language would substantively alter the called for disclosures as it
would not account for circumstances where management cannot
determine whether a known trend, demand, commitment, event or
uncertainty is likely to come to fruition.
    \164\ Accordingly, we are not, as suggested by one commenter,
providing specific guidance on a timeframe for which management
should consider its outlook for forward-looking information as such
timeframe will depend on the nature of and the facts and
circumstances surrounding the forward-looking disclosure.
---------------------------------------------------------------------------

    We are not, as recommended by one commenter, adopting the
probability/magnitude test of Basic. In Basic, the Supreme Court framed
the issue of materiality of forward-looking disclosure as depending on
a balancing of both ``the indicated probability that the event will
occur and the anticipated magnitude of the event in light of the
totality of the company activity.'' \165\ We agree with commenters that
the probability/magnitude test could result in disclosure of issues
that are large in potential magnitude but low in probability.\166\ The
probability/magnitude test in Basic was developed in the context of a
potential merger, where the probability of the event, the potential
timing, and the expected effects may be readily estimated. Some
commenters have noted that the probability/magnitude test can be
difficult to apply where there is uncertainty as to the probability,
timing, and magnitude of the financial impact of future events.\167\ As
articulated above, we believe that the ``reasonably likely'' threshold
provides registrants with a tailored and meaningful framework from
which to objectively analyze whether forward-looking information is
required and provides specific guidance on how registrants should
evaluate known events or uncertainties where the likelihood of fruition
cannot be ascertained.
---------------------------------------------------------------------------

    \165\ See Basic (quoting SEC v. Texas Gulf Sulphur Co., 401 F.2d
833, 849 (2d Cir. 1968)).
    \166\ See S-K Concept Release Letter from Stephen Percoco dated
July 24, 2016.
    \167\ See, e.g., S-K Concept Release Letters from the
Sustainability Accounting Standards Board dated July 1, 2016; See
also letters from Edward D. White dated July 20, 2016; Thomas F.
Steyer dated July 20, 2016; Michael R. Bloomberg dated July 26,
2016; Brita Voss dated July 6, 2016 (supporting the recommendations
of the Sustainability Accounting Standards Board).
---------------------------------------------------------------------------

4. Results of Operations--Net Sales and Revenues (Amended Item
303(b)(2)(iii))
a. Proposed Amendments
    Item 303(a)(3)(iii) currently specifies that, to the extent the
``financial statements'' disclose ``material increases'' in net sales
or revenues, a registrant must provide a narrative discussion of the
extent to which such ``increases'' are attributable to increases in
prices, or to increases in the volume or amount of goods or services
being sold, or to the introduction of new products or services.\168\
The Commission previously clarified that a results of operations
discussion should describe not only increases but also decreases in net
sales or revenues.\169\ Accordingly, the Commission proposed amending
Item 303(a)(3)(iii) to apply to disclosures in the ``statement of
comprehensive income,'' codify prior guidance, and clarify the
requirement by tying the required disclosure to ``material changes'' in
net sales or revenues, rather than solely to ``material increases'' in
these line items.
---------------------------------------------------------------------------

    \168\ Item 303(a)(3)(iii) of Regulation S-K [17 CFR
229.303(a)(3)(iii)].
    \169\ See 1989 MD&A Interpretative Release, at n. 36 (``Although
Item 303(a)(3)(iii) speaks only to material increases, not
decreases, in net sales or revenues, the Commission interprets Item
303(a)(3)(i) and Instruction 4 as seeking similar disclosure for
material decreases in net sales or revenues.'').
---------------------------------------------------------------------------

b. Comments
    Several commenters specifically supported this proposal,\170\ with
one of these commenters stating that registrants already provide this
disclosure.\171\ No commenters specifically opposed this proposal.
---------------------------------------------------------------------------

    \170\ See, e.g., letters from FEI; IMA; Chamber; Society; CFA &
CII; D. Jamieson.
    \171\ See letter from FEI.
---------------------------------------------------------------------------

c. Final Amendments
    We are adopting Item 303(b)(2)(iii) with these amendments as
proposed. We believe clarifying in the rule text that disclosure is
required of ``material changes'' in net sales or revenues will
facilitate compliance. This clarification is consistent with MD&A's
focus on the importance of an analysis that should consist of material
substantive information and present a balanced view of the underlying
dynamics of the business.\172\ We also believe this amendment will
complement our change to Item 303(b) which will require that, where the
financial statements reveal material changes from period-to-period in
one or more line items, registrants must describe the underlying
reasons for these material changes in quantitative and qualitative
terms.
---------------------------------------------------------------------------

    \172\ See 2003 MD&A Interpretive Release at Section III.B.4.
---------------------------------------------------------------------------

5. Results of Operations--Inflation and Price Changes (Current Item
303(a)(3)(iv), and Current Instructions 8 and 9 to Item 303(a))
a. Proposed Amendments
    Item 303(a)(3)(iv) \173\ generally requires registrants, either for
the three most recent fiscal years or for those fiscal years in which
the registrant has been engaged in business, whichever period is
shorter, to discuss the impact of inflation and price changes on their
net sales, revenue, and income from continuing operations. Instruction
8 to

Item 303(a) clarifies that a registrant is only required to provide
this disclosure to the extent material. The instruction further states
that the discussion may be made in whatever manner appears appropriate
under the circumstances and that no specific numerical financial data
is required, except as required by Rule 3-20(c) of Regulation S-X,\174\
which applies to FPIs. Instruction 9 to Item 303(a) states that
registrants that elect to disclose supplementary information on the
effects of changing prices may combine such disclosures with the Item
303(a) discussion and analysis or provide it separately (with an
appropriate cross-reference).\175\
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    \173\ Item 303(a)(3)(iv) of Regulation S-K [17 CFR
229.303(a)(3)(iv)].
    \174\ Rules 3-20(c) and 3-20(d) of Regulation S-X provide the
situations when a registrant must discuss hyperinflation. Rule 3-
20(d) generally describes a hyperinflationary environment as one
that has cumulative inflation of approximately 100 percent or more
over the most recent three-year period.
    \175\ Instruction 9 to Item 303(a).
---------------------------------------------------------------------------

    The Commission proposed eliminating Item 303(a)(3)(iv) and
Instructions 8 and 9 to encourage registrants to focus their MD&A on
material information that is tailored to their respective facts and
circumstances. In the Proposing Release, the Commission stated that a
specific reference to inflation and changing prices may give undue
attention to the topic.\176\ Registrants are already expected to
discuss the impact of inflation or price changes if they are part of a
known trend or uncertainty that has had, or is reasonably likely to
have, a material favorable or unfavorable impact on net sales, revenue,
or income from continuing operations.\177\
---------------------------------------------------------------------------

    \176\ See Proposing Release at Section II.C.5.
    \177\ See Item 303(a)(3)(ii) [CFR 229.303(a)(3)(ii)] and amended
Item 303(b)(2)(ii).
---------------------------------------------------------------------------

b. Comments
    Commenters generally supported eliminating Item 303(a)(3)(iv) and
Instructions 8 and 9 to Item 303(a), as proposed.\178\ Some commenters
stated that registrants should focus their MD&A on registrant-specific
material information and that eliminating this item and the related
instructions would aid in that endeavor.\179\ Other commenters stated
that where inflation is material, registrants would still be required
to disclose this under current rules.\180\ One commenter noted that in
order to satisfy this item, many registrants provide ``boilerplate
disclosures'' and stated that as a result, few, if any, disclosures in
response to this item have been of value to investors.\181\ No
commenters specifically opposed this proposal.
---------------------------------------------------------------------------

    \178\ See, e.g., letters from EEI & AGA; FedEx; Nasdaq; FEI;
IMA; Chamber; Society.
    \179\ See, e.g., letters from EEI & AGA; Nasdaq.
    \180\ See, e.g., letters from FEI; IMA.
    \181\ See letter from IMA.
---------------------------------------------------------------------------

c, Final Amendments
    We are eliminating Item 303(a)(3)(iv) and Instructions 8 and 9 to
Item 303(a) as proposed. Consistent with the discussion above and in
the Proposing Release, under amended Item 303, registrants will be
required to discuss the impact of inflation or changing prices if they
are part of a known trend or uncertainty that had, or is reasonably
likely to have a material impact on net sales, revenue, or income from
continuing operations. Further, amended Item 303 requires that, where
the financial statements reveal material changes from period-to-period
in one or more line items, registrants must describe the underlying
reasons for these material changes in quantitative and qualitative
terms, which may also implicate a discussion of inflation and changing
prices.\182\
---------------------------------------------------------------------------

    \182\ See amended Item 303(b).
---------------------------------------------------------------------------

6. Off-Balance Sheet Arrangements (New Instruction 8 to Item 303(b))
a. Proposed Amendments
    In 2002, the Sarbanes-Oxley Act \183\ was enacted and added Section
13(j) to the Exchange Act, which required the Commission to adopt rules
providing that each annual and quarterly financial report required to
be filed with the Commission disclose all material off-balance sheet
arrangements.\184\ To implement Section 13(j), in 2003, the Commission
adopted specific disclosure requirements for off-balance sheet
arrangements in current Item 303(a)(4).\185\ When adopting Item
303(a)(4), the Commission reiterated that, while at that time only one
item in Item 303 specifically identified off-balance sheet
arrangements,\186\ other requirements ``clearly require[d] disclosure
of off-balance sheet arrangements if necessary to an understanding of a
registrant's financial condition, changes in financial condition or
results of operations.'' \187\ The 2003 amendments supplemented and
clarified the disclosures that registrants must make about off-balance
sheet arrangements and required registrants to provide those
disclosures in a separately designated section of MD&A.\188\
---------------------------------------------------------------------------

    \183\ Sarbanes-Oxley Act of 2002, Pub. L. 107-204, 116 Stat 745
(Jul. 2002) (``Sarbanes-Oxley Act'').
    \184\ Section 401(a) of the Sarbanes-Oxley Act added Section
13(j) to the Exchange Act [15 U.S.C. 78m(j)], which directed the
Commission to adopt rules requiring each annual and quarterly
financial report filed with the Commission to disclose ``all
material off-balance sheet transactions, arrangements, obligations
(including contingent obligations), and other relationships of the
issuer with unconsolidated entities or other persons, that may have
a material current or future effect on financial condition, changes
in financial condition, results of operations, liquidity, capital
expenditures, capital resources, or significant components of
revenues or expenses.''
    \185\ See Off-Balance Sheet Arrangements and Contractual
Obligations Adopting Release, at 5983.
    \186\ Item 303(a)(2)(ii) of Regulation S-K [17 CFR
229.303(a)(2)(ii)].
    \187\ See Off-Balance Sheet Arrangements and Contractual
Obligations Adopting Release, at 5983.
    \188\ See id.
---------------------------------------------------------------------------

    In the release proposing Item 303(a)(4), the Commission recognized
that parts of the proposed off-balance sheet arrangements disclosure
requirements might overlap with disclosure presented in the footnotes
to the financial statements.\189\ The Commission stated, however, that
the proposed rules were designed to provide more comprehensive
information and analysis in MD&A than the disclosure that U.S. GAAP
required in footnotes to financial statements.\190\
---------------------------------------------------------------------------

    \189\ See Disclosure in Management's Discussion and Analysis
About Off-Balance Sheet Arrangements, Contractual Obligations and
Contingent Liabilities and Commitments, Release No. 33-8144 (Nov. 4,
2002) 67 FR 68054 (Nov. 8, 2002), at n.72.
    \190\ See id.
---------------------------------------------------------------------------

    Since the adoption of Item 303(a)(4), as described further in the
Proposing Release,\191\ the FASB has issued additional requirements
that have caused U.S. GAAP to further overlap with the item.\192\ In
the Commission staff's experience, this overlap often leads to
registrants providing cross-references to the relevant notes to their
financial statements or providing disclosure that is duplicative of
information in the notes in response to Item 303(a)(4).
---------------------------------------------------------------------------

    \191\ See Proposing Release at Section II.C.6.
    \192\ In June 2009, the FASB Issued SFAS No. 166, Accounting for
Transfers of Financial Assets an amendment of FASB Statement No.
140, which requires enhanced disclosures about transfers of
financial assets and a transferor's continuing involvement with
transfers of financial assets accounted for as sales. Also in June
2009, the FASB issued SFAS No. 167, Amendments to FASB
Interpretation No. 46(R), which requires enhanced disclosures about
an enterprise's involvement in a variable interest entity, including
unconsolidated entities. SFAS No. 166 and 167 have been codified as
ASC Topics 860 (Transfers and Servicing) and 810 (Consolidation),
respectively. See also Section II.D.1.b and see infra note 344 for a
discussion of IFRS requirements that overlap with Item 5.E of Form
20-F.
---------------------------------------------------------------------------

