 901 of Regulation S-K [17 CFR 229.901].
---------------------------------------------------------------------------
In the context of Item 914(a), disclosure provided under Items 301
and 302 would not be duplicative of the financial statements and would
otherwise be unavailable. However, Item 914(a) specifies disclosure of
other financial information \336\ and states that additional or other
information should be provided if material to an understanding of each
partnership proposed to be included in a roll-up transaction. In light
of these other requirements, we believe deleting references to Items
301 and 302 in Item 914(a) would not result in a loss of material
information.
---------------------------------------------------------------------------
\336\ In addition to disclosure under Items 301 and 302, Item
914(a) calls for the following financial disclosures: Ratio of
earnings to fixed charges, cash and cash equivalents, total assets
at book value, total assets at the value assigned for purposes of
the roll-up transaction (if applicable), total liabilities, general
and limited partners' equity, net increase (decrease) in cash and
cash equivalents, net cash provided by operating activities,
distributions; and per unit data for net income (loss), book value,
value assigned for purposes of the roll-up transaction (if
applicable), and distributions (separately identifying distributions
that represent a return of capital).
---------------------------------------------------------------------------
Request for Comment
79. If we eliminate Items 301 and 302 should we also delete these
references in Item 914(a) and not specify additional disclosure
requirements, as proposed? Are there any unique considerations for
roll-up transactions that would necessitate some or all of the
information required by Items 301 and 302?
2. Regulation AB--Items 1112, 1114, and 1115
Item 1112 of Regulation AB requires disclosure of financial
information required by Item 301 or Item 3.A of Form 20-F about
significant obligors of pool assets if the pool assets relating to the
significant obligor represent 10% or more, but less than 20%, of the
asset pool in an asset-backed securities (``ABS'') transaction.
Similarly, Items 1114 and 1115 of Regulation AB require disclosure of
financial information required by Item 301 or Item 3.A of Form 20-F
about credit enhancement providers and derivatives counterparties,
respectively, whose support represents a similar level of concentration
in an ABS transaction. With our proposal to eliminate Item 301 and Item
3.A of Form 20-F for corporate issuers, financial information about
these third parties to an ABS transaction, including any trend
information comparable to information required by Item 303 or Item 5 of
Form 20-F, may not otherwise be available. Therefore, we propose to
replace in Regulation AB those requirements to disclose selected
financial data under Item 301 or Item 3.A of Form 20-F with
requirements to disclose summarized financial information, as defined
by Rule 1-02(bb) of Regulation S-X,\337\ for
[[Page 12095]]
each of the last three fiscal years (or the life of the relevant entity
or group of entities, if less). We believe the information required
under Rule 1-02(bb) is similar to the information currently required,
and is consistent with other types of financial statement disclosures
that are required to be disclosed when certain significance thresholds
have been met.\338\ As proposed, these requirements span the same
periods as the historical data that the ABS registrant is required to
provide for the pool assets under Item 1111 of Regulation AB.\339\
While this proposal would generally result in fewer periods being
presented under these items, we do not believe requiring disclosure
beyond three years is necessary. Such disclosure would cover periods
beyond those presented for the underlying pool assets to which the
third-party financial information would relate.
---------------------------------------------------------------------------
\337\ [17 CFR 210.1-02(bb)]. We are also proposing amendments to
Rule 1-02(bb) of Regulation S-X, which calls for disclosure of
summary financial information. To eliminate any implication that a
registrant would need to prepare disclosure that is not consistent
with the disclosure in the entity's financial statements, the
proposed amendments would clarify that the disclosure of summary
financial information may vary, as appropriate, to conform to the
nature of the entity's business.
\338\ For example, Rule 4-08(g) of Regulation S-X [17 CFR 210.4-
08(g)] requires disclosure of summarized financial information for
equity method investees when significance thresholds are met.
\339\ While ABS registrants are generally not required to
provide financial statements, under Item 1111 of Regulation AB, ABS
registrants must provide historical data on the pool assets as
appropriate (e.g., the lesser of three years or the time such assets
have existed) to allow material evaluation of the pool data. See 17
CFR 229.1111.
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Request for Comment
80. If we eliminate Item 301 and Item 3.A of Form 20-F, should we
replace these references in Items 1112, 1114, and 1115 of Regulation AB
with a reference to Rule 1-02(bb) of Regulation S-X, as proposed? Would
the potential fewer earlier periods being presented under these items
result in the loss of material information? Are there alternatives that
we should consider? Should we explicitly require a tabular presentation
of the summarized financial information for ABS?
3. Summary Prospectus in Forms S-1 and F-1
We are proposing to replace references to Item 301 and Item 3.A of
Form 20-F in Form S-1 and Form F-1, respectively, with Rule 1-02(bb) of
Regulation S-X, where these forms provide for use of a summary
prospectus under Rule 431.\340\ A summary prospectus is intended to
provide prospective investors with a condensed statement of the more
important information in the registration statement.\341\ Consistent
with this purpose, the Instructions as to Summary Prospectuses in Forms
S-1 and F-1 call for disclosure of selected financial data under Item
301 or Item 3.A of Form 20-F, respectively. These instructions also
state that, with the exception of these items, the summary prospectus
shall not contain any other financial information.\342\ To preserve
disclosure of financial information in summary prospectuses, we propose
to replace the requirement for selected financial data in Forms S-1 and
F-1 with summarized financial information under Item 1-02(bb) of
Regulation S-X. We believe the information required under Rule 1-02(bb)
is similar to the information currently required and is consistent with
other types of financial statement disclosures that should be included
when certain significance thresholds have been met.
---------------------------------------------------------------------------
\340\ See 17 CFR 230.431. See also Instruction 1(f) under
Instructions as to Summary Prospectuses in Form S-1 and Instruction
1(c)(v) under Instructions as to Summary Prospectuses in Form F-1.
\341\ See Adoption of Summary Prospectus Rule and Amendments to
Form S-1 and S-9, Release No. 33-3722 (Nov. 26, 1956) [21 FR 9642
(Dec. 6, 1956)].
\342\ See Instruction 2 under Instructions as to Summary
Prospectuses for Form S-1 and Form F-1.
---------------------------------------------------------------------------
Request for Comment
81. If we eliminate Item 301 and Item 3.A of Form 20-F, as
proposed, should we replace these references in the Instructions as to
Summary Prospectuses of Forms S-1 and F-1 with Item 1-02(bb) of
Regulation S-X, as proposed?
4. Business Combinations--Form S-4, Form F-4 and Schedule 14A
We are proposing to eliminate references to Items 301 and 302 in
Form S-4, Form F-4, and Schedule 14A. Where these forms are used in
conjunction with a business combination, pro forma financial statements
for the most recent fiscal year and interim period under Article 11 of
Regulation S-X are required.\343\ Additionally, Item 3(e) and (f) in
both Forms S-4 and F-4 require Item 301 or Item 3.A of Form 20-F
information, respectively, on a pro forma basis. Item 14(b)(9) and (10)
of Schedule 14A generally call for similar pro forma information in the
context of a business combination. A related instruction stipulates
that, for a business combination accounted for as a purchase, financial
information is required for the same periods required by Article 11 of
Regulation S-X. Because these pro forma requirements are effectively
duplicative of the pro forma financial statements required elsewhere by
the form, we propose to delete them.\344\
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\343\ See Item 5 under Part 1 of Forms F-4 and S-4.
\344\ We are also proposing to delete the related instruction to
these items.
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Similarly, we are proposing to eliminate references to Item 301 and
Item 3.A of Form 20-F in Item 17(b)(3) of both Form S-4 and Form F-4.
We are also proposing to delete the reference to Item 302 in Item
17(b)(4) of Form S-4. Because Item 17(b) of Forms S-4 and F-4 applies
to non-reporting target companies in a business combination, this
disclosure may not be available elsewhere. We believe, however,
consistent with the discussion above,\345\ that the requirement for
discussion and analysis of trends in Item 303 would also be sufficient
to address material information related to a target company in a
business combination context.
---------------------------------------------------------------------------
\345\ See Section II.A above.
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Request for Comment
82. If we eliminate Item 301 and Item 3.A of Form 20-F as proposed,
should we also eliminate references to these items in Form S-4 and F-4
and Schedule 14A, as proposed? Are there any unique considerations in
the context of a business combination?
83. In Forms S-4 and F-4, pro forma information of selected
financial data is required as part of the prospectus summary. Are there
any unique considerations in the context of a business combination such
that Item 301 and Item 3.A of Form 20-F pro forma information should be
required as part of the prospectus summary?
84. Should we eliminate the requirement to provide Item 301, Item
3.A of Form 20-F, and Item 302 disclosure in Forms S-4 and F-4 for non-
reporting target companies, as proposed?
5. Form S-20
We are proposing a conforming change to Form S-20 to remove
references to Item 302 of Regulation S-K.\346\ Form S-20 is used to
register standardized options under the Securities Act and requires
limited information about the clearing agency registrant and the
options being registered. Since the adoption of Rule 238 in 2002, which
exempts from Securities Act Section 5 the registration of offerings of
standardized options that are issued by a registered clearing agency
and traded on a national
[[Page 12096]]
securities exchange, Form S-20 is rarely used.\347\
---------------------------------------------------------------------------
\346\ 17 CFR 239.20. Current references in Form S-20 to Item 302
are references to the item's predecessor, Item 12.
\347\ See Exemption for Standardized Options From Provisions of
the Securities Act of 1933 and From the Registration Requirements of
the Securities Exchange Act of 1934, Release No. 33-8171 (Dec. 23,
2002) [68 FR 188 (Jan. 2, 2003)] (``New Securities Act Rule 238 does
not make Form S-20 obsolete. We are retaining Form S-20 for use by
an issuer of standardized options that is not a clearing agency
registered under Section 17A of the Exchange Act, such as a foreign
clearing agency, or for use by issuers of standardized options that
do not trade on a registered national securities exchange or on a
registered national securities association.''). Since the effective
date of Rule 238 in 2003, we estimate that approximately one entity
has used Form S-20.
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Request for Comment
85. If we eliminate Item 302, should we also eliminate reference to
this item in Form S-20? Are there any unique considerations in the
context of Form S-20?
F. Compliance Date
We propose to provide a transition period after the publication of
a final rule in the Federal Register to provide registrants with
adequate time to adjust their disclosures in light of the proposed
amendments. Though companies would be able to begin voluntarily
complying with the proposed amendments upon effectiveness, we propose a
compliance date of 180 days after effectiveness of any final rule, if
adopted. The Commission believes that this transition period would
allow sufficient time to prepare for and come into compliance with the
amended reporting requirements, but we request comment on whether this
time period is appropriate.
Request for Comment
86. Is the proposed transition period necessary and appropriate? If
not, what time period would be necessary for registrants to comply with
the proposed amendments?
87. Would certain proposed amendments (e.g., critical accounting
estimates) require more time to prepare for than other requirements?
III. General Request for Comments
We request and encourage any interested person to submit comments
on any aspect of our proposals, other matters that might have an impact
on the proposed amendments, and any suggestions for additional changes.
With respect to any comments, we note that they are of greatest
assistance to our rulemaking initiative if accompanied by supporting
data and analysis of the issues addressed in those comments and by
alternatives to our proposals where appropriate.
IV. Economic Analysis
A. Introduction
As discussed above, we are proposing amendments to modernize,
simplify, and enhance certain financial disclosure requirements in
Regulation S-K. Specifically, we are proposing (1) to eliminate Item
301 of Regulation S-K, Selected Financial Data, and Item 302 of
Regulation S-K, Supplementary Financial Information; and (2) to amend
Item 303 of Regulation S-K, Management's Discussion & Analysis of
Financial Condition and Results of Operations. The proposed amendments
are intended to eliminate duplicative disclosures and enhance MD&A
disclosures for the benefit of investors, while simplifying compliance
efforts for registrants.
Overall, investors and registrants may benefit from the proposed
amendments if they would help avoid duplicative disclosure and if
emphasizing the current principles-based approach to MD&A results in
more tailored disclosures that allow investors to better understand the
registrant's business through the eyes of management. We acknowledge
the risk that emphasizing the current principles-based approach may
result in certain loss of information to investors. However, we believe
that any loss of information would be limited because the proposed
eliminations are mostly duplicative. Additionally, under the proposed
principles-based approach, registrants would still be required to
provide disclosure about these topics if they are material to an
investment decision, further mitigating the potential loss of
information.
We are mindful of the costs and benefits of the proposed
amendments. The discussion below addresses the potential economic
effects of the proposed amendments, including the likely benefits and
costs, as well as the likely effects on efficiency, competition, and
capital formation.\348\ At the outset, we note that, where possible, we
have attempted to quantify the benefits, costs, and effects on
efficiency, competition, and capital formation expected to result from
the proposed amendments. In many cases, however, we are unable to
quantify the potential economic effects because we lack information
necessary to provide a reasonable estimate. For example, we are unable
to quantify, with precision, the costs to investors of accessing
alternative information sources (e.g., footnotes to financial
statements or earnings announcements) under each disclosure item. We
are also unable to quantify the potential information processing cost
savings that may arise from the elimination of disclosures that are
duplicative or not material to an investment decision. Where we are
unable to quantify the economic effects of the proposed amendments, we
provide a qualitative assessment of the potential effects and encourage
commenters to provide data and information that would help quantify the
benefits, costs, and the potential impacts of the proposed amendments
on efficiency, competition, and capital formation.
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\348\ Section 2(b) of the Securities Act [15 U.S.C. 77b(b)] and
Section 3(f) of the Exchange Act [17 U.S.C. 78c(f)] require the
Commission, when engaging in rulemaking where it is required to
consider or determine whether an action is necessary or appropriate
in the public interest, to consider, in addition to the protection
of investors, whether the action will promote efficiency,
competition, and capital formation. Further, Section 23(a)(2) of the
Exchange Act [17 U.S.C. 78w(a)(2)] requires the Commission, when
making rules under the Exchange Act, to consider the impact that the
rules would have on competition, and prohibits the Commission from
adopting any rule that would impose a burden on competition not
necessary or appropriate in furtherance of the Exchange Act.
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B. Baseline and Affected Parties
The current disclosure requirements under Items 301, 302, and 303
of Regulation S-K, and the related requirements under Items 3.A and 5
of Form 20-F, and General Instructions B.(11), (12), and (13) of Form
40-F, together with the current disclosure practices registrants have
adopted to comply with these requirements, form the baseline from which
we estimate the likely economic effects of the proposed
amendments.\349\ The disclosure requirements apply to various filings,
including registration statements, periodic reports, and certain proxy
statements filed with the Commission. Thus, the parties that are likely
to be affected by the proposed amendments include investors and other
market participants that use the information in these filings (such as
financial analysts, investment advisors, and portfolio managers), as
well as registrants subject to the relevant disclosure requirements
discussed above.
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\349\ See supra Section I.
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The proposed amendments may affect both domestic registrants and
FPIs.\350\
[[Page 12097]]
We estimate that during calendar year 2018 there were approximately
6,919 registrants that filed on domestic forms \351\ and 806 FPIs that
filed on F-forms, other than registered investment companies. Among the
registrants that filed on domestic forms, approximately 29 percent were
large accelerated filers, 19 percent were accelerated filers, and 52
percent were non-accelerated filers. In addition, we estimate that
approximately 33 percent of these domestic issuers were SRCs \352\ and
21.3 percent were EGCs. The proposed amendments would also affect ABS
issuers. ABS issuers are required to file on Forms SF-1 and SF-3 and,
as a result, may be subject to the proposed changes to Regulation AB
requirements in this release. We estimate that during calendar year
2018, there were 36 unique depositors filing at least one Form SF-1 or
Form SF-3.
