This MD&A Disclosures Checklist is for registrant MD&As included in SEC 1934 and 1933 Act domestic filings, such as Form 10-K, 10-Q, and S-1. This checklist addresses SEC requirements and is divided into the sections noted in the table of contents below.
This checklist prompts you with questions on SEC requirements. The checklist provides background material and references to the SEC source material. The references include both the official positions of the SEC and SEC staff practice and guidance. The official positions of the SEC include Regulation S-K, the codified Accounting Series Releases (ASRs) and Financial Reporting Releases (FRRs), and Accounting and Auditing Enforcement Releases (AAERs). SEC staff practice and guidance includes Staff Accounting Bulletins (SABs), uncodified FRRs, Summaries by the Division of Corporation Finance, Current Issues and Rulemaking Projects by the Division of Corporation Finance, SEC FAQ documents, SEC views expressed at Emerging Issues Task Force Meetings (EITF), minutes of AICPA committees with SEC staff, SEC staff letters, and SEC staff speeches. Official positions of the SEC and staff practice and guidance should be followed in all SEC filings.
The checklist also provides a column for you to note that the requirements have been met and to enter a workpaper reference. The completed checklist can be placed in annual or quarterly workpapers to provide support for your review and compliance procedures.
This checklist is designed primarily for domestic registrants.
“Smaller reporting companies” as the SEC has defined this term in Item 10(f)(1) of Regulation S-K generally means a company that has a public float of less than $75 million or, if a company does not have a calculable public equity float, having revenues of less than $50 million in the last fiscal year. Such companies have scaled disclosure and reporting requirements. The concept of smaller reporting companies was finalized on February 4, 2008, and replaces the concept of “small business issuers” that the SEC previously used. The SEC has issued the following two resources for smaller reporting companies on the transition to the new rules (both available on Accounting Research Manager):
Smaller Reporting Company Compliance and Disclosure Interpretations ; and Changeover to the SEC’s New Smaller Reporting Company System by Small Business Issuers and Non-Accelerated Filer
Companies: A Small Entity Compliance Guide.
Table of Contents Page
A MD&A GENERAL DISCLOSURES................................................................................................................................................ 4
1 INTRODUCTION.................................................................................................................................................................... 42 GENERAL.............................................................................................................................................................................. 63 CLARITY AND USEFULNESS.................................................................................................................................................. 8
B MD&A RESULTS OF OPERATIONS AND FINANCIAL CONDITION...............................................................................................111 INTRODUCTION.................................................................................................................................................................. 112 GENERAL............................................................................................................................................................................ 133 IMPAIRMENT AND RESTRUCTURING................................................................................................................................... 194 BUSINESS COMBINATIONS.................................................................................................................................................. 245 FINANCIAL INSTRUMENTS AND FOREIGN CURRENCIES......................................................................................................266 BENEFIT PLANS, ESOPS, AND STOCK COMPENSATION.......................................................................................................287 INTANGIBLE ASSETS AND DEFFERED TAX ASSETS.............................................................................................................318 ENVIRONMENTAL & PRODUCT LIABILITIES AND LEASE COMMITMENTS..............................................................................329 CONTINGENCIES, LOSS RESERVES AND UNCERTAIN TAX POSITIONS.................................................................................33
C MD&A LIQUIDITY AND CAPITAL RESOURCES..........................................................................................................................351 INTRODUCTION.................................................................................................................................................................. 352. GENERAL............................................................................................................................................................................ 373. LIQUIDITY........................................................................................................................................................................... 394. CAPITAL RESOURCES.......................................................................................................................................................... 44
D MD&A OFF-BALANCE SHEET ARRANGEMENTS.......................................................................................................................461 INTRODUCTION.................................................................................................................................................................. 462 DISCLOSURE REQUIREMENTS............................................................................................................................................. 46
E MD&A INFLATION AND CHANGING PRICES.............................................................................................................................511 INTRODUCTION.................................................................................................................................................................. 512 DISCLOSURE REQUIREMENTS............................................................................................................................................. 51
F MD&A FORWARD-LOOKING DISCLOSURES.............................................................................................................................531 INTRODUCTION.................................................................................................................................................................. 532 DISCLOSURE REQUIREMENTS............................................................................................................................................. 55
G MD&A INTERIM DISCLOSURES................................................................................................................................................ 60H SPECIALIZED INDUSTRIES...................................................................................................................................................... 61
1 BANK HOLDING COMPANIES............................................................................................................................................... 612 REGULATED INDUSTRIES.................................................................................................................................................... 633 FINANCIAL INSTITUTIONS................................................................................................................................................... 644 OIL AND GAS...................................................................................................................................................................... 665 INSURANCE COMPANIES..................................................................................................................................................... 686 RESEARCH AND DEVELOPMENT COMPANIES......................................................................................................................697 DEFENSE CONTRACTORS................................................................................................................................................... 70
For all YES answers, respond to the disclosure requirements and provide a reference.
A MD&A GENERAL DISCLOSURES1 INTRODUCTIONRegulation S-K requires that management's discussion and analysis of financial condition and results of operations (MD&A) provide material historical and prospective textual disclosure to enable investors to assess the financial condition and results of operations of the registrant, with particular emphasis on the registrant's prospects for the future. MD&A should give investors the opportunity to look through the eyes of management by providing a historical and prospective analysis of the registrant's financial condition and results of operations. To assist registrants in fully complying with the requirements of Item 303 of Regulation S-K, in May 1989 the Commission published an interpretive release, Financial Reporting Release No. 36 (Section 501). Although this release does not amend the Regulation S-K requirements, it uses examples and narrative discussion to highlight areas where the SEC staff believed improvement in registrants' disclosures was necessary. The release also provides additional guidance on certain required forward-looking information. To further assist registrants, in December 2003 the Commission published another interpretive release, Financial Reporting Release No. 72 (Section 501): Interpretation – Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition and Results of Operations. Like the 1989 release, the 2003 release does not amend Item 303 – it reminds registrants of existing requirements and provides additional guidance on making MD&A more informative and comprehensible.
Specifically, MD&A should cover information about a registrant's liquidity, capital resources, and results of operations. The MD&A also must discuss: (a) material events and uncertainties known to management that would cause the reported historical financial information not to be necessarily indicative of future operating results or of future financial condition, and (b) the impacts of inflation. Financial and non-financial information included in MD&A must be consistent with other information included in the filing. MD&A is presented for annual financial statements as well as interim financial statements. Special requirements apply to interim periods.
For all YES answers, respond to the disclosure requirements and provide a reference.
Many registrants with more than one segment prepare MD&A on a segment basis as well as on a consolidated basis. The SEC has strongly encouraged a segment approach, particularly when discussing results of operations. To the extent that any segment contributes (or is expected to contribute in the future) in a materially disproportionate way to revenues, profitability, or cash needs, or when discussion on a consolidated basis would present an incomplete and misleading picture of the enterprise, segment discussion must be included.
A line-by-line analysis of the financial statements is not required but may be appropriate in certain situations. The MD&A should not merely duplicate the numerical data contained in the financial statements, nor should the registrant merely recite changes in amounts from year to year that are readily computable from the statements or cover information that is obvious from the financial statements. However, this does not mean that significant matters disclosed in the financial statements should not be covered in the MD&A. For example, if the effect of a significant LIFO inventory liquidation is noted in the financial statements, it also should be pointed out in the MD&A.
The MD&A must cover all the periods for which financial statements are presented. This includes interim financial statements when presented in an SEC filing, either alongside the annual financial information or separately in the document. When earlier trend information is relevant, reference to the five-year selected financial data may be necessary. The discussion should compare the current year to the most recent preceding year and, except for the balance sheet, that year to the previous preceding year. There is no requirement to compare the earliest year for which financial statements are presented to the next preceding year. For example, a calendar-year company in its 2008 MD&A would have to discuss results of operations for 2008 in relation to 2007, and 2007 in relation to 2006, but not 2006 in relation to 2005. Specific subheadings or captions, such as liquidity, capital resources, and results of operations, although helpful in some situations, are not required. However, a separate heading is required for off-balance sheet arrangements.
For all YES answers, respond to the disclosure requirements and provide a reference.
Although Regulation S-K is silent with respect to location of the MD&A, the SEC staff strongly prefers that it either immediately precede or follow the financial statements. The SEC staff also prefers that the discussion be included in its entirety in one place. This placement facilitates incorporation by reference of the MD&A in Form 10-K from shareholder annual reports. The MD&A should not be included in or combined with the notes to the financial statements since much of the data may not be subject to audit verification. Although cross-referencing from the MD&A to other parts of the filing for further details is appropriate, the substance of the matter must still be discussed in the MD&A.
The disclosure requirements of Item 303 of Regulation S-K can be subdivided into the following topics:
Results of Operations and Financial Condition General Impairment and Restructuring Business Combinations Financial Instruments and foreign Currencies Benefit Plans, ESOPs, and Stock Compensation Intangible Assets and Deferred Tax Assets Liabilities and Commitments—Environmental, Product, and Leases
Liquidity and Capital Resources Off-Balance Sheet Arrangements Inflation and Changing Prices Forward-Looking Disclosures - Required and Voluntary Interim-Period MD&A
The sections following this general section are divided into these topics. The final MD&A section addresses industry specific topics.
2 GENERAL1. Is the
company’s MD&A should:
1. Describe known trends, demands, events, and uncertainties that are
For all YES answers, respond to the disclosure requirements and provide a reference.
business subject to known trends, demands, events, and uncertainties?
reasonably likely to have material effects in the future.
2. Disclose, if there are trends, demands, events, or uncertainties for which management cannot predict whether they will occur, the facts and an indication that management cannot assess whether they will occur (i.e., if management does not know if the events will occur then MD&A should disclose the uncertainty). MD&A should disclose, if known, the range of likely effects on future results. Management can avoid the requirement to disclose these matters only when it determines that (a) matters are not reasonably likely to occur or (b) if the matters occurred they would not have a material effect.
References: Regulation S-K, Item 303; FRR No. 36 - 501.02; FRR No. 72 - 501.12; and Summary by the Division of Corporation Finance of Significant Issues Addressed in the Review of the Periodic Reports of the Fortune 500 Companies
2. Does the company have reportable segments?
MD&A should focus on each relevant reportable segment or other subdivision of the company’s business when it would be appropriate for an understanding of the business. MD&A should focus on segments when:
A segment contributes in a materially disproportionate way to revenues, profitability, or cash needs, OR
Discussion only on a consolidated basis would present an incomplete and misleading picture of the enterprise.
3. Does the company have assets or liabilities subject to the reporting requirement
FASB Statement No. 157, Fair Value Measurements, applies in various applications when a company measures fair value. The SEC staff believes that companies should explain why it has changed how it determines fair value when that change goes from a Level 2 to a Level 3 measurement as those terms are used in Statement 157. For example, companies should consider disclosing the types of instruments reclassified and the nature of the inputs no longer observable.
For all YES answers, respond to the disclosure requirements and provide a reference.
s in FASB Statement 157or has it changed how it has been applying key attributes of measuring fair values as prescribed by Statement 157?
