[Federal Register Volume 86, Number 6 (Monday, January 11, 2021)]
[Rules and Regulations]
[Pages 2080-2134]
[FR Doc No: 2020-26090]

Vol. 86

Monday,

No. 6

January 11, 2021

Part III

Securities and Exchange Commission

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17 CFR Parts 210, 229, et al.

Management's Discussion and Analysis, Selected Financial Data, and
Supplementary Financial Information; Final Rule

Federal Register / Vol. 86 , No. 6 / Monday, January 11, 2021 / Rules
and Regulations

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 210, 229, 230, 239, 240, and 249

[Release No. 33-10890; 34-90459; IC-34100; File No. S7-01-20]
RIN 3235-AM48

Management's Discussion and Analysis, Selected Financial Data,
and Supplementary Financial Information

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: We are adopting amendments to modernize, simplify, and enhance
certain financial disclosure requirements in Regulation S-K.
Specifically, we are eliminating the requirement for Selected Financial
Data, streamlining the requirement to disclose Supplementary Financial
Information, and amending Management's Discussion & Analysis of
Financial Condition and Results of Operations (``MD&A''). These
amendments are intended to eliminate duplicative disclosures and
modernize and enhance MD&A disclosures for the benefit of investors,
while simplifying compliance efforts for registrants.

DATES:
    Effective date: The final rules are effective February 10, 2021.
    Compliance date: See Section II.F for further information on
transitioning to the final rules.

FOR FURTHER INFORMATION CONTACT: Angie Kim, Special Counsel, Office of
Rulemaking, at<PHONE_NUMBER>, or Ryan Milne, Associate Chief
Accountant, Office of the Chief Accountant, at<PHONE_NUMBER> in the
Division of Corporation Finance, U.S. Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION: We are adopting amendments to:

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             Commission reference                CFR citation (17 CFR)
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Regulation S-X...............................  Sec.  Sec.   210.1-01
                                                through 210.13-02.
    Item 1-02(bb)............................  Sec.   210.1-02(bb).
Regulation S-K...............................  Sec.  Sec.   229.10
                                                through 229.1406.
    Item 10..................................  Sec.   229.10.
    Item 301.................................  Sec.   229.301.
    Item 302.................................  Sec.   229.302.
    Item 303.................................  Sec.   229.303.
    Item 914.................................  Sec.   229.914.
Regulation AB................................  Sec.  Sec.   229.1100
                                                through 229.1125.
    Item 1112................................  Sec.   229.1112.
    Item 1114................................  Sec.   229.1114.
    Item 1115................................  Sec.   229.1115.
Securities Act of 1933 \1\ (``Securities
 Act'')
    Rule 419.................................  Sec.   230.419.
    Form S-1.................................  Sec.   239.11.
    Form S-20................................  Sec.   239.20.
    Form S-4.................................  Sec.   239.25.
    Form F-1.................................  Sec.   239.31.
    Form F-4.................................  Sec.   239.34.
Securities Exchange Act of 1934 \2\
 (``Exchange Act'')
    Rule 14a-3...............................  Sec.   240.14a-3.
    Schedule 14A.............................  Sec.   240.14a-101.
    Form 20-F................................  Sec.   249.218.
    Form 40-F................................  Sec.   249.220f.
    Form 8-K.................................  Sec.   249.308.
    Form 10-K................................  Sec.   249.310.
Securities Act and Investment Company Act of
 1940 \3\ (``Investment Company Act'')
    Form N-2.................................  Sec.  Sec.   239.14 and
                                                274.11a-1.
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\1\ 15 U.S.C. 77a et seq.
\2\ 15 U.S.C. 78a et seq.
\3\ 15 U.S.C. 80a-1 et seq.