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\350\ The number of domestic registrants and FPIs affected by
the proposed amendments is estimated as the number of unique
companies, identified by Central Index Key (CIK), that filed a Form
10-K, Form 10-Q, Form 20-F, and Form 40-F or an amendment thereto
with the Commission during calendar year 2018. The estimates for the
percentages of SRCs, are based on information from Form 10-K, Form
20-F, and Form 40-F. For purposes of this economic analysis, these
estimates do not include issuers that filed only initial Securities
Act registration statements during calendar year 2018, and no
Exchange Act reports, in order to avoid including entities, such as
certain co-registrants of debt securities, which may not have
independent reporting obligations and therefore would not be
affected by the proposed amendments. Nevertheless, the proposed
amendments would affect any registrant that files a Securities Act
or Exchange Act registration statement or is subject to Exchange Act
reporting obligations. We believe that most registrants that have
filed a Securities Act or Exchange Act registration statement, other
than the co-registrants described above, would be captured by this
estimate through their annual or quarterly filings. The estimates
for the percentages of SRCs, EGCs, accelerated filers, large
accelerated filers, and non-accelerated filers are based on data
obtained by Commission staff using a computer program that analyzes
SEC filings, with supplemental data from Ives Group Audit Analytics.
\351\ This number includes fewer than 25 FPIs that filed on
domestic forms in 2018 and approximately 100 BDCs.
\352\ This estimate is based on the definition of SRCs prior to
the September 2018 effective date of recent amendments to this
definition. See Amendments to the Smaller Reporting Company
Definition, Release No. 33-10513 (June 28, 2018) [83 FR 31992 (July
10, 2018)]. As these amendments increased the number of registrants
who are eligible to be SRCs, it is likely that the percentage of
registrants that are SRCs is now higher than 33 percent.
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C. Potential Benefits and Costs of the Proposed Amendments
In this section, we discuss the anticipated economic benefits and
costs of the proposed amendments. We first analyze the overall economic
effects of the proposed amendments. We then discuss the potential
benefits and costs of specific proposed amendments.
1. Overall Potential Benefits and Costs
We anticipate the proposed amendments \353\ would benefit
registrants in several ways. First, by eliminating certain duplicative
disclosure requirements, the proposed amendments could reduce
registrants' disclosure burden and associated compliance costs. Second,
by modernizing and simplifying Item 303 disclosure requirements, the
proposal may benefit registrants by reducing disclosure burdens and
associated compliance costs. In addition, to the extent the proposed
amendments result in more tailored and informative disclosure, they
could potentially reduce information asymmetry between registrants and
investors, improve firms' liquidity, and decrease the cost of capital.
Finally, certain of the proposed amendments emphasize a more
principles-based approach to MD&A, which we believe would benefit
registrants by underscoring the flexibility available in presenting
financial results that are more indicative of their business.\354\ A
more principles-based approach, however, could lead to registrants
incurring increased costs associated with assessing materiality.
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\353\ See supra Sections II.A. through II.E.
\354\ A number of academic studies have explored the use of
prescriptive thresholds and materiality criteria. Many of these
papers highlight a preference for principles-based materiality
criteria. See, e.g., Eugene A. Imhoff Jr. and Jacob K. Thomas,
Economic consequences of accounting standards: The lease disclosure
rule change, 10.4 J. Acct. & Econ. 277-310 (1988) (providing
evidence that management modifies existing lease agreements to avoid
crossing rules-based criteria for lease capitalization); Cheri L.
Reither, What are the best and the worst accounting standards?, 12.3
Acct. Horizons 283 (1998) (documenting that due to the widespread
abuse of bright-lines in rules for lease capitalization, SFAS No. 13
was voted the least favorite FASB standard by a group of accounting
academics, regulators, and practitioners); Christopher P. Agoglia,
Timothy S. Doupnik, and George T. Tsakumis. Principles-based versus
rules-based accounting standards: The influence of standard
precision and audit committee strength on financial reporting
decisions, 86.3 The Acct. Rev. 747-767 (2011) (conducting
experiments in which experienced financial statement preparers are
placed in a lease classification decision context and finding that
preparers applying principles-based accounting are less likely to
make aggressive reporting decisions than preparers applying a more
precise rules-based standard and supporting the notion that a move
toward principles-based accounting could result in better financial
reporting); Usha Rodrigues and Mike Stegemoller, An inconsistency in
SEC disclosure requirements? The case of the ``insignificant''
private target, 13.2-3 J. Corp. Fin. 251-269 (2007) (providing
evidence, in the context of mergers and acquisitions, where rule-
based [disclosure] thresholds deviate from investor preferences).
Papers that highlight a preference for rules-based materiality
criteria are cited below.
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We believe investors could also benefit from the proposed
amendments. First, proposed amendments that clarify and codify existing
guidance, such as the proposed amendments related to critical
accounting estimates and capital resources, could enhance MD&A
disclosure. More robust and informative disclosure on these topics
could facilitate investors' decision making and enhance investor
protection. Second, if the proposed amendments result in more enhanced
and principles-based disclosure, they could allow investors to more
efficiently process the disclosure and make better-informed investment
decisions. In particular, investors may benefit from more tailored
disclosures that allow them to better understand the registrant's
business through the eyes of management. Investors also could benefit
from the reduction of duplicative disclosure, because reducing such
duplication may improve the readability and conciseness of the
information provided, help investors focus on material information, and
facilitate more efficient information processing.\355\
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\355\ See A. Lawrence, Individual Investors and Financial
Disclosure, 56 J. Acct. & Econ., 130-147 (2013). Using data on
trades and portfolio positions of 78,000 households, this article
shows that individuals invest more in firms with clear and concise
financial disclosures. This relation is reduced for high frequency
trading, financially literate investors, and speculative individual
investors. The article also shows that individuals' returns increase
with clearer and more concise disclosures, implying such disclosures
reduce individuals' relative information disadvantage. A one
standard deviation increase in disclosure readability and
conciseness corresponds to return increases of 91 and 58 basis
points, respectively. The article acknowledges that, given the
changes in financial disclosure standards and the possible advances
in individual investor sophistication, the extent to which these
findings, which are based on historical data from the 1990s, would
differ from those today is unknown. Recent advances in information
processing technology, such as machine learning for textual
analysis, may also affect the generalizability of these findings.
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However, investors could incur certain costs under the proposed
amendments. For example, investors who are used to the current
disclosure format might experience costs when adjusting to the new
format. However, this cost should decrease over time. Investors could
also incur monetary costs such as database subscriptions, or
opportunity costs such as time spent, if they need to obtain or
reconstruct information through alternative sources. However, we do not
expect such costs to be significant since registrants would still need
to disclose material information. There could be certain additional
costs associated with the proposed amendments to the extent that they
result in the elimination of disclosure material to an investment
decision if registrants misjudge what information is material, or if
disclosure becomes less comparable across firms.\356\ The risk of
misjudgment may
[[Page 12098]]
be mitigated by factors including accounting, financial reporting, and
disclosure controls or procedures,\357\ as well as the antifraud
provisions of the securities laws. In terms of the potential loss of
comparability, the cost related to it should be minimal since investors
can pull data from the financial statements via XBRL.
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\356\ See Mark W. Nelson, Behavioral evidence on the effects of
principles- and rules-based standards, 17.1 Accounting Horizons 91-
104 (2003); and Katherine Schipper, Principles-based accounting
standards, 17.1 Accounting Horizons 61-72 (2003) (noting potential
advantages of rules-based accounting standards, including: Increased
comparability among firms, increased verifiability for auditors, and
reduced litigation for firms). See also Randall Rentfro and Karen
Hooks, The effect of professional judgment on financial reporting
comparability, 1 Journal of Accounting and Finance Research 87-98
(2004) (finding that comparability in financial reporting may be
reduced under principles-based standards, which rely more heavily on
the exercise of professional judgment, but comparability may improve
as financial statement preparers become more experienced and hold
higher organizational rank); Andrew A. Acito, Jeffrey J. Burks, and
W. Bruce Johnson, The Materiality of Accounting Errors: Evidence
from SEC Comment Letters, 36.2 Contemp. Acct. Res. 839, 862 (2019)
(studying managers' responses to SEC inquiries about the materiality
of accounting errors and finding that managers are inconsistent in
their application of certain qualitative considerations and may omit
certain qualitative considerations from their analysis that weigh in
favor of an error's materiality).
\357\ See, e.g., Exchange Act Rules 13b-2b [17 CFR 240.13b-2b],
13a-15e [17 CFR 240.13a-15e], and 13a-15f [17 CFR 240.13a-15f].
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Some of the costs of the proposed amendments could be mitigated by
external disciplining mechanisms, such as the Commission staff's filing
review program. In general, registrants would remain subject to the
antifraud provisions of the securities laws.\358\ There also may be
incentives for registrants to voluntarily disclose additional
information if the benefits of reduced information asymmetry exceed the
disclosure costs.
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\358\ See, e.g., Exchange Act Rule 10b-5(b) [17 CFR 240.10b-
5(b)].
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The proposed amendments likely would affect registrants and
investors differently. For example, any compliance cost reduction might
be more beneficial to smaller registrants that are financially
constrained. Similarly, although eliminating information that is not
material should benefit all investors, retail investors could benefit
more as they are less likely to have the time and resources to devote
to reviewing and evaluating disclosure. On the other hand, retail
investors could also incur additional costs as a result of the proposed
amendments because they may need to obtain information from alternative
sources, which could involve monetary costs, such as database
subscriptions, or opportunity costs, such as time spent searching for
alternative sources. These costs may be higher for retail investors
than for institutional investors.
2. Benefits and Costs of Specific Proposed Amendments
We expect the proposed amendments would result in costs and
benefits to registrants and investors, and we discuss those costs and
benefits item by item in this section. The proposed changes to each
item would impact the compliance burden for registrants in filing forms
that require disclosures that are responsive to such items. Overall, we
expect the net effect of the proposed amendments on a registrant's
compliance burden to be limited. As explained in this section, we
expect certain aspects of the proposed amendments to increase
compliance burdens, and others to decrease the burdens. The
quantitative estimates of changes in those burdens for purposes of the
Paperwork Reduction Act of 1995 (``PRA'') \359\ are further discussed
in Section V below. For purposes of the PRA, we estimate that the
effect of the proposed amendments would vary for different forms.
However, taken together, the amendments are likely to result in a net
decrease in burden hours for all forms, ranging from 0.1 to 6.5 burden
hours per form.\360\
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\359\ Paperwork Reduction Act of 1995, Public Law 104-13, 109
Stat. 163 (1995) (codified at 44 U.S.C. 3501 et seq.).
\360\ See infra Section V.B.
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a. Selected Financial Data (Item 301)
Item 301 requires certain registrants \361\ to furnish selected
financial data in comparative tabular form for each of the registrant's
last five fiscal years and any additional fiscal years necessary to
keep the information from being misleading.\362\ The purpose of this
disclosure is to supply in a convenient and readable format selected
financial data that highlights certain significant trends in the
registrant's financial conditions and results of operations. For
certain registrants, information disclosed under Item 301 has also been
disclosed in historical financial data and related XBRL data
submissions that can be accessed through prior filings on EDGAR.
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\361\ As discussed above in Section II.A, SRCs are not required
to provide Item 301 information and EGCs that are providing the
information called for by Item 301 in a Securities Act registration
statement need not present selected financial data for any period
prior to the earliest audited financial statements presented in
connection with the EGC's IPO of its common equity securities. In
addition, an EGC that is providing the information called for by
Item 301 in a registration statement, periodic report, or other
report filed under the Exchange Act need not present selected
financial data for any period prior to the earliest audited
financial statements presented in connection with its first
registration statement that became effective under the Exchange Act
or Securities Act. See Item 301(c) of Regulation S-K; Item 301(d)(1)
of Regulation S-K.
\362\ See supra Section II.A.
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The current disclosure requirement under Item 301 could result in
duplicative disclosure, and it can be costly for registrants to provide
such disclosures under certain circumstances. For example, as discussed
above, providing disclosure of the earliest two years often creates
challenges for registrants when such information has not been
previously provided.\363\ Therefore, eliminating this requirement may
facilitate capital raising activity and increase efficiency for non-EGC
issuers contemplating an IPO. Overall, we expect the proposed
elimination of Item 301 would benefit registrants by eliminating
duplicative disclosures and reducing compliance costs. We also note
that the benefit associated with eliminating the costs of providing
Item 301 disclosure may be offset by the costs associated with making
materiality determinations under a principles-based disclosure
framework. In general, we do not expect the proposed elimination of
Item 301 would affect the cost of capital given that the eliminated
disclosures are largely duplicative. To the extent that there is
information loss under certain circumstances, such as in the case of
non-EGC IPOs, these registrants could potentially experience an
increase in the cost of capital as a result of reduced disclosure.
However, in these circumstances registrants would likely voluntarily
provide the disclosures to the extent the increase in cost of capital
would be significant.
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\363\ See supra Section II.A.
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To the extent the proposed amendments result in the elimination of
disclosure that is not material, investors may benefit. In particular,
if the readability and conciseness of the information provided
improves,\364\ investors may be able to process information more
effectively by focusing on the material information. Also, a
principles-based approach may permit or encourage registrants to
present more tailored information, which also may benefit investors by
allowing them to better understand the registrant's business.
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\364\ See supra note 355.
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Investors may incur costs to the extent the proposed amendments
result in a loss of information. While we do not anticipate significant
information loss from the elimination of Item 301, we recognize that
selected financial information for the two earliest years would no
longer be disclosed in non-EGC IPOs. However, the purpose of the item
is to highlight certain significant
[[Page 12099]]
trends in the registrant's financial condition and results of
operations and we expect that any material trend information that would
have been disclosed pursuant to Item 301 would be disclosed under Item
303. We also recognize investors may incur certain other costs. In
particular, investors would incur search costs if they have to spend
more time to retrieve the information from prior filings. Additionally,
to the extent investors are used to the current format and rely on the
compiled comparable data, they may incur costs to adjust to new
disclosure formats.
Elimination of Item 301 would affect the financial information
disclosure by ABS issuers. As discussed above, the currently available
financial information set forth in Item 301 or Item 3.A of Form 20-F
about significant obligors of pool assets, credit enhancement
providers, and derivatives counterparties as required by Item 1112,
Items 1114, and 1115 of Regulation AB may not otherwise be available.
To mitigate this potential information loss, we propose to replace in
Regulation AB those requirements to disclose selected financial data
under Item 301 or Item 3.A of Form 20-F with requirements to disclose
summarized financial information, as defined by Rule 1-02(bb) of
Regulation S-X, for each of the last three fiscal years (or the life of
the relevant entity or group of entities, if less).
Since the proposed changes related to ABS issuers are intended to
conform to the other changes related to selected financial data and
MD&A, our analysis of the costs and benefits for registrants and their
investors under the proposed amendments to Item 301 and Item 3.A of
Form 20-F can be carried over to ABS issuers. While this proposal would
generally result in fewer periods being presented, we do not expect it
to have a significant effect on ABS issuers and their investors,
because the disclosure of the earlier years would cover periods beyond
those presented for the underlying pool assets to which the third-party
financial information would relate.
b. Supplementary Financial Information (Item 302)
Under Item 302(a), certain registrants are required to disclose
quarterly financial data of specified operating results and variances
in these results from amounts previously reported on a Form 10-Q.\365\
Registrants must provide quarterly information for each full quarter
within the two most recent fiscal years and any subsequent period for
which financial statements are included or required by Article 3 of
Regulation S-X. Item 302(a) also requires disclosure related to effects
of any discontinued operations and unusual or infrequently occurring
items.
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\365\ As discussed in Section II.B.1, SRCs, FPIs, issuers
conducting an IPO, and registrants that have a class of securities
registered under Section 15(d) of the Exchange Act are not subject
to Item 302(a).
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Since the financial data required under this item (including
disclosure related to the effect of any discontinued operations and
unusual or infrequently occurring items), other than fourth-quarter
data, typically can be found in prior quarterly filings through EDGAR,
the prescriptive disclosure requirements under existing Item 302(a)
result in duplicative disclosures. By eliminating the duplicative
disclosure and associated compliance costs, the proposed amendments
would benefit registrants. We do not expect the proposed elimination of
Item 302(a) to affect registrants negatively. While a decrease in
disclosure could potentially increase the company's cost of capital in
general, registrants can always choose to disclose the quarterly
financial information through other channels, such as an earnings
release.