    As a result, and consistent with the other proposed amendments
intended to promote the principles-based nature of MD&A, the Commission
proposed that the current more prescriptive off-balance sheet
arrangement definition and related disclosure requirement in Item
303(a)(4) be replaced with a new

Instruction to Item 303(b). This proposed instruction would require
registrants to 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 a registrant's financial condition, changes in
financial condition, revenues or expenses, results of operations,
liquidity, cash requirements, or capital resources.\193\ This proposed
instruction was intended to build on the current requirement in Item
303(a)(2) that specifically requires consideration of off-balance sheet
financing arrangements as part of the capital resources
discussion.\194\
---------------------------------------------------------------------------

    \193\ See Proposing Release at Section II.C.6.
    \194\ See Item 303(a)(2)(ii) of Regulation S-K [17 CFR
302(a)(2)(ii)].
---------------------------------------------------------------------------

b. Comments
    Many commenters supported the proposal to replace Item 303(a)(4)
with a principles-based instruction.\195\ One of these commenters
further recommended modifying the proposal to allow registrants
discretion to make this disclosure under a separate caption within the
capital resources section.\196\ Another commenter stated that if there
are concerns about specific matters that are not addressed under U.S.
GAAP, these concerns should be addressed by the FASB.\197\ One
commenter recommended reiterating that the amendment is not intended to
broaden or narrow the scope of off-balance sheet arrangements
disclosure requirements in MD&A, but rather, it is intended to
incorporate this disclosure in a more holistic, principles-based
discussion.\198\
---------------------------------------------------------------------------

    \195\ See, e.g., letters from EEI & AGA; FedEx; FEI; SIFMA; IMA;
E&Y Medtronic; Chamber; and Society.
    \196\ See letter from EEI & AGA.
    \197\ See letter from IMA.
    \198\ See letter from Society.
---------------------------------------------------------------------------

    Several commenters expressed concern with the proposal.\199\ One
commenter cautioned that the proposed amendments may result in the loss
of discussion of the nature and business purpose of off-balance sheet
arrangements and any known event, demand, commitment, trend, or
uncertainty that will result, or is likely to result, in a material
change in the availability of the off-balance sheet arrangement.\200\
Another commenter stated that the separate section for off-balance
sheet arrangements remains important because the overlapping
information required to be disclosed in the financial statements is
dispersed.\201\ One commenter stated that the proposed amendments would
allow management to hide off-balance sheet arrangements.\202\
Additionally, some commenters recommended that we provide illustrative
guidance.\203\
---------------------------------------------------------------------------

    \199\ See, e.g., letters from Pfizer; CalPERS; CFA & CII; and D.
Jamieson.
    \200\ See letter from Pfizer.
    \201\ See letter from CFA & CII.
    \202\ See letter from CalPERS.
    \203\ See letters from Pfizer and Society.
---------------------------------------------------------------------------

c. Final Amendments
    We are adopting the amendments to replace Item 303(a)(4) with a
principles-based instruction as proposed.\204\ For the reasons
discussed in the Proposing Release, we continue to believe that the
updates to U.S. GAAP since the adoption of Item 303(a)(4), as well as
the current amendments designed to emphasize the principles-based
nature of MD&A, justify the replacement of the current, more
prescriptive requirement with a principles-based instruction.\205\
---------------------------------------------------------------------------

    \204\ For the same reasons discussed in the Proposing Release,
we believe our amendments are consistent with the statutory mandate
in Section 13(j) of the Exchange Act. See Proposing Release at
Section II.C.6.
    \205\ We are also adopting the amendments to Items 2.03 and 2.04
of Form 8-K as proposed to include the definition of ``off-balance
sheet arrangements'' that is currently in Item 303(a)(4). As stated
in the Proposing Release, we believe it is appropriate to retain the
current definition of ``off-balance sheet arrangements'' in Form 8-K
in light of the Form's four business day filing requirement. See
Proposing Release at footnotes 188 and 189. In addition, we are
making technical amendments to Item 2.03 of Form 8-K to refer to
FASB ASC Topic 842, which has superseded FASB ASC Topic 840.
---------------------------------------------------------------------------

    With respect to commenters that suggested that the amendments may
result in a loss of discussion of the nature and business purpose of
off-balance sheet arrangements or other information, we continue to
believe that new Instruction 8 would mitigate any potential loss of
information by requiring, among other things, a discussion of material
matters of liquidity, capital resources, and financial condition as
they relate to off-balance sheet arrangements.\206\ Furthermore, we
highlight that current Item 303(a)(4) does not require disclosure of
certain types of off-balance sheet arrangements that do not meet the
specific definition in Item 303(a)(4)(ii). For example, many
registrants in the pharmaceutical industry are contingently obligated
to make milestone payments to licensors of drug compounds. These
milestone payments are not covered by the definition of ``off-balance
sheet arrangement'' in Item 303(a)(4) and currently are not required to
be disclosed in the separately-captioned section called for by that
item. We have nonetheless observed that registrants typically discuss
these contingent milestone payments in MD&A to provide investors with
an appropriate understanding of their liquidity and capital resources,
which we believe can be useful to a broader understanding of the impact
of off-balance sheet arrangements to a registrant's financial
condition, and the nature and purpose of such arrangements.
Accordingly, we believe that the principles of MD&A, supplemented with
the new instruction, and the requirements of U.S. GAAP will elicit
discussion sufficient to enable an understanding of the off-balance
sheet arrangement.
---------------------------------------------------------------------------

    \206\ For a discussion of the requirements in Item 303(a)(4)
that overlap with U.S. GAAP see the Proposing Release at Section
II.C.6.
---------------------------------------------------------------------------

    By no longer requiring this disclosure in a separately-captioned
section, we expect that a registrant will incorporate its discussion of
off-balance sheet arrangements into its broader discussion of liquidity
and capital resources. We also acknowledge the commenters that stated
that a separately-captioned section is useful. We continue to believe
that a discussion of off-balance sheet arrangements that is more
integrated with other aspects of MD&A will produce better disclosure
and facilitate a more meaningful understanding of the impact of such
arrangements; however, to the extent that a registrant determines that
some discussion of off-balance sheet arrangements should be highlighted
separately or in a separately captioned section in order to facilitate
an understanding of such disclosure, or to highlight particularly
material information about such arrangements, it has the discretion to
do so.\207\ Finally, we have not given examples or guidance for the
disclosure of off-balance sheet arrangements, as suggested by some
commenters. Disclosures will need to be tailored to a registrant's
arrangements and circumstances, and we do not want to promote a
checklist approach to the disclosures.
---------------------------------------------------------------------------

    \207\ See, e.g., Instruction 3 to amended Item 303(b).
---------------------------------------------------------------------------

7. Contractual Obligations Table (Current Item 303(a)(5)) and Amended
Item 303(b)(1)--Liquidity and Capital Resources)
a. Proposed Amendments
    Under Item 303(a)(5),\208\ registrants other than SRCs must
disclose in tabular format their known contractual obligations. The
item requires a registrant to arrange its table to disclose contracts
by type of obligations,\209\ the

overall payments due, and by four prescribed periods.\210\ A registrant
may disaggregate the categories of obligations, but it must disclose
all obligations falling within the prescribed five categories and for
the prescribed time periods. A registrant may provide footnotes to the
table to the extent such information is necessary to understand the
disclosures in the contractual obligations table. There is no
materiality threshold for this item, meaning registrants must disclose
all contractual obligations falling within the prescribed five
categories.\211\
---------------------------------------------------------------------------

    \208\ Item 303(a)(5) of Regulation S-K [17 CFR 229.303(a)(5)].
    \209\ The types of obligations required to be included are long-
term debt obligations, capital lease obligations, operating lease
obligations, purchase obligations, and other long-term liabilities
reflected on the registrant's balance sheet under GAAP.
    \210\ The payment obligations must be disclosed for the
following timeframes: Less than one year; one to three years; three
to five years; and more than five years.
    \211\ The first three categories of obligations required under
current Item 303(a)(5) (i.e., long-term debt, capital leases, and
operating leases) are defined by reference to the relevant U.S. GAAP
accounting pronouncements that require disclosure of these
obligations in the financial statements or notes thereto. The fourth
category, purchase obligations, is defined as an agreement to
purchase goods or services that is enforceable, legally binding on
the registrant and specifies all significant terms. The fifth
category of contractual obligations captures all other long-term
liabilities that are reflected on the registrant's balance sheet
under generally accepted accounting principles applicable to the
registrant.
---------------------------------------------------------------------------

    When the Commission implemented this disclosure requirement, its
purpose was to ensure that aggregated information about contractual
obligations was presented in one place and to improve transparency of a
registrant's short- and long-term liquidity and capital resources needs
and demands.\212\ This was intended to aid investors in determining the
effect such obligations would have in the context of off-balance sheet
arrangements.\213\ Commission guidance that followed the implementation
of this requirement encouraged registrants to include narratives to the
table to provide more context and analysis for the numbers
presented.\214\
---------------------------------------------------------------------------

    \212\ See Off-Balance Sheet Arrangements and Contractual
Obligations Adopting Release at 5990. See also Off-Balance Sheet
Arrangements and Contractual Obligations Proposing Release.
    \213\ See id.
    \214\ See Commission Guidance on Presentation of Liquidity and
Capital Resources Disclosures in Management's Discussion and
Analysis, Release No. 33-9144 (Sept. 17, 2010) [75 FR 59894 (Sept.
28, 2010)] (``2010 MD&A Interpretive Release''), at 59896.
---------------------------------------------------------------------------

    The Commission proposed eliminating Item 303(a)(5). As part of its
rationale, the Commission stated its belief that eliminating the
requirement would not result in a loss of material information to
investors given the overlap with information required in the financial
statements and in light of the concurrent proposed expansion of the
capital resources requirement, discussed above in Section II.C.2.\215\
---------------------------------------------------------------------------

    \215\ See Proposing Release at Section II.C.7.
---------------------------------------------------------------------------

b. Comments
    Many commenters supported eliminating this item,\216\ while a few
commenters opposed the proposal.\217\ Of the commenters who supported
eliminating this item, a few emphasized the burdens imposed by the
table.\218\ One of these commenters stated that producing the table is
burdensome because, as a multinational company with hundreds of
subsidiaries, the table ``takes a significant amount of time . . .
especially as the information is not referenced in how we operate our
business.'' \219\ Another commenter stated that the contractual
obligations table requires resources beyond those needed for the
financial statements and involves departments across their organization
including, but not limited to, accounting, information technology, real
estate, legal, tax, and merchandising.\220\
---------------------------------------------------------------------------

    \216\ See, e.g., letters from Pfizer; EEI & AGA; FedEx; Nasdaq;
Nareit; FEI; SIFMA; IMA; E&Y UnitedHealth; Costco Wholesale
Corporation dated April 28, 2020 (``Costco''); Chamber; Society.
    \217\ See, e.g., letters from CalPERS; CFA & CII; D. Jamieson.
See also IAC Recommendation.
    \218\ See, e.g., letters from Eli Lilly; FEI; UnitedHealth;
Costco.
    \219\ See letter from Eli Lilly (also opposing retaining the
table in modified form).
    \220\ See letter from Costco.
---------------------------------------------------------------------------

    Commenters that opposed the proposal questioned the cost savings to
registrants from the proposal and suggested the proposal would increase
burdens to investors to gather this data.\221\ A few of these
commenters stated that the table is more important during a crisis such
as the COVID-19 crisis.\222\ Some of these commenters stated that
during periods of liquidity stress, such as the COVID-19 pandemic,
investors find it extremely useful to have aggregated disclosure of
cash commitments in a single location.\223\ Another of these commenters
observed that this requirement was adopted during an economic
crisis.\224\ A few of these commenters also specified that the
information in the table is useful and material and suggested
augmenting the table,\225\ such as with internal hyperlinks \226\ or by
requiring the data be tagged and accompanied with a narrative.\227\
Some of these commenters also stated that the table is not entirely
duplicative of disclosures elsewhere and instead is critical to
assessing the cadence or funding of liabilities.\228\
---------------------------------------------------------------------------