In late March 2008, the SEC staff issued guidance in the form of a sample letter to public companies regarding suggested disclosures in MD&A on the application of Statement 157. Companies that have assets or liabilities (e.g., asset backed securities, derivatives, etc.) covered by Statement 157 should consider the guidance in this release. The guidance includes commentary on reporting on Forms 10-K and 10-Q. The SEC staff issued further guidance in September 2008 with another sample letter to public companies regarding disclosures in MD&A relating to Statement 157. Further, the staffs of the SEC and FASB issued guidance in the form of a press release dated September 30, 2008. Subsequently, on October 10, 2008, FASB Staff Position 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, was issued that refers to these letters and press release adding further support for this SEC guidance.
On December 9, 2008, the SEC staff provided its “best practices” on Statement 157 disclosures in MD&A. These SEC staff views were expressed at the 2008 National Conference on Current SEC and PCAOB Developments.
References: SEC Speech Hunsaker 2007, Sample Letters Dated March 2008 and September 2008 Sent to Public Companies Regarding the Application of Statement 157, FASB Staff Position 157-3, Press Release dated September 30, 2008— SEC Office of the Chief Accountant and FASB Staff Clarifications on Fair Value Accounting, December 9, 2008 Hunsaker presentation “Fair Value: Best Practices for MD&A Disclosures” (slides 34-60); SEC Speech Carr December 8, 20083 CLARITY AND USEFULNESS
1. Is the MD&A well organized and comprehensible
The SEC’s rules do not mandate a set or standard format. Rather, management should tailor its presentation so that the most important information receives prominence. MD&A should be organized in a clear, understandable, and concise manner utilizing both narrative and graphic presentation. In drafting MD&A, the
For all YES answers, respond to the disclosure requirements and provide a reference.
? following should be considered: The format should be easy to grasp or understand. Placement should emphasize importance. Tables should be used to increase clarity and save text. The discussion and analysis should be clear and understandable. Avoid unnecessary information that does not promote understanding.
Reference: FRR No. 72 – 501.12
2. Does the MD&A include an overview or an executive summary?
Although not required, management should consider using an overview or introduction to establish a context that will enhance the reader’s understanding of the sections that follow. For example, the following should be considered: Establish the context for the company’s operations. Set the stage for MD&A as a whole. Provide senior management’s perspective.
Reference: FRR No. 72 – 501.12
3. Does MD&A help the investor understand the business?
In addition to providing a context for investors, the discussion in MD&A should help investors understand the variables and factors (quantitative and qualitative) that management uses to evaluate the company’s performance. The following should be considered: Short and long-term analysis should be provided. Material information from "nonfiled" sources such as earnings releases and
publicly accessible analysts’ calls should be included.The view of the business should be balanced, including key successes AND failures.
Reference: FRR No. 72 – 501.12
4. Does the MD&A focus on the analysis of
An essential element of MD&A is the identification - and assessment – of trends, uncertainties, commitments and events that are reasonably likely to materially affect the business. This aspect of MD&A should be highlighted rather than
For all YES answers, respond to the disclosure requirements and provide a reference.
material events and uncertainties?
obscured. Management is in the best position to provide the investor with analytical information about the effects of known trends and uncertainties by considering issues such as the following: MD&A should explain what happened by providing an analysis for investors.
The "why" and "how" should take precedence over the "what." Reasons for events and uncertainties should be discussed. The substantive
reasons underlying the effects of trends, events, demands, commitments and uncertainties should be provided.
Material events and uncertainties should be discussed when they occur. Material trends, uncertainties, or events should be given prominence.
Discussion of items that are immaterial, duplicative, or that do not promote understanding of MD&A should be eliminated.
Expected future operating performance should be discussed.
MD&A Results of Operations and Financial Condition DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
B MD&A RESULTS OF OPERATIONS AND FINANCIAL CONDITION1 INTRODUCTIONThe discussion of results of operations must cover the effects of any unusual or infrequent events or transactions or significant economic changes that materially affected income from continuing operations. In addition, discussion of the impact of discontinued operations and extraordinary items is also required when these items have had or are reasonably likely to have a material effect on the reported or future financial condition or results of operations. An analysis of changes in line items is required when material and when the changes diverge from related line items of the financial statements, when identification and quantification of the extent of contribution of each of two or more factors is necessary to an understanding of a material change, or when there are material increases or decreases in net sales or revenues.
RESULTS OF OPERATIONS
The SEC staff believes that the effects of offsetting developments or events should be disclosed. Material increases in net revenues must be explained as being attributable to price or volume changes or new products. If the changes are a result of several factors, disclosure of the relative extent of each factor contributing to the increase must be made.
The registrant must discuss all periods presented in the financial statements, even when some of those periods:
Relate to predecessor operations;
Are for periods shorter than a full 12-month period (e.g., when a 9-, 10-, or 11- month period is presented in lieu of a full 12-month period, as permitted under Rule 3-06 of Regulation S-X); or
Do not reflect a significant business combination.
MD&A Results of Operations and Financial Condition DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
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The fact that these periods are not "comparable" with the subsequent periods presented does not eliminate the requirement to discuss the periods and the reasons for the changes in the registrant's results of operations.
The discussion should 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. This would include descriptions and amounts of:
Matters that are expected to have a material impact on future operations but that have not had an impact in the past,
Matters that have had a material impact on reported operations but are not expected to have an impact upon future operations, and
Matters that have had a material impact on past operating results and involve prospective effects.
FINANCIAL CONDITION
In addition to the discussion about the results of operations, a registrant should discuss significant changes in its balance sheet. When the consolidated financial statements reveal material changes from year to year in one or more line items, the causes for the changes must be described to the extent necessary to an understanding of the registrant's businesses as a whole. However, if the causes for a change in one line item also relate to other line items, no repetition is required and a line-by-line analysis of the financial statements as a whole is not required or generally appropriate. The discussion should focus specifically on material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future financial conditions.
MD&A Results of Operations and Financial Condition DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
2 GENERAL1. Have there
been material matters that have affected the company’s financial condition and results of operations?
MD&A should include a discussion of all material matters that have affected financial condition and results of operations, including those arising from disclosures provided elsewhere in the document.
MD&A should:1. Describe material changes to the extent necessary to understand the
company’s business as a whole. Quantification should be as precise as reasonably practicable. The discussion should not merely repeat numerical data contained in the consolidated financial statements and it is not necessary to recite amounts readily computable from the financial statements.
2. Describe the causes of each material change to financial statement items to the extent necessary to understand the business as a whole. Explanations that apply to several lines do not have to be repeated.
3. A registrant that has an investment(s) or is otherwise involved in nonconsolidated conduits (sometimes known as structured investment vehicles) and collateralized debt obligations (CDOs) should consider disclosure of its related exposure to risk.
References: Regulation S-K, Item 303(A) Instruction 4 and (B) Instruction 3 ; FRR No. 36 - 501.01 ; FRR No. 72 – 501.12 and Sample Letter Dated December 2007 Sent by SEC staff to Public Companies with Structured Investment Vehicles.
2. Are there matters that are reasonably likely to have a material effect on
MD&A should:1. Disclose all matters that did not have a material effect in past periods
but are reasonably likely to have a material effect on future periods.
2. Disclose all matters that had a material effect on past periods and have prospective effects. (For example, adoption of an accounting method
4. Did the company have unusual or infrequent events or transactions?
MD&A should disclose all unusual or infrequent events or transactions that materially affected income from continuing operations and the extent to which income was affected.
Reference: Regulation S-K, Item 303(A)(3)(i)
5. Did the company have significant economic changes?
MD&A should disclose any significant economic changes that materially affected income from continuing operations and the extent to which income was affected.
Reference: Regulation S-K, Item 303(A)(3)(i)
6. Did the company have any unusual revenue transactions?
MD&A should include a discussion of unusual or infrequent transactions, known trends or uncertainties that have had, or might reasonably be expected to have, a favorable or unfavorable material effect on revenue, operating income or net income and the relationship between revenue and the costs of the revenue. Changes in revenue should be discussed in terms of the reasons and factors contributing to the increase or decrease. Examples of revenue
MD&A Results of Operations and Financial Condition DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
transactions or events that the SEC staff has asked to be disclosed and discussed include:
1. Shipments of product at the end of a reporting period that significantly reduce customer backlog and that reasonably might be expected to result in lower shipments and revenue in the next period.
2. Granting of extended payment terms that will result in a longer collection period for accounts receivable (regardless of whether revenue has been recognized) and slow cash inflows from operations, and the effect on liquidity and capital resources.
3. Changing trends in shipments into, and sales from, a sales channel or separate class of customer that could be expected to have a significant effect on future sales or sales returns.
4. An increasing trend toward sales to a different class of customer, such as a reseller distribution channel that has lower gross profit margin than existing sales that are principally made to end users. Also, increasing service revenue that has a higher profit margin than product sales.
5. Seasonal trends or variation in sales.
Reference: SAB Topic 13B , Current Accounting and Disclosure Issues in the Division of Corporation Finance 11/30/06, IIF3 Revenue - Disclosure
7. Are there other significant components of revenues and expenses necessary to understand the results of operations?
MD&A should describe these other significant components.
Reference: Regulation S-K, Item 303(A)(3)(i)
8. Are there significant trends or
MD&A should disclose known significant trends or uncertainties that materially affect, or are reasonably likely to materially affect, revenue (price or volume), net sales, or income from continuing operations and the extent of the effect.
MD&A Results of Operations and Financial Condition DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
uncertainties that affect revenue, net sales, or income from continuing operations?
Examples include, but are not limited to, competitor changes, new products, change in demand, or a change in customer base.
Reference: Regulation S-K, Item 303(A)(3)(ii)
9. Did the company have material increases or decreases in net revenue resulting from changes in price, volume or product/service mix?
MD&A should attribute increases or decreases in net revenue among price changes, volume changes (due to change in demand or change in market share), introduction of new products, effect of purchased businesses and disposals of assets not accounted for as discontinued operations. The discussion may be narrative.
MD&A Results of Operations and Financial Condition DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
statement line items?
contribute to the material change in a line item.
Reference: FRR No. 36 - 501.04
12. Has the company had material changes in estimates?
MD&A should include a transparent, plain English discussion of the changes and their effect on the trends and operations of the company
Reference: Current Issues and Rulemaking Projects, Other Current Accounting and Disclosure Issues, Disclosure, Accounting and Auditing Alerts, Point 7, 2001
13. Did the company have discontinued operations and (or) extraordinary items?
MD&A should disclose the impact of all discontinued operations and extraordinary items that had – or are reasonably likely to have in the future – a material effect on reported results of operations and financial condition. Disclosure should include discussion of the impact on the company’s results of operations, financial condition, and liquidity of changes in the plan of disposal or changes in circumstances related to the plan.
References: FRR No. 36 - 501.04; SAB Topic 5Z5
14. Is the company disclosing non-GAAP financial measures?
MD&A that includes non-GAAP financial information must be accompanied by the following disclosures:
1. The most directly comparable financial measure determined in accordance with GAAP presented with equal or greater prominence than the non-GAAP measure;
2. A quantitative reconciliation of the differences between the non-GAAP measure and the associated comparable GAAP measure. When the non-GAAP measure applies to forward-looking information, a quantitative reconciliation should be presented if available without unreasonable effort;
3. The reasons that management believes the presentation of the non-GAAP information is useful for an investor’s understanding of the registrant’s financial condition and results of operations; and
4. The additional purposes, if any, for which management uses non-GAAP
MD&A Results of Operations and Financial Condition DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
measures.These latter two disclosures should be specific to the non-GAAP measure, the registrant, the registrant’s industry and management’s use of the information in its decision-making process. Presenting non-GAAP information solely because management believes it is used by analysts is not sufficient.
