SEC Proposes Some Significant Changes to Regulation S-K and Provides Guidance on Disclosure of Key Performance Indicators

Proposed Amendments to Regulation S-K

On January 30th, the SEC proposed more amendments to the disclosure requirements of Regulation S-K.  Like other proposed and final amendments to Regulation S-K issued over the past two years, the recent proposal intends to modernize, simplify and enhance the SEC’s framework for disclosures outside the financial statements. Further information about the SEC’s ongoing Disclosure Effectiveness Initiative, of which this proposal is a part, can be found on the SEC’s Spotlight on Disclosure Effectiveness webpage. The proposed amendments would:

  • Streamline the disclosure instructions to management’s discussion and analysis (MD&A) (S-K Item 303) and clarify the overall objective of MD&A;
  • Eliminate the requirements to disclose selected financial data (S-K Item 301) and supplementary financial data (S-K Item 302);
  • Amend certain other longstanding prescriptive disclosure requirements within MD&A (e.g., disclosure of contractual obligations in a tabular format would no longer be required);
  • Clarify the existing guidance for the disclosure of critical accounting estimates and incorporate it into Regulation S-K;
  • Clarify the disclosure requirements regarding the results of operations by codifying other guidance within Regulation S-K (e.g., the discussion of the reasons underlying material changes is required); and
  • Promote a principles-based approach to certain disclosures within MD&A.

The proposal is subject to a 60-day public comment period after its publication in the Federal Register.  Appendix A includes some of the significant proposed amendments compared to the current requirements.

Interpretive Guidance on Key Performance Indicators and Metrics in MD&A

The SEC also released guidance on the disclosure of key performance indicators and metrics in MD&A that is effective upon its publication in the Federal Register. The guidance provides considerations and disclosures that are expected to accompany non-financial and financial metric used to describe the performance or status of the business. Examples of such metrics include same store sales, revenue per subscriber, active customers, employee turnover rates, etc.

Based on a registrant’s facts and circumstances, the SEC expects the following disclosures to accompany disclosures of key performance indicators and metrics:

  • A clear definition of the metric and how it is calculated;
  • A statement indicating the reasons why the metric provides useful information to investors; and
  • A statement indicating how management uses the metric in managing or monitoring the performance of the business.

The guidance includes additional disclosure considerations for companies that change the method by which they calculate or present a metric from one period to another (e.g., differences in the metrics between periods, reasons for the changes, etc.).

Registrants should also consider:

  • The extent to which an existing regulatory framework applies, such as GAAP or, for non-GAAP measures, Regulation G or Item 10 of Regulation S-K ;
  • Whether there are estimates or assumptions underlying the metric or its calculation, and whether disclosure of such items is necessary for the metric not to be misleading; and
  • Additional information that may be necessary to provide adequate context for an investor to understand the metric presented.

The guidance reminds registrants of the importance to maintain effective disclosure controls and procedures when disclosing material key performance indicators or metrics that are derived from the company’s own information.

Apendix A

Topic Proposed Amendments Current Requirements
Interim
Periods

(Item 303(b)(2))
Discuss material changes in the results of operations for the most recently completed quarter as compared to either the corresponding quarter of the prior year or to the immediately preceding quarter. Discuss any material changes in the results of operations for the most recent fiscal year-to-date period presented in the statement of operations and corresponding year-to-date period of the preceding fiscal year. Interim Periods (Item 303(b)(2))
Off-balance
sheet arrangements

(Item 303(a)(4))
Within the context of MD&A, discuss commitments or obligations, including contingent obligations, arising from arrangements with unconsolidated entities or persons that have, or are reasonably likely to have, a material current or future effect on such registrant’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements, or capital resources. Discuss in a separately captioned section, off-balance sheet arrangements that have or are reasonably likely to have current or future effect on the registrant’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.
Contractual Obligations (Item 303(a)(5)) Eliminate the requirement to present a contractual obligations table and enhance the capital resources discussion. Disclose in a tabular format the contractual obligations as of the latest fiscal year end balance sheet. The table must disclose contractual obligations by type and payments due by prescribed periods of time.
Capital
Resources
(Item 303(a)(2))
Describe material cash requirements, including commitments for capital expenditures, as of the latest fiscal period, the anticipated source of funds needed to satisfy such cash requirements, and the general purpose of such requirements.

Material cash requirements could include items such as funds necessary to maintain current operations, complete projects underway, and achieve stated objectives or plans; or commitments for capital and other expenditures.

Describe material commitments for capital expenditures as of the end of the latest fiscal period and indicate the general purpose of such commitments and the anticipated sources of funds needed to fulfill such commitments.  Any material trends in the registrant’s capital resources should be described.
Critical
Accounting Estimates
Codifies and clarifies guidance about the disclosure of critical accounting estimates within Regulation S-K.

Defines a critical accounting estimate as an estimate made in accordance with GAAP that involves a significant level of estimation uncertainty and has had or is reasonably likely to have a material impact on the registrant’s financial condition or results of operations.

Clarifies current guidance and requires disclosure, to the extent material, of why the estimate is subject to uncertainty, how much each estimate has changed during the reporting period, the sensitivity of the reported amounts to the material methods, assumptions, and estimates underlying the estimate’s calculation.

Disclosure guidance regarding critical accounting estimates appears within Commission interpretive guidance on MD&A disclosure.

Disclose critical accounting estimates and assumptions when:

  • The nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and
  • The impact of the estimates and assumptions on financial condition or operating performance is material.

Disclose specifically why accounting estimates or assumptions bear the risk of change.

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