    \221\ See letters from CalPERS (stating that registrants already
have systems in place to provide this disclosure while investors do
not have the technology to efficiently find these disclosures
elsewhere); CFA & CII; D. Jamieson. See also IAC Recommendation.
    \222\ See letters from CalPERS; CFA & CII; D. Jamieson.
    \223\ See letter from CFA & CII; D. Jamieson.
    \224\ See letter from CalPERS.
    \225\ See letters CFA & CII; D. Jamieson. See also IAC
Recommendation (providing, as an example of the potential
materiality of the table, a recent analyst report on the cruise line
industry during the COVID-19 crisis and the report's reliance on the
table to juxtapose the mismatch between revenue shortfalls and near-
term obligations).
    \226\ See, e.g., letters from CFA & CII; D. Jamieson. See also
IAC Recommendation.
    \227\ See, e.g., letters from CFA & CII; D. Jamieson.
    \228\ See letters from CFA & CII and D. Jamieson (providing
purchase obligations as an example of disclosure in the table that
is not duplicated elsewhere).
---------------------------------------------------------------------------

c. Final Amendments
    We are eliminating Item 303(a)(5) as proposed and, in consideration
of comments received, we are also amending Item 303(b) to specifically
require disclosure of material cash requirements from known contractual
and other obligations as part of a liquidity and capital resources
discussion. As discussed in the Proposing Release, the Commission
believed that eliminating current Item 303(a)(5) should not result in
the loss of material information. The Commission stated that, in
addition to disclosure in the financial statements, registrants would,
under the proposals to amend the discussion of capital resources, be
required to discuss material cash requirements, which would include
material contractual obligations.\229\ The amendments described below
further clarify and enhance this point.
---------------------------------------------------------------------------

    \229\ See Proposing Release at Section II.C.7.
---------------------------------------------------------------------------

    We are adopting amendments to the liquidity and capital resources
requirements in Item 303(b) that are a change from what was proposed.
These changes are in response to commenter input on the proposed
elimination of Item 303(a)(5) and on the proposals related to the
liquidity and capital resource requirements. The amendments to Item
303(b) are intended to clarify the requirements while continuing to
emphasize a principles-based approach focused on material short- and
long-term liquidity and capital resources needs, while also specifying
that material cash requirements from known contractual and other
obligations should be considered as part of these disclosures.
Specifically, these amendments:
     Create a new Item 303(b)(1) to provide the overarching
requirements for liquidity and capital resources

disclosures in order to clarify these requirements; \230\
---------------------------------------------------------------------------

    \230\ See Section II.C.2 supra.
---------------------------------------------------------------------------

     Incorporate in Item 303(b)(1) portions of current
Instruction 5 to Item 303(a), which defines ``liquidity'' as the
ability to generate adequate amounts of cash to meet the needs for
cash, clarifying its applicability to the liquidity and capital
resources requirements more generally;
     Codify prior Commission guidance that specifies that
short-term liquidity and capital resources covers cash needs up to 12
months into the future while long-term liquidity and capital resources
covers items beyond 12 months; \231\
---------------------------------------------------------------------------

    \231\ See 1989 MD&A Interpretive Release.
---------------------------------------------------------------------------

     Require the discussion on both a short-term and long-term
basis;
     Require the discussion to analyze material cash
requirements from known contractual and other obligations and such
disclosures to specify the type of obligation and the relevant time
period for the related cash requirements;
     Include a new instruction that states that the discussion
of material cash requirements from known contractual obligations may
include, for example, lease obligations, purchase obligations, or other
liabilities reflected on the registrant's balance sheet; and
     Include a new instruction that states, consistent with
prior Commission guidance,\232\ the analysis for all of Item 303(b)
should be in a format that facilitates easy understanding and does not
duplicate disclosure already provided in the filing.\233\
---------------------------------------------------------------------------

    \232\ See, e.g., 2003 MD&A Interpretive Release.
    \233\ Notwithstanding the adoption of Item 303(b)(1) that sets
forth the overarching requirements for a liquidity and capital
resources discussion and the related elimination of language in Item
303 indicating that discussions of liquidity and capital resources
may be combined whenever the two topics are interrelated, this new
instruction would, for example, continue to allow registrants
flexibility to either combine or separate the two topics.
---------------------------------------------------------------------------

    The Commission's objective in adopting current Item 303(a)(5) was
to provide aggregated information about contractual obligations in a
single location and to improve transparency of a registrant's short-
and long-term liquidity and capital resources needs and demands.\234\
Much of the disclosure required by current Item 303(a)(5) is now
provided in the financial statements, unlike when the requirement was
first adopted. As a result, much of this information is also required
to be tagged in XBRL, allowing users to extract and compare this data.
Given these developments since the adoption of the contractual
obligations table, and consistent with the long-standing principles-
based focus of MD&A, we are eliminating Item 303(a)(5) as proposed.
Combined with the amended liquidity and capital resource requirements,
our amendments are intended to improve the transparency of a
registrant's short- and long-term liquidity and capital resources needs
and demands while reducing undue burdens to prepare such disclosure.
---------------------------------------------------------------------------

    \234\ See Off-Balance Sheet Arrangements and Contractual
Obligations Proposing Release.
---------------------------------------------------------------------------

    Our amendments are also intended to address commenters' concerns
about the challenges imposed by the current contractual obligations
table. We recognize that, because the current contractual obligations
table does not have a materiality threshold, the burdens imposed by the
table on registrants can include identifying, evaluating, and
aggregating contracts that are not material. By eliminating the
prescriptive requirement to prepare a contractual obligations table and
refocusing instead on a principles-based approach that requires a
robust discussion of liquidity and capital resources, including a
discussion of contractual obligations, our intent is to relieve
registrants of these burdens while continuing to provide investors with
material information.
    Our amendments allow registrants flexibility in discussing material
cash requirements from known contractual and other obligations. To that
end, while amended Instruction 4 provides examples of the types of
known contractual obligations that may be included that are generally
consistent with those required by current Item 303(a)(5), unlike the
current requirement, the amendments do not prescribe specific
categories of contractual obligations. We acknowledge a commenters'
observation that the current table is not entirely duplicative of U.S.
GAAP, and therefore the elimination of Item 305(a)(5) could result in a
loss of certain information.\235\ Examples in amended Instruction 4 are
deliberately not tied to U.S. GAAP to provide flexibility for company-
specific disclosure, avoid unnecessary duplication with the financial
statements, and allow registrants to consider disclosing other
categories of contractual obligations appropriate for its
business.\236\ Additionally, as registrants prepare their financial
statements in accordance with U.S. GAAP, and with the exception of
certain purchase obligations, they are already required to assess
currently prescribed categories of contractual obligations. To the
extent obligations under these currently prescribed categories are
material, they are required to be discussed in MD&A, regardless of
whether our rules prescribe these categories. Likewise, our amendments
do not specify or provide examples of ``other obligations'' that may be
material to a registrant, allowing registrants flexibility to determine
what may be material and necessary to be disclosed.
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    \235\ For example, information relating to certain purchase
obligations is not specifically called for under U.S. GAAP and is
therefore not typically disclosed in the financial statements.
Additionally, information related to the ``payments due by period''
currently required by the item may not be required to be disclosed
in a registrant's financial statements.
    \236\ See also amended Instruction 3 to Item 303(b).
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    While the current table requires disclosure of all contractual
obligations aggregated by type of obligation and for specified periods,
we recognize not all obligations presented nor the periods for which
they are presented are material. Accordingly, our amendments to Item
303(b)(1) further require that the disclosures specify the type of
obligation and relevant time period for the related cash requirements,
in recognition of commenter concerns that such information may be lost
with the elimination of Item 303(a)(5). Our amendments are intended to
focus only on material disclosures and specifically, disclosure of
those periods where the cash requirements or reasonably likely effect
of these cash requirements on liquidity and capital resources is
material. For example, if a financial obligation is reasonably likely
to have a material effect on liquidity and capital resources over a
number of subsequent periods or sometime within a range of future
periods, these amendments would require registrants to identify and
discuss this obligation and related effects.
    We are mindful of commenters who stated that the current table is
an easy-to-use format as it aggregates disclosure in a single location
or otherwise requested that the table be retained and expanded. We also
acknowledge input from registrants who emphasized that preparation of
the table can be burdensome and costly. On balance, we believe our
amendments help ensure that material information of contractual
obligations continues to be provided to investors, while reducing some
of the burdens and costs associated with the prescriptive requirements
of current Item 303(a)(5).
    We further believe that, consistent with the objectives in the
Proposing Release of enhancing and clarifying certain requirements in
MD&A, the

changes we are making to Item 303(b)(1) will assist registrants in
considering what disclosure is needed in that context, both in
connection with the impact of contractual obligations on those areas
and more generally.\237\
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    \237\ See Section II.C.2.c supra. With respect to the
application of the enhanced liquidity and capital resource
requirements on SRCs, see Section II.C.11. infra.
---------------------------------------------------------------------------

8. Critical Accounting Estimates (New Item 303(b)(3))
a. Proposed Amendments
    While not specified in Item 303, the Commission has stated in prior
guidance that, while preparing MD&A, registrants should consider
whether accounting estimates and judgments could materially affect
reported financial information. Specifically, the Commission addressed
critical accounting estimates in the 2003 MD&A Interpretive
Release.\238\ The Commission stated that when preparing MD&A
disclosure, companies should consider whether they have made accounting
estimates or assumptions where 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.\239\ This guidance further stated that if critical accounting
estimates or assumptions are identified, a registrant should analyze,
to the extent material, factors such as how it arrived at the estimate,
how accurate the estimate/assumption has been in the past, how much the
estimate/assumption has changed in the past, and whether the estimate/
assumption is reasonably likely to change in the future. This guidance
also stated that a registrant should analyze its specific sensitivity
to change based on other outcomes that are reasonably likely to occur.
Any disclosure should supplement, not duplicate, the description of
accounting policies that are already disclosed in the notes to the
financial statements, and provide greater insight into the quality and
variability of information regarding financial condition and operating
performance.\240\
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    \238\ See 2003 MD&A Interpretive Release. Prior to this release,
the Commission reminded registrants that, under the existing MD&A
disclosure requirements, a registrant should address material
implications of uncertainties associated with the methods,
assumptions, and estimates underlying the registrant's critical
accounting measurements, and encouraged companies to explain the
effects of the critical accounting policies applied and the
judgments made in their application. See Cautionary Advice Regarding
Disclosure, Release No. 33-8040 (Dec. 12, 2001) [66 FR 65013 (Dec.
17, 2001)].
    \239\ See id.
    \240\ See id.
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    The Commission proposed amending Item 303 to add new Item
303(b)(4), which would explicitly require disclosure of critical
accounting estimates in order to clarify the required disclosures of
critical accounting estimates, facilitate compliance, and improve the
resulting disclosure. Because registrants often repeat the information
in the financial statement footnotes about significant accounting
policies, the proposals were also intended to eliminate disclosure that
duplicates the financial statement discussion of significant accounting
policies and, instead, promote enhanced analysis of measurement
uncertainties.
    As proposed, critical accounting estimates were defined as those
estimates made in accordance with generally accepted accounting
principles that involve a significant level of estimation uncertainty
and have had or are reasonably likely to have a material impact on the
registrant's financial condition or results of operations. By focusing
the definition on estimation uncertainties, the Commission stated that
it intended to avoid any unnecessary repetition of significant
accounting policy footnotes.\241\ For each critical accounting
estimate, the proposal would require registrants to disclose, to the
extent material, why the estimate is subject to uncertainty, how much
each estimate has changed during the reporting period, and the
sensitivity of the reported amounts to the methods, assumptions, and
estimates underlying the estimate's calculation.\242\ Lastly, the
proposal specified that the discussion should provide quantitative as
well as qualitative information when quantitative information is
reasonably available and will provide material information to
investors.
---------------------------------------------------------------------------

    \241\ Additionally, the proposals included an instruction
stating that critical accounting estimate disclosure should
supplement, but not duplicate, the description of accounting
policies or other disclosures in the notes to the financial
statements
    \242\ These proposed requirements are similar to those found in
IFRS. See IAS 1, paragraph 129.
---------------------------------------------------------------------------

b. Comments
    Commenters were generally supportive of the proposed amendments to
add critical accounting estimates to Item 303.\243\ However, many
commenters raised concerns with the proposed requirements to disclose
the sensitivity of the reported amounts to the methods, assumptions,
and estimates underlying the estimate's calculation and how much each
estimate has changed during the reporting period.\244\
---------------------------------------------------------------------------