At the 2006 Annual AICPA Conference on Current SEC and PCAOB Developments, a staff member of the SEC’s Division of Corporation Finance made a presentation on the use of non-GAAP measures and effectively reiterated the staff’s view discussed in its 2003 FAQ document, notably Question 8. However, at the 2006 conference, the SEC staff indicated that certain registrants were presenting a complete reconstructed income statement (line-by-line) using non-GAAP measures. The SEC staff member indicated the staff would object to such a presentation whether in MD&A or elsewhere in a registrant’s filing, press releases that have been included in a Form 8-K filing, etc.
References: Regulation S-K, Item 10 , Frequently Asked Questions Regarding the Use of Non-GAAP Financial Measures – June 13, 2003; Division of Corporation Finance Presentation at the 2006 Annual AICPA Conference on Current SEC and PCAOB Developments, Slide 7
15. Did the company have any material related-party transactions?
MD&A should discuss material related-party transactions to the extent necessary so that investors can gain an understanding of the effects of related-party transactions on the registrant’s current and prospective financial position and operating results. The term "related-party" is defined in both the accounting literature (FASB Statement No. 57, Related Party Disclosures) and in the SEC’s literature (Item 404 of Regulation S-K). However, registrants should also consider disclosing information about certain parties that fall outside the definition of "related-parties." These parties are those with a relationship to the company (e.g., former senior management member of the registrant) that enables them to negotiate terms of material transactions that may not be available from other, more clearly independent parties on an arm’s-length basis.
MD&A Results of Operations and Financial Condition DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
Reference: FRR No. 61, II C
16. Has a subsidiary of the company issued its own stock?
MD&A should disclose: The impact of the transaction. The likelihood of similar transactions occurring in future years.
Reference: SAB Topic 5H
17. Does the company have an investment in a variable interest entity but (VIE) but is not the primary beneficiary?
FASB Interpretation (FIN) No. 46 (Revised December 2003) Consolidation of Variable Interest Entities, requires a beneficiary of a VIE (other than its primary beneficiary) to disclose its maximum exposure to loss. The SEC staff believes that when management makes this disclosure, companies could better explain how it determined this maximum.
SEC Speech Hunsaker 2007
18. Has the company considered whether its MD&A disclosure might be enhanced with the use of certain pro forma disclosures?
The SEC staff believes that there will be situations when comparisons other than those of the historical financial information may provide valuable supplemental and in certain cases, more relevant analysis, to fully discuss trends and changes. For example, a registrant may consummate a large business acquisition during the period that impacts the comparability of the most recent year's results to the prior year. In another example, a registrant may have applied push-down accounting due to a change in control in a reporting period through the application of EITF Topic D-97, “Push Down Accounting,” or where a ”newco” with no substantive operations acquires an operating company in a leveraged buyout transaction accounted for under EITF Issue No. 88-16, “Basis in Leveraged Buyout Transactions.” When determining whether a supplemental discussion based upon pro forma information should be included, registrants should consider all of the facts and circumstances surrounding the transaction, the nature of the pro forma adjustments to be made, and the overall meaningfulness of any such supplemental pro forma discussion. The SEC staff set forth its views of the appropriateness of certain
1. Identify key assumptions used in the development of cash flow projections and the implication of those assumptions.
2. Indicate if the company is likely to violate debt covenants in the future.3. Discuss the ramifications to the cash flow projections used in the
impairment analysis.4. If growth rates used in the impairment analysis are lower than those
used by outside analysts, indicate if the company had discussions with analysts regarding their overly optimistic projections.
5. If reduced expectations for the future are sufficient to cause an impairment charge, indicate if the company has appropriately informed the market and its shareholders of its reduced expectations for the future.
6. Identify material assets analyzed for impairment for which an impairment charge has not yet been recorded.
Note: The SEC staff believes that cash flow projections used in the impairment analysis must be both internally consistent with the company’s other projections and externally consistent with financial statement and other public disclosures.
Asset Impairment Charge DisclosuresMD&A should:
1. Describe the assets and the segments affected.2. Identify reasons a write-down became necessary.3. Disclose the amount of loss for each material asset category:
MD&A Results of Operations and Financial Condition DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
b. Intangible assets4. Describe the method of determining fair value.5. Classify the loss in the statement of operations.
Assets Held for Sale DisclosuresMD&A should:
1. Disclose the carrying amount of assets held for sale and subsequent changes in carrying amount.
2. Identify expected disposal dates.3. Disclose the results of operations for the assets to the extent that those
results are included in the period and can be identified.4. Disclose the effect of suspending depreciation.5. Disclose whether further losses may result because of how the registrant
evaluated any impairment charge when a group of assets is being sold that consisted of long-lived assets as well as other assets such as trade receivables and inventory.
References: SAB Topic 5CC ; Summary by the Division of Corporation Finance of Significant Issues Addressed in the Review of the Periodic Reports of the Fortune 500 Companies; December 8, 2008 Adam Brown Speech
2. Did the company have an other-than-temporary impairment charge for a marketable debt or equity security?
MD&A should include:1. Amount of the charge.2. Reasons for the charge and its timing;3. Segment the charge relates to;4. The risks and uncertainties regarding future declines; and5. The estimated effects that material declines would have on the
registrant’s liquidity.
The SEC staff expects these disclosures that go beyond the requirements of EITF Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” that were carried forward in FASB Staff Position (FSP) No. FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.”
MD&A Results of Operations and Financial Condition DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
References: SEC Speech, Alkema, 2003 and Current Accounting and Disclosure Issues in the Division of Corporation Finance 11/30/06, IIH1, Investments – Other-Than-Temporary Declines in Value; October 14, 2008 Letter to FASB chairman (Robert H. Herz) from chief accountant (Conrad Hewitt)
3. Did the company report a restructuring charge for any period presented?
MD&A should:1. Discuss the events and decisions that gave rise to the restructuring exit
costs and exit plan.2. Describe the likely effects of management’s plans on financial position,
future operating results and liquidity unless it is determined that a material effect is not reasonably likely to occur.
3. Quantify and disclose the likely effects of the restructuring (e.g., reduced depreciation, employee expenses, etc.) and identify the initial period in which those effects are expected to be realized, including any offsetting effect of anticipated increases in other expenses or decreases in revenues. Additionally, identify the income statement line items to be impacted (e.g., cost of sales, marketing, selling, general, and administrative [SG&A] etc.)
4. Identify the periods in which material cash outlays are anticipated and the expected source of their funding.
5. Disclose and explain the types and amounts of discretionary or decision-dependent costs of a period such as exit costs, including their income statement classification.
6. Disclose the nature and amount of additional types of exit costs and other types of restructuring charges that appear quantitatively or qualitatively material.
7. Identify losses relating to asset impairment separately from charges based on estimates of future cash expenditures.
8. If the company has multiple exit plans, present separate information for each individual exit plan that has a material effect on the balance sheet, results of operations, or cash flows.
Note: The SEC staff often finds that, because of the discretionary nature of exit plans and the components thereof, presenting and analyzing material exit and involuntary termination charges in tabular form, with the related liability
MD&A Results of Operations and Financial Condition DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
balances and activity (e.g., beginning balance, new charges, cash payments, other adjustments with explanations, and ending balances) from balance sheet date to balance sheet date, is necessary to explain fully the components and effects of significant restructuring charges. The staff believes that such a tabular analysis aids a financial statement user’s ability to disaggregate the restructuring charge by income statement line item in which the costs would have otherwise been recognized, absent the restructuring plan, (e.g., cost of sales, SG&A, etc.)
References: SAB Topics 5P3 and 5P4
4. Does the company have trends and uncertainties developing that could cause the company to consider a restructuring?
MD&A should discuss evolving events that could cause the company to consider a restructuring. Whether or not currently recognizable in the financial statements, material exit or involuntary termination costs that could affect a known trend, demand, commitment, event or uncertainty to management, should be disclosed in MD&A.
The SEC has noted that economic events that lead to a restructuring occur over time. The staff believes that as these events evolve, they often meet the requirement for disclosure in MD&A prior to the period in which the exit costs and liabilities are recorded based on GAAP.
After a restructuring charge is taken, the SEC staff believes that MD&A should include discussion of the events and decisions that gave rise to the exit costs and exit plans. The staff will look to previous MD&As for information on the evolution of these events and decisions.
Reference: SAB Topic 5P4
5. Does the company have recurring or nonrecurring restructuring
Depending on the nature and materiality of the charge, it will likely be necessary to discuss the nature of the restructuring charge in MD&A. Whether a restructuring charge should be discussed in MD&A is a different question from whether it can be eliminated in connection with a non-GAAP financial measure. The SEC staff has noted that whether recurring charges, such as restructuring
MD&A Results of Operations and Financial Condition DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
charges that are eliminated in non-GAAP financial measures?
charges, can be eliminated in non-GAAP financial measures largely depends on whether the charge will disappear or become immaterial in the near-term. If a company has a past history of restructuring charges, it will be difficult for the company to support that the charges are nonrecurring, and to meet the burden of disclosing why a non-GAAP financial measure that excludes these charges is useful to investors.
See additional discussion above in question 14 in the General section.
References: Frequently Asked Questions Regarding the Use of Non-GAAP Financial Measures, Questions 8 and 9
6. Did the company recognize a restructuring charge in a prior reporting period?
MD&A should:1. Discuss material revisions to exit plans, exit costs, or the timing of the
plan’s execution, including the nature and reasons for the revisions. 2. Identify reasons why savings expected to result from the restructuring
were not achieved (if not achieved as expected) and the likely effect on future operating results and liquidity.
3. Discuss material activity in the liability balances of each significant type of exit cost and involuntary employee termination benefits that occurs subsequent to the initiation of the restructuring, either as a result of expenditures or changes in/reversals of estimates or the fair value of the liability. The SEC staff recommends presentation in tabular form.
Reference: SAB Topic 5P4
4 BUSINESS COMBINATIONS1. Did the
company record an in-process research and development
MD&A should disclose the following:1. Specific nature and fair value of each significant in-process research and
development project acquired.2. Completeness, complexity and uniqueness of the projects at the
acquisition date.3. Nature, timing, and estimated costs of the efforts necessary to complete
MD&A Results of Operations and Financial Condition DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
write-off resulting from a business combination?
the projects, and the anticipated completion dates.4. Risks and uncertainties associated with completing development on
schedule, and consequences if it is not completed timely.5. Appraisal method used to value projects.6. Significant appraisal assumptions, such as:
a. Period in which material net cash inflows from significant projects are expected to commence;
b. Material anticipated changes from historical pricing, margins and expense levels; and
c. The risk adjusted discount rate applied to the project’s cash flows.
7. In periods after a significant write-off, the status of efforts to complete the projects, and the impact of any delays on the company’s expected investment return, results of operations, and financial condition.
Reference: SEC Letter Dated 1/12/99
2. Has the company been involved in a business combination and incurred exit costs or employee termination costs for acquiring the business?
MD&A should:1. Disclose when the registrant began formulating exit plans for which
accrual may be necessary.2. Describe the types and amounts of liabilities recognized for exit costs
and involuntary employee termination benefits and included in the acquisition cost allocation.
