III. How the Rules Work
a. Fundamental Principles of MD&A 15-17
- What Regulations & Forms Govern MD&A 15-17
- Purpose of MD&A 15-18
- Not Intended to Be Recitation of Financials 15-18
- Provide Analysis, Not Just Mere Discussion 15-19
- Should Be “User Friendly” 15-20
- Not “Check-the-Box” Regulation 15-20
- Content & Focus of MD&A Disclosure 15-21
- Format of Disclosure 15-21
- Better Usability of MD&A 15-22
- MD&A-Type Disclosures Must Appear in Filed Reports 15-22
- MD&A Not Part of Financial Statements 15-23
- Relationship of CEO/CFO Certifications 15-23
- Related Party Transactions Disclosure May Be Required 15-23
- Litigation-Related Disclosure May be Required 15-24
b. Disclosure Controls & Drafting Process 15-24
- Written Disclosure Controls & Procedures for MD&A 15-24
- Role of Disclosure Committees for MD&A 15-25
- Who Takes Lead for Drafting MD&A 15-25
- Who Should Not Take Lead for Drafting MD&A 15-26
- Independent Auditor Involvement 15-26
- Tie to Financials & Other Sections of Disclosure Document 15-27
- Look at Corp Fin Staff Comments 15-27
- Involvement of Audit Committee 15-27
- Litigation Counsel Should Review Litigation-Related MD&A Disclosures 15-28
- Outside Law Firm Involvement Possible 15-28
- Periodic Underwriter Counsel Involvement Ahead of Imminent Deal 15-28
c. MD&A Summaries 15-28
- Non-GAAP Use in MD&A Summaries 15-28
d. Item 303(a) & Full Year Comparisons 15-30
- Form 10-K’s MD&A 15-30
- Year-to-Year Comparisons Required 15
- Common Definitions 15-30
- Segments 15-31
- Corp Fin Comments Often on Segment Determinations 15-31
- How to Respond to Corp Fin Comments on Segment Determinations 15-32
e. “Known Trends” 15-36
- Two-Step Analysis for Determining When “Known Trends” Must Be Disclosed 15-36
- Identifying “Known Trends” 15-36
- Concerns Over Turning “Known Trends” Into Self-Fulfilling Prophecies 15-37
- Addressing “Recent Accounting Pronouncements” 15-38
- “Known Trends” Disclosure on Emerging Issues 15-41
- Actually Known Trends vs. Should-Have-Known 15-42
- Merger Negotiations Need Not Be Disclosed As “Known Trend" 15-42
f. Liquidity & Capital Resources 15-43
- Importance of Liquidity & Capital Resources Disclosure 15-43
- Discussions of Liquidity & Capital Resources Frequently Combined 15-43
- Type of Liquidity & Capital Resources Disclosure Required 15-43
- Evaluate Liquidity on Short-Term and Long-Term Basis 15-44
- Disclosure About Potential Cash Flow Fluctuations Required 15-44
- Intra-Period Variations Required If Material 15-44
- “Capital Resources” Disclosure 15-44
- Cash Flow, Cash Requirements & Cash Management 15-45
- Known or Anticipated Breaches of Material Debt Covenants Required 15-46
- Addressing Repurchase Agreements 15-46
- Restrictions on Intra-Company Loans and Dividends 15-47
- Discuss Known Trends 15-47
g. Results of Operations 15-48
- Four Requirements for “Results of Operations” Section 15-48
- Address Known Trends 15-49
- “Unusual or Infrequent Events” 15-49
- Impact of Inflation 15-49
h. Off-Balance Sheet Arrangements 15-49
- Controversy Over Off-Balance Sheet Arrangements 15-49
- Definition of “Off-Balance Sheet Arrangement” 15-49
- Required Types of Disclosure 15-50
- Not Required Until Definitive Agreement (Or Subject Only to Customary Closing Conditions) Exists 15-51
- Multiple Arrangements Should Be Aggregated in Groups or Categories 15-51
- Disclosure of Only Most Recent Fiscal Year Required 15-51
- Cross-Referencing to Financial Statement Footnotes Permitted 15-51
- Relationship to Liquidity & Capital Resources Disclosure 15-51
- No Specific Confidentiality Exemption for Off-Balance Sheet Arrangements 15-52
i. Contractual Obligations 15-52
- Table of Contractual Obligations Required 15-52
- Subcategories Required for Tabular Presentation 15-53
- Definition of Required Subcategories 15-53