    \243\ See, e.g., letters from CFA & CII; D. Jamieson; RSM; PWC;
Pfizer; EEI & AGA; Deloitte; KPMG; Grant Thornton; CAQ; BDO; FEI;
SIFMA; IMA; UnitedHealth; Medtronic; Chamber; ABA; E&Y Society.
    \244\ See, e.g., letters from RSM; PWC; Pfizer; EEI & AGA;
Deloitte; KPMG; Grant Thornton; CAQ; BDO; FEI; SIFMA; IMA;
UnitedHealth; Medtronic; Chamber; ABA; E&Y Society.
---------------------------------------------------------------------------

    Some commenters supported the proposed requirement to disclose a
sensitivity analysis and requested that it be rigorously enforced.\245\
In contrast, several commenters suggested this requirement--by virtue
of the nature of some critical accounting estimates, the potential
interrelatedness of assumptions, and the degree of inputs used to
arrive at the estimate--would result in investor confusion, disclosure
that is not useful to investors, unwarranted questioning of past
judgments, or heightened liability exposure.\246\
---------------------------------------------------------------------------

    \245\ See, e.g., letters from CFA & CII and D. Jamieson.
    \246\ See, e.g., letters from PWC; Pfizer; KPMG; CAQ; BDO;
SIFMA; UnitedHealth; Medtronic; ABA.
---------------------------------------------------------------------------

    Many commenters stated that a sensitivity analysis is challenging
for registrants to provide,\247\ with a number of these commenters
stating that quantitative disclosures can be particularly challenging
or costly.\248\ Several commenters asked the Commission to allow
management discretion in providing the disclosure based on
consideration of factors such as whether: a sensitivity or quantitative
analysis would be meaningful or relevant; \249\ a reasonably likely
change to an assumption would be material; \250\ or a sensitivity
analysis is either practicable \251\ or produced in the ordinary course
of business rather than solely to satisfy the disclosure
requirement.\252\ Other commenters

recommended limiting the disclosure to only qualitative disclosure,
which they believed would be more meaningful to investors than
quantitative disclosure,\253\ or disclosures of rough ranges due to the
difficulty in quantifying sensitivities.\254\ One commenter asked the
Commission to specify that registrants are not required to quantify
individual assumptions underlying their critical accounting estimates
as long as they quantify how reasonably likely changes would materially
affect the critical accounting estimates.\255\ Another commenter stated
that, if the final rule requires a quantitative sensitivity analysis
and it is impracticable to disclose the extent of the possible effects
on an assumption, the rule should state that the registrant can
disclose that it is reasonably possible that outcomes within the next
fiscal year that are different than the assumption could require a
material adjustment, similar to disclosure required under IFRS about
estimation uncertainty.\256\
---------------------------------------------------------------------------

    \247\ See, e.g., letters from RSM; PWC; Pfizer (stating that,
for the pharmaceutical industry, critical accounting estimates are
often based on many complex judgments and assumptions that can be
inherently uncertain and unpredictable, including qualitative
changes in the industry and that disclosing sensitivity of the
reported amounts to the assumptions would be highly subjective and
not provide additional insight); KPMG; CAQ; BDO; FEI; SIFMA (stating
that ``[it understood] from discussions with outside auditors that
preparation of these kinds of quantitative disclosures, which are
required under IFRS, is extremely burdensome on both registrants and
their auditors''); IMA; E&Y (noting concerns about disclosing
potentially confidential assumptions); UnitedHealth; ABA.
    \248\ See, e.g., letters from KPMG, CAQ, BDO, FEI, SIFMA, E&Y.
    \249\ See, e.g., letters from FEI; UnitedHealth; Medtronic; PWC;
ABA.
    \250\ See, e.g., letters from RSM; KPMG; CAQ; E&Y.
    \251\ See, e.g., letters from KPMG; Chamber.
    \252\ See letter from SIFMA.
    \253\ See letter from SIFMA (stating the current proposal's
language of ``reasonably available'' would, in the event of a
lawsuit predicated on omission of this information, still require
resolution of the factual issue of whether this information was
reasonably available).
    \254\ See letter from IMA.
    \255\ See letter from E&Y.
    \256\ See letter from KPMG (citing International Accounting
Standards (IAS) 1, paragraph 131).
---------------------------------------------------------------------------

    Several commenters asked the Commission to clarify the period over
which the changes in estimates should be described (i.e., most recent
period or all periods presented, including interim periods).\257\ A few
commenters opposed the proposed requirement to disclose how much an
estimate has changed over the reporting period,\258\ stating that the
disclosure either could result in confusion and unwarranted questioning
of past judgments \259\ or would be reflected in amounts that are
reported in the financial statements and discussed in Item 303(a)
pursuant to requirements to discuss material changes.\260\ One
commenter recommended that an ``estimate'' in this context be the key
assumptions or inputs underlying the estimate recognized in the
financial statements.\261\ Two commenters that opposed disclosure of
how much an estimate has changed over the reporting period stated their
belief that ASC Topic 275 (Risks and Uncertainties) acknowledges that
actual results and estimates can differ and that such differences are
not necessarily an indication of an error or deviation from U.S. GAAP
so long as the risks and uncertainties relating to such estimates are
disclosed.\262\
---------------------------------------------------------------------------

    \257\ See, e.g., letters from RSM; Deloitte; KPMG; CAQ.
    \258\ See, e.g., letters from Medtronic; ABA; Society.
    \259\ See letter from Medtronic.
    \260\ See letters from ABA and Society.
    \261\ See letter from KPMG.
    \262\ See letters from PWC; Medtronic.
---------------------------------------------------------------------------

    We received several comments related to aspects of the proposal
other than disclosure of sensitivity analysis and changes in estimates.
One commenter stated that it is challenging for registrants to
determine ``a reference point (i.e., at the assumption level or at the
financial statement level) in determining materiality for disclosure of
the methods, assumptions and estimates underlying the calculation of
the critical accounting estimate.'' \263\ Several commenters expressed
support for the proposed instruction stating that critical accounting
estimate disclosure is intended to supplement, not repeat, the
description of significant accounting policies in the notes to the
financial statements,\264\ though one commenter asked that this be
moved to the rule itself to elevate its prominence.\265\ Several
commenters recommended that the Commission provide illustrative
examples of critical accounting estimate disclosures \266\ or further
guidance \267\ to facilitate application of the final rule. Some
commenters recommended clarifying whether this proposal is intended to
modify current Commission guidance on critical accounting estimates or
to change existing practice.\268\
---------------------------------------------------------------------------

    \263\ See letter from RSM.
    \264\ See, e.g., letters from Grant Thornton; BDO; Chamber; ABA;
Society.
    \265\ See letter from Grant Thornton.
    \266\ See, e.g., letters from KPMG; BDO; IMA; Society.
    \267\ See letter from IMA.
    \268\ See letters from Deloitte; E&Y (recommending this
clarification specifically for quantitative disclosures).
---------------------------------------------------------------------------

    In response to the Commission's request for comment, a few
commenters stated that they did not perceive any issues with or overlap
between critical accounting estimates and critical audit matters.\269\
One commenter recommended aligning the definition of critical
accounting estimates with the definition of critical accounting
estimate used by the Public Company Accounting Oversight Board in AS
1301: Communications with Audit Committees (``AS 1301'').\270\ While we
did not specifically solicit comment on the submission format of
critical accounting estimates, one commenter recommended that
information provided be submitted in machine-readable format, stating
that tagged critical accounting estimates disclosure may help investors
compare critical accounting estimates with critical audit matters.\271\
---------------------------------------------------------------------------

    \269\ See, e.g., letters from IMA; Chamber; BDO.
    \270\ See letter from RSM. AS 1301 defines critical accounting
estimate as ``[a]n accounting estimate where (a) the nature of the
estimate 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 (b) the impact of the
estimate on financial condition or operating performance is
material.'' This definition is consistent with that contained in the
2003 MD&A Interpretive Release.
    \271\ See letter from CFA.
---------------------------------------------------------------------------

c. Final Amendments
    We are adopting new Item 303(b)(3) \272\ substantially as proposed
for the reasons described in the Proposing Release and above, but with
certain modifications in response to commenters' concerns to make clear
that: (i) The application of the material and reasonably available
qualifier applies to all parts of the disclosure, not just to
quantitative information; (ii) the discussion on how much each estimate
has changed may also be met through a discussion of changes in the
assumptions during the period; and (iii) the disclosure of changes in
the estimate/assumption will cover a ``relevant period,'' rather than a
``reporting period.'' \273\
---------------------------------------------------------------------------

    \272\ Proposed as Item 303(b)(4).
    \273\ Consistent with the proposal, new Item 303(b)(3) does not
require a registrant to submit the critical accounting estimates
disclosure in a machine-readable format as requested by a commenter,
who stated that this may help investors compare critical accounting
estimates with critical audit matters. See letter from CFA. The
communications auditors are expected to provide on critical audit
matters in an audit report have a different objective than
disclosures related to critical accounting estimates. Critical audit
matters provide insight into matters that are especially
challenging, subjective, and complex to audit from the perspective
of the auditor. On the other hand, critical accounting estimates
disclosure should provide management's insights into estimation
uncertainties that have had or are reasonably likely to have a
material impact on reported financial statements. See Proposing
Release at Section II.C.8. Likewise, we are not adopting any new
XBRL requirements for this Item more broadly. See Section IV.E infra
for discussion on alternatives considered for Item 303 of Regulation
S-K, including submission in a machine readable format.
---------------------------------------------------------------------------

    We agree with commenters who raised concerns that, as proposed, the
requirements to disclose the sensitivity of reported amounts to the
methods, assumptions, and estimates underlying a calculation and how
much each estimate has changed during the reporting period for each
critical accounting estimate could have been read to require disclosure
that is not material, or that was costly or otherwise challenging to
prepare. Specifically, these commenters stated that the proposed
requirement could suggest that registrants are required to provide

quantification for ``every'' critical accounting estimate,\274\ have
limited flexibility in presenting such disclosures,\275\ or are subject
to a different standard than the rest of MD&A.\276\ In order to clarify
that this was not our intent, new Item 303(b)(3) more clearly states
that the reasonably available and material qualifier applies to all
information about a critical accounting estimate that has had or is
reasonably likely to have a material impact on financial condition or
results of operations, whether qualitative or quantitative, including
whether the information relates to sensitivity of the reported amount
or how much the estimate has changed.\277\
---------------------------------------------------------------------------

    \274\ See letter from ABA.
    \275\ See letter from PWC.
    \276\ See letter from E&Y.
    \277\ For both qualitative and quantitative information, the
disclosure requirement is only triggered if the information is
necessary to understand the estimation uncertainty and the impact
the critical accounting estimate has had or is reasonably likely to
have on financial condition or results of operations.
---------------------------------------------------------------------------

    While some commenters asked the Commission to adopt different
thresholds, such as when ``practicable'' or ``in the ordinary course of
business and not solely for purposes of disclosure,'' we believe that
``reasonably available'' is the appropriate standard as it is familiar
to registrants and consistent with current Commission rules.\278\ We
believe that, in practice, if the disclosure is ``impracticable'' to
provide, it would not be ``reasonably available.'' In addition,
limiting the discussion to material information is intended to avoid
disclosure that is not useful to investors and is consistent with the
principles-based nature of MD&A.
---------------------------------------------------------------------------

    \278\ See, e.g. Securities Act Rule 409 [17 CFR 230.409] and
Exchange Act Rule 12b-21 [17 CFR 240.12b-21] which generally state
that information required need be given only insofar as it is known
or reasonably available to the registrant.
---------------------------------------------------------------------------