3. Identify any unresolved contingencies or purchase price allocation issues and the types of additional liabilities that may result in an adjustment of the acquisition cost allocation.
Reference: SAB Topic 5P4
3. Has the company been involved in a business combination in
MD&A should include an appropriate disclosure regarding any unrecognized preacquisition contingency and its reasonably likely effects on operating results, liquidity, and financial condition
MD&A Results of Operations and Financial Condition DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
which it has assumed certain contingent liabilities of the acquired company?
4. Is the company a physician practice management company or a similar management arrangement?
If the company is a physician practice management company (i.e., contractual arrangements between entities that are in business to practice and dispense medicine (physician practices) and entities that are in business to manage the operations of those physician practices), MD&A should:
1. Discuss the financial terms of the management contracts. If there are several types of contracts, discuss the financial terms of each type.
2. Detail the financial terms of individually material agreements.
Reference: Current Issues and Rulemaking Projects, Guidance About Disclosures, 1999
5. Is the company involved with high yield or highly leveraged transactions or non-investment grade loans and (or) investments related to corporate restructurings (e.g., LBOs,
MD&A should describe the transactions, loans, and (or) investments that have had, or are reasonably likely to have, a material effect on financial condition or results of operations, and the effects resulting from such participation. Registrants should consider the following for disclosure:
1. Relevant lending and investing policies, including credit and risk management policies.
2. Amounts of holdings stated separately by type if individually material, including guarantees and repurchase or other commitments to lend or acquire such loans and investments, and the potential risks inherent in the holdings.
3. Information regarding the level of activity during the period.4. Amount of holdings, if any, giving rise to significantly greater risks than
MD&A Results of Operations and Financial Condition DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
recapitalizations)?
5 FINANCIAL INSTRUMENTS AND FOREIGN CURRENCIES1. Does the
company have derivatives that represent an economic hedge but do not qualify for hedge accounting under FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities?
MD&A should discuss the reasons for entering into these economic hedges.
References: SEC Speech, Faucette, 2003; and Current Accounting and Disclosure Issues in the Division of Corporation Finance 11/30/06, IIM3, Issues Associated with SFAS 133, Accounting for Derivative Instruments and Hedging Activities
2. Does the company materially engage in trading commodity contracts that are not traded on an exchange?
MD&A should completely disclose contracts that are recorded at fair value but do not have quoted market prices. Regarding the disclosure of fair value considerations related to these types of contracts, registrants should provide information that: Disaggregates realized and unrealized changes in fair value; Identifies changes in fair value attributable to changes in valuation
techniques; Disaggregates estimated fair values at the latest balance sheet date based
on whether fair values are determined directly from quoted market prices or are estimated; and
Indicate the maturities of contracts at the latest balance sheet date.
MD&A Results of Operations and Financial Condition DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
3. Did the company enter into material transactions denominated in currencies other than the currency in which its financial statements are reported?
MD&A should describe any material effects of changes in currency exchange rates on reported revenues, costs, and business practice and plans. The company should quantify the extent to which material trends in amounts are attributable to changes in the value of the reporting currency relative to the functional currency of the underlying operations. Any materially different trends in operations or liquidity that would be apparent if reported in the functional currency should be analyzed.
Reference: Current Issues and Rulemaking Projects, 1996
4. Does the company have foreign operations with a change in functional currency?
FASB Statement No. 52, Foreign Currency Translation, requires the assets, liabilities, and operations of a foreign operation to be measured using the functional currency of that foreign operation.
While FASB Statement 52 does not prescribe specific disclosures about a change in functional currency, the SEC staff believes that the company should discuss the change in MD&A. The MD&A should include a discussion of:
The foreign operations and their impact on results of operations, liquidity, and cash flows;
The nature and timing of the change in functional currency; The actual and reasonably likely effects of the change; The economic facts and circumstances that led management to
conclude that the change was appropriate; and The effects of these underlying economic facts and circumstances on
the company’s business.
Reference: Current Issues and Rulemaking Projects, 11/24/99, IIIG
6 BENEFIT PLANS, ESOPS, AND STOCK COMPENSATION1. Does the company have pension or other
MD&A should discuss:
The significant assumptions and estimates and how those assumptions
MD&A Results of Operations and Financial Condition DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
post-employment plans?
and estimates are determined; The effect that pension plans had on results of operations, cash flow and
liquidity, including the amount of expected pension returns included in earnings and the amount of cash outflows used to fund the pension plan;
Any expected change in pension or other postemployment benefit plan trends, including known changes in the expected return assumption and discount rate to be used during the next year and the reasonably likely impact of the known change in assumption on future results of operation and cash flows;
Material trends or patterns of amounts reflected in the financial statements, significant assumptions, and any material variations between the results based on these assumptions and the company’s actual experience. This discussion should include any material deviations between actual and expected long-term rates of return on plan assets;
Amounts of material funding obligations, material known trends or uncertainties related to paying such amounts, the effect of future payments on future cash flows, and any material uncertainty in the funding obligation itself;
The amount of current unrecognized losses on pension assets and the estimated effect of those losses on future pension expense; and
A sensitivity analysis that expresses the potential change in expected results that would result from hypothetical changes to pension or other postemployment benefit assumptions and estimates.
References: Summary by the Division of Corporation Finance of Significant Issues Addressed in the Review of the Periodic Reports of the Fortune 500 Companies; Current Accounting and Disclosure Issues in the Division of Corporation Finance, 11/30/06, IIJ, Pension, Post Retirement, and Post Employment Plans
2. Have the company’s
During 2006, the Pension Protection Act of 2006 was enacted. Passage of this act may materially affect a company’s funding obligations with respect to its
MD&A Results of Operations and Financial Condition DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
funding requirements as a result of the Pension Protection Act of 2006 been considered for disclosure?
benefit plans. Registrants should provide transparent disclosure in MD&A of the act’s anticipated impact on the company’s liquidity and capital resources. The SEC staff recognizes that in some circumstances it will be difficult to forecast precise funding requirements as a result of the annual recomputation required by the act; however, it will often be possible to provide disclosure of the magnitude of cash commitments for future annual periods assuming present market value conditions remain constant.
Reference: SEC Speech, Ucuzoglu 2006
3. Does the company have a leveraged employee stock ownership plan (ESOP)?
The company should consider the need to discuss the potential impact of leveraged ESOPs in the MD&A Results of Operations and Liquidity section.
Reference: EITF Issue 89-8
4. Has the company adopted FASB Statement No. 123R, Share-Based Payment?
Once a company adopts FASB Statement No. 123 (Revised 2004), Share-Based Payment, the financial statements will not be comparable with prior years. Staff Accounting Bulletin (SAB) Topic 14M, “Share-Based Payment — Disclosures in MD&A Subsequent to Adoption of Statement 123R,” (SAB 107) advises companies that MD&A should discuss the noncomparability and assist users in understanding the effects of the accounting change. SAB 107 recommends that companies discuss the following items:
Prior method used to record compensation (APB Opinion No. 25, Accounting for Stock Issued to Employees, or FASB Statement No. 123, Accounting for Stock-Based Compensation);
Transition method used to adopt 123R (modified prospective or modified retrospective);
One-time effects of adoption, if any; Changes in option valuation models or assumptions previously disclosed; Changes in mix of employee compensation; Changes in the terms of share-based payment awards; and
MD&A Results of Operations and Financial Condition DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
Total fair-value-based compensation expense associated with prior awards that are not vested at the adoption of Statement 123R and the weighted average period over which that compensation will be recorded in earnings.
[Editor’s Note: Conrad Hewitt, Chief Accountant of the SEC, issued a letter dated September 19, 2006 discussing the views of the SEC staff relating to the accounting required by companies that followed APB Opinion No. 25, Accounting for Stock Issued to Employees, prior to the effective date of FASB Statement No.123 (Revised 2004), Share-Based Payment. In this letter, the SEC staff addresses the accounting consequences under Opinion 25 of dating an option award to predate the actual award date, option grants with administrative delays, uncertainty as to the validity of prior grants, and other related circumstances. On January 16, 2007, the SEC's Division of Corporation Finance (Corp Fin) issued a sample letter to companies requesting guidance related to filing restated financial statements for errors when accounting for stock option grants. During 2006, certain registrants discovered that they had improperly complied with the accounting requirements relating to company-issued stock options – a problem that includes "back-dating" as it is sometimes referred to. This problem is most acute in years before a company was required to adopt the accounting prescribed in Statement 123R. A registrant that has identified errors relating to its stock option grants and concludes that it should amend prior filings should carefully review and consider the guidance in this SEC release.]
References: SAB Topic 14M; Letter from SEC Chief Accountant Dated September 19, 2006; Current Accounting and Disclosure Issues in the Division of Corporation Finance 11/30/06, IB2 Employee Stock Options - Staff Accounting Bulletin 107, SEC Speech Albert 2006, SEC Speech Ucuzoglu 2006, January 16, 2007 Corp Fin letter
MD&A Results of Operations and Financial Condition DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
1. Did the company have recorded and (or) unrecorded intangible assets?
Companies should consider the need for more extensive narrative and quantitative information about the intangibles that are important to their business in the MD&A.
Reference: Current Issues and Rulemaking Projects, Other Current Accounting and Disclosure Issues, Disclosure about Intangible Assets, 2001
2. Did the company have a deferred tax asset?
MD&A should disclose the factors assumed that:1. Make the deferred tax asset realizable.
a. For example, the minimum annualized rate by which taxable income must increase during a tax net operating loss (NOL) carryforward period should be disclosed if realization of the benefit is dependent on taxable income higher than currently reported.
2. Make the valuation allowance for the deferred tax asset appropriate.a. The amount of the allowance should be consistent with
management’s view of the realization of the deferred tax asset, and
b. Consistent with other narrative disclosure in the financial statements.
i. If the company has a history of earning pretax income but has provided a valuation allowance for deferred tax assets, the negative factors that support the allowance should be discussed.
ii. If the company has a history of pretax operating losses but has not provided any valuation allowance for deferred tax assets, the positive factors that support the lack of allowance should be disclosed.
References: Current Issues and Rulemaking Projects, 11/16/98; SEC Speech, Overton, 1996
MD&A Results of Operations and Financial Condition DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
8 ENVIRONMENTAL & PRODUCT LIABILITIES AND LEASE COMMITMENTS1. Does the
company have environmental and (or) product liabilities?
General - The SEC staff urges companies to provide in their MD&A a meaningful analysis of the environmental and (or) product liability expenses charged in each period and how the amounts were determined.
Environmental - MD&A should discuss, to the extent material, historical and anticipated environmental expenditures, including:
Recurring costs associated with managing hazardous substances and pollution in on-going operations;
Capital expenditures to limit or monitor hazardous substances or pollutants;
Mandated expenditures to remediate previously contaminated sites; and
Other infrequent or non-recurring clean-up expenditures that can be anticipated but which are not required in the present circumstances.
For individually material environmental sites, disaggregated disclosure of accruals and reasonably likely losses may be necessary. If different sites are at different stages of remediation, the effect of the differences should be discussed in the context of amounts accrued and disclosed.
Product liability- MD&A should discuss, to the extent material, historical and anticipated liability costs, including:
The nature of personal injury or property damages alleged by claimants; Aggregate settlement costs by type of claim; and Related costs of administering and litigating claims.
For particular claims that are individually material, disaggregated disclosure of accruals and reasonably likely losses may be necessary.
