Regulation S-K Gets a Facelift

Companies should start preparing now for the amended rules, designed to streamline and modernize MD&A and related financial disclosures.

In recent years, the U.S. Securities and Exchange Commission (SEC) has sought to streamline and modernize disclosure requirements. Late last year, this effort targeted the rules governing public companies’ disclosure of management’s discussion and analysis (MD&A) of financial condition and results of operations, and other specific financial information that must appear in periodic reports and registration statements filed with the agency.

The final rules—which were adopted on November 19, 2020, and became effective on February 10 of this year—include several amendments to Regulation S-K that public companies should be aware of.

The mandatory compliance date for the amended rules is a registrant’s first fiscal year ending on or after August 9, 2021, although registrants can choose to comply early as long as their disclosure is responsive to the amended item in its entirety. Registrants will be required to apply the amended rules in a registration statement and prospectus that, on the initial filing date, must contain financial statements for a period on or after the mandatory compliance date.

Among other changes, the amended rules:

Eliminate the requirement to disclose selected financial data.

Prior to the new amendments, registrants were required to disclose selected financial data in comparative tabular format for each of the past five fiscal years (or for the life of the registrant and its predecessors, if less than five years), as well as any additional fiscal years necessary to keep the information from being misleading, and—in some cases—for interim periods. The SEC has eliminated this requirement, in part because corporate financial information from prior periods is now readily available electronically.

That said, the SEC is emphasizing the need for registrants to consider:

Note that smaller reporting companies, which were not previously required to disclose selected financial data, are unaffected by this change.

Simplify rules around disclosure of quarterly supplementary financial information.

Prior to the amendments, Item 302(a) of Regulation S-K required registrants to disclose selected quarterly financial data for certain operating results, variances in those results from amounts reported in a previous Form 10-Q, and the effect of any discontinued operations and unusual or infrequent items. The amended Item 302(a) simplifies these rules and reduces the range of circumstances in which they need to be applied.

Under the amended rules, registrants must disclose quarterly supplementary financial data specified in Item 302(a) only when the company has experienced one or more material retrospective changes pertaining to the statements of income for any quarters within the past two fiscal years and for any subsequent interim period for which financial statements are required. Retrospective changes that may require disclosure include correction of an error and disposition of a business accounted for as discontinued operations.

This change does not affect smaller reporting companies, which were not required to disclose supplementary financial information prior to the amendments.

The SEC considered deleting Item 302(b) in its entirety, subject to the finalization of certain amendments to U.S. Generally Accepted Accounting Principles (GAAP)—relating to disclosure of oil and gas producing activities, in particular. Since the U.S. GAAP amendments have not been finalized, there was no change to Item 302(b), though the SEC may in the future reconsider the proposal to eliminate that item.

Streamline and modernize MD&A.

A primary purpose of MD&A, according to the SEC, is to enable investors to more clearly see the company from the perspective of management. As such, the amended rules expressly set forth a number of “objectives” of MD&A, including the following:

The “reasonably likely” disclosure standard.  The SEC stated, in its release announcing the adoption of the final rules, that it continues to believe the “reasonably likely” threshold is the appropriate standard for prospective matters and forward-looking information required under the MD&A rules. Referring to its existing “two-step test” for analyzing whether this threshold has been met, the SEC elaborated on the disclosure standard as follows:

“[W]hen applying the ‘reasonably likely’ threshold, registrants should consider whether a known trend, demand, commitment, event, or uncertainty is likely to come to fruition. If such known trend, demand, commitment, event, or uncertainty would reasonably be likely to have a material effect on the registrant’s future results or financial condition, disclosure is required. Known trends, demands, commitments, events, or uncertainties that are not remote or where management cannot make an assessment as to the likelihood that they will come to fruition, and that would be reasonably likely to have a material effect on the registrant’s future results or financial condition, were they to come to fruition, should be disclosed if a reasonable investor would consider omission of the information as significantly altering the mix of information made available in the registrant’s disclosures.”

The amended rule makes clear that the “reasonably likely” standard also applies to certain disclosures regarding known trends in results of operations and adds that “material changes” in net sales or revenue, rather than only “material increases,” should be disclosed. The impact of inflation and changing prices must be disclosed if it is material, or if inflation and changing prices are part of a known trend or uncertainty that had, or is reasonably likely to have, a material impact.