Table of Contents

I. Introduction
    A. Background
    B. Overview of the Final Amendments
II. Description of the Final Amendments
    A. Selected Financial Data (Item 301)
    1. Proposed Amendments
    2. Comments
    3. Final Amendments
    B. Supplementary Financial Information (Item 302)
    1. Proposed Amendments
    2. Comments
    3. Final Amendments
    C. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Item 303)
    1. Restructuring and Streamlining
    2. Capital Resources--Material Cash Requirements (New Item
303(b)(1) and Amended Item 303(b)(1)(ii))
    3. Results of Operations--Known Trends or Uncertainties (Amended
Item 303(b)(2)(ii))
    4. Results of Operations--Net Sales and Revenues (Amended Item
303(b)(2)(iii)) 600
    5. Results of Operations--Inflation and Price Changes (Current
Item 303(a)(3)(iv), and Current Instructions 8 and 9 to Item 303(a))
    6. Off-Balance Sheet Arrangements (New Instruction 8 to Item
303(b))
    7. Contractual Obligations Table (Current Item 303(a)(5)) and
Amended Item 303(b)(1)--Liquidity and Capital Resources)
    8. Critical Accounting Estimates (New Item 303(b)(3))
    9. Interim Period Discussion (Amended Item 303(c))
    10. Safe Harbor for Forward-Looking Information (Current Item
303(c))
    11. Smaller Reporting Companies (Current Item 303(d))
    D. Application to Foreign Private Issuers
    1. Form 20-F
    2. Form 40-F
    3. Item 303 of Regulation S-K (Hyperinflation Requirement in
Item 303 for FPIs)
    E. Additional Conforming Amendments
    1. Roll-up Transactions--Item 914 of Regulation S-K
    2. Regulation AB--Items 1112, 1114, and 1115

    3. Summary Prospectus in Forms S-1 and F-1
    4. Business Combinations--Form S-4, Form F-4, and Schedule 14A
    5. Form S-20
    F. Compliance Date
III. Other Matters
IV. Economic Analysis
    A. Introduction
    B. Baseline and Affected Parties
    C. Potential Benefits and Costs of the Amendments
    1. Overall Potential Benefits and Costs
    2. Benefits and Costs of Specific Amendments
    D. Anticipated Effects on Efficiency, Competition, and Capital
Formation
    E. Alternatives
V. Paperwork Reduction Act
    A. Summary of the Collections of Information
    B. Summary of Comment Letters and Revisions to PRA Estimates
    C. Effects of the Amendments on the Collections of Information
    D. Incremental and Aggregate Burden and Cost Estimates for the
Final Amendments
VII. Final Regulatory Flexibility Act Certification
VIII. Statutory Authority