MD&A should discuss the following, if the contingency involves a large number of relatively small individual claims of a similar type:
Number of claims pending at each balance sheet date;
MD&A Results of Operations and Financial Condition DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
Number of claims filed for each period presented; Number of claims dismissed, settled, or otherwise resolved for each
period; Average settlement amount per claim; Historical and expected trends in these amounts and their reasonably
likely effects on operating results and liquidity.
References: SAB Topic 5Y, Question 3; Summary by the Division of Corporation Finance of Significant Issues Addressed in the Review of the Periodic Reports of the Fortune 500 Companies
2. Does the company have lease commitments?
MD&A should discuss known likely trends or uncertainties in future rent or amortization expense that could materially affect operating results.
Reference: SEC Letter, February 7, 2005
9 CONTINGENCIES, LOSS RESERVES AND UNCERTAIN TAX POSITIONS1. Does the company have possible loss contingencies, including those related to income tax claims?
General - The SEC staff has stated that registrants, their auditors and advisors have a responsibility to critically assess the claims against the company in order to identify those for which losses should be accrued and those that are not accrued because the success of the claim is only reasonably possible.
The requirement to discuss uncertainties in MD&A encompasses both financial and non-financial factors that may influence the business, either directly or indirectly. In many cases, there will be current or immediate accounting implications associated with an uncertainty, as occurs when the likelihood of a loss contingency becomes probable and the amount of loss is reasonably estimable. However, the need to discuss such matters in MD&A will often precede any accounting recognition when the registrant becomes aware of information that creates a reasonable likelihood of a material effect on its
MD&A Results of Operations and Financial Condition DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
financial condition or results of operations, or when such information is otherwise subject to disclosure in the financial statements.
Reference: Current Accounting and Disclosure Issues in the Division of Corporation Finance, 11/30/06, III, Contingencies, Loss Reserves, and Uncertain Tax Positions, April 17, 2007 SEC Regulations Committee Discussion Document E
MD&A Liquidity and Capital Resources DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
C MD&A LIQUIDITY AND CAPITAL RESOURCES1 INTRODUCTIONLiquidity
The discussion of liquidity, which may be combined with the discussion of capital resources, must identify any known trends or demands, commitments, events, or uncertainties that are expected to impact liquidity. "Liquidity" has been defined by the SEC as the ability of a company to generate adequate amounts of cash to meet the company's needs for day-to-day operating expenses and material commitments on both a long- and short-term basis. "Short-term" is defined in Financial Reporting Release No. 36 as up to 12 months into the future. Discussions about liquidity should not be overly general. Disclosures should adequately describe the sources of short-term funding and circumstances that are reasonably likely to affect those sources of liquidity.
The discussion also must describe internal and external sources of liquidity, including any material unused sources of liquid assets; and restrictions, including impact, on the ability of subsidiaries to transfer funds to the registrant if these disclosures are required in the financial statements.
When a material deficiency (a term that is not defined by the SEC) in liquidity exists or is expected to exist, the registrant must either indicate the course of action it has taken or proposes to take to remedy the deficiency, or state that it is currently unable to address the deficiency. The registrant must furnish any information (e.g., related to cash flow or working capital) that it believes is an indicator of its liquidity.
Registrants are expected to use the statement of cash flows presented in accordance with FASB Statement No. 95, Statement of
MD&A Liquidity and Capital Resources DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
Cash Flows, and other appropriate indicators in analyzing their liquidity and are expected to present a balanced discussion dealing with cash flows from investing and financing activities as well as from operations.
Although liquidity, by definition, relates to the future, members of the SEC staff have indicated that the discussion of liquidity should cover all the years presented from a trend standpoint and point out matters that make past results indicative or not indicative of future results.
Capital Resources
The discussion of capital resources must cover commitments for capital expenditures as of the end of the latest fiscal year and the anticipated sources of funds needed to fill those commitments. As indicated in the Codification of Accounting Series Releases (ASRs) and Financial Reporting Releases (FRRs), Section 501.03, registrants are expected to address material capital expenditures, significant balloon payments, 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 these obligations.
Any known material trends, favorable or unfavorable, in the registrant's capital resources as well as expected changes in the mix of equity, debt, and off-balance-sheet financing and the relative cost of those resources must be described. The Codification of Accounting Series Releases (ASRs) and Financial Reporting Releases (FRRs), Section 501.03, indicates that matters that have materially affected the most recent period but are not expected to have short- or long-term implications, as well as matters that currently are not material but are expected to affect future liquidity and capital resources significantly, must be disclosed. Examples of these types of matters include advertising, R&D, debt refinancings or redemptions, and levels of
MD&A Liquidity and Capital Resources DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
financing provided either by suppliers or to customers.
The SEC staff also encourages registrants to discuss factors that are relevant to the company's future plans and objectives. This information may be of particular importance to capital-intensive enterprises (for which planned expenditures generally are more meaningful than legally committed expenditures) and highly leveraged companies (for which the cost of capital may be high and the availability limited). This topic is discussed further in the Codification of Accounting Series Releases (ASRs) and Financial Reporting Releases (FRRs), Section 501.03.
2. GENERAL1. Are there matters that
are reasonably likely to have a material effect on future periods?
MD&A should:1. Discuss matters affecting liquidity or capital resources in the
most recent period that are reasonably likely to have future implications. MD&A should discuss liquidity and capital resources on both a long-term (over 12 months) and short-term (12 months or less) basis.
2. Discuss matters that are not currently material but are reasonably likely to significantly affect future liquidity or capital resources.
3. On December 9, 2008, the SEC staff identified “Ten Considerations for Preparing the Liquidity & Capital Resources Section of MD&A in 2008 Annual Reports.” The 2008 global financial crisis was the focus of this presentation.
References: Regulation S-K, Item 303(A) Instructions 2, 3, and 5; FRR No. 36 - 501.03 ; and FRR No. 72 – 501.13 , April 17, 2007 SEC Regulations Committee Discussion Document E; Michael Fay presentation at the 2008 National Conference on Current SEC and
3. Are there liquidity or capital resource factors relevant to future plans and objectives?
MD&A should identify liquidity or capital resource factors that are relevant to future plans and objectives. The SEC staff encourages this disclosure, particularly for highly leveraged companies and capital-intensive enterprises.
Reference: FRR No. 36 - 501.03(b)
4. Does the MD&A evaluate the company’s cash flow, capital resources, capital requirements, and liquidity?
The company should present a clear picture of its ability to generate cash sufficient to meet its reasonably likely future cash needs. In particular, a company that presents its cash flow statement using the indirect method permitted by FASB Statement 95, should discuss the factors that drive cash flows rather than simply describe the line items that appear on the cash flow statement. In drafting the this section, the following should be considered: Material cash requirements should be identified – The SEC staff
notes that a good starting point for this is the tabular disclosure of contractual obligations. The tabular disclosure should be supplemented with additional information about cash requirements such as interest, taxes, or amounts to be funded to cover postretirement benefits that may not be included in the tabular disclosure. The MD&A should also:
o Identify funds needed to operate, complete projects, and implement business plans;
o Explain commitments for capital or other expenditures; and
MD&A Liquidity and Capital Resources DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
o Provide the reasonably likely exposure to future cash requirements from known trends or uncertainties, and timing on when the uncertainties will be resolved.
The primary factors driving the company’s current and future cash flows should be provided.
Material covenants related to outstanding debt should be discussed and analyzed.
Cash management policies should be discussed.
Reference: FRR No. 72 – 501.13
3. LIQUIDITY1. Are there known and
(or) anticipated trends, demands, commitments, events, or uncertainties?
MD&A should identify known and anticipated trends, demands, commitments, events, or uncertainties reasonably likely to materially increase or decrease liquidity. Liquidity is defined as the company’s ability to generate cash adequate to meet its needs for day-to-day operations and material long- and short-term commitments. MD&A should discuss liquidity in the context of the company’s own business. For example, a discussion of working capital might be appropriate for a manufacturer but not for a bank.
The SEC staff recommends that management should consider the following in identifying trends, demand, commitments, events and uncertainties that require disclosure:
Provisions in financial guarantees or commitments, debt or lease agreements or other arrangements that could trigger a requirement for an early payment, additional collateral support, changes in terms, acceleration of maturity, or the creation of an additional financial obligation, such as adverse changes in the company’s credit rating, financial ratios, earnings, cash flows, or stock price, or changes in the value of underlying, linked or indexed assets;
Circumstances that could impair the company’s ability to continue to engage in transactions that have been integral to
MD&A Liquidity and Capital Resources DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
historical operations or are financially or operationally essential, or that could render that activity commercially impracticable, such as the inability to maintain a specified investment grade credit rating, level of earnings, earnings per share, financial ratios, or collateral;
Factors specific to the registrant and its markets that the registrant expects to be given significant weight in the determination of the registrant’s credit rating or will otherwise affect the registrant’s ability to raise short-term and long-term financing;
Guarantees of debt or other commitments to third parties; and Written options on non-financial assets (e.g., real estate puts).
References: Regulation S-K, Item 303(A) Instructions 2, 3, and 5 ; FRR No. 61; and FRR No. 72 – 501.13 ; Current Accounting and Disclosure Issues in the Division of Corporation Finance 11/30/06, III2 Contingencies, Loss Reserves, and Uncertain Tax Positions – Discussion in MD&A, SEC Speech, Stokes 2006
2. Are there financial indicators of the company’s liquidity condition?
MD&A should:1. Make clear the balance sheet conditions or income or cash flow
items that are indicators of the company’s liquidity condition. MD&A should enhance the discussion by an explanation of the reason why a particular indicator was considered appropriate.
2. Explain liquidity issues arising from all components of cash flow: operating, investing, and financing.
3. Disclose, separately, internal and external sources of liquidity, including:
a. Material unused sources of liquid assets.b. Known and anticipated trends, demands, commitments,
events or uncertainties that would impact the sources of liquidity.
MD&A Liquidity and Capital Resources DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
c. Nature and extent of restrictions on – and the resulting effects on past and future liquidity of – the ability of subsidiaries to transfer funds to the parent company when Regulation S-X Rule 4-08(e) requires disclosure of such restrictions in the financial statements.
4. Include a balanced discussion of historical cash flows for all periods presented. Discuss trends and identify matters that make past results indicative or not indicative of future results.
3. Are there significant variations between operating income and operating cash flow?
MD&A should highlight the significant variations between operating income and operating cash flows. The implications of the variance should be explained in terms of the implications for liquidity and earnings trends.
Reference: Current Issues and Rulemaking Projects, 11/24/99, III.J
4. Does a material liquidity deficiency exist or is one expected?
MD&A should describe, if there is a material liquidity deficiency, or one is expected to exist:
1. The deficiency.2. The course of action proposed to remedy the situation or if none,
a statement that the company has not decided on a remedy or a statement that it is unable to address the deficiency.
3. If the auditor’s report is modified for a going-concern uncertainty, MD&A should contain appropriate and prominent disclosure of the difficulties and viable plans to overcome them.
MD&A Liquidity and Capital Resources DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
2. How the decrease results in uncertainties about the company’s future liquidity.
3. The course of action that the company plans to take to remedy the liquidity problems, or alternatively, indicate that the company has no such plan.