    New Item 303(b)(3) will require registrants to disclose how much an
estimate and/or assumption has changed over a relevant period. This is
intended to allow an investor to better evaluate the uncertainty
associated with the critical accounting estimate by observing changes
in estimates or assumptions over time. The revised item also
specifically references ``assumptions'' in addition to estimates
because, as suggested by one commenter, this would make clear that
registrants have flexibility to provide appropriate context in the
discussion of changes underlying a critical accounting estimate. This
disclosure requirement, along with the required sensitivity disclosure,
is not intended to yield discussions of quantitative changes to
reported amounts, which would be disclosed in response to other
requirements in Item 303, such as the discussion of results of
operations under new Item 303(b)(2). Instead, our intent is for
registrants to provide investors with a greater understanding of the
variability that is reasonably likely to affect the financial condition
or results of operations so investors can adequately evaluate the
estimation uncertainty of a critical accounting estimate.
    We also believe that such information would not be duplicative of
financial statement disclosures, as suggested by some commenters. While
U.S. GAAP requires discrete disclosure of the underlying assumptions
for certain accounting estimates,\279\ it does not require a discussion
of material changes in those assumptions over a relevant period, and
there is no general requirement to disclose underlying assumptions for
all material accounting estimates included in the financial statements.
For that reason, we believe that quantification of certain assumptions,
when material and reasonably available, may be necessary to facilitate
understanding of the material critical accounting estimate and allow an
investor to better understand the degree of estimation uncertainty. To
the extent the financial statements include information about specific
changes in the estimate or underlying assumptions, the amendments
include an instruction \280\ that specifies that critical accounting
estimates should supplement, but not duplicate, the description of
accounting policies or other disclosures in the notes to the financial
statements. Further, unlike existing requirements in U.S. GAAP, our
amendments emphasize forward-looking information as they are intended
to provide investors with greater insight into estimation uncertainty
that is reasonably likely to have a material impact on financial
condition and operating performance. We remind registrants that the
principle that MD&A should not be a recitation of financial statements
in narrative form extends to disclosure of critical accounting
estimates.\281\
---------------------------------------------------------------------------

    \279\ For example, ASC 820 Fair Value requires disclosure of the
valuation techniques and inputs used to arrive at a measure of fair
value, including judgments and assumptions made. We also note that
while ASC 275, Risks and Uncertainties requires a discussion of
estimates, it includes specific criteria including a reasonably
possible ``change in the near term due to one or more future
confirming events.'' By contrast, the critical accounting estimate
requirement is broader as it is not tied only to changes in the near
term and encompasses items that may not be affected by future
events, such as the range in methods a registrant may use in
estimation.
    \280\ See amended Instruction 3 to Item 303(b).
    \281\ See 2003 MD&A Interpretive Release.
---------------------------------------------------------------------------

    Our proposal would have required disclosure of how much estimates
changed during a ``reporting period,'' and several commenters asked the
Commission to specify this period. New Item 303(b)(3) will require
disclosure of changes in each estimate and/or assumption over a
``relevant period,'' but does not specify the period over which a
registrant should discuss the changes in the estimate or assumption.
This approach is intended to give registrants the flexibility to
determine the relevant period necessary to describe material changes in
estimates or assumptions that would facilitate an understanding of
estimation uncertainty, consistent with the principles-based nature of
MD&A. For certain estimates or assumptions, providing information about
estimates and/or assumptions only as of the balance sheet date may be
appropriate to inform investors about the nature of the estimation
uncertainty and how reported amounts bear the risk of change. In
contrast, other estimates or assumptions may require disclosure over
the number of years presented in the financial statements to facilitate
an understanding of the estimation uncertainty. We do not believe that
the requirement to disclose changes in the estimate and/or assumption
over a relevant period is inconsistent with the provisions of ASC Topic
275, Risks and Uncertainties, that were cited by some commenters.\282\
In this regard, disclosure of changes in an estimate/assumption should
not be implied to mean that the earlier estimate was made in error.
Rather, the disclosure provides insight into the estimation uncertainty
and the variability that could result over time.
---------------------------------------------------------------------------

    \282\ See letters from PWC and Medtronic.
---------------------------------------------------------------------------

    Some commenters recommended specifying a reference point (i.e.,
assumption-level or financial statement-level) in determining
materiality for disclosure of the methods, assumptions, and estimates
underlying the calculation of the critical accounting estimate. We are
not specifying a reference point in order to allow flexibility to
discuss the level that provides material information to an investor
about the critical accounting estimate. Similarly, we have not given
examples or guidance for particular estimates at this time, as
suggested by some commenters. Disclosures will need to be tailored to a
registrant's particular business, uncertainties

underlying its financial statement line items, and other circumstances,
and we do not want to promote a checklist approach to the disclosures.
In addition, although a commenter requested that we conform the
definition of critical accounting estimate to that found in AS 1301,
Communications with Audit Committees,\283\ we continue to believe that
the rule's definition, which places greater focus on describing the
estimation uncertainty, will promote disclosure that avoids any
unnecessary repetition of significant accounting policy footnotes.
---------------------------------------------------------------------------

    \283\ See letter from RSM.
---------------------------------------------------------------------------

    We acknowledge commenters' request for clarification on whether the
proposed critical accounting estimate disclosure requirements are
intended to change how registrants currently approach these
disclosures.\284\ We believe the principles of new Item 303(b)(3) are
not materially different from the guidance on critical accounting
estimates set forth in the 2003 MD&A Interpretive Release. Our
amendments, including the modifications to the proposed amendments, are
intended to clarify the required disclosures under this requirement,
facilitate compliance, and improve the resulting disclosure.
---------------------------------------------------------------------------

    \284\ See letters from Deloitte; E&Y (recommending this
clarification specifically for quantitative disclosures).
---------------------------------------------------------------------------

    In addition, as required by current Item 303(b), new Item 303(c)
will continue to require that MD&A disclosure for interim periods
include a discussion of the material changes in items specified in the
full fiscal year requirements in amended Item 303(b).\285\ As this
applies to critical accounting estimates disclosure in discussion of
interim periods, registrants would be required to discuss material
changes to the full fiscal year disclosures.
---------------------------------------------------------------------------

    \285\ See infra Section II.C.9.
---------------------------------------------------------------------------

9. Interim Period Discussion (Amended Item 303(c))
a. Proposed Amendments
    Current Item 303(b) requires registrants to provide MD&A disclosure
for interim periods that enables market participants to assess material
changes in financial condition and results of operations between
certain specified periods.\286\ Current Item 303(b)(1) requires
registrants to discuss any material change in financial condition from
the end of the preceding fiscal year to the date of the most recent
interim balance sheet.\287\ Current Item 303(b)(2) requires registrants
to discuss any material changes in their results of operations for the
most recent fiscal year-to-date period presented in their income
statement, along with a similar discussion of the corresponding year-
to-date period of the preceding fiscal year. If a registrant is
required or elects to provide an income statement for the most recent
fiscal quarter, the discussion must also cover material changes with
respect to that fiscal quarter and the corresponding fiscal quarter in
the preceding fiscal year.\288\ Current Item 303(b)(2) also states that
registrants subject to Rule 3-03(b) of Regulation S-X \289\ providing
statements of comprehensive income for the twelve-month period ended as
of the date of the most recent interim balance sheet must discuss
material changes of that twelve-month period as compared to the
preceding fiscal year rather than the preceding period.
---------------------------------------------------------------------------

    \286\ Item 303(b) of Regulation S-K [17 CFR 229.303(b)].
    \287\ If the interim financial statements include an interim
balance sheet as of the corresponding interim date of the preceding
year, the registrant must also discuss any material changes in
financial condition from that date to the date of the most recent
interim balance sheet provided. At their discretion, registrants may
combine discussions of changes from both the end and the
corresponding interim date of the preceding fiscal year when such
discussions are required. See Item 303(b)(1).
    \288\ In addition, if the registrant elects to provide a
statement of comprehensive income for the twelve-month period ended
as of the date of the most recent interim balance sheet provided,
the registrant must also discuss material changes with respect to
that twelve-month period and the twelve-month period ended as of the
corresponding interim balance sheet date of the preceding fiscal
year. See Item 303(b)(2).
    \289\ These registrants include those primarily engaged in: The
generation, transmission, or distribution of electricity; the
manufacture, mixing transmission, or distribution of gas; the
supplying or distribution of water; or the furnishing of telephone
or telegraph services; or in holding securities of companies engaged
in such business.
---------------------------------------------------------------------------

    The Commission proposed amending current Item 303(b) (to be
renumbered as proposed Item 303(c)) to allow for flexibility in
comparisons of interim periods and to simplify the item. Specifically,
the Commission proposed permitting registrants to compare their most
recently completed quarter to either the corresponding quarter of the
prior year (as is currently required) or the immediately preceding
quarter. Under the proposal, if a registrant elects to discuss changes
from the immediately preceding quarter, the registrant must provide
summary financial information that is the subject of the discussion for
that quarter or identify the prior EDGAR filing that presents such
information so that a reader may have ready access to the prior quarter
financial information being discussed. In addition, under the proposed
amendment, if in a subsequent Form 10-Q, a registrant changes the
comparison from the comparison presented in the immediately prior Form
10-Q, the registrant would be required to explain the reason for the
change and present both comparisons in the filing where the change is
announced.\290\
---------------------------------------------------------------------------

    \290\ The Commission also proposed eliminating language in
current Item 303(b)(2) relating to requirements for registrants
subject to Rule 3-03(b) of Regulation S-X. See Proposing Release at
Section II.C.9.
---------------------------------------------------------------------------

b. Comments
    Commenters generally supported amending current Item 303(b) as
proposed.\291\ Some of these commenters recommended allowing
registrants additional flexibility by revising the existing requirement
to compare current year-to-date information to prior year-to-date
information and giving registrants discretion to decide whether this
disclosure would be meaningful.\292\ Two of these commenters also
stated that investors do not use the year-to-date comparative
information.\293\ Both of these commenters recommended amending the
year-to-date comparative information requirement to make such
information optional, with greater guidance provided to registrants to
help them determine whether to include such information.\294\
---------------------------------------------------------------------------

    \291\ See, e.g., letters from Pfizer; Nareit (noting, however,
that some members of their task force ``reasoned that a requirement
to only disclose information in one manner could mislead investors
if a company had a material transaction that was not reflected in
the comparative period presented''); FEI; SIFMA; IMA; Medtronic;
Chamber; Society.
    \292\ See, e.g., letters from FEI; Medtronic; Chamber.
    \293\ See, e.g., letters from FEI; Medtronic.
    \294\ See id.
---------------------------------------------------------------------------

    Two commenters opposed the proposal to allow registrants
flexibility in comparisons of interim periods.\295\ Both of these
commenters stated that current prescribed disclosure requirements
``provide uniformity of information essential to making assessments.''
\296\ Both commenters also stated that if a comparison to the prior
quarter were relevant or material, the current structure provides the
registrants the flexibility to make such comparisons in addition to the
year-to-date comparative information.\297\
---------------------------------------------------------------------------

    \295\ See, e.g., letters from CFA & CII; D. Jamieson.
    \296\ See id.
    \297\ See id.
---------------------------------------------------------------------------

c. Final Amendments
    We are adopting Item 303(c) with the amendments as proposed. We
acknowledge commenters' concerns regarding the benefits of uniform
disclosures. However, we continue to believe that the flexibility
provided by these amendments will help registrants

provide a more tailored and meaningful analysis that is relevant to
their specific business cycles while also providing investors with
material information to assess quarterly performance. Because not all
businesses are seasonal, a comparison to the corresponding quarter of
the preceding year may not be as meaningful as a comparison to the
preceding quarter. Additionally, by requiring registrants not only to
explain the reasons for a change in comparison from prior periods but
also to provide both comparisons when there is such a change, we
believe investors will benefit from greater insight into a registrant's
decision making and have sufficient disclosure to understand any
period-over-period change.
    We are not, as suggested by some commenters, amending the year-to-
date comparative information requirement in current Item 303(b) to make
it optional. When adopting the precursor to current Item 303(b), the
Commission noted the item was intended to complement discussion in
annual reports.\298\ At that time, the Commission stated ``that the
most meaningful discussion of financial condition for interim reporting
purposes would deal with the end of the preceding fiscal year and the
date of the most recent interim balance sheet provided.'' \299\ We
continue to believe that a discussion of material year-to-date changes
remains valuable and complements the MD&A provided in annual reports.
We also believe that a comparative year-to-date discussion provides
important context for the current quarter.
---------------------------------------------------------------------------

    \298\ See New Interim Financial Information Provisions and
Revisions of Form 10-Q for Quarterly Reporting, Release No. 33-6288
(Feb. 9, 1981), 46 FR 12480 (Feb. 17, 1981) (adopting current Item
303(b) of Regulation S-K as then Item 11(b) of Regulation S-
K)(``Item 303(b) Adopting Release''). See also 1982 Integrated
Disclosure Adopting Release (reorganizing Regulation S-K to, among
other things, move the substance of Item 11(b) of Regulation S-K to
Item 303(b) of Regulation S-K).
    \299\ See Item 303(b) Adopting Release.
---------------------------------------------------------------------------