I. Introduction

A. Background

    On January 30, 2020, the Commission proposed amendments to
Regulation S-K,\4\ and related rules and forms to: (1) Eliminate Item
301, Selected Financial Data and Item 302, Supplementary Financial
Information; and (2) modernize, simplify, and enhance the disclosure
requirements in Item 303, MD&A.\5\ The Commission also proposed certain
parallel amendments to financial disclosure requirements applicable to
foreign private issuers (``FPIs'').\6\ The proposed amendments were
part of an ongoing, comprehensive evaluation of our disclosure
requirements \7\ and focused on modernizing and improving disclosure by
reducing costs and burdens while continuing to provide investors with
all material information.
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    \4\ 17 CFR 229.10 through 229.1406.
    \5\ See Management's Discussion and Analysis, Selected Financial
Data, and Supplementary Financial Information, Release No. 33-10750
(Jan. 30, 2020) [85 FR 12068 (Feb. 28, 2020)] (the ``Proposing
Release'').
    \6\ An FPI is any foreign issuer other than a foreign
government, except for an issuer that (1) has more than 50% of its
outstanding voting securities held of record by U.S. residents; and
(2) any of the following: (i) A majority of its executive officers
or directors are citizens or residents of the United States; (ii)
more than 50% of its assets are located in the United States; or
(iii) its business is principally administered in the United States.
See 17 CFR 230.405. See also 17 CFR 240.3b-4(c).
    \7\ See Proposing Release at Section I.A.
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    Many commenters supported the objectives of the proposed amendments
or were generally in favor of the proposals.\8\ We also received
suggestions to modify or further consider aspects of the proposed
amendments that commenters believed could be clarified or improved.\9\
After reviewing and considering the public comments, we are adopting
the majority of the amendments as proposed. As discussed further below,
in certain cases, we are adopting the proposed rules with modifications
that are intended to address comments received.
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    \8\ Comment letters for the Proposing Release are available at
https://www.sec.gov/comments/s7-01-20/s70120.htm. Unless otherwise
indicated, comment letters cited in this release are to the
Proposing Release. In addition, the SEC's Investor Advisory
Committee adopted recommendations (``IAC Recommendation'') with
respect to the proposal and other disclosure matters, asking the
Commission and staff to: Reconsider whether to permit all companies
to omit fourth quarter information from annual reports; closely
monitor accounting developments relating to reverse factoring;
continue to monitor the use of non-GAAP measures by reporting
companies; and reconsider whether to permit omission of the tabular
contractual obligations information in annual reports. See U.S.
Securities & Exchange Commission Investor Advisory Committee,
Recommendation of the SEC Investor Advisory Committee Relating to
Accounting and Financial Disclosure (May 21, 2020), available at
https://www.sec.gov/spotlight/investor-advisory-committee-2012/accounting-and-financial-disclosure.pdf. See also letter from the
Investor-as-Owner Subcommittee of the SEC Investor Advisory
Committee dated April 27, 2020.
    \9\ In addition, some commenters provided input addressing
whether there is a need for additional disclosure requirements
relating to environmental, social, or governance issues (``ESG'')
and sustainability matters. See letters from RSM US LLP dated April
20, 2020 (``RSM''); Edison Electric Institute and American Gas
Association dated April 28, 2020 (``EEI & AGA''); U.S. Chamber of
Commerce's Center for Capital Markets Competitiveness dated May 4,
2020 (``Chamber''); Principles for Responsible Investment dated
April 28, 2020; Institute for Policy Integrity, New York University
School of Law dated April 28, 2020; E. Warren, United States Senator
dated April 28, 2020; Center for Audit Quality dated April 28, 2020
(``CAQ''); Ernst & Young, LLP dated April 28, 2020 (``E&Y''); The
Forum for Sustainable and Responsible Investment dated June 17,
2020. These commenters reflected a range of views. For example, some
commenters broadly supported the establishment of comprehensive ESG
disclosure requirements, while others recommended prescriptive line-
item requirements specifically addressing climate risk disclosures.
Other commenters asserted that the existing disclosure principles in
Regulation S-K are sufficient to elicit disclosure of material
information and objected to new rules that would require all
registrants to include topic-specific disclosure on ESG and
sustainability matters irrespective of the applicability to
registrants' particular operations and finances. In keeping with the
Commission's principles-based approach to MD&A, we are not adding
any new requirements to Item 303 with respect to ESG or
sustainability matters, and continue to emphasize the Commission's
existing guidance on these topics. See Commission Guidance Regarding
Disclosure Related to Climate Change, Release No. 33-9106 (Feb. 8,
2010) [75 FR 6290 (Feb. 8, 2010)].
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B. Overview of the Final Amendments

