On November 19, 2020, the Securities and Exchange Commission ("SEC") voted to adopt amendments to modernize, simplify, and enhance certain financial disclosure requirements in Regulation S-K. The SEC's adopting release indicated that the amendments would focus financial disclosures on material information for the benefit of investors, while reducing compliance costs and burdens for registrants. Calendar year-end registrants are not required to comply with these updated rules in Annual Reports on Form 10-K until 2022, but may take advantage of the new disclosure requirements after the updated rules become effective.
In general, the amendments to Items 301, 302, and 303 of Regulation S-K are intended to put more of a focus on material information by:
- Eliminating the five-year disclosure of selected financial data under Item 301 (Selected Financial Data); and
- Modernizing, simplifying, and streamlining Item 302(a) (Supplementary Financial Information) and Item 303 (Management's Discussion & Analysis ("MD&A")).
Specifically, the key changes to Items 302(a) and 303:
- Replace the quarterly tabular disclosure required by Item 302(a) with a principles-based requirement to show only material retrospective changes, such as the correction of an error or a change in an accounting principle.
- Add a new Item 303(a) that clarifies the objectives of the MD&A are to allow the reader to view the registrant from management's perspective.
- Amend current Item 303(a)(1) and (2) (amended Item 303(b)(1)) disclosure requirements for liquidity and capital resources by requiring registrants to disclose material cash requirements, including commitments for capital expenditures, the anticipated source of funds needed to satisfy such cash requirements, and the general purpose of such requirements.
- Amend current Item 303(a)(3) (amended Item 303(b)(2)) to clarify disclosure requirements for results of operations by implementing a "reasonably likely" standard (as opposed to "will" cause) for disclosing known trends or uncertainties and by requiring disclosure of "material changes" (rather than only "material increases") in net sales or revenues.
- Eliminate the requirement to discuss the impact of inflation and changing prices under Item 303(a)(3)(iv) and Instructions 8 and 9.
- Replace current Item 303(a)(4), which requires disclosure of off-balance sheet arrangements in a separately-captioned section of the MD&A, with a new principles-based instruction to describe those obligations within the broader discussion of the MD&A.
- Eliminate current Item 303(a)(5), which requires registrants to provide a contractual obligations table.
- Amend current Item 303(b), Interim periods (amended Item 303(c)) to provide flexibility in the comparison of interim periods by allowing registrants to compare their most recently completed fiscal quarter to either the corresponding quarter of the prior year or to the immediately preceding quarter.
- Add a new Item 303(b)(3) for critical accounting estimates to clarify and codify SEC guidance on critical accounting estimates, which requires disclosure of why the estimate is subject to uncertainty, how much each estimate changed over the relevant period, and the sensitivity of the estimate to changes in underlying assumptions.
These amendments to Regulation S-K will become effective 30 days after their publication in the Federal Register, which, as of this alert, has not yet occurred. Registrants are required to comply with the rule beginning with the first fiscal year ending on or after the date that is 210 days after publication in the Federal Register. Once effective, registrants, however, are permitted to comply with the final amendments, provided that disclosure is responsive to an amended item in its entirety. The SEC's press release announcing the amendments is available at this link and the final adopting release for the amendments is available at this link.
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