Investors could benefit to the extent that the proposed amendments
result in less duplicative disclosure and less disclosure of immaterial
information. The proposed amendments may result in improved readability
and conciseness of the information provided, help investors focus on
material information, and facilitate more efficient information
processing by investors. The proposed amendments would also allow
registrants to present financial information that is more reflective of
their own industry and firm operating cycles, which could allow
investors to better understand their business.
We anticipate information loss from the proposed elimination of
fourth quarter financial information currently required under Item
302(a), which is otherwise not explicitly required to be disclosed.
Though fourth quarter financial data could be calculated from annual
report and cumulative third quarter data, it may be costly for
investors to calculate or obtain. While such costs might be minimal for
institutional investors, which have both resources and sophistication
to obtain the needed financial information, for retail investors, the
search costs might be substantially larger, which could involve
monetary costs such as database subscriptions, or opportunity costs
such as time spent searching for alternative sources and cross-
referencing. Additionally, investors could make mistakes in deriving
the fourth quarter financial information. Finally, in the case of a
restatement, investors, including more sophisticated institutional
investors, might not be able to accurately back out the fourth quarter
information. To the extent that there is lack of accurate fourth
quarter information which cannot be obtained through alternative means,
investors' decision making could be affected.
However, the potential information loss from the elimination of
Item 302(a) might be mitigated under MD&A's principles-based framework.
We believe that fourth quarter data may not be material to all
registrants or in every fiscal year. For example, for investors in
companies with long operating cycles, fourth quarter data might not be
as incrementally important as annual data. However, to the extent that
there are material trends or events in the fourth quarter or throughout
the fiscal year, registrants would be required to address those matters
in their MD&A.
Item 302(b) requires issuers engaged in oil and gas producing
activities, other than SRCs, to disclose information about those
activities that is required by U.S. GAAP for each period presented. The
FASB has recently proposed to amend U.S. GAAP to require the
incremental disclosure called for by Item 302(b). Thus, because the
disclosure required by Item 302(b) would be included in the notes to
the registrant's financial statements, the proposed elimination of Item
302(b) would remove duplicative disclosure on this topic, benefiting
both registrants and investors. Registrants could benefit from the
reduced compliance burden. Investors should not face information loss
from this aspect of the proposed amendments, as this requirement
completely overlaps with the proposed amendments to U.S. GAAP. However,
investors may incur costs to adjust to the new disclosure format. Such
costs are likely to be one-time costs or to decrease over time.
c. Item 303(a) Restructuring and Streamlining
The proposal includes multiple changes that are intended to clarify
and streamline the requirements of Item 303. For example, we are
proposing a new Item 303(a) to provide a succinct and clear description
of the purpose of MD&A. As discussed above, emphasizing the purpose of
MD&A at the outset of the item is intended to provide clarity and focus
to registrants as they consider what information to discuss and
analyze, which could
[[Page 12100]]
encourage management to disclose those factors that are most specific
and relevant to a registrant's business. Other changes include
restructuring and streamlining language in Item 303 and the related
instructions.
We anticipate that the proposed amendments would provide
registrants with more clarity on disclosure requirements. When there is
confusion related to disclosure requirements, registrants may either
over-disclose and incur additional compliance costs, or under-disclose
and face increased litigation risk. To the extent that the proposed
amendments reduce registrants' confusion, registrants could potentially
benefit from reduced compliance costs and litigation risk. More
informative disclosure could potentially benefit both registrants and
investors by reducing information asymmetry in the market. Reduced
information asymmetry could help investors make more informed
investment decisions, which may benefit registrants in their capital
raising. For registrants, reduced information asymmetry could also
potentially improve firm liquidity and reduce cost of capital.
d. Capital Resources (Item 303(a)(2))
Item 303(a)(2), which requires a registrant to discuss its material
commitments for capital expenditures as of the end of the latest fiscal
period, does not define the term ``capital resources.'' The lack of
specificity was intended to provide management flexibility for a
meaningful discussion when this disclosure requirement was adopted in
1980. Nonetheless, the Commission has previously provided guidance to
clarify the nature of this requirement.\366\ Further, while the
required disclosure of material commitments of capital expenditures
generally relates to physical assets, such as buildings and equipment,
this requirement may not fully reflect market developments. While
capital expenditures remain important in many industries, certain
expenditures that are not necessarily capital investments may be
increasingly important to companies. For example, expenditures for
human resources or intellectual property may be essential for companies
in certain industries. The proposed amendments to Item 303(a)(2) are
intended to encompass these types of expenditures. The proposed
amendments would also require, consistent with the Commission's 2003
MD&A Interpretive Release, that registrants broadly disclose material
cash commitments, including but not limited to capital expenditures. We
believe the proposed amendments would modernize the requirement and
make the disclosure more reflective of current and future industry
outlays.
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\366\ See 2003 MD&A Interpretive Release.
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We believe that the proposed amendments could benefit registrants
by providing additional clarity on the term ``capital resources'' and
reducing confusion, thereby eliciting appropriate disclosure from
registrants and potentially decreasing litigation risk. Capital
expenditures vary across industries. While firms in traditional
industries rely more on physical assets, firms in other industries such
as the technology sector may invest more heavily in intellectual
property and human capital. Specifying only capital expenditures in the
rule could lead to confusion about what information should be provided.
As a result, registrants may over-disclose and incur additional
compliance costs, or under-disclose and face increased litigation risk.
Further, we expect that registrants would benefit from decreased
compliance costs to the extent that the proposed amendments reduce the
need to consult existing Commission guidance to process and understand
the disclosure requirements.
The proposed amendments should also benefit investors through
improved disclosure. As discussed above, lack of clarity might lead to
under- or over-disclosure by registrants. For example, disclosure
focusing only on capital expenditures rather than on material cash
commitments more generally might lead to under-disclosure for less
capital intensive industries. As a result, investors might not receive
adequate or consistent information to make informed investment
decisions. By providing clarity on the requirement, the proposed
amendments may facilitate more informative disclosure.
The proposed amendments might increase the disclosure burden for
some registrants because they may prompt disclosure of material
investments in non-physical assets that registrants might not otherwise
be disclosing. However, we do not anticipate a significant increase in
compliance costs. As discussed above, some registrants already include
disclosure beyond capital expenditures, which the Commission's MD&A
guidance has encouraged.\367\ Also, better disclosure should eventually
benefit registrants, because it could reduce information asymmetry
between management and investors, reduce the cost of capital, and
thereby improve firms' liquidity and their access to capital
markets.\368\
---------------------------------------------------------------------------
\367\ See supra Section II.C.2 and footnote 129.
\368\ See Douglas W. Diamond and Robert E. Verrecchia,
Disclosure, Liquidity, and the Cost of Capital, 46 J. Fin. 1325
(1991) (finding that revealing public information to reduce
information asymmetry can reduce a firm's cost of capital through
increased liquidity). See also Christian Leuz and Robert E.
Verrecchia, The Economic Consequences of Increased Disclosure, 38 J.
Acct. Res. 91 (2000) (providing empirical evidence that increased
disclosure leads to lower information asymmetry component of the
cost of capital in a sample of German firms); Christian Leuz and
Peter D. Wysocki, The Economics of Disclosure and Financial
Reporting Regulation: Evidence and Suggestions for Future Research,
54 J. Acct. Res. 525 (2016) (providing a comprehensive survey of the
literature on the economic effect of disclosure). Studies that
provide both theoretical and empirical evidence on the link between
information asymmetry and cost of capital include Thomas E. Copeland
and Dan Galai, Information Effects on the Bid[hyphen]Ask Spread, 38
J. Fin. 1457 (1983) (proposing a theory of information effects on
the bid-ask spread); David Easley and Maureen O'Hara, Price, Trade
Size, and Information in Securities Markets, 19 J. Fin. Econ. 69
(1987) (using a model to provide explanation for the price effect of
block trades); David Easley and Maureen O'Hara, Information and the
Cost of Capital, 59 J. Fin. 1553 (2004) (showing that differences in
the composition of information between public and private
information affect the cost of capital, with investors demanding a
higher return to hold stocks with greater private information);
Yakov Amihud and Haim Mendelson, Asset Pricing and the Bid-Ask
Spread, 17 J. Fin. 223 (1986) (predicting that market-observed
expected return is an increasing and concave function of the spread,
and providing empirical results that are consistent with the
predictions of the model).
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e. Results of Operations--Known Trends or Uncertainties (Item
303(a)(3)(ii))
Item 303(a)(3)(ii) requires a registrant to describe any known
trends or uncertainties that have had or that the registrant expects
will have a material impact (favorable or unfavorable) on net sales or
revenues or income from continuing operations. The proposed amendments
clarify that when a registrant knows of events that are reasonably
likely to cause a material change in the relationship between costs and
revenues, such as known or reasonably likely future increases in costs
of labor or materials or price increases or inventory adjustments, the
reasonably likely change must be disclosed. This proposed amendment
would conform the language in this paragraph to other Item 303
disclosure requirements for known trends and align Item 303(a)(3)(ii)
with the Commission's guidance on forward-looking disclosure.\369\
---------------------------------------------------------------------------
\369\ See supra note 139.
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As discussed above, the language in the existing Item 303(a)(3)(ii)
differs from other Item 303 disclosure requirements for forward-looking
information.\370\ This differing language
[[Page 12101]]
may have led to confusion and inconsistent practice regarding what
events should be disclosed. While the Commission has sought to
alleviate some of these concerns by clarifying the standard for
forward-looking information in its MD&A guidance,\371\ the proposed
amendment could further benefit registrants by reducing any residual
confusion, eliciting more consistent disclosure, and potentially
decreasing compliance costs and litigation risk. In addition, more
consistent disclosure may allow investors to make more meaningful
comparisons across firms and make more informed investment decisions.
---------------------------------------------------------------------------
\370\ See supra Section II.C.3. See also supra note 138 and 139.
\371\ See 1989 MD&A Interpretive Release.
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Some registrants may experience an increased cost of compliance
under the proposed amendments to the extent that these registrants have
been disclosing events that will cause a material change in the
relationship between costs and revenues as opposed to events that are
reasonably likely to cause the change. Also, some registrants might
need to spend resources to evaluate the future likelihood that such
events might occur. However, such registrants might be few in light of
existing Commission guidance, and the increase in compliance costs
could be offset by the potential decrease in cost of capital as a
result of enhanced disclosure and reduced information asymmetry.\372\
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\372\ See supra note 368.
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f. Results of Operations--Net Sales, Revenues, and Line Item Changes
(Item 303(a)(3)(iii) and Instruction 4)
Item 303(a)(3)(iii) currently requires management to discuss
certain factors, such as changes in prices or volume, that led to
certain material increases in net sales or revenues. The proposed
amendments broaden the current requirement focusing on ``material
increases in net sales or revenue'' in the ``financial statements'' to
instead require disclosure of ``material changes from period to period
in one more line items'' in the ``statement of comprehensive income.''
Additionally, the proposed amendments would amend Item 303(a)(3)(iii)
to require disclosure specifying the reasons underlying these material
changes. Instead of specifying disclosure of ``material increases'' in
net sales or revenue, our proposed revisions would tie the required
disclosure to ``material changes'' in net sales or revenues. The
proposed amendments to Instruction 4 would similarly clarify that MD&A
requires a narrative discussion of the underlying reasons for material
changes in quantitative and qualitative terms.
The proposed amendments are intended to codify Commission guidance
on results of operations disclosure. The Commission has previously
stated that MD&A disclosure should include both qualitative and
quantitative analysis and clarified that a results of operations
discussion should describe increases or decreases in any line item,
including net sales or revenues.\373\ The need for registrants to
consult both existing Item 303(a)(3)(iii) and the Commission's guidance
to understand the requirement could lead to confusion and inconsistent
disclosure practice in registrants. The additional clarity provided by
the proposed amendments could benefit registrants by reducing any
confusion, eliciting more consistent disclosure, and potentially
decreasing compliance costs and litigation risk.
---------------------------------------------------------------------------
\373\ See, e.g., 2003 MD&A Interpretative Release and 1989 MD&A
Interpretative Release.
---------------------------------------------------------------------------
The proposed amendments could increase disclosure burdens for
registrants, thus potentially increasing compliance costs. However,
since many registrants may already be following relevant Commission
guidance, the marginal increase in compliance costs is not expected to
be significant. Additionally, to the extent that registrants do incur
additional compliance costs, such costs could be offset by the
potential decrease in cost of capital as a result of increased
disclosure and reduced information asymmetry.\374\
---------------------------------------------------------------------------
\374\ See supra note 368.
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The proposed amendments would require registrants to provide a
nuanced discussion of the underlying reasons that may be contributing
to material changes in line items, and therefore should enhance the
disclosure. More consistent and informative disclosure would allow
investors to make more meaningful comparisons across firms and make
more informed investment decisions. However, any potential benefits to
investors may be limited to the extent registrants already are
following the relevant Commission guidance.
g. Results of Operations--Inflation and Price Changes (Item
303(a)(3)(iv), Instruction 8, and Instruction 9)
We propose to eliminate Item 303(a)(3)(iv) and related Instructions
8 and 9, which generally require that registrants specifically discuss
the impact of inflation and price changes on their net sales, revenue,
and income from operations for the three most recent fiscal years, to
the extent material. The purpose of the proposed elimination is to
streamline Item 303 by eliminating the specific reference to these
topics, which may not be material to most registrants. This proposed
change is consistent with the principles-based disclosure framework of
Item 303.
We do not believe that these proposed changes would result in a
loss of material information for market participants. Registrants would
still be required to discuss in their MD&A the impact of inflation and
changing prices, if material.
The proposed elimination of this item could benefit registrants by
streamlining Item 303 and reducing compliance costs. Similar to what we
have discussed above,\375\ to the extent that the elimination
encourages registrants that currently disclose inflation and changing
prices even if not material to modify such disclosure,\376\ investors
could potentially benefit from a focus on material information, which
would allow them to process information more effectively. Also,
emphasizing a principles-based approach may encourage registrants to
present more tailored information, which also may benefit investors.
---------------------------------------------------------------------------
\375\ See supra Section III.B.2.i.
\376\ See supra note 354.
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h. Off-Balance Sheet Arrangements (Item 303(a)(4))
Current Item 303(a)(4) requires, in a separately-captioned section,
disclosure of a registrant's off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on a
registrant's financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital
expenditures, or capital resources that is material to investors. We
propose to replace Item 303(a)(4) with a new principles-based
instruction that would require registrants to discuss commitments or
obligations, including contingent obligations, arising from
arrangements with unconsolidated entities or persons that have, or are
reasonably likely to have, a material current or future effect on a
registrant's financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, cash
requirements, or capital resources.
We do not believe the proposed amendments would lead to significant
information loss, as we expect the proposed principles-based
instruction would continue to elicit material information about off-
balance sheet arrangements. As discussed above, we believe that the
proposed amendments would encourage registrants to consider
[[Page 12102]]
and integrate disclosure of off-balance sheet arrangements in the
context of their broader MD&A disclosures and may avoid boilerplate
disclosure that either duplicates information in the financial
statements, or cross-references the financial statements without
additional disclosure to put such information into appropriate context.
The proposed amendments could benefit registrants by avoiding
duplicative disclosure and reducing compliance costs. As discussed
above, to the extent the proposed amendments improve the readability
and conciseness of the information provided, they may help investors
process information more effectively. Also, emphasizing a principles-
based approach may encourage registrants to provide disclosure that is
tailored and informative, which could be more beneficial to investors.
Investors might need to spend time searching for the information
and adjusting to the new format and location of the disclosure as the
proposal would no longer require the relevant disclosure in a
separately captioned section. Such costs are likely to be one-time or
decrease over time.
i. Tabular Disclosure of Contractual Obligations (Item 303(a)(5))
Under existing Item 303(a)(5), registrants other than SRCs must
disclose in tabular format their known contractual obligations. There
is no materiality threshold for this item. A registrant must arrange
its chart to disclose the aggregate amount of contractual obligations
by type and with subtotals by four prescribed periods. The Commission
adopted this requirement so that aggregated information about
contractual obligations was presented in one place.\377\ However, as
discussed above, most of the information presented in response to this
requirement is already included in the notes to the financial
statements. In order to promote the principles-based nature of MD&A and
streamline disclosures by reducing overlapping requirements, we propose
to eliminate Item 303(a)(5).