    We are adopting changes to Items 301, 302, and 303 of Regulation S-
K that would reduce duplicative disclosure and focus on material
information. Our amendments:
     Eliminate Item 301 (Selected Financial Data); and
     Modernize, simplify, and streamline Item 302(a)
(Supplementary Financial Information) and Item 303 (MD&A).
Specifically, these amendments will:
    [cir] Revise Item 302(a) to replace the current requirement for
quarterly tabular disclosure with a principles-based requirement for
material retrospective changes;
    [cir] Add a new Item 303(a), Objective, to state the principal
objectives of MD&A
    [cir] Amend Item 303(a), Full fiscal years (amended Item 303(b))
and Item 303(b), Interim periods (amended Item 303(c)) to modernize,
clarify, and streamline the items;
    [cir] Replace Item 303(a)(4), Off-balance sheet arrangements, with
an instruction to discuss such obligations in the broader context of
MD&A
    [cir] Eliminate Item 303(a)(5), Tabular disclosure of contractual
obligations, and amend Item 303(b)(1), Liquidity and Capital Resources,
to specifically require disclosure of material cash requirements from
known contractual and other obligations as part of an enhanced
liquidity and capital resources discussion; and
    [cir] Add a new Item 303(b)(3), Critical accounting estimates, to
clarify and codify Commission guidance on critical accounting
estimates.\10\
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    \10\ See Commission Guidance Regarding Management's Discussion
and Analysis of Financial Condition and Results of Operation,
Release No. 33-8350 (Dec. 19, 2003) [68 FR 75056 (Dec. 29, 2003)]
(the ``2003 MD&A Interpretive Release'').
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    We are also adopting certain parallel amendments to Forms 20-F and
40-F, including Item 3.A of Form 20-F (Selected Financial Data), Item 5
of Form 20-F (Operating and Financial Review and Prospects), General
Instruction B.(11) of Form 40-F (Off-Balance Sheet Arrangements), and
General Instruction B.(12) of Form 40-F (Tabular Disclosure of
Contractual Obligations).\11\ The following table summarizes some of
the changes we are adopting, as described more fully in Section II
(Final Amendments): \12\
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    \11\ We discuss the amendments that affect FPIs in Section II.D
infra. We are adopting corresponding changes for FPIs to all items,
except for Items 302(a) and 303(b).
    \12\ The information in this table is not comprehensive and is
intended only to highlight some of the more significant aspects of
the final amendments. It does not reflect all of the amendments or
all of the rules and forms that are affected. All changes are
discussed in their entirety below. As such, this table should be
read together with the referenced sections and the complete text of
this release.

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                                       Summary description  of                             Discussed  below in
        Current item  or issue              amended rules        Principal objective(s)          section
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Item 301, Selected financial data....  Registrants will no      Modernize disclosure     II.A.
                                        longer be required to    requirement in light
                                        provide 5 years of       of technological
                                        selected financial       developments and
                                        data.                    simplify disclosure
                                                                 requirements.
Item 302(a), Supplementary financial   Registrants will no      Reduce repetition and    II.B.
 information.                           longer be required to    focus disclosure on
                                        provide 2 years of       material information.
                                        tabular selected         Modernize disclosure
                                        quarterly financial      requirement in light
                                        data. The item will be   of technological
                                        replaced with a          developments.
                                        principles-based
                                        requirement for
                                        material retrospective
                                        changes.
Item 303(a), MD&A....................  Clarify the objective    Simplify and enhance     II.C.1.a.
                                        of MD&A and streamline   the purpose of MD&A.
                                        the fourteen
                                        instructions.
Item 303(a)(2), Capital resources....  Registrants will need    Modernize and enhance    II.C.2 and II.C.7.
                                        to provide material      disclosure
                                        cash requirements,       requirements to
                                        including commitments    account for capital
                                        for capital              expenditures that are
                                        expenditures, as of      not necessarily
                                        the latest fiscal        capital investments.
                                        period, the
                                        anticipated source of
                                        funds needed to
                                        satisfy such cash
                                        requirements, and the
                                        general purpose of
                                        such requirements.
Item 303(a)(3)(ii), Results of         Registrants will need    Clarify item             II.C.3.
 operations.                            to disclose known        requirement by using a
                                        events that are          disclosure threshold
                                        reasonably likely to     of ``reasonably
                                        cause a material         likely,'' which is
                                        change in the            consistent with the
                                        relationship between     Commission's
                                        costs and revenues,      interpretative
                                        such as known or         guidance on forward-
                                        reasonably likely        looking statements.
                                        future increases in
                                        costs of labor or
                                        materials or price
                                        increases or inventory
                                        adjustments.
Item 303(a)(3)(iii), Results of        Clarify that a           Clarify MD&A disclosure  II.C.4.
 operations.                            discussion of material   requirements by
                                        changes in net sales     codifying existing
                                        or revenue is required   Commission guidance.
                                        (rather than only
                                        material increases).
Item 303(a)(3)(iv), Results of         The item and             Encourage registrants    II.C.5.
 operations.                            instructions will be     to focus on material
Instructions 8 and 9.................   eliminated.              information that is
(Inflation and price changes)........   Registrants will still   tailored to a
                                        be required to discuss   registrant's
                                        these matters if they    businesses, facts, and
                                        are part of a known      circumstances.
                                        trend or uncertainty
                                        that has had, or the
                                        registrant reasonably
                                        expects to have, a
                                        material favorable or
                                        unfavorable impact on
                                        net sales, or revenue,
                                        or income from
                                        continuing operations.
Item 303(a)(4), Off-balance sheet      The item will be         Prompt registrants to    II.C.6.
 arrangements.                          replaced by a new        consider and integrate
                                        instruction to Item      disclosure of off-
                                        303. Under the new       balance sheet
                                        instruction,             arrangements within
                                        registrants will be      the context of their
                                        required to discuss      MD&A.
                                        commitments or
                                        obligations, including
                                        contingent
                                        obligations, arising
                                        from arrangements with
                                        unconsolidated
                                        entities or persons
                                        that have, or are
                                        reasonably likely to
                                        have, a material
                                        current or future
                                        effect on such
                                        registrant's financial
                                        condition, changes in
                                        financial condition,
                                        revenues or expenses,
                                        results of operations,
                                        liquidity, cash
                                        requirements, or
                                        capital resources even
                                        when the arrangement
                                        results in no
                                        obligation being
                                        reported in the
                                        registrant's
                                        consolidated balance
                                        sheets.
Item 303(a)(5), Contractual            Registrants will no      Promote the principles-  II.C.7 and II.C.2.
 obligations.                           longer be required to    based nature of MD&A
                                        provide a contractual    and simplify
                                        obligations table. A     disclosures.
                                        discussion of material
                                        contractual
                                        obligations will
                                        remain required
                                        through an enhanced
                                        principles-based
                                        liquidity and capital
                                        resources requirement
                                        focused on material
                                        short- and long-term
                                        cash requirements from
                                        known contractual and
                                        other obligations.