    Additionally, we are adopting as proposed several amendments that
will further streamline the item. These amendments will:
     Eliminate the text that states that registrants need not
provide a discussion of the impact of inflation and changing prices,
consistent with the amendments described above; \300\ and
---------------------------------------------------------------------------

    \300\ See supra discussion at Section II.C.5.
---------------------------------------------------------------------------

     Amend current Item 303(b)(2) (amended Item 303(c)(2))
material changes in results of operations--to break the requirements
into two subsections:
    [cir] Amended Item 303(c)(2)(i) will continue to require
registrants to discuss any material changes in their results of
operations between the most recent year-to-date interim period(s) and
the corresponding period(s) of the preceding fiscal year for which
statements of comprehensive income are provided; and
    [cir] Amended Item 303(c)(2)(ii) will, as discussed above, require
registrants to compare their most recently completed quarter to either
the corresponding quarter of the prior year (as is currently required)
or the immediately preceding quarter.\301\ Additionally, amended Item
303(c) will continue to require that the interim discussion and
analysis must include a discussion of the material changes in items
specified in the full fiscal year requirements in amended Item 303(b).
---------------------------------------------------------------------------

    \301\ As described above, if a registrant changes the comparison
from the prior interim period comparison, the registrant would be
required to explain the reason for the change.
---------------------------------------------------------------------------

    We are also amending as proposed the item to eliminate language
requiring registrants subject to Rule 3-03(b) of Regulation S-X \302\
that elect to provide a statement of comprehensive income for the 12-
month period ended as of the date of the most recent interim balance
sheet to discuss material changes in that 12-month period with respect
to the preceding fiscal year, rather than the corresponding preceding
period. These amendments are intended to give these registrants the
same flexibility as other registrants to make the most meaningful
comparisons in their interim period MD&A.
---------------------------------------------------------------------------

    \302\ See supra footnote 289.
---------------------------------------------------------------------------

    Finally, as proposed, and for the reasons discussed in the
Proposing Release, our amendments delete Instructions 2, 3, 5, 6, 7,
and 8 to current Item 303(b) to help streamline the item and eliminate
unnecessary instructions.\303\ The following table outlines the current
and amended structure of amended Item 303(c): \304\
---------------------------------------------------------------------------

    \303\ Instruction 5 to Item 303(b) is currently reserved.
    \304\ The information in this table is not comprehensive and is
intended only to highlight the general structure of the current
rules and amendments. It does not reflect all of the substance of
the amendments or all of the rules and forms that will be affected.
All changes are discussed in their entirety throughout this release.
As such, this table should be read together with this Section
II.C.9.

------------------------------------------------------------------------
           Current structure                    Amended structure
------------------------------------------------------------------------
Item 303(b), Interim periods...........  Item 303(c), Interim periods.
(1) Material changes in financial        (1) Material changes in
 condition.                               financial condition.
(2) Material changes in results of       (2) Material changes in results
 operations, Rule 3-03(b) of Regulation   of operations.
 S-X matters.                            (i) Material changes in results
                                          of operations (year-to-date).
                                         (ii) Material changes in
                                          results of operations (quarter
                                          comparisons).
Instruction 1 to Item 303(b)...........  Instruction 1 to Item 303(c)
                                          (with amendments to reference
                                          Instructions 2, 3, 4, 6, 8,
                                          and 11 to amended Item
                                          303(b)).
Instruction 2 to Item 303(b)...........  Eliminate.
Instruction 3 to Item 303(b)...........  Eliminate.
Instruction 4 to Item 303(b)...........  Instruction 2 to Item 303(c).
Instruction 5 to Item 303(b)...........  Eliminate.
Instruction 6 to Item 303(b)...........  Eliminate.
Instruction 7 to Item 303(b)...........  Eliminate.
Instruction 8 to Item 303(b)...........  Instruction 11 to amended Item
                                          303(b).
------------------------------------------------------------------------

10. Safe Harbor for Forward-Looking Information (Current Item 303(c))
a. Proposed Amendments
    Item 303(c) \305\ currently states that the safe harbors provided
in Section 27A of the Securities Act and Section 21E of the Exchange
Act (together, ``statutory safe harbors'') apply to all forward-looking
information provided in response to current Item 303(a)(4) (off-balance
sheet arrangements) and current Item 303(a)(5) (tabular disclosure of
contractual obligations), provided such disclosure is made by

certain enumerated persons.\306\ For current Item 303(a)(4), current
Item 303(c) further states that the ``meaningful cautionary
statements'' element of the statutory safe harbors is satisfied if a
registrant satisfies all of current Item 303(a)(4)'s requirements.\307\
---------------------------------------------------------------------------

    \305\ Item 303(c) of Regulation S-K [17 CFR 229.303(c)].
    \306\ Such persons are the issuer; a person acting on behalf of
the issuer; an outside reviewer retained by the issuer making a
statement on behalf of the issuer; or an underwriter, with respect
to information provided by the issuer or information derived from
information provided by the issuer.
    \307\ Item 303(c)(2)(ii) of Regulation S-K [17 CFR
229.303(c)(2)(ii)].
---------------------------------------------------------------------------

    The Commission added current Item 303(c) in 2003 when it adopted
Items 303(a)(4) and (5).\308\ Item 303(c) was intended to remove
possible ambiguity about the application of the statutory safe harbors
to these items and to promote more meaningful disclosure.\309\
---------------------------------------------------------------------------

    \308\ See Off-Balance Sheet Arrangements and Contractual
Obligations Adopting Release at 5992 (``To encourage the type of
information and analysis necessary for investors to understand the
impact of off-balance sheet arrangements and to reduce the burden of
estimating the payments due under contractual obligations, the
amendments include a safe harbor for forward-looking
information.'').
    \309\ See id.
---------------------------------------------------------------------------

    Because the Commission proposed to eliminate both Items 303(a)(4)
and (5), it also proposed eliminating current Item 303(c), which
specifically and exclusively refers to those disclosure requirements.
The proposed amendments were not intended to alter the application of
the statutory safe harbors, which protect eligible forward-looking
statements in MD&A against private legal actions that are based on
allegations of a material misstatement or omission, with certain
exceptions. \310\ The Proposing Release also reiterated the
availability of the safe harbors in Securities Act Rule 175 \311\ and
Exchange Act Rule 3b-6 \312\ (the ``regulatory safe harbors''), which
expressly apply to forward-looking information in MD&A disclosure.\313\
---------------------------------------------------------------------------

    \310\ See Sections 27A of the Securities Act and 21E of the
Exchange Act. The statutory safe harbors by their terms do not apply
to forward-looking statements included in financial statements
prepared in accordance with generally accepted accounting
principles. Notably, the statutory safe harbors also would not apply
to MD&A disclosure if the MD&A forward-looking statements were made:
(1) In connection with an initial public offering; a tender offer;
an offering by, or relating to the operations of, a partnership,
limited liability company, or a direct participation investment
program, an offering of securities by a blank check company; a roll-
up transaction; or a going private transaction; or (2) or by an
issuer of penny stock. See Section 27A(b) of the Securities Act and
Section 21E(b) of the Exchange Act. Also, the statutory safe harbors
do not, absent a rule, regulation, or Commission order, apply to
forward-looking statements by issuers covered by Section
27A(b)(1)(A) of the Securities Act and Section 21E(b)(1)(A) of the
Exchange Act. Because the statutory safe harbors only apply to
forward-looking statements made by or on behalf of an issuer that is
subject to the reporting requirements of Section 13(a) or 15(d) of
the Exchange Act, they would not apply to forward-looking statements
made in connection with an offering under Regulation A unless the
issuer is a reporting company and no other exclusions from the safe
harbor apply.
    \311\ [17 CFR 230.175].
    \312\ [17 CFR 240.3b-6].
    \313\ See Proposing Release at Section II.C.10.
---------------------------------------------------------------------------

b. Comments
    A few commenters recommended revising the proposal to expand the
safe harbors available to registrants.\314\ One of these commenters
recommended harmonizing the treatment of forward-looking information in
MD&A and the financial statements.\315\ This commenter also asked the
Commission to reiterate, in any final release, its statements in the
Proposing Release regarding its commitment to the statutory safe
harbors and that the amendments are not intended to alter application
of this safe harbor. Another commenter asked the Commission to ``expand
the statutory safe harbors to apply to all forward-looking statements
wherever they appear in MD&A, for all transactions and registrants.''
\316\ This commenter also asked the Commission to ``expand the . . .
statutory safe harbors to cover any forward-looking critical accounting
estimates disclosure for all types of companies and transactions
(including IPOs).'' \317\
---------------------------------------------------------------------------

    \314\ See letters from SIFMA; Chamber.
    \315\ See letter from Chamber.
    \316\ See letter from SIFMA.
    \317\ See id.
---------------------------------------------------------------------------

c. Final Amendments
    We are adopting amendments to eliminate current Item 303(c) as
proposed. As the Commission stated when adopting Item 303(c), the item
was intended to remove possible ambiguity about the application of the
statutory safe harbors to the specific disclosures called for by
current Items 303(a)(4) and (5).\318\ While the final amendments
continue to require disclosure regarding off-balance sheet arrangements
and contractual obligations,\319\ such disclosure will now be
integrated into a registrant's broader MD&A discussion. We therefore
believe the potential ambiguity that motivated the Commission to adopt
current Item 303(c) in the context of the prescriptive requirements of
Item 303(a)(4) and (5) no longer exists. Rather, whether and the extent
to which disclosure related to contractual obligations or off-balance
sheet arrangements constitutes forward-looking statements that fall
under the protections of either the statutory or regulatory safe
harbors would be evaluated consistently with other forward-looking
disclosures in MD&A.
---------------------------------------------------------------------------

    \318\ See Off-Balance Sheet Arrangements and Contractual
Obligations Adopting Release.
    \319\ See amended Instruction 8 to Item 303(b).
---------------------------------------------------------------------------

    Because our amendments to eliminate current Item 303(c) do not
alter the availability or scope of the statutory and regulatory safe
harbors, and because we are eliminating the prescriptive requirements
associated with Items 303(a)(4) and (5), we are eliminating the item,
as proposed. While we acknowledge the suggestion of one commenter to
consider expanding the scope of the statutory safe harbors to apply
more broadly, including to cover all transactions and issuers, an
expansion would warrant a broader review of the statutory and
regulatory safe harbors and any areas where expansion may be necessary
or appropriate. It is therefore beyond the scope of the current
rulemaking.
    As requested by a commenter, we explicitly confirm that eliminating
current Item 303(c) does not alter the application or availability of
the statutory safe harbors or the regulatory safe harbors for all of
amended Item 303, including the new requirement to disclose critical
accounting estimates.\320\ We continue to believe that the statutory
and regulatory safe harbors for eligible forward-looking statements
have encouraged greater disclosure of forward-looking information that
has benefited investors and our markets. As registrants prepare their
MD&A disclosures under the amendments, we remind registrants of the
availability and scope of these safe harbors and encourage greater
disclosure of forward-looking information.
---------------------------------------------------------------------------

    \320\ Instruction 7 to Item 303(a) of Regulation S-K [17 CFR
229.303(a)], Securities Act Rule 175 [17 CFR 230.175], and Exchange
Act Rule 3b-6 [17 CFR 240.3b-6]. Our amendments to Item 303 retain
Instruction 7 to current Item 303(a), which will be renumbered as
Instruction 6 to amended Item 303(b).
---------------------------------------------------------------------------

11. Smaller Reporting Companies (Current Item 303(d))
a. Proposed Amendments
    Current Item 303(d) \321\ states that an SRC may provide current
Item 303(a)(3)(iv) information for the most recent two fiscal years if
it provides financial information on net sales and revenues and income
from continuing operations for only two years. Item 303(d) also states
that an SRC is not required to provide the contractual obligations
table specified in Item 303(a)(5). Because the Commission proposed to
eliminate current Items 303(a)(3)(iv) and (a)(5), the Commission also
proposed eliminating current Item

303(d), which specifically and exclusively references these two
disclosure requirements.
---------------------------------------------------------------------------

    \321\ Item 303(d) of Regulation S-K [17 CFR 229.303(d)].
---------------------------------------------------------------------------

b. Comments
    One commenter supported the proposal to eliminate current Item
303(d).\322\ Some commenters, while not commenting on this specific
proposal, indicated they generally opposed any further accommodations
allowing SRCs to provide scaled disclosure.\323\
---------------------------------------------------------------------------