Reference: AAER 561
6. Does the company have cash flow from discontinued operations?
MD&A should:1. Describe how cash flows from discontinued operations are
reported in the cash flow statements.2. Quantify cash flows from discontinued operations if they
are not disclosed separately in the cash flow statement.3. Describe how the absence of cash flows from discontinued
operations is expected to affect future liquidity and capital resources. For example, provide the effect on financing levels, terms, and covenants.
References: Division of Corporation Finance Presentation at the 33 rd Annual AICPA National Conference on Current SEC and PCAOB Developments, Slide 26, Current Accounting and Disclosure Issues in the Division of Corporation Finance 11/30/06, IIC1 Statement of Cash Flows – Discontinued Operations
7. In connection with an IPO, did the company issue for "nominal consideration" common stock, options or warrants to purchase common stock or other potentially dilutive securities?
MD&A should address the effects of dilutive issuances on the company’s liquidity, capital resources and results of operations.
Reference: SAB Topic 4D, Question 1
8. Are future cash outlays MD&A should disclose the effect on liquidity, if future cash outlays for
MD&A Liquidity and Capital Resources DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
for income taxes expected to exceed income tax expense?
income taxes are expected to substantially exceed income tax expense.
Reference: ASR No. 280 - 204.03 , April 17, 2007 SEC Regulations Committee Discussion Document E
9. Does the company engage in repurchase or reverse repurchase agreements?
MD&A should disclose, if the company engages in repurchase or reverse repurchase agreements:
1. Any material impact on liquidity and operations or the risk that results. Consider the entire period, not just the ending position, in assessing the impact on operations.
2. Material deviations from a stated policy regarding taking possession of assets under reverse repos.
3. Provisions to ensure the sufficiency of market value of underlying assets in the event of counterparty default.
Reference: FRR No. 24 - 501.10
10. Does the company have off-balance-sheet arrangements and other commitments?
MD&A should discuss the effects of off-balance sheet arrangements and other commitments in a separately captioned section of MD&A.
Reference: See Off-Balance Sheet Arrangements Below
11. Did the company receive a material insurance settlement?
MD&A should address:1. What was received;2. Why it was received;3. What the company plans to do with the settlement;4. Classification of the settlement in the cash flow statement; and5. The effect of the settlement on reported earnings.
References: Division of Corporation Finance Presentation at the 33rd Annual AICPA National Conference on Current SEC and PCAOB Developments, Slide 33, Current Accounting and Disclosure Issues in the Division of Corporation Finance 11/30/06, IIC2 Statement of Cash Flows – Insurance Proceeds
MD&A Liquidity and Capital Resources DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
12. Does the company have lease commitments?
MD&A should address known likely trends or uncertainties in future rent or amortization expense that could materially affect cash flows.
Reference: SEC Letter, February 7, 2005
13. Does the company have FIN 48 liabilities that will require cash settlement sometime in the future?
To the extent the registrant can make reasonably reliable estimates of the amount and timing of cash settlement, liabilities arising from FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes, should be included in the contractual obligations table required by Regulation S-K, Item 303 (a)(5). FIN 48 obligations not included in the table, should be disclosed in either a footnote to the table or in an “other” category along with the basis for exclusion.
For interim reporting purposes, Instruction 7 to Regulation S-K, Item 303(b) requires the table only when “material changes outside the ordinary course of the registrant’s business in the specified contractual obligations” occur during the interim period. Accordingly, when such criteria are met for FIN 48 liabilities, the registrant should either provide a complete updated contractual obligations table or provide narrative disclosures discussing the impact on prior disclosures.
Reference: April 17, 2007 SEC Regulations Committee Discussion Document E
4. CAPITAL RESOURCES1. Does the company have
material commitments for capital expenditures?
MD&A should:1. Disclose material commitments for capital expenditures as of the
end of the latest fiscal year. Even if no legal or contractual commitments have been made, disclosure is required if material planned expenditure result from a known demand, such as a growth trend. If the company decides not to incur the expenditures in this instance, a known uncertainty would exist
MD&A Liquidity and Capital Resources DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
regarding continuation of the trend/growth that MD&A should disclose.
2. Describe the material commitments for capital expenditures as of the latest fiscal period and indicate the general purpose of the commitments.
3. Disclose anticipated sources of funds to fulfill the commitments described above.
4. Discuss material capital expenditures, significant balloon payments, and other demands or commitments, including off-balance sheet items to be incurred beyond the next fiscal year and their proposed sources of funding.
2. Does the company have known capital resource trends?
MD&A should:1. Disclose known material favorable and unfavorable trends in
capital resources. 2. Disclose expected changes in the mix of equity, debt, and off-
balance sheet components of capital. 3. Disclose expected changes in relative cost of capital resources.4. Disclose the nature, extent, and impact of regulatory assistance
in connection with financial assistance from a federal regulatory agency related to an acquisition of a troubled financial institution, a transfer of nonperforming assets to a newly formed entity, or other organization.
For all YES answers, respond to the disclosure requirements and provide a reference.
D MD&A OFF-BALANCE SHEET ARRANGEMENTS1 INTRODUCTIONMD&A should discuss the key terms, risks and uncertainties associated with material off-balance sheet arrangements, including:
Key terms of the off-balance sheet arrangements such as guarantees, certain derivatives, retained interests and variable interests; and
The material effect of the arrangements on financial condition changes in financial condition, revenues and expenses, results of operations, liquidity, capital expenditures, and capital resources.
The disclosure should cover the most recent fiscal year, but it also should address changes from the previous year. In quarterly reports, MD&A should discuss material changes in the year-end disclosures.
2 DISCLOSURE REQUIREMENTS1. Does the
company have off-balance-sheet arrangements?
Disclose in a separately captioned section of MD&A the material facts and circumstances of off-balance-sheet arrangements such as guarantees, certain derivatives, retained interests, and variable interests. The purpose of this disclosure is to provide investors with a clear understanding of the arrangements and their material effects on financial condition, changes in financial condition, revenues and expenses, results of operations, liquidity, capital expenditures, and capital resources. MD&A also should include other information that the company believes is necessary for an understanding of its off-balance-sheet arrangements and the specified material effects. The disclosure should cover the most recent fiscal year, but it should also address changes from the previous year. MD&A in quarterly reports should inform investors about material changes in the year-end disclosures. More specifically, a company must disclose all of the following:
The nature and business purpose of the off-balance-sheet arrangements; The importance of off-balance-sheet arrangements to liquidity, capital
resources, market risk support, credit risk support, or other benefits; The overall magnitude of a company’s off-balance-sheet activities, the
For all YES answers, respond to the disclosure requirements and provide a reference.
specific material impact of the arrangements on a company, and the circumstances that could cause material contingent obligations or liabilities to come to fruition; and
Any known event, demand, commitment, trend, or uncertainty that will, or is reasonably likely to, result in the termination, or material reduction in availability to the company, of its off-balance-sheet arrangements that provide the company with material benefits.
In order to assist registrants in identifying their business activities that may have off-balance sheet implications, Item 303 explicitly defines the off-balance sheet arrangements that are required to be disclosed. The definition focuses on the common types of structures that may result in a registrant obtaining or retaining risk of loss that is not transparent to investors. The definition of off-balance sheet arrangements employs concepts in accounting literature in order to define the categories of arrangements with precision. Generally, the definition includes the following categories of contractual arrangements:
• Certain guarantee contracts, • Retained or contingent interests in assets transferred to an
unconsolidated entity, • Derivative instruments that are classified as equity, • Material variable interests in unconsolidated entities that conduct
certain activities, or A registrant that has an investment(s) or is otherwise involved
in nonconsolidated conduits (sometimes known as structured investment vehicles) and collateralized debt obligations (CDOs) should consider disclosure of its related exposure to risk.
In 2007, several companies determined that they were exposed (more than expected) from off-balance-sheet-structures because of their involvement with “subprime mortgages.” Registrants should ensure that such exposure has been discussed and quantified in their MD&A. In addition, on January 8, 2008, the SEC staff issued disclosure guidance for registrants that have transferred subprime adjustable rate mortgage loans to a Qualifying Special-Purpose Entity (as defined in FASB Statement No. 140, Accounting for Transfers and Servicing of Financial
For all YES answers, respond to the disclosure requirements and provide a reference.
Assets and Extinguishments of Liabilities). Registrants that have made such transfers should carefully review the disclosure guidance by the SEC staff.
References: Regulation S-K, Item 303(A)(4) , Item 303; Form 20-F, Item 5; Form 40-F, General Instruction B; Current Accounting and Disclosure Issues in the Division of Corporation Finance, 11/30/06, IIN, Disclosure of Off-Balance Sheet Arrangements; SEC Speech, Stokes 2006; Sample Letter Dated December 2007 Sent by SEC staff to Public Companies with Structure Investment Vehicles; SEC Speech Hunsaker 2007; Conrad Hewitt Letter Dated January 8, 2008
2. Does the company have payments due under contractual obligations?
Except for smaller reporting companies, disclose in a tabular format the amounts of payments due under specified contractual obligations. The amounts are to be aggregated by category of contractual obligation, for specified time periods. The company must present the information in a table, but can determine where within the MD&A to include the table.
The information should be as of the latest fiscal year-end balance sheet date, and the table should be in the following format:
For all YES answers, respond to the disclosure requirements and provide a reference.
Capital lease obligationsOperating lease obligationsPurchase obligationsOther long-term liabilities reflected on the company’s balance sheet under GAAPTotal
The SEC staff believes that judgment will be necessary in preparing the table. Preparers should use footnotes to clarify the content of the table. The staff addressed three specific issues about the table’s content: (1) purchase orders; (2) pension and other postretirement benefit obligations (OPEB); and liabilities arising from FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes.1. Purchase orders – The SEC staff believes that open purchase orders should be
aggregated and reported in the line item "purchase obligations." If the company’s internal reporting system does not aggregate certain purchase orders (for example, those below a specified dollar amount), those exclusions from the amount disclosed should be explained in a footnote to the table. Additional disclosures to clarify the significance of missing open purchase order information could include:
a. Prior year actual spending; orb. Amount employees are authorized to spend.
For all YES answers, respond to the disclosure requirements and provide a reference.
The staff also observed that management should consider whether the inability to gather this information represents an internal control deficiency.
2. Pension and OPEB – The staff stated that judgment should be exercised when determining how to present these obligations in the table. However, material funding requirements for both pension and OPEB should be included in the table along with a footnote describing the basis of presentation.
3. FIN 48 – The staff indicated that FIN 48 liabilities should be included in the contractual obligations table to the extent the registrant can make reasonably reliable estimates of the amount and period in which these liabilities will be paid. FIN 48 obligations not included in the table should be disclosed in either a footnote to the table or in an “other” category along with the basis for exclusion.
Companies, other than smaller reporting companies, must include the table of known contractual obligations in registration statements, annual reports, and proxy or information statements that are required to include financial statements. MD&A in quarterly reports should update the year-end discussions of off-balance-sheet arrangements and disclose material changes in the tabular presentation of contractual payments.
References: Regulation S-K, Item 303; Form 10-K Item 7; Form 20-F, Item 5; Form 40-F, General Instruction B; SEC Presentation, Division of Corporation Finance, Slides 14-17, 2003; April 17, 2007 SEC Regulations Committee Discussion Document E
MD&A INFLATION AND CHANGING PRICES DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
E MD&A INFLATION AND CHANGING PRICES1 INTRODUCTIONIf material, the impact of inflation and changing prices must be covered in the MD&A. The discussion need not include any specific numeric financial data; rather, a qualitative discussion will suffice. For example:
"The revenue increase was primarily due to inflation." "Most of the company’s property and equipment was acquired in recent
years, so recorded depreciation approximates depreciation based on current dollars."