---------------------------------------------------------------------------
\377\ See Off-Balance Sheet Arrangements and Contractual
Obligations Adopting Release, at 5990.
---------------------------------------------------------------------------
We believe the proposal could lead to reduced compliance costs by
avoiding duplicative disclosure, therefore benefiting registrants. On
the other hand, we also recognize that there might be increased costs
associated with assessing the materiality of contractual obligations
under the proposed principles-based approach. However we do not expect
such costs to be significant given that the materiality standard is
already used by registrants when preparing MD&A disclosures. As
discussed above, to the extent the elimination of redundant or
immaterial disclosure improves the readability and conciseness of the
information provided, the proposed amendment could potentially benefit
investors, because it may help them process information more
effectively by focusing on material information. Also, since a
principles-based approach allows registrants to present more tailored
information, it could lead to more informative disclosure, which would
benefit investors.
We recognize that there could be a loss of certain information due
to the proposed elimination of the item. As discussed in Section
II.C.7, some of the information in the contractual obligations table
such as purchase obligations is not specifically called for under U.S.
GAAP. Additionally, information related to the ``payments due by
period'' currently required by the item may be difficult to ascertain
from a registrant's financial statements. However, since the proposed
amendments to capital resources disclosure would encompass material
contractual obligations, we believe any loss of information would not
be significant.
We expect investors could experience certain additional costs. A
centralized location and tabular format make it convenient for
investors to extract and analyze information. Under the proposed
amendments, the absence of a centralized location and tabular format
may cause investors to incur search costs to derive the data from the
financial statements, or monetary costs to obtain the information
through alternative channels, such as database subscriptions. Investors
may also incur opportunity costs, such as time spent searching for
alternative sources, and these costs may fall more heavily on retail
investors than on other types of investors, such as institutional
investors.
j. Critical Accounting Estimates
Item 303(a) does not currently include a subsection requiring
registrants to disclose critical accounting estimates. U.S. GAAP also
does not require similar disclosure of estimates and assumptions in the
notes to financial statements, except in limited circumstances.
However, IFRS requires disclosures regarding sources of estimation
uncertainty and judgments made in the process of applying accounting
policies that have the most significant effect on the amounts
recognized in the financial statements.\378\ Although the Commission
has issued guidance on disclosure of critical accounting estimates,
many registrants repeat the discussion of significant accounting
policies from the notes to the financial statements in their MD&A and
provide limited additional discussion of critical accounting estimates.
We propose amending Item 303 to explicitly require such disclosure due
to the importance of critical accounting estimates in providing
meaningful insight into the uncertainties related to these estimates
and reported financials and how accounting policies of registrants
faced with similar facts and circumstances may differ.
---------------------------------------------------------------------------
\378\ See supra note 227.
---------------------------------------------------------------------------
As discussed above, commenters have suggested that there is
confusion as to how and whether to disclose critical accounting
estimates, resulting in inconsistent disclosure practice among
registrants. As noted above, many registrants simply repeat the
discussion of significant accounting policies from the notes to the
financial statements in their MD&A, which is duplicative and may not be
particularly informative to investors. Providing a clear disclosure
framework could benefit registrants by reducing confusion and
duplicative disclosure, thereby decreasing compliance costs.
Investors would also likely benefit from the proposed amendments.
The proposed amendments could elicit more informative disclosure from
registrants related to their estimates and assumptions, which would
help investors better understand any potential risk or uncertainty
related to these estimates and make more informed investment decisions.
The proposed amendments could also promote more consistent disclosure
practices among registrants by providing more clarity, allowing
investors to make more meaningful comparisons across registrants and
better informed investment decisions.
We recognize that the proposed disclosure requirement could
introduce additional costs to market participants. While we do not
anticipate that investors would incur any direct costs (other than
information processing costs) associated with this proposal, compliance
costs might increase for registrants because of the proposed more
prescriptive disclosure compared to the existing more principles-based
approach. However, the potential increase in compliance costs might
decline over time as registrants become more accustomed to the new
filing requirements. We also note that,
[[Page 12103]]
consistent with Commission guidance, some registrants may already
provide disclosures related to critical accounting estimates that do
not duplicate the financial statement disclosures, thus the increase in
compliance costs might be minimal to those registrants. In addition,
the increase in compliance costs could be offset by a potential
decrease in registrants' cost of capital, because such disclosure could
reduce information asymmetry between investors and firms.\379\ Taken
together, we expect any potential increase in registrants' disclosure-
related costs to be small.
---------------------------------------------------------------------------
\379\ See supra note 368.
---------------------------------------------------------------------------
k. Interim Period Discussion (Item 303(b))
Item 303(b) requires registrants to provide MD&A disclosure for
interim periods that enables market participants to assess material
changes in financial condition and results of operations between
certain specified periods. The proposal would amend current Item 303(b)
to allow for flexibility in comparisons of interim periods and to
streamline the item. Specifically, under the proposed Item 303(c),
registrants would be allowed 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. The
proposed amendments would also streamline the instructions to current
Item 303(b), consistent with the proposed amendments to current Item
303(a) and the related instructions.
This more flexible approach is intended to allow registrants to
provide analysis that is better tailored to their business cycles. This
may result in more informative disclosure that could reduce information
asymmetry and firms' cost of capital, benefiting registrants.\380\ In
addition, streamlining the item could avoid duplicative disclosure and
reduce associated compliance costs.
---------------------------------------------------------------------------
\380\ Id.
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Investors also may benefit from the proposed amendments. As noted
above, the proposed amendments would provide registrants flexibility to
choose the interim period presented, which could allow them to provide
a more tailored analysis. This, in turn, could allow investors to make
better informed investment decisions. On the other hand, more
flexibility in disclosure could also decrease comparability across
firms, potentially increasing the cost of investors' decision-making.
However, we do not expect the flexibility in reporting to significantly
reduce comparability, since registrants in the same industry may be
likely to have similar business cycles and choose similar interim
periods. Therefore, the concern about a reduction of comparability
across firms in the same industry could be mitigated. Streamlining this
item is potentially beneficial to investors, as the resultant reduction
of duplicative disclosure might increase the effectiveness of
information processing by investors, thus helping them make more
informed decisions.
l. Safe Harbor for Forward-Looking Information (Item 303(c))
Item 303(c) \381\ states that the safe harbors provided in Section
27A of the Securities Act and 21E of the Exchange Act apply to all
forward-looking information provided in response to Item 303(a)(4)
(off-balance sheet arrangements) and Item 303(a)(5) (contractual
obligations), provided such disclosure is made by certain enumerated
persons.\382\ We propose to eliminate this item to conform to the
proposed elimination of Items 303(a)(4) and 303(a)(5). We do not
believe this proposed change would have any economic effect by itself.
Disclosure would continue to be protected by the existing safe harbors,
and therefore, we do not expect changes in market behavior. To the
extent that the elimination of the section may result in any confusion
as to the application of the safe harbors, there could be a cost to
registrants. However, we believe such cost should be de minimis.
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\381\ Item 303(c) of Regulation S-K.
\382\ Such persons are: An issuer; a person acting on behalf of
the issuer; an outside reviewer retained by the issuer making a
statement on behalf of the issuer; or an underwriter, with respect
to information provided by the issuer or information derived from
information provided by the issuer.
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m. Smaller Reporting Companies (Item 303(d))
Item 303(d) \383\ states that an SRC may provide Item 303(a)(3)(iv)
information for the most recent two fiscal years if it provides
financial information on net sales and revenues and income from
continuing operations for only two years. Item 303(d) also states that
an SRC is not required to provide the contractual obligations chart
specified in Item 303(a)(5). To conform to the proposals to eliminate
Item 303(a)(3)(iv) and (a)(5), we propose to eliminate Item 303(d).
SRCs may continue to rely on Instruction 1 to Item 303(a),\384\ which
states that an SRC's discussion shall cover the two-year period
required in Article 8 of Regulation S-X. As we propose to eliminate
this item as a conforming change, we do not believe this proposed
change would have any economic effect by itself.
---------------------------------------------------------------------------
\383\ Item 303(d) of Regulation S-K.
\384\ Proposed renumbered Item 303(b).
---------------------------------------------------------------------------
n. Foreign Private Issuers
The proposed changes related to Item 3.A and Item 5 of Form 20-F
and General Instructions B.(11), (12), and (13) of Form 40-F for FPIs
are intended to conform to the other changes related to selected
financial data and MD&A. Therefore, our analysis of the costs and
benefits for domestic issuers and their investors under the proposed
amendments to Item 301 can be carried over to FPIs and their investors
under the amended items. The proposed changes could benefit FPIs
through a reduction in compliance costs, although the benefits are
likely to be smaller given that current Item 3.A permits a FPI to omit
either or both of the earliest two years of data under certain
conditions and registrants that file on Form 40-F use Canadian
disclosure documents to satisfy the Commission's registration and
disclosure requirements. Since FPIs would have more flexibility to
provide information that is better tailored to their industry or
country, investors could benefit from more informative disclosure.
However, investors might incur additional search costs when looking for
information through alternative channels.
To maintain a consistent approach to MD&A for domestic registrants
and FPIs, we are proposing changes to Forms 20-F and 40-F that
generally conform to our proposed amendments to Item 303. Therefore,
our discussion of the costs and benefits for domestic issuers and their
investors under the proposed amendments to Item 303 generally can be
carried over to FPIs under the amended item. The proposal adds to Item
303 the current Form 20-F instruction that requires FPIs that are not
subject to the multijurisdictional disclosure system to discuss
hyperinflation in a hyperinflationary economy. This disclosure can be
important to investors when analyzing FPIs, as hyperinflation in some
FPIs' home countries might be an important risk factor for the firm's
results of operations or financial health.
D. Anticipated Effects on Efficiency, Competition, and Capital
Formation
We believe the proposed amendments could have positive effects on
efficiency, competition, and capital formation. As discussed above, we
expect the proposed amendments could reduce duplicative disclosure and
elicit disclosure that is more focused on material information and
tailored to a
[[Page 12104]]
registrant's business, making the disclosure more informative. We
believe more informative disclosure could reduce information asymmetry
between firms and investors, thereby improving firm liquidity and price
efficiency.\385\ We also believe the proposed amendments could promote
competition in the capital markets and facilitate capital formation.
This is because more informative disclosure could allow investors to
make more meaningful comparisons across firms and make more informed
investment decisions, and as a result, more value-enhancing projects
may receive more capital allocation.
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\385\ See supra note 368. See also David Hirshleifer and Siew
Hong Teoh, Limited attention, information disclosure, and financial
reporting, 36 J. Acct. & Econ. 337-386 (2003) (developing a
theoretical model where investors have limited attention and
processing power and showing that, with partially attentive
investors, the means of presenting information may have an impact on
stock price reactions, misvaluation, long-run abnormal returns, and
corporate decisions).
---------------------------------------------------------------------------
However, as discussed above, since registrants no longer need to
present certain information (e.g., five-year comparable data),
investors could incur costs when searching for alternative channels to
obtain or reconstruct the information. Since each investor would have
to consider the need for alternative sources of information, it could
result in inefficiency in the information distribution process.
Additionally, if registrants misjudge what information is material,
there could be an increase in information asymmetries between
registrants and investors, negatively affecting efficiency,
competition, and capital formation. However, we expect this risk to be
offset by mitigating factors, including accounting controls and the
antifraud provisions of the securities laws.
The proposed amendments, in particular by simplifying and codifying
certain positions expressed in various Commission guidance, might
reduce the compliance costs of private companies considering going
public and this cost reduction may be more significant for SRCs. For
companies considering an IPO, the benefit of easing the burdens
associated with preparing these disclosures for the first time could
decrease the costs of going public and thus leave more capital for
future investment. This could lead to more efficient capital formation.
E. Alternatives
As an alternative to the proposed elimination of Item 301, which
requires registrants to furnish selected financial data in comparative
tabular form for each of the registrant's last five fiscal years, we
considered amending the item to require only the same number of years
of data as presented in the registrant's financial statements in that
same filing. Similarly, another alternative we considered is expanding
the current EGC accommodation to all initial registrants. The EGC
accommodation generally provides that an EGC need not present selected
financial data for any period prior to the earliest audited period
presented in its initial filing.\386\ This accommodation allows EGCs to
build up to the full five years of selected financial data.
---------------------------------------------------------------------------
\386\ See Item 301(d) of Regulation S-K [17 CFR 229.301].
---------------------------------------------------------------------------
The benefit of these alternatives would be potential cost savings
from a reduction in compliance burdens by not having to reproduce the
earliest years of selected financial data. These alternatives might be
sufficient for investors to make a quick comparison with the most
recent financial data without cross-referencing to other sources.
However, given the nature of electronic access to financial data
through EDGAR, we think the potential benefits of these alternatives
would be more limited than the proposed elimination of Item 301. We
decided not to propose the alternative of requiring the same number of
years of data as presented in the registrant's financial statements in
that same filing because such disclosure would be largely duplicative
and therefore, have limited utility. Regarding the alternative that we
expand the current EGC accommodation to all initial registrants, while
this approach could provide cost savings to non-EGC initial registrants
at the beginning, in the long run, these registrants would still face
the same duplicative disclosure problem that other registrants do
currently. As a result, we decided not to propose this alternative.
As another alternative, we considered amending Item 301 to require
the earliest years only in circumstances where the company can
represent that the information cannot be provided without unreasonable
effort and expense, as is currently allowed under Item 3.A of Form 20-
F. For example, as a commenter noted, there are several situations
where such disclosure can be costly.\387\ Under this approach,
registrants would experience reduced compliance costs under the
exempted circumstances, albeit a smaller reduction compared to the
proposed approach, because they would still need to disclose selected
financial data for the earliest years when it is deemed not time
consuming and costly. On the other hand, while investors would still
incur search costs if they prefer to analyze five years' financial
data, such costs would be smaller compared to the proposed approach. We
decided not to propose this alternative because the lack of a
consistent or objective standard to determine when additional financial
disclosure is required could be time consuming or burdensome for
registrants.
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\387\ See supra note 28 and 29 and corresponding text.
---------------------------------------------------------------------------
As an alternative to the proposed elimination of Item 302, which
requires disclosure of quarterly financial data of selected operating
results and variances in these results from amounts previously reported
on a Form 10-Q, we considered requiring a registrant to separately
disclose fourth quarter data elsewhere in its annual report, such as in
MD&A. This approach could prevent or mitigate the potential loss of the
fourth quarter financial data under the proposed approach. We decided
not to propose this alternative because the fourth quarter information
may not be material or significant to investors in all circumstances.
Therefore, separate presentation of the fourth quarter information
might not justify its cost.
We are proposing to amend current Item 303(a)(2) to specify that a
registrant should broadly disclose material cash commitments, including
but not limited to capital expenditures. We considered proposing a
definition for the term ``capital resources.'' While defining the term
could provide more clarity for registrants, it would also result in a
disclosure requirement more prescriptive in nature, inconsistent with
our current objective to promote the principles-based nature of MD&A.
We therefore decided not to propose this alternative.
As an alternative to the proposed elimination of Item 303(a)(5),
which requires registrants to disclose in tabular format contractual
obligations by type of obligation, overall payments due and prescribed
periods, we considered maintaining the contractual obligations
disclosure requirement in a modified form. For example, we considered
allowing this disclosure in a non-tabular format. While this approach
could prevent any potential information loss, the non-tabular
presentation of information may not be as clear as the tabular format.
Also, this approach may not generate meaningful savings for registrants
through reduced compliance costs. Another alternative we considered was
to reduce the prescribed time periods that need to be disclosed. For
example, we could require disclosures of only short-term or long-
[[Page 12105]]
term obligations rather than requiring disclosure to be grouped in the
four time periods currently specified in Item 303(a)(5). While this
approach could be more beneficial to investors by reducing their search
costs compared to the proposed approach, it would result in redundant
disclosure and higher compliance costs to registrants.