    \322\ See letter from Chamber.
    \323\ See letters from CFA & CII; D. Jamieson.
---------------------------------------------------------------------------

c. Final Amendments
    In light of the elimination of current Items 303(a)(3)(iv) and (5),
we are adopting amendments to current Item 303(d) as proposed.
Notwithstanding the elimination of current Item 303(a)(5), new Item
303(b) specifically requires disclosure of material cash requirements
from known contractual and other obligations as part of a liquidity and
capital resources discussion.\324\ SRCs are currently required to
provide MD&A disclosure addressing liquidity and capital resources, and
we believe that SRCs should continue to provide this disclosure under
the amended requirements. Excluding SRCs from the relevant discussion
of liquidity and capital resources would be inconsistent with the
objectives and requirements stated in amended Item 303(a), as such
disclosure may be necessary to an understanding of the registrant's
financial condition, cash flows, and other changes in financial
condition and results of operations.
---------------------------------------------------------------------------

    \324\ See Section II.C.7 supra.
---------------------------------------------------------------------------

    Although SRCs are not currently required to include a contractual
obligations table, they are already required under U.S. GAAP to assess
most of the currently prescribed categories that would otherwise be
included in this table. Additionally, some of the revisions to the
liquidity and capital resources disclosure requirements codify current
MD&A guidance, which already applies to SRCs.\325\
---------------------------------------------------------------------------

    \325\ See 1989 MD&A Interpretive Release and 2003 MD&A
Interpretive Release.
---------------------------------------------------------------------------

    When adopting the contractual obligations table requirement, the
Commission excluded the predecessor to SRCs, small business issuers,
stating that the exclusion was consistent with the policies of
facilitating capital raising by small businesses and reducing the
compliance burdens placed on these registrants by the federal
securities laws.\326\ Because the basis for current Item 303(d) was a
reduction in the burdens associated with the preparation of the
contractual obligations table itself, and because we are eliminating
that prescriptive requirement, we believe that the elimination of
current Item 303(d) is likewise appropriate.
---------------------------------------------------------------------------

    \326\ See Off-Balance Sheet Arrangements and Contractual
Obligations Adopting Release. See also Small Business Initiatives,
Release No. 33-6949 (July 30, 1992) [57 FR 36442 (Aug. 13, 1992)].
---------------------------------------------------------------------------

D. Application to Foreign Private Issuers

    We are adopting corresponding amendments that will apply to FPIs
providing disclosure required by Form 20-F or Form 40-F largely as
proposed.\327\ We are also adopting amendments to current Instruction
11 to Item 303 as proposed, which specifically applies to FPIs that
choose to file on domestic forms. Similar to our discussions above and
for the reasons discussed in greater detail below, our amendments to
these forms are intended to modernize, clarify, and streamline these
disclosure requirements.
---------------------------------------------------------------------------

    \327\ To the extent that other forms, such as Form F-1, require
information provided by Form 20-F, these amendments to Form 20-F
will also apply to those other forms.
---------------------------------------------------------------------------

    Generally, commenters did not specifically comment on the proposed
amendments related to FPIs. One commenter stated that, unless otherwise
specified, its comments apply to all registrants, including FPIs.\328\
---------------------------------------------------------------------------

    \328\ See letter from CAQ.
---------------------------------------------------------------------------

1. Form 20-F
a. Selected Financial Data (Item 3.A of Form 20-F)
i. Proposed Amendments
    Similar to Item 301, Item 3.A of Form 20-F requires FPIs to provide
selected historical financial data for the most recent five financial
years (or such shorter period that the company has been in operation).
Also similar to Item 301, Item 3.A specifies the information that must
be included in the selected financial data and provides that EGCs are
not required, in a Securities Act registration statement, to present
selected financial data for any period prior to the earliest audited
financial statements presented in connection with the registrant's
initial public offering of its common equity securities.\329\ In a
registration statement, periodic report, or other report filed under
the Exchange Act, an EGC need not present selected financial data for
any period prior to the earliest audited financial statements presented
in connection with the EGC's first registration statement that became
effective under the Exchange Act or the Securities Act.\330\ However,
unlike Item 301, Item 3.A also permits a FPI to omit either or both of
the earliest two years of data if it represents that it cannot provide
the information, or cannot provide the information on a restated basis,
without unreasonable effort or expense. Given the similarities between
Item 3.A and Item 301, the Commission proposed deleting Item 3.A and
the related instructions.
---------------------------------------------------------------------------

    \329\ See Instruction 3 to Item 3.A.
    \330\ Id.
---------------------------------------------------------------------------

ii. Final Amendments
    For reasons similar to those discussed above with respect to the
elimination of Item 301, we are eliminating Item 3.A of Form 20-F, as
proposed.\331\ We recognize that, unlike Item 301, Item 3.A. permits an
FPI in certain situations to omit either or both of the earliest two
years of data. However, as with Item 301, trend disclosure elicited by
Item 3.A typically would be discussed in response to Item 5 of Form 20-
F, which requires MD&A disclosure similar to Item 303. Despite the
deletion of Item 3.A., FPIs should continue to consider whether such
tabular disclosure as part of an introductory section or overview,
including to demonstrate material trends, would be appropriate.\332\
---------------------------------------------------------------------------

    \331\ See supra Section II.A.
    \332\ See 2003 MD&A Interpretive Release (``Companies should
consider whether a tabular presentation of relevant financial or
other information may help a reader's understanding of MD&A.''). See
also footnote 1 of 2003 MD&A Interpretive Release which states that
the guidance in that release is intended to apply to FPIs.
---------------------------------------------------------------------------

b. Operating and Financial Review and Prospects (Item 5 of Form 20-F)
i. Proposed Amendments
    The disclosure requirements for Item 5 of Form 20-F (Operating and
Financial Review and Prospects) are substantively comparable to the
MD&A requirements under Item 303 of Regulation S-K.\333\ To maintain a
consistent approach to MD&A for domestic registrants and FPIs, the
Commission proposed amendments to Form 20-F that generally conformed to
the proposed amendments to Item 303.\334\
---------------------------------------------------------------------------

    \333\ When the Commission revised the wording of Item 5 of Form
20-F in 1999, the adopting release noted that the requirements
correspond with Item 303 of Regulation S-K. See International
Disclosure Standards, Release No. 33-7745 (Sept. 28, 1999) [64 FR
53900 (Oct. 5, 1999)], at 53904 (``International Disclosure
Standards Release'').
    \334\ See Proposing Release at Section II.D.
---------------------------------------------------------------------------

ii. Final Amendments
    We are adopting the amendments to Item 5 of Form 20-F largely as
proposed, with some modifications to conform to our amendments to Item
303 by incorporating any relevant changes made to Item 303 in response
to

comments received. Specifically, and for reasons similar to those
discussed above with respect to the amendments to Item 303, we are
adopting, the amendments modify the proposals for Item 5 of Form 20-F
by:
     Consistently using the term ``reasonably likely''
throughout; \335\
---------------------------------------------------------------------------

    \335\ See supra Section II.C.3.
---------------------------------------------------------------------------

     Eliminating the contractual obligations table and amending
the item to include a principles-based liquidity and capital resources
requirement focused on material short- and long- term cash requirements
from known contractual and other obligations; \336\ and
---------------------------------------------------------------------------

    \336\ See supra Section II.C.7.
---------------------------------------------------------------------------

     Modifying the critical accounting estimate proposal to
emphasize that this disclosure is only required to the extent
reasonably available and material.\337\
---------------------------------------------------------------------------

    \337\ See supra Section II.C.8.
---------------------------------------------------------------------------

    More generally, similar to our amendments to Item 303 and
consistent with what was proposed, we are amending the forepart of Item
5 to specify the purpose of MD&A and highlight the item's objective.
These amendments state that the disclosure responsive to Item 5 must:
     Include other statistical data that will enhance a
reader's understanding of the company's financial condition, changes in
financial condition, and results of operations;
     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 or future
financial condition;
     Provide a narrative explanation of the financial
statements that enables investors to see a registrant ``through the
eyes of management;'' \338\ and
---------------------------------------------------------------------------

    \338\ See 2003 MD&A Interpretative Release, at 75056. See also
1989 Interpretative Release, at 22428.
---------------------------------------------------------------------------

     Provide information relating to other subdivisions, such
as geographic areas or product lines, in addition to providing
information relating to all separate segments.\339\
---------------------------------------------------------------------------

    \339\ See supra Section II.C.1.c.
---------------------------------------------------------------------------

    Additionally, the amendments:
     Amend Item 5 to specify that the discussion must include a
quantitative and qualitative description of the reasons underlying
material changes, including where material changes within a line item
offset one another; \340\
---------------------------------------------------------------------------

    \340\ See supra Section II.C.1.b.
---------------------------------------------------------------------------

     Revise the liquidity and capital resources requirement in
Item 5.B to specify that a registrant must broadly disclose material
cash commitments, including but not limited to capital expenditures;
\341\
---------------------------------------------------------------------------

    \341\ See supra Sections II.C.2 and II.C.7.
---------------------------------------------------------------------------

     Amend Item 5.A.2, which currently requires disclosure of
inflation, if material, and hyperinflation if the currency in which the
financial statements are presented is of a country that has experienced
hyperinflation,\342\ to require only disclosure of hyperinflation;
\343\ and
---------------------------------------------------------------------------

    \342\ Rules 3-20(c) and 3-20(d) of Regulation S-X provide the
situations when a foreign private issuer must reflect hyperinflation
in its financial statements. Rule 3-20(d) generally describes a
hyperinflationary environment as one that has cumulative inflation
of approximately 100 percent or more over the most recent three-year
period.
    \343\ See supra Section II.C.5. Consistent with our proposals,
our amendments do not alter the requirement in Item 5.A.2 as it
relates to hyperinflation. Instruction 1 to Item 5.A states that
disclosure of hyperinflation must be provided if hyperinflation has
occurred in any of the periods for which an FPI is required to
provide audited financial statements or unaudited interim financial
statements. We continue to believe that for FPIs in a
hyperinflationary economy, hyperinflation is a salient issue such
that it merits specific mention.
---------------------------------------------------------------------------

     Replace Item 5.E, which covers off-balance sheet
arrangements, with a principles-based instruction.\344\
---------------------------------------------------------------------------

    \344\ See amended Instruction 7 to Item 5 of Form 20-F. For FPIs
filing on Forms 20-F and 40-F that apply IFRS, the overlap between
the requirements of those Forms and IFRS are similar to the overlap
between Item 303(a)(4) and U.S. GAAP, as described in supra Section
II.C.6. Certain IFRS standards require some disclosures that
substantially overlap with the requirements of Item 5.E. of Form 20-
F including but without limitation: Information that enables users
of the financial statements to evaluate the nature and extent of
risks arising from financial instruments to which the entity is
exposed or has continuing involvement in at the end of the reporting
period and how those risks have been managed (see Paragraphs 31, 32
and 42A of IFRS 7, Financial Instruments; Disclosures (``IFRS 7''))
such as: Credit risk relating to financial guarantee contracts (see
Paragraph 35M of IFRS 7); risk relating to continuing involvement in
transferred financial assets (see Paragraphs 42B(b), 42C and 42E of
IFRS 7); and obligations under interests in unconsolidated entities
(see Paragraphs 1 and 24 to 31 of IFRS 12, Disclosure of Interests
in Other Entities).