No comment is necessary if inflation has no material impact on the financial statements.
Although generally accepted accounting principles no longer require publicly traded companies to disclose supplemental information on the effects of changing prices, the SEC continues to encourage registrants to voluntarily present quantified supplemental disclosures on the effects of inflation and other price changes. Companies that elect to disclose the supplementary information specified by FASB Statement No. 89, Financial Reporting and Changing Prices, may combine their explanations with the MD&A. Alternatively, the discussion may be omitted from the MD&A, but in this case a cross-reference should be provided to any supplemental disclosures related to the effects of inflation.
2 DISCLOSURE REQUIREMENTS1. Has inflation
had a material effect on the financial statements for the three most recent fiscal years?
MD&A should:1. Discuss the impact of inflation and changing prices on net sales or revenue
and income from continuing operations, if inflation has a material effect on the financial statements for the three most recent fiscal years. MD&A need not quantify the impact and may consist of a brief presentation of management’s views.
2. Cross-reference the disclosures or combine the explanations, if the company makes voluntary disclosures under FASB Statement 89. The SEC encourages voluntary disclosure of changing price information
MD&A INFLATION AND CHANGING PRICES DisclosureRequirements
Reference
Question Y N Disclosure Requirements Met?
For all YES answers, respond to the disclosure requirements and provide a reference.
3. Interim periods only – MD&A need not cover inflation and changing prices for interim periods.
A smaller reporting company may provide disclosure of the impact of inflation and changing prices for the last two most recent fiscal years if the registrant provides information on net sales and income from continuing operations for only two years.
For all YES answers, respond to the disclosure requirements and provide a reference.
F MD&A FORWARD-LOOKING DISCLOSURES1 INTRODUCTIONForward-Looking Disclosures
The MD&A requirements distinguish between certain prospective information that must be discussed and forward-looking disclosures that may be made voluntarily. Disclosure is required for the future impact of presently known trends, demands, events, or uncertainties. Disclosure is optional for forward-looking information (e.g., projections).
The distinction between the two types rests with the nature of the prediction required, although both are covered by the SEC's safe-harbor rules, Rule 175, Liability for Forward-Looking Statements by Issuers. The required disclosures are based on currently known trends, events, and uncertainties that are reasonably expected to have material effects (e.g., reduction in product prices, changes in insurance coverage, or the likely nonrenewal of a material contract). Optional forward-looking disclosures involve anticipating a future trend or event or anticipating a less predictable impact of a known event, trend, or uncertainty. This topic is discussed further in the Codification of Accounting Series Releases (ASRs) and Financial Reporting Releases (FRRs), Section 501.02.
When a known trend, demand, commitment, event, or uncertainty exists, management must make two assessments:
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.
If management cannot make that determination, it must evaluate objectively the consequences of the known trend, demand, event, commitment, 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
For all YES answers, respond to the disclosure requirements and provide a reference.
of operations is not reasonably likely to occur. Each final determination resulting from the assessments made by management must be objectively reasonable at the time the determination is made. The disclosure in this latter case could be limited to a discussion of the facts and an indication that management is unable to assess the likely impact on future results, etc.
Application of these principles is demonstrated in the following example, which is presented in the Codification of Accounting Series Releases (ASRs) and Financial Reporting Releases (FRRs), Section 501.02:
A registrant has been correctly designated a PRP (potentially responsible party) by the EPA (Environmental Protection Agency) with respect to cleanup of hazardous waste at three sites. No statutory defenses are available. The registrant is in the process of preliminary investigations of the sites to determine the nature of its potential liability and the amount of remedial costs necessary to clean up the sites. Other PRPs also have been designated, but the ability to obtain contribution is unclear (since the liability is joint and several), as is the extent of insurance coverage, if any. Management is unable to determine that a material effect on future financial condition or results of operations is not reasonably likely to occur. Based upon the facts of this hypothetical case, MD&A disclosure of the effects of the PRP status, quantified to the extent reasonably practicable, would be required. For MD&A purposes, aggregate potential cleanup costs must be considered. Facts regarding whether insurance coverage may be contested, and whether and to what extent potential sources of contribution or indemnification constitute reliable sources of recovery, may be factored into the determination of whether a material future effect is not reasonably likely to occur.
Critical Accounting Policies
Registrants should disclose information about their critical accounting
For all YES answers, respond to the disclosure requirements and provide a reference.
policies. A critical accounting policy is one that is both very important to the portrayal of a company's financial position and its results of operations and requires management's most difficult, subjective or complex judgments. The purpose of disclosing information about critical accounting policies is to:
Communicate to investors and other financial-statement users the level of imprecision inherent in the financial statements;
Provide an understanding about how management forms its judgments about future events; and
Explain how these judgments and future events could affect the financial statements.
The key points to identify for investors in these disclosures are:
Types of assumptions that underlie the most significant and subjective estimates;
Sensitivity of those estimates to deviations of actual results from management's assumptions; and
Circumstances that have resulted in revised assumptions in the past.
2 DISCLOSURE REQUIREMENTS1. Does the
company have a known trend, demand, event, commitment or uncertainty?
If management cannot determine if the event is likely to come to fruition, it must evaluate objectively the consequences of the known trend, demand, event, commitment, 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. Each final determination resulting from the assessments made by management must be objectively reasonable at the time the determination is made. The disclosure in this latter case could be limited to a discussion of the facts and an indication that management is unable to assess the likely impact on
2. Has the company identified its critical accounting policies?
Although the SEC’s proposed rules regarding the discussion of critical accounting policies has not yet been finalized, MD&A should nonetheless address the role significant accounting policies and estimates have in understanding the company’s results. For example, the following should be considered: Identify and evaluate critical accounting policies Identify the riskiness of the critical accounting policies, analyzing to the
extent possible factors such as:- How the company arrived at the estimate;- How accurate the estimate/assumption has been in the past;- Whether the estimate/assumption is reasonably likely to change in
the future; and- Evaluate the sensitivity to change of critical accounting policies.
For example, discuss and quantify the sensitivity of the company’s pension plan long-term rate of return and the effect of reasonably possible changes on the company’s financial condition and operating performance
The SEC staff has asked companies to enhance their disclosure of critical accounting policies in one or more of the following areas:
Revenue recognition; Restructuring charges; Impairments of long-lived assets, investments and goodwill; Depreciation and amortization expenses; Income tax liabilities; Pension income and expense; Environmental liabilities; Repurchase obligations under repurchase commitments; Stock based compensation; Insurance loss reserves; Inventory reserves and allowance for doubtful accounts;
For all YES answers, respond to the disclosure requirements and provide a reference.
Lease accounting; and Changes in valuing financial instruments.
A company that has significant assets or liabilities subject to the valuation requirements in FASB Statement No. 157, Fair Value Measurements, should include as a critical accounting estimate a discussion on how it applied Statement 157 particularly if Level 3 inputs were involved.
References: FRR No. 60 ; FRR No. 72 – 501.14 ; Summary by the Division of Corporation Finance of Significant Issues Addressed in the Review of the Periodic Reports of the Fortune 500 Companies; SEC Letter February 7, 2005; and Current Accounting and Disclosure Issues, 11/30/06, IIE2 Leasing – Disclosure, IIF Revenue- Disclosure, IIH1 Investments-Other-Than-Temporary Declines in Value, III Contingencies, Loss Reserves, and Uncertain Tax Positions, IIJ2 Pension, Post Retirement, and Post Employment Plans - Disclosure, IIL5 Segment Disclosure - Operating Segments and Goodwill Impairment, IIM1 Issues Associated with SFAS 133, Accounting for Derivative Instruments and Hedging Activities – Formal Documentation under SFAS 133, SEC Speech, Stokes 2006, SEC Speech, Hunsaker 2007, Sample Letter March 27, 2008; Slides 61-74 of Steven C. Jacobs December 9, 2008 presentation; SEC Speech Carr December 8, 2008
3. Is the company going to adopt a recently issued accounting standard in a future period?
MD&A should:1. Disclose the impact of adoption on future financial condition and results
of operations. Disclosure does not have to be made if the future effect is not expected to be material. The SEC staff believes the following should be disclosed:
a. Description of the new standard.b. Date adoption is required or, if earlier, expected.c. Methods of adoption allowed by the standard and, if determined,
the method to be used.d. Description of the standard’s impact on the financial statements
unless not known or reasonably estimable (in which case MD&A should make a statement to that effect).
e. Disclosure of the related potential impact of other significant
For all YES answers, respond to the disclosure requirements and provide a reference.
matters (such as technical violations of debt covenants).
On September 13, 2006, the SEC staff issued Staff Accounting Bulletin (SAB) Topic 1N, “Financial Statements — Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108), SAB 108 addresses how a registrant should evaluate whether an error in its financial statements is material. The SEC staff concludes in SAB 108 that materiality should be evaluated using both the “rollover” and “iron curtain” methods. Registrants are required to comply with the guidance in SAB 108 in financial statements for fiscal years ending after November 15, 2006. Registrants that have evaluated financial statement errors contrary to the views of the SEC staff and have not adopted the provisions of SAB 108 should consider disclosure of same following the guidance in SAB Topic 11M, “Miscellaneous Disclosure — Disclosure of the Impact That Recently Issued Accounting Standards Will Have on the Financial Statements of the Registrant When Adopted in a Future Period” (SAB 74).
References: SAB Topic 11M, SAB 108
4. Is disclosure of a prospective acquisition or disposition of a business required by GAAP, securities regulation, or was such a disclosure made by or on behalf of the
MD&A should discuss the impact of the transaction. If not disclosed in a previous MD&A, the current MD&A need not discuss the impact of the negotiations if including that information would jeopardize completion of the transaction.
For all YES answers, respond to the disclosure requirements and provide a reference.
company?5. Is the
company accounting for a derivative gain or loss related to a forecasted transaction?
The SEC staff believes that MD&A should disclose events or circumstances that may determine whether a forecasted transaction, such as an issuance of debt that is hedged, will occur. Also, the MD&A should disclose the gain or loss that may result if such a transaction is no longer probable.
For all YES answers, respond to the disclosure requirements and provide a reference.
H SPECIALIZED INDUSTRIES1 BANK HOLDING COMPANIES
1. If the company is a bank holding company, has it had changes in any of the elements and (or) components of the loan loss allowance, even if the total provision for loan losses did not change materially from period to period?
MD&A should explain fully the reasons for changes in each of the elements and components of the loan loss allowance, even if the total provision for loan losses did not change materially from period to period, so that a reader can understand how changes in risks in the portfolio during each period relate to the loan loss allowance established at period-end. Quantify and explain:
1. How changes in loan concentration, quality and terms that occurred during the period are reflected in the allowance.
2. How changes in estimation methods and assumptions affected the allowance.
3. Why reallocations of the allowance among different parts of the portfolio or different elements of the allowance occurred.
4. How actual changes and expected trends in nonperforming loans affected the allowance.
5. How actual changes and expected trends in risks associated with cross border outstanding amounts affected the allowance.