As an alternative to proposed Item 303(b)(4), we considered issuing
additional guidance on critical accounting estimates that enhances the
guidance issued in the 2003 MD&A Release. While this alternative could
save compliance costs for registrants because it would not create a new
requirement, the savings might not necessarily be significant, given
the existing Commission guidance on this topic. Further, we believe
that by codifying existing guidance, proposed Item 303(b)(4) would
provide investors with more enhanced disclosure and protection by
ensuring that companies consistently provide such disclosure.
Therefore, we decided not to propose this alternative.
Proposed Item 303(b) would allow flexibility for registrants 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. As an alternative, we considered
an approach under which registrants would be required to compare the
most recent quarter to both the corresponding quarter of the prior year
and the immediately preceding quarter. While this alternative approach
would provide investors with more disclosure, it might not be clear to
investors which time period is more representative of the registrant's
business, and registrants would incur more compliance costs. Also, this
alternative is less consistent with the principles-based nature of
MD&A. Therefore, we decided not to propose this alternative.
The proposed amendments do not require registrants to structure
financial disclosures in a machine-readable format. An alternative
suggested by some commenters \388\ was to require registrants to
structure MD&A in the Inline XBRL format. Requiring registrants to
structure MD&A disclosures could create benefits for investors (either
through direct use of the data or through reliance on the data as
extracted and analyzed by intermediaries) as well as other market
participants by enabling more efficient retrieval, aggregation, and
analysis of disclosed information and facilitating comparisons across
issuers and time periods.\389\ However, as other commenters observed,
filers would incur increased costs under this alternative, with a block
text and detail tagging requirement imposing greater costs than a block
text tagging-only requirement.\390\ This increased cost effect may be
mitigated by the fact that registrants are or will be required to
structure financial statement and cover page disclosures in the Inline
XBRL format,\391\ and would therefore incur only the incremental cost
associated with tagging the additional disclosures. Also, concerns as
to filer cost might be partially alleviated by the overall decline in
the costs of XBRL tagging over time, including for SRCs. \392\ However,
our proposed amendments emphasize MD&A's principles-based framework,
which encourages registrants to provide meaningful disclosure that is
tailored to their specific facts and circumstances. This may make MD&A
less comparable across issuers, thereby reducing the benefits of this
alternative. As a result, we did not propose this alternative, but
solicit comment on the specific benefits and costs of such a tagging
requirement.
---------------------------------------------------------------------------
\388\ See, e.g., letters from CalPERS, California State
Teachers' Retirement System (July 21, 2016), CFA Institute,
Deloitte, RGA, Data Coalition (July 21, 2016) (``Data Coalition''),
Merrill Corporation (July 19, 2016) (``Merrill''), and XBRL US (July
21, 2016) (``XBRL US''). In addition, the Commission received
several comments supporting an Inline XBRL structuring requirement
for MD&A disclosure in connection with the Inline XBRL proposing
release. See, e.g., letters from CFA Institute (July 1, 2017) and
XBRL US (July 1, 2017 and Feb. 1, 2018).
\389\ See Inline XBRL Adopting Release, at 40851, footnote 71
and accompanying text, and 40862. See also, e.g., Mohini Singh,
``Data and Technology: How Information is Consumed in the New Age,''
CFA Institute (July 3, 2018) (describing examples of analytical,
benchmarking, and regulatory XBRL usage); Chunhui Liu, Tawei Wang,
and Lee J. Yao (2014), ``XBRL's Impact on Analyst Forecast Behavior:
An Empirical Study,'' Journal of Accounting and Public Policy, 33(1)
(finding that XBRL adoption has significantly increased information
quantity and quality, as measured by analyst following and forecast
accuracy).
\390\ See, e.g., letters from Institute of Management
Accountants (July 29, 2016); FEI I and II; Maryland Bar Securities
Committee, Northrop Grumman, and CCMC.
\391\ See Inline XBRL Adopting Release; FAST Act Adopting
Release.
\392\ Preliminary statistics from a pricing survey being
conducted by the AICPA and XBRL US indicate that the cost of XBRL
formatting has declined 41% since 2014 and that the average cost of
XBRL preparation for SRCs in 2017 averaged $5,850 per year. See
AICPA, ``Research shows XBRL filing costs are lower than expected,''
available at https://www.aicpa.org/InterestAreas/FRC/AccountingFinancialReporting/XBRL/DownloadableDocuments/XBRL%20Costs%20for%20Small%20Companies.pdf. See also Mohini Singh,
``The Cost of Structured Data: Myth vs. Reality,'' CFA Institute
(August 2017), available at https://www.cfainstitute.org/-/media/documents/survey/the-cost-of-structured-data-myth-vs-reality-august-2017.ashx.
---------------------------------------------------------------------------
Request for Comment
We request comment on all aspects of our economic analysis,
including the potential costs and benefits of the proposed amendments
and alternatives thereto, and whether the proposed amendments, if
adopted, would promote efficiency, competition, and capital formation
or have an impact on investor protection. In addition, we also seek
comment on alternative approaches to the proposed amendments and the
associated costs and benefits of these approaches. Commenters are
requested to provide empirical data, estimation methodologies, and
other factual support for their views, in particular, on costs and
benefits estimates.
Specifically, we seek comment with respect to the following
questions: Are there any costs and benefits to any entity that are not
identified or misidentified in the above analysis? Are there any
effects on efficiency, competition, and capital formation that are not
identified or misidentified in the above analysis? Should we consider
any of the alternative approaches outlined above instead of the
proposed amendments? Which approach and why? Are there any other
alternative approaches to improving MD&A disclosure that we should
consider? If so, what are they and what would be the associated costs
or benefits of these alternative approaches?
V. Paperwork Reduction Act
A. Summary of the Collections of Information
Certain provisions of our rules, schedules, and forms that would be
affected by the proposed amendments contain ``collection of
information'' requirements within the meaning of the PRA.\393\ The
Commission is submitting the proposed amendments to the Office of
Management and Budget (``OMB'') for review in accordance with the
PRA.\394\ The hours and costs associated with preparing, filing, and
sending the schedules and forms constitute reporting and cost burdens
imposed by each collection of information. An agency may not conduct or
sponsor, and a person is not required to comply with, a collection of
information unless it displays a currently valid OMB control number.
Compliance with the information collections is mandatory. Responses to
the information collections are not kept confidential and there is no
mandatory retention period for the
[[Page 12106]]
information disclosed. The titles for the collections of information
are:
---------------------------------------------------------------------------
\393\ 44 U.S.C. 3501 et seq.
\394\ 44 U.S.C. 3507(d); 5 CFR 1320.11.
---------------------------------------------------------------------------
``Form 1-A'' (OMB Control No. 3235-0286);
``Form 10'' (OMB Control No. 3235-0064);
``Form 10-Q'' (OMB Control No. 3235-0070);
``Form 10-K'' (OMB Control No. 3235-0063);
``Schedule 14A'' (OMB Control No. 3235-0059);
``Form 20-F'' (OMB Control No. 3235-0288);
``Form 40-F'' (OMB Control No. 3235-0381);
``Form F-1'' (OMB Control No. 3235-0258);
``Form F-4'' (OMB Control No. 3235-0325);
``Form N-2'' (OMB Control No. 3235-0026);
``Form S-1'' (OMB Control No. 3235-0065);
``Form S-4'' (OMB Control No. 3235-0324);
``Form S-11'' (OMB Control No. 3235-0067);
We adopted all of the existing regulations, schedules, and forms
pursuant to the Securities Act, the Exchange Act, and/or the Investment
Company Act. The regulations, schedules, and forms set forth the
disclosure requirements for registration statements, periodic reports,
and proxy and information statements filed by registrants to help
investors make informed investment and voting decisions.
A description of the proposed amendments, including the need for
the information and its proposed use, as well as a description of the
likely respondents, can be found in Section II above, and a discussion
of the economic effects of the proposed amendments can be found in
Section IV above.
B. Summary of the Proposed Amendments' Effects on the Collections of
Information
The following Table 1 summarizes the estimated effects of the
proposed amendments on the paperwork burdens associated with the
affected forms listed in Section V.A.
PRA Table 1--Estimated Paperwork Burden Effects of the Proposed
Amendments
------------------------------------------------------------------------
Estimated net
Proposed amendments and effects Affected forms effect *
------------------------------------------------------------------------
Item 301: Selected Financial Data
Elimination of Item 301 Forms 10, 2 hour
requirement to furnish selected 10-K, S-1, S-4, net decrease in
financial data for each of the and S-11. compliance
registrant's last five fiscal .................. burden per form.
years because Item 303 already Schedule 0.2 hour
calls for disclosure of material 14A \**\. net decrease in
trend information, which would .................. compliance
decrease the paperwork burden by .................. burden per
reducing repetitive information Form N-2 schedule.
about a registrant's historical . 0.3 hour
performance. .................. net decrease in
Replacing the reference .................. compliance
to Item 301 with a reference to Forms SF- burden per form.
Rule 1-02(bb) of Regulation S-X 1 and SF-3. No
in Items 1112, 1114, and 1115 of change in
Regulation AB would generally compliance
result in similar disclosure burden per form.
being presented under these
Items, and therefore not affect
the burden estimate.
Item 302(a): Supplementary
Financial Information
Elimination of Item Forms 10, 3 hour
302(a) requirement to disclose 10-K, S-1, S-4, net decrease in
selected quarterly financial and S-11. compliance
data of selected operating .................. burden per form.
results because Item 302(a) Schedule 0.3 hour
information is largely available 14A \**\. net decrease in
in Forms 10-Q, which would compliance
decrease the paperwork burden by burden per
reducing repetitive information schedule.
about a registrant's quarterly
performance.
Form N-2 0.5 hour
. net decrease in
compliance
burden per form.
Item 302(b): Information About
Oil and Gas Producing Activities
Elimination of Item Forms 10, 0.1 hour
302(b) disclosures required for 10-K, S-1, S-4, net decrease in
registrants engaged in oil and and S-11. compliance
gas producing activities would .................. burden per form.
decrease the paperwork burden by Schedule 0.1 hour
reducing repetitive disclosure 14A \**\. net decrease in
that, subject to the adoption of compliance
the FASB's Accounting Standards burden per
Update, will be duplicative of schedule.
U.S. GAAP.
Item 303(a): Full Fiscal Years
Restructuring and Streamlining:
Establishing a new Forms 10, 2.6 hour
paragraph to emphasize the 10-K, 10-Q, S-1, net increase in
purpose of the MD&A section at S-4, and S-11. compliance
the outset to clarify and focus .................. burden per form.
registrants is expected to have Form 1-A 0.3 hour
a minimal impact on the [supcaret]. net increase in
paperwork burden, as the change .................. compliance
would codify existing guidance. .................. burden per form.
Estimated burden increase: 0.1 Schedule 0.3 hour
hour per form and per schedule. 14A\**\. net increase in
Amendments to streamline .................. compliance buren
the text of new Item 303 would .................. per schedule.
have no effect on the paperwork Form N-2 0.4 hour
burden because these amendments . net increase in
are clarifications of existing compliance
requirements. burden per form.
Capital Resources:
Expanding Item 303(a)(2)
to also require a discussion of
material cash requirements, in
addition to commitments for
capital expenditures, would
increase the paperwork burden.
Estimated burden increase: 1
hour per form and 0.1 hour
increase per schedule.
Results of Operations--Known
Trends or Uncertainties:
[[Page 12107]]
Amending 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. Estimated burden
increase: 1.0 hour per form and
0.1 hour increase per schedule.
Results of Operations--Net Sales,
Revenues, and Line Item Changes:
Amending Item 303(a),
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 by requiring a
more nuanced discussion
consistent with the overall
objective of MD&A. Estimated
burden increase: 1.0 hour per
form and 0.1 hour increase per
schedule.
Results of Operations--Inflation
and Price Changes:
Eliminating the specific
reference to inflation within
Item 303(a)(3)(iv) for issuers
should marginally reduce the
paperwork burden, although such
decrease is expected to be
minimal. Estimated burden
decrease: 0.5 hours per form and
0.1 hour decrease per schedule.
Off-Balance Sheet Arrangements:
Replacing Item 303(a)(4)
with an instruction emphasizing
a more principles-based approach
with respect to off-balance
sheet arrangement disclosures,
would reduce duplicative
disclosures and decrease the
paperwork burden. Estimated
burden decrease: 1.0 hour per
form and 0.1 hour decrease per
schedule.
Amending Items 2.03 and
2.04 of Form 8-K to retain the
definition of ``off-balance
sheet arrangements'' that is
currently in 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, and would therefore result
in no change in paperwork burden
for this form.
Contractual Obligations Table:
Eliminating Item
303(a)(5), the requirement that
registrants provide a tabular
disclosure of contractual
obligations, would reduce
duplicative disclosures and
decrease the paperwork burden.
Estimated burden decrease: 1.0
hour per form and 0.1 hour
decrease per schedule.
Critical Accounting Estimates:
Amending Item 303 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. Estimated
burden increase: 2.0 hours per
form and 0.2 hour increase per
schedule.
Item 303(b): Interim Periods
Amending Item 303(b) to Forms 10, 4.0 hour
allow for more flexibility in 10-K, 10-Q, S-1, net decrease in
interim periods compared and S-4, and S-11. compliance
eliminating certain instructions .................. burden per form.
and providing cross-references Form 1-A 0.4 hour
to similar instructions in Item [supcaret]. net decrease in
303(a) would decrease the .................. compliance
paperwork burden. .................. burden per form.
Schedule 0.4 hour
14A \**\. net decrease in
.................. compliance
.................. burden per
Form N-2 schedule.
. 0.7 hour
net decrease in
compliance
burden per form.
Item 303(c): Safe Harbor for
Forward-Looking Information
Eliminating Item 303(c)
as a conforming change would
have no effect on the paperwork
burden.
Item 303(d): Accommodations for
SRCs
Eliminating Item 303(d)
as a conforming change would
have no effect on the paperwork
burden.
Effect on FPIs
Eliminating Item 3.A and Form 20-F 2.0 hour
generally conforming Item 5 of net decrease in
Form 20-F to the proposed compliance
amendments to Item 303 would burden per form.
reduce the paperwork burden.
Eliminating the Form 40-F 2.0 hour
contractual obligations net decrease in
disclosure requirement and compliance
replacing the off-balance sheet burden per form.
disclosure requirements in Forms
20-F and 40-F with a principles-
based instruction would reduce
the paperwork burden.
Amending current Forms F-1 3.5 hour
Instruction 11 to Item 303 to and F-4. net decrease per
conform to the hyperinflation form.
disclosure requirements of Form
20-F would not affect the
paperwork burden.
--------------------------------------
Total........................ Form 1-A. 0.1 hour
net decrease per
form.
Form 10-Q 1.4 hour
net decrease per
form.
Forms 10, 6.5 hour
10-K, S-1, S-4, net decrease per
and S-11. form.
[[Page 12108]]
Schedule 0.7 hour
14A. net decrease per
form.
Forms F-1 3.5 hour
and F-4. net decrease per
form.
Form 20-F 2.0 hour
net decrease per
form.
Form 40-F 2.0 hour
net decrease per
form.
Form N-2. 1.1 hour
net decrease per
form.
------------------------------------------------------------------------
\*\ Estimated effect expressed as increase or decrease of burden hours
on average and derived from Commission staff review of samples of
relevant sections of the affected forms.
\**\ The lower estimated average incremental burden for Schedule 14A
reflects the Commission staff estimates that no more than 10% of the
Schedule 14As filed annually include Item 301-303 disclosures.
Form N-2 states that disclosure under Items 301-303 of
Regulation S-K is only required if ``the Registrant is regulated as a
business development company under the 1940 Act.'' The estimated
average incremental burden for Form N-2 reflects the fact that
approximately 17% of registrants are BDCs. The estimated burden has
been reduced to adjust for this percentage.
[ne] The reduced estimated average incremental burden for the proposed
elimination of Item 302(b) reflects the fact that approximately 3.5%
of registrants engage in oil and gas producing activities. For
purposes of this PRA analysis, BDCs have been deemed not to be engaged
in oil and gas producing activities.
[supcaret] In the preparation of Part II of Form 1-A, Regulation A
issuers have the option of disclosing either the information required
by (i) the Offering Circular format or (ii) Part I of Forms S-1 or S-
11 (except for the financial statements, selected financial data, and
supplementary information called for by those forms). The burden
associated with Form 1-A is affected only to the extent that an issuer
chooses to use Part I of these forms. The Commission staff estimates
that 10.6% of Form 1-A filings reflect this election.