Instruction 4 to Item 303(a).........  Incorporate a portion    Enhance analysis in      II.C.1.b.
(Material changes in line items).....   of the instruction       MD&A. Clarify MD&A
                                        into amended Item        disclosure
                                        303(b). Clarify in       requirements by
                                        amended Item 303(b)      codifying existing
                                        that where there are     Commission guidance on
                                        material changes in a    the importance of
                                        line item, including     analysis in MD&A.
                                        where material changes
                                        within a line item
                                        offset one another,
                                        disclosure of the
                                        underlying reasons for
                                        these material changes
                                        in quantitative and
                                        qualitative terms is
                                        required.
Item 303(b), Interim periods.........  Registrants will be      Allow for flexibility    II.C.9.
                                        permitted to compare     in comparison of
                                        their most recently      interim periods to
                                        completed quarter to     help registrants
                                        either the               provide a more
                                        corresponding quarter    tailored and
                                        of the prior year or     meaningful analysis
                                        to the immediately       relevant to their
                                        preceding quarter.       business cycles.
                                        Registrants subject to
                                        Rule 3-03(b) of
                                        Regulation S-X will be
                                        afforded the same
                                        flexibility.
Critical Accounting Estimates........  Registrants will be      Facilitate compliance    II.C.8.
                                        explicitly required to   and improve resulting
                                        disclose critical        disclosure. Eliminate
                                        accounting estimates.    disclosure that
                                                                 duplicates the
                                                                 financial statement
                                                                 discussion of
                                                                 significant policies.
                                                                 Promote meaningful
                                                                 analysis of
                                                                 measurement
                                                                 uncertainties.
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    We discuss the final amendments below in the order that each Item
appears in Regulation S-K.

