The Time Has Come… MD&A Requirements May Soon Be Updated

In regards to management’s discussion and analysis (MD&A) of financial condition and results of operation, the U.S. Securities and Exchange Commission (SEC) plans to issue a proposal that would “modernize and simplify disclosure rules” by April 2020. Here’s what we know so far.

Different business environment from 2003

MD&A, where management provides a narrative discussion of the company’s outcomes and operations, is an essential component of public companies’ financial statements. However, since the SEC last updated its MD&A guidance in December 2003, there have been many changes in the business environment. For example, intangible assets such as human capital and intellectual property have become more prominent in a company’s value.

Although little has been formally announced about the project, updating the MD&A disclosure rule is a new item on the SEC’s spring 2019 agenda.

Revising vs. rewriting: what’s the difference?

According to Chief Accountant Kyle Moffatt, a senior staff member of the Division of Corporation Finance (CorpFin), the unit responsible for writing the disclosure rule, the SEC does not plan to rewrite the disclosure rule at this time. Moffatt stated, “I don’t think people have identified [MD&A] as something that needs to be fixed today” during a recent panel discussion. He added that there are other rulemaking projects for specific rules that will touch on pieces of MD&A.

This project is part of the initiative by SEC Chairman Jay Clayton to scale back burdensome disclosure requirements. Businesses have complained for years that disclosure documents today have become too lengthy — several hundred pages in total. Business groups argue that the filings are costly to prepare but don’t provide much value to investors.

Recently, William Hinman, the director of CorpFin, said that the staff will review Regulation S-K, which lays out the reporting requirements for periodic reports. Instructions on the type of information that should be covered in MD&A are provided under Item 303 of Reg S-K.

During the inaugural meeting of the SEC’s Small Business Capital Formation Advisory Committee, Hinman explained the thinking behind the staff’s broad review of Reg S-K and how “some of the S-K rules have sort of bright-line dollar standards that may be a little out of date.” He also said, “We want to sort of reinvigorate that S-K with a principles-based approach that focuses on materiality. We do think that could give us the ability to streamline some of the requirements there.”

Part of a broad pro-business agenda

Recently, the SEC proposed a rule that would exempt more categories of companies from the requirement that they get their external auditors to attest to their internal financial controls. If the commission moves ahead to streamline MD&A, it will represent yet another victory for businesses.

For more information about how these new revisions can affect you and your business, contact a Weaver professional today.

© 2019