C. Incremental and Aggregate Burden and Cost Estimates for the Proposed
Amendments
Below we estimate the incremental and aggregate reductions in
paperwork burden as a result of the proposed amendments. These
estimates represent the average burden for all registrants, both large
and small. In deriving our estimates, we recognize that the burdens
will likely vary among individual registrants based on a number of
factors, including the nature of their business. We do not believe that
the proposed amendments would change the frequency of responses to the
existing collections of information; rather, we estimate that the
proposed amendments would change only the burden per response.
The burden reduction estimates were calculated by multiplying the
estimated number of responses by the estimated average amount of time
it would take a registrant to prepare and review disclosure required
under the proposed amendments. For purposes of the PRA, the burden is
to be allocated between internal burden hours and outside professional
costs. Table 2 below sets forth the percentage estimates we typically
use for the burden allocation for each form. We also estimate that the
average cost of retaining outside professionals is $400 per hour.\395\
---------------------------------------------------------------------------
\395\ We recognize that the costs of retaining outside
professionals may vary depending on the nature of the professional
services, but for purposes of this PRA analysis, we estimate that
such costs would be an average of $400 per hour. This estimate is
based on consultations with several registrants, law firms, and
other persons who regularly assist registrants in preparing and
filing reports with the Commission.
PRA Table 2--Standard Estimated Burden Allocation for Specified Forms
and Schedules
------------------------------------------------------------------------
Outside
Form/schedule type Internal professionals
(percent) (percent)
------------------------------------------------------------------------
Forms 1-A, 10-K, 10-Q, 8-K, Schedule 14A 75 25
Forms S-1, S-4, S-11, F-1, F-4, SF-1, SF- 25 75
3, and 10..............................
Forms 20-F and 40-F..................... 25 75
Form N-2................................ 25 75
------------------------------------------------------------------------
Table 3 below illustrates the incremental change to the total
annual compliance burden of affected forms, in hours and in costs, as a
result of the proposed amendments.
---------------------------------------------------------------------------
\396\ The number of estimated affected responses is based on the
number of responses in the Commission's current OMB PRA filing
inventory. The OMB PRA filing inventory represents a three-year
average. We do not expect that the proposed amendments would
materially change the number of responses in the current OMB PRA
filing inventory.
\397\ The estimated reductions in Columns (C), (D), and (E) are
rounded to the nearest whole number.
[[Page 12109]]
PRA Table 3--Calculation of the Incremental Change in Burden Estimates of Current Responses Resulting From the Proposed Amendments
--------------------------------------------------------------------------------------------------------------------------------------------------------
Reduction in Reduction in
Number of Burden hour Reduction in Reduction in professional professional
Form estimated reduction per burden hours for company hours for hours for current costs for current
affected current affected current affected current affected affected affected
responses response responses responses responses responses
(A) \396\ (B) (C) = (A) x (B) (D) = (C) x 0.25 (E) = (C)-(D) (F) = (E) x $400
\397\ or 0.75
--------------------------------------------------------------------------------------------------------------------------------------------------------
S-1.............................. 901 6.5 5,857 1,464 4,393 $1,757,200
S-4.............................. 551 6.5 3,582 896 2,687 1,074,800
S-11............................. 64 6.5 416 104 312 124,800
F-1.............................. 63 4.5 284 71 213 85,200
F-4.............................. 39 4.5 176 44 132 52,800
N-2.............................. 166 1.1 183 46 137 54,800
1-A.............................. 179 0.1 18 14 5 2,000
10............................... 216 6.5 1,404 351 1,053 421,200
10-K............................. 8,137 6.5 52,891 39,668 13,223 5,289,200
10-Q............................. 22,907 1.4 32,070 24,053 8,018 3,207,200
20-F............................. 725 2.0 1,450 363 1,088 435,200
40-F............................. 132 2.0 264 66 198 79,200
Sch. 14A......................... 5,586 0.7 3,910 2,933 978 391,200
----------------------------------------------------------------------------------------------------------------------
Total........................ 39,666 .................. .................. 70,073 .................. 12,974,800
--------------------------------------------------------------------------------------------------------------------------------------------------------
The following Table 4 summarizes the requested paperwork burden,
including the estimated total reporting burdens and costs, under the
proposed amendments.
---------------------------------------------------------------------------
\398\ From Column (D) in PRA Table 3.
\399\ From Column (F) in PRA Table 3.
PRA Table 4--Requested Paperwork Burden Under the Proposed Amendments
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Current Requested
burden Program change in Number of Reduction in
Form current change burden affected Reduction in professional Annual Burden hours Cost burden
annual current current cost responses company hours costs responses
responses burden hours burden
(A) (B) (C) (D) (E) \398\ (F) \399\ (G) = (A) (H) = (B)-(E) (I) = (C)-(F)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
S-1............................................. 901 148,556 $182,048,700 901 1,464 $1,757,200 901 147,092 $180,291,500
S-4............................................. 551 563,216 678,291,204 551 896 1,074,800 551 562,320 677,216,404
S-11............................................ 64 12,290 15,016,968 64 104 124,800 64 12,186 14,892,168
F-1............................................. 63 26,815 32,445,300 63 71 85,200 63 26,744 32,360,100
F-4............................................. 39 14,076 17,106,000 39 44 52,800 39 14,032 17,053,200
N-2............................................. 166 73,250 4,668,396 166 46 54,800 166 73,204 4,613,596
1-A............................................. 179 98,396 13,111,912 179 14 2,000 179 98,382 13,109,912
10.............................................. 216 12,072 14,356,888 216 351 421,200 216 11,721 13,935,688
10-K............................................ 8,137 14,220,652 1,896,891,869 8,137 39,058 5,207,600 8,137 14,181,594 1,891,684,269
10-Q............................................ 22,907 3,253,411 432,290,354 22,907 24,053 3,207,200 22,907 3,229,358 429,083,154
20-F............................................ 725 479,304 576,875,025 725 363 435,200 725 478,941 576,439,825
40-F............................................ 132 14,237 17,084,560 132 66 79,200 132 14,171 17,005,360
Sch. 14A........................................ 5,586 3,253,411 432,290,354 5,586 2,933 391,200 5,586 3,250,478 431,899,154
-----------------------------------------------------------------------------------------------------------------------------------------------
Total....................................... 39,666 22,169,686 4,312,477,530 39,666 70,073 12,974,800 39,666 22,099,613 4,299,502,730
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Request for Comment
Pursuant to 44 U.S.C. 3506(c)(2)(B), we request comment in order
to:
Evaluate whether the proposed collections of information
are necessary for the proper performance of the functions of the
Commission, including whether the information will have practical
utility;
Evaluate the accuracy and assumptions and estimates of the
burden of the proposed collection of information;
Determine whether there are ways to enhance the quality,
utility, and clarity of the information to be collected;
Evaluate whether there are ways to minimize the burden of
the collection of information on those who respond, including through
the use of automated collection techniques or other forms of
information technology; and
Evaluate whether the proposed amendments would have any
effects on any other collection of information not previously
identified in this section.
Any member of the public may direct to us any comments concerning
the accuracy of these burden estimates and any suggestions for reducing
these burdens. Persons submitting comments on the collection of
information requirements should direct their comments to the Office of
Management and Budget, Attention: Desk Officer for the U.S. Securities
and Exchange Commission, Office of Information and Regulatory Affairs,
Washington, DC 20503, and send a copy to, Vanessa A. Countryman,
Secretary, U.S. Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549-1090, with reference to File No. S7-01-20.
Requests for materials submitted to OMB by the Commission with regard
to the collection of information should be
[[Page 12110]]
in writing, refer to File No. S7-01-20 and be submitted to the U.S.
Securities and Exchange Commission, Office of FOIA Services, 100 F
Street NE, Washington, DC 20549-2736. OMB is required to make a
decision concerning the collection of information between 30 and 60
days after publication of this proposed rule. Consequently, a comment
to OMB is best assured of having its full effect if the OMB receives it
within 30 days of publication.
VI. Small Business Regulatory Enforcement Fairness Act
For purposes of the Small Business Regulatory Enforcement Fairness
Act of 1996 (SBREFA),\400\ the Commission must advise OMB as to whether
the proposed amendments constitute a ``major'' rule. Under SBREFA, a
rule is considered ``major'' where, if adopted, it results or is likely
to result in:
---------------------------------------------------------------------------
\400\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------
An annual effect on the U.S. economy of $100 million or
more;
A major increase in costs or prices for consumers or
individual industries; or
Significant adverse effects on competition, investment, or
innovation.
We request comment on whether our proposal would be a ``major
rule'' for purposes of the Small Business Regulatory Enforcement
Fairness Act. In particular, we request comment on the potential effect
on the U.S. economy on an annual basis; any potential increase in costs
or prices for consumers or individual industries; and any potential
effect on competition, investment, or innovation.
Commenters are requested to provide empirical data and other
factual support for their views to the extent possible.
VII. Regulatory Flexibility Act Certification
When an agency issues a rulemaking proposal, the Regulatory
Flexibility Act (``RFA'') \401\ requires the agency to prepare and make
available for public comment an Initial Regulatory Flexibility Analysis
(``IRFA'') that will describe the impact of the proposed rule on small
entities.\402\ Section 605 of the RFA allows an agency to certify a
rule, in lieu of preparing an IRFA, if the proposed rulemaking is not
expected to have a significant economic impact on a substantial number
of small entities.\403\
---------------------------------------------------------------------------
\401\ 5 U.S.C. 601 et seq.
\402\ 5 U.S.C. 603(a).
\403\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------
The proposed amendments would have an impact on a substantial
number of small entities.\404\ However, the Commission expects that the
impact on entities affected by the proposed rule would not be
significant.\405\ The primary effects of the proposed amendments would
be to (1) modernize, simplify, and enhance the disclosure requirements
for MD&A in Item 303, such as by codifying prior Commission
interpretive guidance and eliminating duplicative disclosures; (2)
simplify duplicative disclosure requirements by eliminating Item 301,
Selected Financial Data, and Item 302, Supplementary Financial
Information; and (3) generally make conforming changes that would apply
to FPIs filing on Forms 20-F or 40-F. As a result, we expect that the
impact of the proposed amendments would be a reduction in the paperwork
burden of affected entities, including small entities, and that the
overall impact of the paperwork burden reduction would be modest.\406\
Accordingly, the Commission hereby certifies, pursuant to 5 U.S.C.
605(b), that the proposed amendments to Items 301, 302, and 303 of
Regulation S-K and Forms 20-F and 40-F and the related conforming
changes, if adopted, would not have a significant economic impact on a
substantial number of small entities for purposes of the RFA.
---------------------------------------------------------------------------
\404\ We estimate that there are 1,171 issuers that file with
the Commission, other than investment companies, that may be
considered small entities and are potentially subject to the
proposed amendments. This estimate is based on staff analysis of
issuers, excluding co-registrants, with EDGAR filings of Form 10-K,
20-F, and 40-F, or amendments, filed during the calendar year of
January 1, 2018, to December 31, 2018. Analysis is based on data
from XBRL filings, Compustat, and Ives Group Audit Analytics.
\405\ See Section IV.B above.
\406\ We estimate that the proposed amendments are likely to
result in a net decrease of between 0.1 and 6.5 burden hours per
form for purposes of the PRA. See Section V.B above.
---------------------------------------------------------------------------
Request for Comment
We request comment on this certification. In particular, we solicit
comment on the following: Do commenters agree with the certification?
If not, please describe the nature of any impact of the proposed
amendments on small entities and provide empirical data to illustrate
the extent of the impact. Such comments will be considered in the
preparation of the final rules (and in a Final Regulatory Flexibility
Analysis if one is needed) and will be placed in the same public file
as comments on the proposed rules themselves.
VIII. Statutory Authority and Text of Proposed Rule and Form Amendments
The amendments contained in this release are being proposed under
the authority set forth in Sections 7, 10, 19(a), and 28 of the
Securities Act of 1933, as amended, Sections 3(b), 12, 13, 14, 23(a),
and 36 of the Securities Exchange Act of 1934, as amended, and Sections
8, 24, 30, and 38 of the Investment Company Act of 1940, as amended.
List of Subjects
17 CFR Part 210
Accountants, Accounting, Banks, Banking, Employee benefit plans,
Holding companies, Insurance companies, Investment companies, Oil and
gas exploration, Reporting and recordkeeping requirements, Securities,
Utilities.
17 CFR Parts 229, 239, 240, and 249
Administrative practice and procedure, Reporting and recordkeeping
requirements, Securities.
In accordance with the foregoing, we propose to amend Title 17,
Chapter II of the Code of Federal Regulations as follows:
PART 210--FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL
STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF
1934, INVESTMENT COMPANY ACT OF 1940, INVESTMENT ADVISERS ACT OF
1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975
0
1. The authority citation for part 210 continues to read as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3,
77aa(25), 77aa(26), 77nn(25), 77nn(26), 78c, 78j-1, 78l, 78m, 78n,
78o(d), 78q, 78u-5, 78w, 78ll, 78mm, 80a-8, 80a-20, 80a-29, 80a-30,
80a-31, 80a-37(a), 80b-3, 80b-11, 7202 and 7262, and sec. 102(c),
Pub. L. 112-106, 126 Stat. 310 (2012), unless otherwise noted.
0
2. Amend Sec. 210.1-02 by revising paragraph (bb)(1) introductory text
and (bb)(2) to read as follows:
Sec. 210.1-02 Definitions of terms used in Regulation S-X (17 CFR
part 210).
* * * * *
(bb) * * * (1) Except as provided in paragraph (bb)(2) of this
section, summarized financial information referred to in this
regulation shall mean the presentation of summarized information as to
the assets, liabilities and results of operations of the entity for
which the information is required. Summarized financial information
shall include the following disclosures, which may be subject to
appropriate variation to conform to the nature of the entity's
business:
* * * * *
[[Page 12111]]
(2) Summarized financial information for unconsolidated
subsidiaries and 50 percent or less owned persons referred to in and
required by Sec. 210.10-01(b) for interim periods shall include the
information required by paragraph (bb)(1)(ii) of this section.
* * * * *
PART 229--STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES
ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND
CONSERVATION ACT OF 1975--REGULATION S-K
0
3. The authority citation for part 229 continues to read as follows:
Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2,
77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj,
77nnn, 77sss, 78c, 78i, 78j, 78j-3, 78l, 78m, 78n, 78n-1, 78o, 78u-
5, 78w, 78ll, 78 mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-
31(c), 80a-37, 80a-38(a), 80a-39, 80b-11 and 7201 et seq.; 18 U.S.C.
1350; sec. 953(b), Pub. L. 111-203, 124 Stat. 1904 (2010); and sec.
102(c), Pub. L. 112-106, 126 Stat. 310 (2012).
Sec. 229.301 [Removed and Reserved]
0
4. Remove and reserve Sec. 229.301.
Sec. 229.302 [Removed and Reserved]
0
5. Remove and reserve Sec. 229.302.
0
6. Revise Sec. 229.303 to read as follows:
Sec. 229.303 (Item 303) Management's discussion and analysis of
financial condition and results of operations.
(a) Objective. The objective of the discussion and analysis is to
provide material information relevant to an assessment of the financial
condition and results of operations of the registrant including an
evaluation of the amounts and certainty of cash flows from operations
and from outside sources. This discussion and analysis must provide a
narrative explanation of the registrant's financial statements that
allows investors to view the registrant from management's perspective.
The discussion and analysis must focus specifically on material events
and uncertainties known to management that would cause reported
financial information not to be necessarily indicative of future
operating results or of future financial condition. This includes
descriptions and amounts of matters that are reasonably expected to
have a material impact on future operations and have not had a material
impact on past operations, and matters that have had a material impact
on reported operations and are not reasonably expected to have a
material impact upon future operations. The discussion and analysis
must be of the financial statements and other statistical data that the
registrant believes will enhance a reader's understanding of the
registrant's financial condition, changes in financial condition and
results of operations.