Our rationale for these amendments is consistent with the rationale
discussed above for amending corresponding provisions of Item 303.
    Some of the amendments to Form 20-F are unique to this form but
consistent with MD&A's focus on materiality. Specifically, as proposed
and for the reasons discussed in the Proposing Release, we are
amending:
     Item 5.D of Form 20-F to require disclosure of ``material
trends'' instead of ``the most significant recent trends;'' \345\ and
---------------------------------------------------------------------------

    \345\ See, e.g., 2003 MD&A Interpretive Release, at 75060.
---------------------------------------------------------------------------

     Instruction 1 to Item 5 to add references to the 2002
Commission Statement,\346\ 2003 MD&A Interpretive Release, 2010 MD&A
Interpretive Release, and the 2020 MD&A Interpretive Release \347\ to
explicitly direct FPIs to this guidance.
---------------------------------------------------------------------------

    \346\ Commission Statement about Management's Discussion and
Analysis of Financial Condition and Results of Operations, Release
No. 33-8056 (Jan. 22, 2002) [67 FR 3746 (Jan. 25, 2002)] (``2002
Commission Statement'').
    \347\ See Commission Guidance on Management's Discussion and
Analysis of Financial Condition and Results of Operations, Release
No. 33-10751 (Jan. 30, 2020) [85 FR 10568 (Feb. 25, 2020)].
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    These and all of our amendments to Item 5 of Form 20-F are intended
to ensure that existing MD&A requirements for FPIs continue to mirror
the substantive MD&A requirements in Item 303.\348\
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    \348\ See International Disclosure Standards Release. See also
Off-Balance Sheet Arrangements and Contractual Obligations Adopting
Release.
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2. Form 40-F
a. Proposed Amendments
    Form 40-F generally permits eligible Canadian FPIs to use Canadian
disclosure documents to satisfy the Commission's registration and
disclosure requirements. As a result, the MD&A contained in Forms 40-F
is largely prepared in accordance with Canadian disclosure standards.
The Commission proposed replacing the off-balance sheet disclosure
requirement in General Instruction B.(11) of Form 40-F with a
principles-based instruction and deleting General Instruction B.(12),
the contractual obligations disclosure requirement. The proposal would
only require disclosure of off-balance sheet arrangements to the extent
disclosure is not already provided under the MD&A required by Canadian
law. Lastly, and consistent with the Item 303 proposals, the Commission
proposed to eliminate General Instruction B.(13), which acknowledges
application of the statutory safe harbor, and specifically and
exclusively applies to General Instructions B.(11) and B.(12).
b. Final Amendments
    We are adopting the amendments to Form 40-F largely as proposed,
with modifications to conform to our amendments to Item 303 by
incorporating relevant changes made to Item 303 in response to comments
received. For the reasons discussed above with respect to the liquidity
and capital resources requirements in Item 303(b), we are replacing the
contractual obligations disclosure requirement in General Instruction
B.(12) with a principles-based instruction that expands the MD&A
discussion to require analysis of material cash requirements from known
contractual and other obligations.\349\ In addition, as

proposed, we are amending the form to replace General Instruction
B.(11) with a principles-based instruction.\350\ As noted above, unlike
Item 303 and Form 20-F, the MD&A required under Form 40-F is defined as
required by Canadian law.\351\ Accordingly, our amendments to Form 40-F
only require disclosure of off-balance sheet arrangements and an
analysis of material cash requirements to the extent it is not already
provided under the MD&A required by Canadian law. Lastly, and as
proposed, we are eliminating General Instruction B.(13), which
acknowledges application of the statutory safe harbor and specifically
and exclusively applies to General Instructions B.(11) and B.(12).\352\
Notwithstanding this deletion and consistent with the amendments we are
making to Item 303, given that eligible Canadian FPIs may still need to
disclose certain contractual obligations and off-balance sheet
transactions, the statutory safe harbors and regulatory safe harbors
will continue to cover forward-looking statements, if applicable.
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    \349\ See supra Section II.C.7.
    \350\ See supra Section II.C.6. We believe our amendments to
General Instruction B.(11) of Form 40-F is consistent with the
statutory mandate in Section 13(j) of the Exchange Act for the same
reasons discussed in the Proposing Release. See Proposing Release at
Section II.C.6.
    \351\ See General Instruction B.(3) of Form 40-F.
    \352\ See supra Section II.C.10.
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3. Item 303 of Regulation S-K (Hyperinflation Requirement in Item 303
for FPIs)
a. Proposed Amendments
    FPIs may voluntarily choose to file on forms that would require
disclosure under Item 303. Current Instruction 11 to Item 303 requires
``foreign private registrants'' to discuss briefly any pertinent
governmental economic, fiscal, monetary, or political policies or
factors that have materially affected or could materially affect,
directly or indirectly, their operations or investments by United
States nationals.\353\ The Commission proposed amending this FPI
instruction to incorporate the requirement for FPIs to discuss
hyperinflation in a hyperinflationary economy. The Commission also
proposed replacing the reference to ``foreign private registrants''
with the defined term ``foreign private issuer.'' \354\
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    \353\ See Instruction 11 to Item 303(a) of Regulation S-K.
    \354\ See Rule 405 and Rule 3b-4(c).
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b. Final Amendments
    For consistency with the requirements of Form 20-F,\355\ we are
adopting amendments to Item 303 as proposed. Specifically, current
Instruction 11 to Item 303(a) is being amended as Instruction 9 to Item
303(b) to require a ``foreign private issuer'' to consider the impact
of hyperinflation if hyperinflation has occurred in any of the periods
for which audited financial statements or unaudited financial
statements are filed. This modification is intended to align the
requirement in Item 303 more closely with Form 20-F.
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    \355\ See supra Section II.D.1.
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E. Additional Conforming Amendments

    The Commission proposed additional conforming amendments,
consistent with the rationale for the proposals.\356\ No commenters
opposed these proposals.
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    \356\ In addition to the conforming amendments discussed in this
section, we are also amending certain rules and forms to update
references to the items we are amending, as follows: remove
references to Item 301 or Item 3.A of Form 20-F (Item 10 of
Regulation S-K [17 CFR 229.10]; Forms S-1 [17 CFR 239.11], N-2 [17
CFR 274.11a-1], S-11 [17 CFR 239.18], S-4 [17 CFR 239.25], F-1 [17
CFR 239.31], F-4 [17 CFR 239.34], 1-A [17 CFR 239.90], 10 [17 CFR
249.208c], and 10-K [17 CFR 249.310]; Schedule 14A [17 CFR 240.14a-
101]; and Exchange Act Rule 14a-3 [17 CFR 240.14a-3]); and update
references to subparagraphs of Item 303 (Securities Act Rule 419 [17
CFR 230.419]). While the disclosure requirements for Item 9 of Form
1-A for Regulation A issuers are similar to the MD&A requirements
under Item 303, we did not propose amendments to Form 1-A. See
Proposing Release at footnote 2. However, in the preparation of Part
II of Form 1-A, Regulation A issuers have the option of disclosing
either the information required by (i) the Offering Circular format
(including Item 9 referenced above) or (ii) Part I of Forms S-1 or
S-11 (except for the financial statements, selected financial data,
and supplementary information called for by those forms).
Accordingly, while the final rules do not amend Item 9 of Form 1-A,
they would still impact Regulation A issuers that choose to disclose
the information required by Part I of Forms S-1 or S-11. See
Paragraph (a)(1)(ii) of Part II of Form 1-A.
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1. Roll-up Transactions--Item 914 of Regulation S-K
a. Proposed Amendments
    The Commission proposed deleting references to Items 301 and 302 in
Item 914(a) of Regulation S-K. This item applies to roll-up
transactions, which, subject to certain exceptions, generally involve
the combination or reorganization of one or more partnerships, directly
or indirectly, where some or all of the investors in any such
partnerships will receive new securities or securities in another
entity.\357\ Item 914(a) provides that, for each partnership to be
included in a roll-up transaction, certain financial information,
including disclosure under Item 301 and Item 302, must be provided.
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    \357\ See Rule 901(c) of Regulation S-K [17 CFR 229.901(c)].
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b. Final Amendments
    We are adopting amendments to Item 914(a) to eliminate the
reference to Item 301, as proposed, but will retain the reference to
Item 302 in light of our final amendments to retain that item.\358\ For
Item 301, we recognize that, in the context of Item 914(a), disclosure
provided under this item would not be duplicative of the financial
statements and would otherwise be unavailable. However, Item 914(a)
requires disclosure of other specified financial information \359\ and
states that additional or other information should be provided if
material to an understanding of each partnership proposed to be
included in a roll-up transaction. In light of these other
requirements, we continue to believe that our amendment deleting
references to Items 301 in Item 914(a) would not result in a loss of
material information. As discussed above, our amendments to Item 302(a)
are intended to address discrete areas of disclosure that we believe
may be important to investors. Accordingly, we are retaining current
references to Item 302(a).
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    \358\ We are also including a technical amendment to Item 914 to
eliminate the reference to the ratio of earnings to fixed charges.
See Disclosure Update and Simplification, Release No. 33-10532 (Aug.
17, 2018) [83 FR 50234 (Oct. 4, 2018)] at Section III.B.1.f.
    \359\ In addition to disclosure under Items 301 and 302, Item
914(a) calls for the following financial disclosures: Ratio of
earnings to fixed charges, cash and cash equivalents, total assets
at book value, total assets at the value assigned for purposes of
the roll-up transaction (if applicable), total liabilities, general
and limited partners' equity, net increase (decrease) in cash and
cash equivalents, net cash provided by operating activities,
distributions; and per unit data for net income (loss), book value,
value assigned for purposes of the roll-up transaction (if
applicable), and distributions (separately identifying distributions
that represent a return of capital).
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2. Regulation AB--Items 1112, 1114, and 1115
a. Proposed Amendments
    Item 1112 of Regulation AB requires disclosure of financial
information required by Item 301 or Item 3.A of Form 20-F about
significant obligors of pool assets if the pool assets relating to the
significant obligor represent 10% or more, but less than 20%, of the
asset pool in an asset-backed securities (``ABS'') transaction.
Similarly, Items 1114 and 1115 of Regulation AB require disclosure of
financial information required by Item 301 or Item 3.A of Form 20-F
about credit enhancement providers and derivatives counterparties,
respectively, whose support represents a similar level of concentration
in an ABS transaction. As a result of the proposal to eliminate Item

301 and Item 3.A of Form 20-F for corporate issuers, financial
information about these third parties to an ABS transaction, including
any trend information comparable to information required by Item 303 or
Item 5 of Form 20-F, would not otherwise be available. Accordingly, the
Commission proposed replacing in Regulation AB those requirements to
disclose selected financial data under Item 301 or Item 3.A of Form 20-
F with requirements to disclose summarized financial information, as
defined by Rule 1-02(bb) of Regulation S-X,\360\ for each of the last
three fiscal years (or the life of the relevant entity or group of
entities, if less).
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    \360\ [17 CFR 210.1-02(bb)].
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b. Final Amendments
    We are adopting amendments to Items 1112, 1114, and 1115 of
Regulation AB as proposed. We continue to believe the information
required under Rule 1-02(bb) is similar to the information currently
required and is consistent with other types of financial statement
disclosures that are required to be disclosed when certain significance
thresholds have been met.\361\ The amendments require disclosure of the
same periods as the historical data that the ABS registrant is required
to provide for the pool assets under Item 1111 of Regulation AB.\362\
We recognize that the amendments would generally result in fewer
periods being presented under these items. However, we do not believe
requiring disclosure beyond three years is necessary as such disclosure
would cover periods beyond those presented for the underlying pool
assets to which the third-party financial information would relate.
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    \361\ We are also amending Rule 1-02(bb) of Regulation S-X as
proposed, which calls for disclosure of summary financial
information. To eliminate any implication that a registrant would
need to prepare disclosure that is not consistent with the
disclosure in the entity's financial statements, the amendments
clarify that the disclosure of summary financial information may
vary, as appropriate, to conform to the nature of the entity's
business.
    \362\ While ABS registrants are generally not required to
provide financial statements, under Item 1111 of Regulation AB, ABS
registrants must provide historical data on the pool assets as
appropriate (e.g., the lesser of three years or the time such assets
have existed) to allow material evaluation of the pool data. See 17
CFR 229.1111.
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3. Summary Prospectus in Forms S-1 and F-1
a. Proposed Amendments
    The Commission proposed replacing references to Item 301 and Item
3.A of Form 20-F in Form S-1 and Form F-1, respectively, with Rule 1-
02(bb) of Regulation S-X, where these forms provide for use of a
summary prospectus under Rule 431.\363\ A summary prospectus is
intended to provide prospective investors with a condensed statement of
the more important information in the registration statement.\364\
Consistent with this purpose, the Instructions as to Summary
Prospectuses in Forms S-1 and F-1 call for disclosure of selected
financial data under Item 301 or Item 3.A of Form 20-F, respectively.
These instructions also state that, with the exception of these items,
the summary prospectus shall not contain any other financial
information.\365\
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    \363\ See 17 CFR 230.431. See also Instruction 1(f) under
Instructions as to Summary Prospectuses in Form S-1 and Instruction
1(c)(v) under Instructions as to Summary Prospectuses in Form F-1.
    \364\ See Adoption of Summary Prospectus Rule and Amendments to
Form S-1 and S-9, Release No. 33-3722 (Nov. 26, 1956) [21 FR 9642
(Dec. 6, 1956)].
    \365\ See Instruction 2 under Instructions as to Summary
Prospectuses for Form S-1 and Form F-1.