The U.S. Securities and Exchange Commission (SEC) is planning to issue a proposal by April 2020 that would “modernize and simplify disclosure rules” regarding management’s discussion and analysis (MD&A) of financial condition and results of operations.
Here’s what we know so far.
Additions to MD&A requirements
MD&A is an integral part of public companies’ financial statements. In it, management provides a narrative discussion of the company’s results and operations.
However, a lot has changed in the business environment since the SEC last updated its MD&A guidance in December 2003.
For example, intangible assets, such as human capital and intellectual property, have become more prominent in a company’s value.
Updating the MD&A disclosure rule is a new item on the SEC’s spring 2019 agenda. But little else has been formally announced about the project.
Revising vs. rewriting MD&A requirements
At this point, the SEC isn’t planning to rewrite the disclosure rule, 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.
During a recent panel discussion, Moffatt said, “I don’t think people have identified [MD&A] as something that needs to be fixed today.” He added that there are other rulemaking projects for specific rules that will touch on pieces of MD&A.
This project is part of SEC Chairman Jay Clayton’s initiative to scale back burdensome disclosure requirements.
For years, businesses have complained that disclosure documents today have become too long — some total hundreds of pages. Business groups argue that the filings are costly to prepare but don’t provide much value to investors.
On a related note, CorpFin Director William Hinman recently said that the staff will review Regulation S-K, which lays out the reporting requirements for periodic reports.
Item 303 of Reg S-K provides instructions on the types of information that should be covered in MD&A.
“Some of the S-K rules have sort of bright-line dollar standards that may be a little out of date,” said Hinman, explaining the thinking behind the staff’s broad review of Reg S-K during the inaugural meeting of the SEC’s Small Business Capital Formation Advisory Committee.
“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.”
A pro-business regulatory environment
The SEC recently 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.