Reasons underlying material changes.  Previous SEC guidance largely captured the requirement that registrants must provide the rationale for stating specific material changes. However, the SEC believed it was necessary to emphasize this requirement in the new amendments, with the goal of enhancing analysis in MD&A. The amended rules now state:

“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 SEC acknowledged that “isolating reasons for specific material changes, and quantifying such isolated reasons, can sometimes be challenging because they can be highly interrelated.” With this in mind, the SEC encourages companies in these circumstances to “acknowledge this fact, and to explain such interrelated circumstances to the extent possible.”

Company segment or subdivision.  Prior to the amendments, the MD&A rules requiring companies to discuss information about reportable segments “and/or other subdivisions” of the company—if appropriate to an understanding of the business—offered “geographic areas” as an example of such a subdivision. In the new final rules, the SEC added “product lines” as another example; however, the SEC also clarified that this additional example is not intended to require product line disclosure if such disclosure is not, in the judgment of the company, necessary to an understanding of the company’s business.

Liquidity and capital resources disclosure.  Like before the amendments, registrants must describe known trends and uncertainties that will, or are reasonably likely to, result in a material increase or decrease in their liquidity. The amended rules specify that the liquidity and capital resources disclosure must analyze both the registrant’s ability to generate and obtain adequate amounts of cash to meet the company’s liquidity requirements, and its plans for cash in the short term and long term.

Certain language in the MD&A rules that described required disclosure of “material commitments for capital expenditures” has been replaced by the SEC to underscore its guidance requiring broader discussion of the registrant’s “material cash requirements.” Such discussion should include, but is not limited to, commitments for capital expenditures. Like before the amendments, registrants must describe known material trends in their capital resources. Notably, the rule specifies that the discussion “must consider changes among equity, debt, and any off-balance-sheet financing arrangements.”

The SEC clarified that smaller reporting companies are required to disclose material cash requirements as part of their liquidity and capital resources discussion, even though prior to the amendments, smaller reporting companies were not required to include the table of contractual obligations.

Off-balance-sheet arrangements and contractual obligations.  Rather than requiring the inclusion of a separately captioned item containing disclosure of off-balance-sheet arrangements, the final rules instruct registrants to integrate this disclosure throughout MD&A.

Similarly, the requirement that registrants disclose their known contractual obligations in a specified tabular format has been eliminated. Registrants are now specifically required to disclose material cash requirements from known contractual and other obligations, indicating the type of obligation and the relevant time period for the cash requirement, in their liquidity and capital resources disclosures.

Critical accounting estimates.  Codifying and clarifying previous SEC guidance, the amended rules explicitly require disclosure of critical accounting estimates. The definition of “critical accounting estimates” focuses on estimation uncertainties, in an effort to avoid unnecessary repetition of the significant accounting policy footnotes:

“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 the financial condition or results of operations of the registrant.”

In accordance with the amendments, registrants must provide any qualitative and quantitative information necessary to understand the estimation uncertainty and the impact that the critical accounting estimate has had, or is reasonably likely to have, on the company’s financial condition or results of operations—to the extent this information is both material and reasonably available. The qualitative and quantitative information should include the degree to which each estimate and/or assumption has changed over a relevant period, as well as the sensitivity of the reported amount to the methods, assumptions, and estimates underlying its calculation.

Noting concerns expressed by some commenters, the SEC provided several clarifications, including the following:

Offer new flexibility for quarterly results comparisons.

The amended rules allow registrants to compare their most recently completed quarter with either the corresponding quarter of the prior year or the immediately preceding quarter. Registrants are still required to discuss material changes in results of operations with respect to the most recent fiscal year-to-date period and the corresponding year-to-date period of the preceding fiscal year.

Leap Forward in Modernizing, Streamlining, and Clarifying

In addition to the final rules described in this article, the SEC adopted corresponding amendments that apply to foreign private issuers, with the same objectives of modernizing, clarifying, and streamlining disclosure requirements.

All these amendments represent an important step in the SEC’s efforts to modernize, streamline, and clarify reporting requirements for periodic reports and registration statements. While registrants and issuers have several months to adapt their reporting practices to meet the new requirements, individuals and entities tasked with preparing and submitting such reports should begin working now to make the necessary adjustments.


Clint Smith is a partner in Jones Walker LLP’s Corporate Practice Group.

Kaitlyn Daniel McGowan is a former associate in Jones Walker LLP’s Corporate Practice Group.