II. Description of the Final Amendments

A. Selected Financial Data (Item 301)

1. Proposed Amendments
    Current Item 301 \13\ requires registrants to furnish selected
financial data in comparative tabular form for each of the registrant's
last five fiscal years and any additional fiscal years necessary to
keep the information from being misleading. Instruction 1 to Item 301
states that the purpose of the item is to supply in a convenient and
readable format selected financial data that highlights certain
significant trends in the registrant's financial condition and results
of operations. Instruction 2 to Item 301 lists specific items that must
be included, subject to appropriate variation to conform to the nature
of the registrant's business, and provides that registrants may include
additional items they believe would enhance an understanding of, and
highlight, other trends in their financial condition and results of
operations.\14\
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    \13\ See also infra Section II.D for a discussion of related
amendments to Form 20-F.
    \14\ Instruction 2 to Item 301 of Regulation S-K states that,
subject to appropriate variation to conform to the nature of the
registrant's business, the following items shall be included in the
table of financial data: Net sales or operating revenues; income
(loss) from continuing operations; income (loss) from continuing
operations per common share; total assets; long-term obligations and
redeemable preferred stock (including long-term debt, capital
leases, and redeemable preferred stock); and cash dividends declared
per common share.
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    Smaller reporting companies \15\ are not required to provide Item
301 information.\16\ Emerging growth companies (``EGCs'') \17\ that are
providing the information called for by Item 301 in a Securities Act
registration statement need not present selected financial data for any
period prior to the earliest audited financial statements presented in
connection with the EGC's initial public offering (``IPO'') of its
common equity securities.\18\ In addition, an EGC that is providing the
information called for by Item 301 in a registration statement,
periodic report, or other report filed under the Exchange Act need not
present selected financial data for any period prior to the earliest
audited financial statements presented in connection with its first
registration statement that became effective under the Exchange Act or
Securities Act.\19\
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    \15\ Item 10(f)(1) of Regulation S-K defines a smaller reporting
company (``SRC'') as a registrant that is not an investment company,
an asset-backed issuer, or a majority-owned subsidiary of a parent
that is not an SRC that: Had a public float of less than $250
million; or had annual revenues of less than $100 million, and had
either no public float or a public float of less than $700 million.
Business development companies (``BDCs'') do not fall within the SRC
definition and are a type of closed-end investment company that is
not registered under the Investment Company Act.
    \16\ Item 301(c) of Regulation S-K [17 CFR 229.301(c)].
    \17\ An EGC is defined as a company that has total annual gross
revenues of less than $1.07 billion during its most recently
completed fiscal year and, as of December 8, 2011, had not sold
common equity securities under a registration statement. A company
continues to be an EGC for the first five fiscal years after it
completes an IPO, unless one of the following occurs: Its total
annual gross revenues are $1.07 billion or more; it has issued more
than $1 billion in non-convertible debt in the past three years; or
it becomes a ``large accelerated filer,'' as defined in Exchange Act
Rule 12b-2. See Securities Act Rule 405 and Exchange Act Rule 12b-2.
    \18\ Item 301(d)(1) of Regulation S-K [17 CFR 229.301(d)(1)].
    \19\ Item 301(d)(2) of Regulation S-K [17 CFR 229.301(d)(2)].
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    The Commission proposed to eliminate Item 301 in part because of
advances in technology since the item's adoption in 1970 that allow for
easy access to the information required by this item on the
Commission's Electronic Data Gathering, Analysis, and Retrieval system
(``EDGAR'').\20\ The Commission also noted that Item 301 was originally
intended to elicit disclosure of material trends and that requiring
five years of selected financial data is not necessary to achieve this
because of the requirement for discussion and analysis of trends in
Item 303.\21\
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    \20\ See Proposing Release at Section II.A.
    \21\ See Proposing Release at Section II.A.
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2. Comments
    Commenters broadly supported the proposals.\22\ A few commenters
stated that Item 301 creates additional complexity or costs when
evaluating whether to recast earlier years or when