- Repurchase Obligations 15-53
j. Accounting Policies & Estimates 15-54
- No Specific SEC Rules for Accounting Policies & Estimates 15-54
- Differences Between Accounting “Estimates” v. “Policies 15-54
- PCAOB Staff’s Concept Paper on Accounting Estimates & Fair Value 15-56
- Supplement—Not Duplicate—Financial Statement Notes 15-56
- Include Risk Assessments & Sensitivity Analysis, Quantified If Possible 15-56
- Audit Committee’s Involvement with Audit Estimates 15-57
- Cases Addressing Faulty Segment Reporting 15-57
k. Item 303(b) & Interim Period Updates 15-58
- Form 10-Q’s MD&A 15-58
- Address Known Trends 15-58
i. Safe Harbors for Forward-Looking Information 15-59
- Use of Safe Harbor in MD&A 15-59
- Private Securities Litigation Reform Act of 1995 15-59
- Comparing the PSLRA Safe Harbor & “Bespeaks Caution” Doctrine 15-60
- Safe Harbor Only Applies to Forward-Looking Statements 15-61
- Safe Harbor May Not Apply to “Mixed” Statements 15-61
- “On Track” Statements May Not Be Forward-Looking 15-62
- Interplay—and Cross-References—of Risk Factors (& Cautionary Language) With MD&A 15-62
m. Smaller Reporting Companies 15-63
n. Foreign Private Issuers 15-63
o. Non-GAAP Financial Measures 15-63
- How Non-GAAP Financial Measures Are Used in MD&A 15-63
- Definition of “Non-GAAP Financial Measure” 15-64
- Restrictions on Use of Non-GAAP Financial Measures in SEC Filings 15-64
- Trends in Use of Non-GAAP Financial Information in MD&A 15-65
p. SEC Enforcement Actions Addressing MD&A 15-66
- Cases Involving Insufficient Known Trend Disclosure 15-66
- Cases Addressing Material Misrepresentations 15-69
- Cases Addressing Insufficient Disclosure of Accounting Issues 15-69
- Cases Addressing Incomplete Disclosure of “Unusual Events” 15-70
q. Private Litigation Over MD&A 15-70
IV. Common Questions & Our Analysis
a. MD&A Disclosure Generally 15-71
- MD&A Should Address General Economic Conditions, Particularly During Times of Uncertainty 15-71
- Disclosure of Future Non-Recurring Transaction May Be Required 15-72
- SEC Staff Expects Quantification of Forward-Looking Information If Feasible 15-73
- Correcting Errors in MD&A Depends on Materiality 15-74
b. Specific Disclosure Requirements of Item 303(a) & Full-Year Comparisons 15-75
- Affirmative Statement About Sufficient Liquidity & Capital Resources for 12 Months Required 15-75
- “Capital Resource” Is Intentionally Undefined 15-75
- Disclosure May Be Required for Possible Default Even If Negotiating for Waiver/Amendment 15-76
- Immaterial Defaults: Item 303 Doesn’t Require Disclosure (But Reg S-X Might) 15-77
- Updating Prior Year MD&A May Be Required 15- Following Material Change 15-78
- Pro Formas May Be Required in MD&A Following Material Change 15-78
c. Specific Disclosure Requirements of Item 303(b) & Interim Updates 15-79
- Contractual Obligations Update Generally Not Required in 10-Q 15-79
- Only Material Changes to Critical Accounting Policies Required in Form 10-Q 15-79
- Post-Period Disclosure in 10-Q and Interaction with Rule 135c 15-80
- Change in Auditor for Review of Interim Financials 15-81
d. Smaller Reporting Companies 15-81
- Shouldn’t Pair Three Years of Financial Statements With Two Years of Analysis 15-81
e. Non-GAAP Financial Measures 15-81
- Meaning of “Not More Prominent” Than GAAP Disclosure 15-81
- “Effective Tax Rate” Is Non-GAAP Financial Measure 15-82
- Earnings Release Information Need Not Be Repeated Unless MD&A Requires (But Disclosures Should be Consistent) 15-82
f. M&A–Related Disclosures 15-83
- M&A Costs for Deals Not Yet Announced 15-83
- Pro Forma MD&A Not Required in Form S-4 15-84
- MD&A After Merger With Shell Must Include Historical Discussion of Shell Operations 15-84
- Form S-4: Don’t Need to Include MD&A for Non-Reporting Target 15-84
- Offering to Fund Acquisition 15-85