6. How the level of the allowance compares with historical net loss experience.
References: SEC Letter Dated 1/12/99, Current Issues and Rulemaking Projects, 11/24/99, IIIE, Allowance for Loan Losses, and Current Accounting and Disclosure Issues in the Division of Corporation Finance, 11/30/06, IIP1, Allowance for Loan Losses - Disclosure
2. Does the company have known uncertainties relating to a significant concentration of commitments
MD&A should disclose any known trend and (or) uncertainty likely to impact future operations, such as concentrations of higher risk assets or commitments that are significant in relation to shareholder equity. Guide 3 (Loan Concentrations) requires disclosure of any concentration of loans exceeding 10% of total loans. Companies should consider whether such uncertainties are reasonably likely to materially impact future operations so as to require disclosure under MD&A even though such concentration of loans may not meet the threshold for disclosure under Guide 3.
For all YES answers, respond to the disclosure requirements and provide a reference.
or loans? Reference: Current Issues and Rulemaking Projects, 1996
3. Does the company originate residential loan products?
Provide the following, as appropriate: Disaggregated information about residential mortgage loans with features
that may result in higher credit risk; Descriptions of risk mitigation activities used to reduce exposure to credit
risk related to residential mortgage loans; Disclosure of trends related to residential mortgage loans with features
that may result in higher credit risk that are reasonably likely to have a material favorable or unfavorable impact on net interest income after provision for loan loss.
Reference: Current Accounting and Disclosure Issues in the Division of Corporation Finance, 11/30/06, IIQ5, Loans and Other Receivables – Disclosure about Residential Loan Products
For all YES answers, respond to the disclosure requirements and provide a reference.
2 REGULATED INDUSTRIES1. Is the
company a utility with a potential environmental contingency loss?
Many utilities are responsible for alleged contaminated sites. Estimates of the financial impact of environmental contingencies can be complicated by the utilities’ insurance coverage and by the utility’s ability to recover environmental costs from ratepayers through future rates.
MD&A should discuss potential environmental contingencies and relate the contingencies to liquidity, capital resources, construction programs, the expected action of regulators, and insurance coverage.
Reference: Minutes of the AICPA Public Utility Committee Meeting with the SEC staff April 19, 1991
2. Is the company facing competitive and (or) regulatory changes?
MD&A should discuss the specific risks and uncertainties that are reasonably likely to affect the company. Many utilities are facing increasing competition and a changing regulatory environment. MD&A should discuss, and quantify as practicable, the consequences of the competitive and regulatory changes, including:
Description of plans submitted to regulators to implement special rate and/or depreciation plans;
Amount of potentially "stranded" costs identified in those plans; Specific segments or customer classes most likely to be affected by
regulatory or competitive changes; How specific assets, revenues, and operating margins may be affected; How cost of capital may be affected; and Other reasonably likely material effects.
Reference: Current Issues and Rulemaking Projects, Industry-Specific Issues, 11/16/98, IIIA, Disclosure by Electric Utilities
For all YES answers, respond to the disclosure requirements and provide a reference.
3 FINANCIAL INSTITUTIONS1. Did the
company receive financial assistance in connection with federally assisted acquisitions or restructurings?
MD&A should disclose the assistance if it has had a material effect or is reasonably likely to have a material effect on results of operations, the nature, amounts, and effects of such assistance.
Reference: FRR No. 36 - 501.06(c)
2. Is the company out of compliance with applicable regulatory net capital requirements?
MD&A should address the capital requirements and plans for compliance.
Reference: Current Issues and Rulemaking Projects, 1996, Financial Institutions - Disclosure of Regulatory Capital Requirements
3. Does the company have an investment portfolio with debt securities carried at amortized cost as specified in FASB Statement No. 115, Accounting for Certain Investments in
MD&A should assess the significance of unrealized loss in its debt securities portfolio carried at amortized cost. This assessment should be made relative to the company’s net worth and regulatory capital requirements. Also, MD&A should analyze and, to the extent practicable, quantify:
The likely effects on current and future earnings and investment yields and on liquidity and capital resources of material unrealized losses in the portfolio;
Material sales of securities at gains; and Material shifts in average maturity.
A similar analysis should be provided if a material portion of fixed rate mortgages maturing beyond one year carries rates below current market.
If a material proportion of the portfolio consists of securities that are not traded actively in a liquid market, MD&A should:
For all YES answers, respond to the disclosure requirements and provide a reference.
Debt and Equity Securities?
Disclose the proportion; Describe the nature of the securities and the source of market value
information; and Discuss any material risks associated with the investment relative to
earnings and liquidity.Similar disclosure should be furnished if the portfolio includes instruments the market values of which are highly volatile relative to small changes in interest rates and this volatility may materially affect operating results or liquidity.
Reference: Current Issues and Rulemaking Projects, 11/16/98, IIID, Accounting for Investment Securities
4. Has the company had material changes in investment securities positions that affect tax-exempt interest income?
MD&A should discuss material changes in items of revenue or expense and should explain the changes in textual discussion and statistical tables. Companies may want to present yields on a tax equivalent basis. If appropriate, MD&A should include a comment on material changes in investment securities that affect tax-exempt interest income.
For all YES answers, respond to the disclosure requirements and provide a reference.
4 OIL AND GAS1. Did the company hedge oil and gas prices?
If the company’s hedging activity had a material impact on average oil and gas prices received during the year, MDA should discuss and quantify the impact.
Reference: Current Issues and Rulemaking Projects, 11/24/99, IIIS7, Issues in the Extractive Industry - Hedging Transactions
2. Does the company follow the full cost method of accounting under Rule 4-10(c) of Regulation S-X?
Oil and gas producing companies following the full cost accounting method should disclose the effect of the adoption of FASB Statement No. 143, Accounting for Asset Retirement Obligations, in MD&A. This disclosure should address each area of accounting that is affected or that is expected to be affected. This disclosure should specifically address changes in the company’s application of full cost accounting, including, but not limited to, how the company’s calculation of the full cost ceiling and depreciation, depletion, and amortization (DD&A) are affected by the adoption of Statement 143. The SEC staff also notes that following the adoption of Statement 143, a registrant’s calculation of DD&A under Rule 4-10(c) should continue to include an amount for estimated dismantlement and abandonment costs, net of estimated salvage values that are expected to result from future development activities.All registrants are expected to apply the accounting and disclosures described in Staff Accounting Bulletin (SAB) Topic 12D4, “Oil and Gas Producing Activities — Application of Full Cost Method of Accounting — Interaction of Statement 143 and the Full Cost Rules,” (SAB 106) prospectively as of the beginning of the first fiscal quarter beginning after October 4, 2004. [Editor’s note: While most companies should have already adopted the guidance in Statement 143, companies may find the guidance in SAB Topic 12D4 useful when explaining and disclosing the interaction of the full cost method of accounting and Statement 143.]
Reference: SAB Topic 12D43. Does the company engage in activity related to buy/sell
If reported volumes and revenue reflect material activity arising from these transactions, the company should include quantification of the effects and address any related material trends and uncertainties in MD&A.
References: SEC Sample Letter, February 11, 2005, Current Accounting and
For all YES answers, respond to the disclosure requirements and provide a reference.
arrangements for oil and gas commodities?
Disclosure Issues in the Division of Corporation Finance 11/30/06, IID Oil and Gas
4. Does the company capitalize exploratory drilling costs?
MD&A disclosures should address the trends and uncertainties related to exploration expenses, and the extent to which they were affected by the deferral of exploratory drilling costs.
For all YES answers, respond to the disclosure requirements and provide a reference.
5 INSURANCE COMPANIES1. Did the
company have significant unrealized losses in its investment portfolio?
MD&A should discuss the implications of significant unrealized losses in the company’s investment portfolio.
Reference: ASR 301 - FRR 403.03
2. Is the company a property and casualty insurance company that carries reinsurance?
MD&A should address the effects of trends related to losses and reinsurance that are reflected in Guide 6 information and the notes to the financial statements. The effects on results of operations, liquidity, and capital resources should be discussed. The SEC staff believes that the better presentation of the Guide 6 tables is a gross presentation of losses and reinsurance recoveries, but the staff will accept net basis information as long as disclosures in the tables and MD&A are adequately informative. Reference: SEC Speech, Barber, 1995
3. Is the company a property and casualty insurance company that recently had significant unfavorable claims experience that the company considers to be nonrecurring
The company should consider providing disclosure of the loss contingency in MD&A. The SEC staff also expects companies to disclose the nature of the loss contingency and the impact on trends in their loss reserve development discussion provided pursuant to Property-Casualty Industry Guides 4 and 6. References: SAB Topic 5W , Current Accounting and Disclosure Issues in the Division of Corporation Finance 11/30/06, IIR Disclosure of Liability for Unpaid Claims and Claim Adjustment Expenses and Reinsurance Recoveries on Paid and Unpaid Claims
For all YES answers, respond to the disclosure requirements and provide a reference.
6 RESEARCH AND DEVELOPMENT COMPANIES1. Does the
company engage in research and development (R&D) activities and transfer rights to the R&D under complex arrangements?
Biotechnology companies and others engaged in research and development activities often provide services and transfer rights under complex arrangements that present many accounting and disclosure issues. The arrangements may include payment terms that include receipt of up-front fees and milestone payments. If these arrangements comprise a significant portion of revenues, clear and balanced disclosure should be provided about the terms of the arrangements, the methods of accounting for them, the specific risks and uncertainties associated with them, and their historical and expected effects on operations and financial position.
MD&A should discuss: The historical and expected effects of material new contracts and the
achievement of revenue recognition milestones on operations and financial position;
The amounts of material up-front and milestone fees scheduled to be received and to be recognized as revenue over each of the next five years;
Material uncertainties affecting realization of fees.
Reference: Current Issues and Rulemaking Projects, 8/31/01, Research and Development Expenses
2. Does the company incur significant R&D expenses?
MD&A should discuss for major R&D projects or groups of related projects: The costs incurred to date; The current status; The estimated completion dates; If costs are not reasonably certain, discuss those uncertainties; and The risks and uncertainties associated with completing development
projects on schedule and the consequences if they are not completed timely.
Reference: Current Issues and Rulemaking Projects, 8/31/01, Research and Development Expenses
For all YES answers, respond to the disclosure requirements and provide a reference.
7 DEFENSE CONTRACTORS1. Is the
company a defense contractor or does it invest in defense contractors?
MD&A should discuss the potential effects of the government's inquiry into the defense contract procurement process if the effects may be material to the company. Such a discussion should be included where the registrant reasonably expects that the government's inquiry will have a material adverse effect on a company's financial condition, liquidity, capital resources, net sales, revenues or income from continuing operations, or such inquiry otherwise would cause a material change in the relationship between costs and revenues. Disclosure also should be provided where, in light of the uncertainty regarding the government's inquiry, reported financial information would not necessarily be indicative of the company's future operating results or financial condition.
The Commission's rules also require disclosure of any additional material information, beyond information specifically required to be disclosed that is necessary to make the required statements not misleading, as to the business, financial results and condition, and the management of the company. In this regard, consideration should be given to disclosing the effects of the government's inquiry where management reasonably believes that existing disclosure may be materially deficient because of the investigation's potential impact upon company expenditures, earnings, or competitive position within the industry. Moreover, if a company has a policy or approach towards defense contract procurement that is likely to be affected as a result of the inquiry, it may be-necessary to disclose such effects, including the resulting costs, in the description of the company's business, MD&A, or financial statements as appropriate.