(b) Full fiscal years. The discussion of financial condition,
changes in financial condition and results of operations must provide
information as specified in paragraphs (b)(1) through (4) of this
section and such other information that the registrant believes to be
necessary to an understanding of its financial condition, changes in
financial condition and results of operations. Where the financial
statements reflect material changes from period-to-period in one or
more line items, including where material changes within a line item
offset one another, describe the underlying reasons for these material
changes in quantitative and qualitative terms. The reasons for material
changes must be described to the extent necessary to an understanding
of the registrant's businesses as a whole. Where in the registrant's
judgment a discussion of segment information and/or of other
subdivisions (e.g., geographic areas, product lines) of the
registrant's business would be necessary to an understanding of such
business, the discussion must focus on each relevant segment and/or
other subdivision of the business and on the registrant as a whole.
(1) Liquidity. Identify any known trends or any known demands,
commitments, events or uncertainties that will result in or that are
reasonably likely to result in the registrant's liquidity increasing or
decreasing in any material way. If a material deficiency is identified,
indicate the course of action that the registrant has taken or proposes
to take to remedy the deficiency. Also identify and separately describe
internal and external sources of liquidity, and briefly discuss any
material unused sources of liquid assets.
(2) Capital resources. (i) Describe the registrant's material cash
requirements, including commitments for capital expenditures, as of the
end of the latest fiscal period, the anticipated source of funds needed
to satisfy such cash requirements and the general purpose of such
requirements.
(ii) Describe any known material trends, favorable or unfavorable,
in the registrant's capital resources. Indicate any expected material
changes in the mix and relative cost of such resources. The discussion
must consider changes between equity, debt and any off-balance sheet
financing arrangements.
(3) Results of operations. (i) Describe any unusual or infrequent
events or transactions or any significant economic changes that
materially affected the amount of reported income from continuing
operations and, in each case, indicate the extent to which income was
so affected. In addition, describe any other significant components of
revenues or expenses that, in the registrant's judgment, would be
material to an understanding of the registrant's results of operations.
(ii) Describe any known trends or uncertainties that have had or
that the registrant reasonably expects will have a material favorable
or unfavorable impact on net sales or revenues or income from
continuing operations. If the registrant knows of events that are
reasonably likely to cause a material change in the relationship
between costs and revenues (such as known or reasonably likely future
increases in costs of labor or materials or price increases or
inventory adjustments), the reasonably likely change in the
relationship must be disclosed.
(iii) If the statement of comprehensive income presents material
changes from period to period in net sales or revenue, if applicable,
describe the extent to which such changes are attributable to changes
in prices or to changes in the volume or amount of goods or services
being sold or to the introduction of new products or services.
(4) Critical accounting estimates. Critical accounting estimates
are those estimates made in accordance with generally accepted
accounting principles that involve a significant level of estimation
uncertainty and have had or are reasonably likely to have a material
impact on financial condition or results of operations. Discuss, to the
extent material, why each critical accounting estimate is subject to
uncertainty, how much each estimate has changed during the reporting
period, and the sensitivity of the reported amount to the methods,
assumptions and estimates underlying its calculation. The discussion
should provide quantitative as well as qualitative information when
quantitative information is reasonably available and will provide
material information to investors.
Instructions to paragraph 303(b):
1. Generally, the discussion must cover the periods covered by the
financial statements included in the filing and the registrant may use
any presentation that in the registrant's judgment enhances a reader's
understanding. A smaller reporting company's discussion must cover the
two-year period required in Article 8 of Regulation S-X and may use any
presentation that in the registrant's
[[Page 12112]]
judgment enhances a reader's understanding. For registrants providing
financial statements covering three years in a filing, discussion about
the earliest of the three years may be omitted if such discussion was
already included in the registrant's prior filings on EDGAR that
required disclosure in compliance with Item 303 of Regulation S-K,
provided that registrants electing not to include a discussion of the
earliest year must include a statement that identifies the location in
the prior filing where the omitted discussion may be found. An emerging
growth company, as defined in Rule 405 of the Securities Act (Sec.
230.405 of this chapter) or Rule 12b-2 of the Exchange Act (Sec.
240.12b-2 of this chapter), may provide the discussion required in
paragraph (b) of this section for its two most recent fiscal years if,
pursuant to Section 7(a) of the Securities Act of 1933 (15 U.S.C.
77g(a)), it provides audited financial statements for two years in a
Securities Act registration statement for the initial public offering
of the emerging growth company's common equity securities.
2. Discussions of liquidity and capital resources may be combined
whenever the two topics are interrelated.
3. If the reasons underlying a material change in one line item in
the financial statements also relate to other line items, no repetition
of such reasons in the discussion is required and a line-by-line
analysis of the financial statements as a whole is not required or
generally appropriate. Registrants need not recite the amounts of
changes from period to period which are readily computable from the
financial statements. The discussion must not merely repeat numerical
data contained in the financial statements.
4. The term ``liquidity'' as used in this Item refers to the
ability of an enterprise to generate adequate amounts of cash to meet
the enterprise's needs. Except where it is otherwise clear from the
discussion, the registrant must indicate those balance sheet conditions
or income or cash flow items which the registrant believes may be
indicators of its liquidity condition. Liquidity generally must be
discussed on both a long-term and short-term basis. The issue of
liquidity must be discussed in the context of the registrant's own
business or businesses. For example, a discussion of working capital
may be appropriate for certain manufacturing, industrial, or related
operations but might be inappropriate for a bank or public utility.
5. Where financial statements presented or incorporated by
reference in the registration statement are required by Sec. 210.4-
08(e)(3) of Regulation S-X [17 CFR part 210] to include disclosure of
restrictions on the ability of both consolidated and unconsolidated
subsidiaries to transfer funds to the registrant in the form of cash
dividends, loans or advances, the discussion of liquidity must include
a discussion of the nature and extent of such restrictions and the
impact such restrictions have had or are expected to have on the
ability of the parent company to meet its cash obligations.
6. Any forward-looking information supplied is expressly covered by
the safe harbor rule for projections. See Rule 175 under the Securities
Act [17 CFR 230.175 ], Rule 3b-6 under the Exchange Act [17 CFR 240.3b-
6], and Securities Act Release No. 6084 (June 25, 1979) (44 FR 33810).
7. All references to the registrant in the discussion and in this
Item mean the registrant and its subsidiaries consolidated.
8. Discussion of commitments or obligations, including contingent
obligations, arising from arrangements with unconsolidated entities or
persons that have or are reasonably likely to have a material current
or future effect on a registrant's financial condition, changes in
financial condition, revenues or expenses, results of operations,
liquidity, cash requirements or capital resources must be provided even
when the arrangement results in no obligations being reported in the
registrant's consolidated balance sheets. Such off-balance sheet
arrangements may include: 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 registrant's own equity
under U. S. GAAP.
9. If the registrant is a foreign private issuer, briefly discuss
any pertinent governmental economic, fiscal, monetary, or political
policies or factors that have materially affected or could materially
affect, directly or indirectly, their operations or investments by
United States nationals. The discussion must also consider the impact
of hyperinflation if hyperinflation has occurred in any of the periods
for which audited financial statements or unaudited interim financial
statements are filed. See Rule 3-20(c) of Regulation S-X for a
discussion of cumulative inflation rates that may trigger this
requirement.
10. If the registrant is a foreign private issuer, the discussion
must focus on the primary financial statements presented in the
registration statement or report. The foreign private issuer must refer
to the reconciliation to United States generally accepted accounting
principles and discuss any aspects of the difference between foreign
and United States generally accepted accounting principles, not
discussed in the reconciliation, that the registrant believes is
necessary for an understanding of the financial statements as a whole,
if applicable.
11. The term statement of comprehensive income means a statement of
comprehensive income as defined in Sec. 210.1-02 of Regulation S-X.
Instruction to paragraph 303(b)(4): The disclosure of critical
accounting estimates should supplement, but not duplicate, the
description of accounting policies or other disclosures in the notes to
the financial statements.
(c) Interim periods. If interim period financial statements are
included or are required to be included by Article 3 of Regulation S-X
[17 CFR 210.3], a management's discussion and analysis of the financial
condition and results of operations must be provided so as to enable
the reader to assess material changes in financial condition and
results of operations between the periods specified in paragraphs
(c)(1) and (2) of this section. The discussion and analysis must
include a discussion of material changes in those items specifically
listed in paragraph (b) of this section.
(1) Material changes in financial condition. Discuss any material
changes in financial condition from the end of the preceding fiscal
year to the date of the most recent interim balance sheet provided. If
the interim financial statements include an interim balance sheet as of
the corresponding interim date of the preceding fiscal year, any
material changes in financial condition from that date to the date of
the most recent interim balance sheet provided also must be discussed.
If discussions of changes from both the end and the corresponding
interim date of the preceding fiscal year are required, the discussions
may be combined at the discretion of the registrant.
(2) Material changes in results of operations. (i) Discuss any
material changes in the registrant's results of operations with respect
to the most recent fiscal year-to-date period for which a statement of
comprehensive income is provided and the corresponding year-to-date
period of the preceding fiscal year.
[[Page 12113]]
(ii) Discuss any material changes in the registrant's results of
operations with respect to either the most recent quarter for which a
statement of comprehensive income is provided and the corresponding
quarter for the preceding fiscal year or, in the alternative, the most
recent quarter for which a statement of comprehensive income is
provided and the immediately preceding sequential quarter. If the
latter immediately preceding sequential quarter is discussed, then
provide in summary form the financial information for that immediately
preceding sequential quarter that is subject of the discussion or
identify the registrant's prior filings on EDGAR that present such
information. If there is a change in the form of presentation from
period to period that forms the basis of comparison from previous
periods provided pursuant to this paragraph, the registrant must
discuss the reasons for changing the basis of comparison and provide
both comparisons in the first filing in which the change is made.
Instructions to paragraph 303(c):
1. If interim financial statements are presented together with
financial statements for full fiscal years, the discussion of the
interim financial information must be prepared pursuant to this
paragraph (c) and the discussion of the full fiscal year's information
must be prepared pursuant to paragraph (b) of this section. Such
discussions may be combined. Instructions 3, 6, 8 and 11 to paragraph
(b) of this section apply to this paragraph (c).
2. The registrant's discussion of material changes in results of
operations must identify any significant elements of the registrant's
income or loss from continuing operations which do not arise from or
are not necessarily representative of the registrant's ongoing
business.
0
7. Amend Sec. 229.914 by revising paragraph (a) to read as follows:
Sec. 229.914 (Item 914) Pro forma financial statements: Selected
financial data.
(a) For each partnership proposed to be included in a roll-up
transaction provide: Ratio of earnings to fixed charges, cash and cash
equivalents, total assets at book value, total assets at the value
assigned for purposes of the roll-up transaction (if applicable), total
liabilities, general and limited partners' equity, net increase
(decrease) in cash and cash equivalents, net cash provided by operating
activities, distributions; and per unit data for net income (loss),
book value, value assigned for purposes of the roll-up transaction (if
applicable), and distributions (separately identifying distributions
that represent a return of capital). This information must be provided
for the previous two fiscal years. Additional or other information must
be provided if material to an understanding of each partnership
proposed to be included in a roll-up transaction.
* * * * *
0
8. Amend Sec. 229.1112 by revising paragraph (b)(1) and Instruction
3.a. to paragraph (b) to read as follows:
Sec. 229.1112 (Item 1112) Significant obligors of pool assets.
* * * * *
(b) Financial information. (1) If the pool assets relating to a
significant obligor represent 10% or more, but less than 20%, of the
asset pool, provide summarized financial information, as defined by
Rule 1-02(bb) of Regulation S-X (Sec. 210.1-02(bb) of this chapter),
for the significant obligor for each of the last three fiscal years (or
the life of the significant obligor and its predecessors, if less),
provided, however, that for a significant obligor under Sec.
229.1101(k)(2) of this chapter (Item 1101(k)(2) of Regulation AB), only
net operating income for the most recent fiscal year and interim period
is required.
* * * * *
Instructions to Item 1112(b):
* * * * *
3. * * *
a. If the summarized financial information required by paragraph
(b)(1) of this section is presented on a basis of accounting other than
U.S. GAAP or IFRS as issued by the IASB, then present a reconciliation
to U.S. GAAP and Regulation S-X, pursuant to Item 17 of Form 20-F. If a
reconciliation is unavailable or not obtainable without unreasonable
cost or expense, at a minimum provide a narrative description of all
material variations in accounting principles, practices and methods
used in preparing the non-U.S. GAAP financial statements used as a
basis for the summarized financial information from those accepted in
the U.S.
* * * * *
0
9. Amend Sec. 229.1114 by revising paragraph (b)(2)(i) and Instruction
4.a. to paragraph (b) to read as follows:
Sec. 229.1114 (Item 1114) Credit enhancement and other support,
except for certain derivatives instruments.
* * * * *
(b) * * *
(2) Financial information. (i) If any entity or group of affiliated
entities providing enhancement or other support described in paragraph
(a) of this section is liable or contingently liable to provide
payments representing 10% or more, but less than 20%, of the cash flow
supporting any offered class of the asset-backed securities, provide
summarized financial information, as defined by Rule 1-02(bb) of
Regulation S-X (Sec. 210.1-02(bb) of this chapter), for each such
entity or group of affiliated entities for each of the last three
fiscal years (or the life of the entity or group of affiliated entities
and any predecessors, if less).
* * * * *
Instruction 4 to Item 1114(b). * * *
a. If the summarized financial information required by paragraph
(b)(1) of this section is presented on a basis of accounting other than
U.S. GAAP or IFRS as issued by the IASB, then present a reconciliation
to U.S. GAAP and Regulation S-X, pursuant to Item 17 of Form 20-F. If a
reconciliation is unavailable or not obtainable without unreasonable
cost or expense, at a minimum provide a narrative description of all
material variations in accounting principles, practices and methods
used in preparing the non-U.S. GAAP financial statements used as a
basis for the summarized financial information from those accepted in
the U.S.
* * * * *
0
10. Amend Sec. 229.1115 by revising paragraph (b)(1) to read as
follows:
Sec. 229.1115 (Item 1115) Certain derivatives instruments.
* * * * *
(b) Financial information. (1) If the aggregate significance
percentage related to any entity or group of affiliated entities
providing derivative instruments contemplated by this section is 10% or
more, but less than 20%, provide summarized financial information, as
defined by Rule 1-02(bb) of Regulation S-X (Sec. 210.1-02(bb) of this
chapter), for such entity or group of affiliated entities for each of
the last three fiscal years (or the life of the entity or group of
affiliated entities and any predecessors, if less).
* * * * *
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
0
11. The authority citation for part 239 continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3,
77sss, 78c, 78l, 78m, 78n, 78o(d), 78o-7 note, 78u-5, 78w(a), 78ll,
78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 80a-26,
80a-29, 80a-30, and 80a-37; and sec. 107, Pub. L. 112-106, 126 Stat.
312, unless otherwise noted.
* * * * *
[[Page 12114]]
0
12. Amend Form S-1 (referenced in Sec. 239.11) by:
0
a. Revising paragraphs (f) and (g) of Instruction 1 under
``Instructions as to Summary Prospectus''; and
0
b. Adding paragraph (h) of Instruction 1 under ``Instructions as to
Summary Prospectus'' to read as follows:
Note: The text of Form S-1 does not, and this amendment will
not, appear in the Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
* * * * *
INSTRUCTIONS AS TO SUMMARY PROSPECTUSES
1. * * *
(f) As to Item 11, a brief statement of the general character of
the business done and intended to be done and a brief statement of the
nature and present status of any material pending legal proceedings;
(g) A tabular presentation of notes payable, long term debt,
deferred credits, minority interests, if material, and the equity
section of the latest balance sheet filed, as may be appropriate; and
(h) Subject to appropriate variation to conform to the nature of
the registrant's business, provide summarized financial information
defined by Rule 1-02(bb)(1)(i) and (ii) of Regulation S-X (Sec. 210.1-
02(bb) of this chapter) in comparative columnar form for the periods
for which financial statements are required by Regulation S-X (17 CFR
part 210).
* * * * *
0
13. Amend Form S-20 (referenced in Sec. 239.20) by revising Item 7 and
paragraph (1) to Item 8 to read as follows:
Note: The text of Form S-20 does not, and this amendment will
not, appear in the Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-20
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
* * * * *
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
* * * * *
Item 7. Financial Statements
Include financial statements meeting the requirements of Regulation
S-X [17 CFR 210].
Item 8. Undertakings
Furnish the following undertakings:
1. The undersigned registrant hereby undertakes to file a post-
effective amendment, not later than 120 days after the end of each
fiscal year subsequent to that covered by the financial statements
presented herein, containing financial statements meeting the
requirements of Regulation S-X [17 CFR 210].
* * * * *
0
14. Amend Form S-4 (referenced in Sec. 239.25) by:
0
a. Removing and reserving Item 3(d), (e), and (f) and removing the
Instruction to Item 3(e) and (f) under Part I, Section A (``Information
About the Transaction''); and
0
b. Removing and reserving Item 17(b)(3) and (4) under Part I, Section C
(``Information with Respect to Companies Other Than S-3 Companies'').
0
15. Amend Form F-1 (referenced in Sec. 239.31) by:
0
a. Revising the paragraph 1(c)(v) under ``Instructions as to Summary
Prospectuses''; and
0
b. Adding paragraph 1(c)(vi) to read as follows:
Note: The text of Form F-1 does not, and this amendment will
not, appear in the Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM F-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
* * * * *
INSTRUCTIONS AS TO SUMMARY PROSPECTUSES
1. * * *
(c) * * *
(v) As to Item 4, a brief statement of the general character of the
business done and intended to be done and a brief statement of the
nature and present status of any material pending legal proceedings;
(vi) Subject to appropriate variation to conform to the nature of
the registrant's business, provide summarized financial information
defined by Rule 1-02(bb)(1)(i) and (ii) of Regulation S-X (Sec. 210.1-
02(bb) of this chapter) in comparative columnar form for the periods
for which financial statements are required by Item 8.A. of Form 20-F.
If interim period financial statements are included, the summarized
financial information should be updated for that interim period, which
may be unaudited, provided that fact is stated. If summarized financial
data for interim periods is provided, comparative data from the same
period in the prior financial year shall also be provided, except that
the requirement for comparative balance sheet data is satisfied by
presenting the year end balance sheet information.
* * * * *
0
16. Amend Form F-4 (referenced in Sec. 239.34) by:
0
a. Removing and reserving Item 3(d), (e), and (f) and removing the
Instruction to Item 3(e) and (f) under Part I, Section A (``Information
About the Transaction''); and
0
b. Removing and reserving Item 17(b)(3) under Part I, Section C
(``Information with Respect to Foreign Companies Other Than F-3
Companies'').
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF
1934
0
17. The authority citation for part 240 continues to read in part as
follows:
Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3,
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f,
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4,
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm,
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C.
1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-
106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
Sec. 240.14a-101 [Amended]
0
18. Amend Sec. 240.14a-101 by removing and reserving (b)(8), (9), and
(10) under Item 14 (``Mergers, consolidations, acquisitions and similar
matters''):
PART 249--FORMS, SECURITIES EXCHANGE ACT OF 1934
0
19. The authority citation for part 249 continues to read, in part, as
follows:
Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C.
5461 et seq.; 18 U.S.C. 1350; Sec. 953(b), Pub. L. 111-203, 124
Stat. 1904; Sec. 102(a)(3), Pub. L. 112-106, 126 Stat. 309 (2012);
Sec. 107, Pub. L. 112-106, 126 Stat. 313 (2012), and Sec. 72001,
Pub. L. 114-94, 129 Stat. 1312 (2015), unless otherwise noted.
* * * * *
0
20. Amend Form 20-F (referenced in Sec. 249.220f) by:
[[Page 12115]]
0
a. Removing and reserving General Instruction G(c);
0
b. Removing and reserving Item 3.A;
0
c. Removing Instructions to Item 3.A;
0
d. Amending Item 5; and
0
e. Revising Instruction 3 of Instructions to Item 8.A.2 to remove the
final sentence, to read as follows:
Note: The text of Form 20-F does not, and this amendment will
not, appear in the Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 20-F
* * * * *
Item 5. Operating and Financial Review and Prospects
The purpose of this standard is to provide management's explanation
of factors that have materially affected the company's financial
condition and results of operations for the historical periods covered
by the financial statements, and management's assessment of factors and
trends which are anticipated to have a material effect on the company's
financial condition and results of operations in future periods. This
discussion and analysis must provide a narrative explanation of the
registrant's financial statements that allows investors to view the
registrant from management's perspective.
Discuss the company's financial condition, changes in financial
condition and results of operations for each year and interim period
for which financial statements are required. The discussion must
include a quantitative and qualitative description of the reasons
underlying material changes, including where material changes within a
line item offset one another, to the extent necessary for an
understanding of the company's business as a whole. Information
provided also must relate to all separate segments and/or other
subdivisions (e.g., geographic areas, product lines) of the company.
The discussion must include other statistical data that the company
believes will enhance a reader's understanding of the company's
financial condition, changes in financial condition, and results of
operations. The discussion and analysis must also focus specifically on
material events and uncertainties known to management that would cause
reported financial information not to be necessarily indicative of
future operating results or of future financial condition. Provide the
information specified below as well as such other information that is
necessary for an investor's understanding of the company's financial
condition, changes in financial condition and results of operations.
A. Operating results. Provide information regarding significant
factors, including unusual or infrequent events or new developments,
materially affecting the company's income from operations, indicating
the extent to which income was so affected. Describe any other
significant component of revenue or expenses necessary to understand
the company's results of operations.
1. If the statement of comprehensive income presents material
changes from period to period in net sales or revenue, if applicable,
describe the extent to which such changes are attributable to changes
in prices or to changes in the volume or amount of products or services
being sold or to the introduction of new products or services.
2. If the currency in which financial statements are presented is
of a country that has experienced hyperinflation, the existence of such
inflation, a five year history of the annual rate of inflation and a
discussion of the impact of hyperinflation on the company's business
must be disclosed.
3. Provide information regarding the impact of foreign currency
fluctuations on the company, if material, and the extent to which
foreign currency net investments are hedged by currency borrowings and
other hedging instruments.
4. Provide information regarding any governmental economic, fiscal,
monetary or political policies or factors that have materially
affected, or could materially affect, directly or indirectly, the
company's operations or investments by host country shareholders.
B. Liquidity and capital resources. The following information must
be provided:
1. Information regarding the company's liquidity (both short and
long term), including:
(a) A description of the internal and external sources of liquidity
and a brief discussion of any material unused sources of liquidity.
Include a statement by the company that, in its opinion, the working
capital is sufficient for the company's present requirements, or, if
not, how it proposes to provide the additional working capital needed.
(b) an evaluation of the sources and amounts of the company's cash
flows, including the nature and extent of any legal or economic
restrictions on the ability of subsidiaries to transfer funds to the
company in the form of cash dividends, loans or advances and the impact
such restrictions have had or are expected to have on the ability of
the company to meet its cash obligations.
2. Information regarding the type of financial instruments used,
the maturity profile of debt, currency and interest rate structure. The
discussion also must include funding and treasury policies and
objectives in terms of the manner in which treasury activities are
controlled, the currencies in which cash and cash equivalents are held,
the extent to which borrowings are at fixed rates, and the use of
financial instruments for hedging purposes.
3. Information regarding the company's material cash requirements,
including commitments for capital expenditures, as of the end of the
latest financial year and any subsequent interim period and an
indication of the general purpose of such requirements and the
anticipated sources of funds needed to satisfy such requirements.
C. Research and development, patents and licenses, etc. Provide a
description of the company's research and development policies for the
last three years.
D. Trend information. The company must identify material recent
trends in production, sales and inventory, the state of the order book
and costs and selling prices since the latest financial year. The
company also must discuss, for at least the current financial year, any
known trends, uncertainties, demands, commitments or events that are
reasonably likely to have a material effect on the company's net sales
or revenues, income from continuing operations, profitability,
liquidity or capital resources, or that would cause reported financial
information not necessarily to be indicative of future operating
results or financial condition.
E. Critical Accounting Estimates.
A registrant that does not apply in its primary financial
statements IFRS as issued by the IASB must discuss information about
its critical accounting estimates. This disclosure should supplement,
not duplicate, the description of accounting policies in the notes to
the financial statements.
Critical accounting estimates. Critical accounting estimates are
those estimates made in accordance with generally accepted accounting
principles that involve a significant level of estimation uncertainty
and have had or are reasonably likely to have a material impact on
financial condition or results of operations. Discuss, to the extent
material, why each critical accounting estimate is subject to
uncertainty, how much each estimate has changed during the reporting
period, and the sensitivity of the reported amounts to the material
[[Page 12116]]
methods, assumptions and estimates underlying its calculation. The
discussion should provide quantitative as well as qualitative
information when quantitative information is reasonably available and
will provide material information to investors.
Instructions to Item 5:
1. Refer to the Commission's interpretive releases (No. 33-6835)
dated May 18, 1989, (No. 33-8056) dated January 22, 2002, (No. 33-8350)
dated Dec. 19, 2003, (No. 33-9144) dated September 17, 2010, and (No.
33-10751) dated January 30, 2020 for guidance in preparing this
discussion and analysis by management of the company's financial
condition and results of operations.
2. The discussion must focus on the primary financial statements
presented in the document. You should refer to the reconciliation to
U.S. GAAP, if any, and discuss any aspects of the differences between
foreign and U.S. GAAP, not otherwise discussed in the reconciliation,
that you believe are necessary for an understanding of the financial
statements as a whole.
3. We encourage you to supply forward-looking information, but that
type of information is not required. Forward-looking information is
covered expressly by the safe harbor provisions of Section 27A of the
Securities Act and Section 21E of the Exchange Act. Forward-looking
information is different than presently known data which will have an
impact on future operating results, such as known future increases in
costs of labor or materials. You are required to disclose this latter
type of data if it is material.
4. To the extent the primary financial statements reflect the use
of exceptions permitted or required by IFRS 1, the issuer must:
a. Provide detailed information as to the exceptions used,
including:
i. An indication of the items or class of items to which the
exception was applied; and
ii. A description of what accounting principle was used and how it
was applied;
b. Include, where material, qualitative disclosure of the impact on
financial condition, changes in financial condition and results of
operations that the treatment specified by IFRS would have had absent
the election to rely on the exception.
5. An issuer filing financial statements that comply with IFRS as
issued by the IASB must, in providing information in response to
paragraphs of this Item 5 that refer to pronouncements of the FASB,
provide disclosure that satisfies the objective of the Item 5
disclosure requirements. In responding to this Item 5, an issuer need
not repeat information contained in financial statements that comply
with IFRS as issued by the IASB.
6. Generally, the discussion must cover the periods covered by the
financial statements and the registrant may use any format that in the
registrant's judgment enhances a reader's understanding. For
registrants providing financial statements covering three years in a
filing, a discussion of the earliest of the three years may be omitted
if such discussion was already included in any other of the
registrant's prior filings on EDGAR that required disclosure in
compliance with Item 5 of Form 20-F, provided that registrants electing
not to include a discussion of the earliest year must include a
statement that identifies the location in the prior filing where the
omitted discussion may be found.
7. Discussion of commitments or obligations, including contingent
obligations, arising from arrangements with unconsolidated entities or
persons that have or are reasonably likely to have a material current
or future effect on a registrant's financial condition, changes in
financial condition, revenues or expenses, results of operations,
liquidity, cash requirements or capital resources must be provided even
when the arrangement results in no obligations being reported in the
registrant's consolidated balance sheets. Such off-balance sheet
arrangements may include: 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 registrant's own equity,
or not reflected in the statement of financial position.
Instruction to Item 5.A:
1. You must provide the information required by Item 5.A.2 with
respect to hyperinflation if hyperinflation has occurred in any of the
periods for which you are required to provide audited financial
statements or unaudited interim financial statements in the document.
See Rule 3-20(c) of Regulation S-X for a discussion of cumulative
inflation rates that trigger this requirement.
* * * * *
Item 8. Financial Information
* * * * *
Instructions to Item 8.A.2:
* * * * *
In initial registration statements, if the financial statements
presented pursuant to Item 8.A.2 are prepared in accordance with U.S.
generally accepted accounting principles, the earliest of the three
years may be omitted if that information has not previously been
included in a filing made under the Securities Act of 1933 or the
Securities Exchange Act of 1934.
* * * * *
0
21. Amend Form 40-F (referenced in Sec. 249.240f) by:
0
a. Revising General Instruction B.(11) to read as follows;
0
b. Removing and reserving General Instructions B.(12) and (13); and
0
c. Removing the Instructions following General Instruction B.(13).
Note: The text of Form 40-F does not, and this amendment will
not, appear in the Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 40-F
* * * * *
B. Information To Be Filed on This Form
* * * * *
(11) Off-balance sheet arrangements. To the extent not discussed in
management's discussion and analysis that is provided pursuant to
General Instruction B.(3) of this form, discuss the commitments or
obligations, including continent obligations, arising from arrangements
with unconsolidated entities or persons that have or are reasonably
likely to have a material current or future effect on a registrant's
financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, cash requirements or
capital resources must be provided even when the arrangement results in
no obligations being reported in the registrant's consolidated balance
sheets. Such off-balance sheet arrangements may include: 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
registrant's own equity, or not reflected in the statement of financial
position.
* * * * *
0
22. Amend Form 8-K (referenced in Sec. 249.308) by revising Item
2.03(c)(1)
[[Page 12117]]
through(3) and 2.03(d) to read as follows:
Note: The text of Form 8-K does not, and this amendment will
not, appear in the Code of Federal Regulations.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
* * * * *
INFORMATION TO BE INCLUDED IN THE REPORT
* * * * *
Item 2.03 Creation of a Direct Financial Obligation or an Obligation
Under an Off-Balance Sheet Arrangement of a Registrant.
* * * * *
(c) For purposes of this Item 2.03, direct financial obligation
means any of the following:
(1) A long-term debt obligation means a payment obligation under
long-term borrowings referenced in FASB ASC paragraph 470-10-50-1 (Debt
Topic), as may be modified or supplemented);
(2) a capital lease obligation means a payment obligation under a
lease classified as a capital lease pursuant to FASB ASC Topic 840,
Leases, as may be modified or supplemented;
(3) an operating lease obligation means a payment obligation under
a lease classified as an operating lease and disclosed pursuant to FASB
ASC Topic 840, as may be modified or supplemented; or
(4) a short-term debt obligation that arises other than in the
ordinary course of business.
(d) For purposes of this Item 2.03, off-balance sheet arrangement
means any transaction, agreement or other contractual arrangement to
which an entity unconsolidated with the registrant is a party, under
which the registrant has:
(1) Any obligation under a guarantee contract that has any of the
characteristics identified in FASB ASC paragraph 460-10-15-4
(Guarantees Topic), as may be modified or supplemented, and that is not
excluded from the initial recognition and measurement provisions of
FASB ASC paragraphs 460-10-15-7, 460-10-25-1, and 460-10-30-1.
(2) A retained or contingent interest in assets transferred to an
unconsolidated entity or similar arrangement that serves as credit,
liquidity or market risk support to such entity for such assets;
(3) Any obligation, including a contingent obligation, under a
contract that would be accounted for as a derivative instrument, except
that it is both indexed to the registrant's own stock and classified in
stockholders' equity in the registrant's statement of financial
position, and therefore excluded from the scope of FASB ASC Topic 815,
Derivatives and Hedging, pursuant to FASB ASC subparagraph 815-10-15-
74(a), as may be modified or supplemented; or
(4) Any obligation, including a contingent obligation, arising out
of a variable interest (as defined in the FASB ASC Master Glossary), as
may be modified or supplemented in an unconsolidated entity that is
held by, and material to, the registrant, where such entity provides
financing, liquidity, market risk or credit risk support to, or engages
in leasing, hedging or research and development services with, the
registrant.
* * * * *
By the Commission.
Dated: January 30, 2020.
Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2020-02313 Filed 2-27-20; 8:45 am]
BILLING CODE 8011-01-P