recasting earlier years, such as when there is a new accounting
standard or change in business.\23\ For example, one commenter stated
that the costs of providing the earlier two years can be significant
and elaborated that these costs include: Internal costs to prepare any
restatement and disclosures; implementation of internal controls; and
external costs such as legal and audit fees.\24\ Another commenter
stated that it recently disposed of a portion of its business and
revising the full five years under Item 301 was difficult and time
consuming, and it believed that the disclosure was not useful to
investors.\25\
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    \22\ See, e.g., letters from PriceWaterhouseCoopers LLP dated
April 23, 2020 (``PWC''); Pfizer, Inc. dated April 24, 2020
(``Pfizer''); Eli Lilly and Company dated April 24, 2020 (``Eli
Lilly''); EEI and AGA; KPMG LLP dated April 28, 2020 (``KPMG'');
CAQ; FedEx dated April 28, 2020 (``FedEx''); Nasdaq, Inc. dated
April 28, 2020 (``Nasdaq''); Nareit dated April 28, 2020
(``Nareit''); Financial Executives International dated April 28,
2020 (``FEI''); SIFMA dated April 28, 2020 (``SIFMA''); Institute of
Management Accountants dated April 28, 2020 (``IMA''); E&Y
UnitedHealth Group dated April 28, 2020 (``UnitedHealth'');
Medtronic dated April 29, 2020 (``Medtronic''); Chamber; ABA
Business Law Section dated June 5, 2020 (``ABA''); Society for
Corporate Governance dated June 22, 2020 (``Society'').
    \23\ See, e.g., letters from Eli Lilly; EEI & AGA; FEI.
    \24\ See letter from FEI.
    \25\ See letter from Eli Lilly.
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    Some commenters opposed the proposal and recommended retaining this
item.\26\ These commenters suggested that eliminating the item would
increase the time and costs for investors to obtain the same disclosure
through other means.\27\ Some of these commenters also stated that
eliminating Item 301 would result in the loss of disclosure, noting
specifically the loss of the earlier two years where a corporation
discontinues its operations, changes its accounting standards, or
otherwise materially restates prior period results.\28\ A few
commenters also expressed the view that the proposal would negatively
impact trend disclosure, especially for the full five years, because,
in their observation, registrants do not typically provide this
disclosure despite requirements in Item 303 and Commission guidance
calling for it.\29\ These commenters stated that they ``have not noted
[trend] disclosure being provided by registrants in MD&A to any
significant extent, and have certainly not seen evidence of this type
of disclosure encompassing a full five-year trend analysis.'' \30\
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    \26\ See, e.g., letters from NASAA dated April 28, 2020
(``NASAA''); California Public Employees' Retirement Systems dated
April 28, 2020 (``CalPERS''); CFA Institute and Council of
Institutional Investors dated April 28, 2020 (``CFA & CII''); Dan
Jamieson dated May 1, 2020 (``D. Jamieson'').
    \27\ See id.
    \28\ See letters from NASAA (observing loss of information where
there is a change in accounting standard or restatement, noting that
in both scenarios the lost disclosure would be particularly
significant); CFA & CII (observing loss of information where there
are discontinued operations or restatements); D. Jamieson.
    \29\ See letters from CFA & CII; D. Jamieson.
    \30\ See id.
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    A few commenters, while not objecting to the proposed elimination
of the item, recommended continued consideration of investor input as
to the overall utility of Item 301.\31\ One of these commenters stated
that many registrants disclose trends for the periods covered by the
financial statements, and if Item 303 is intended to elicit five-year
trend disclosure, Item 303 should be clarified to make this objective
clear.\32\
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    \31\ See letters from Grant Thornton dated April 28, 2020
(``Grant Thornton'') (encouraging ``the SEC to continue outreach to
investors on the overall utility of selected financial data and
supplementary financial information prior to finalizing rulemaking
in this area''); BDO USA, LLP dated April 28, 2020 (``BDO'')
(stating its belief that ``investors are best positioned to provide
feedback about whether the Selected Financial Data . . . should be
eliminated or retained'').
    \32\ See letter from BDO.
---------------------------------------------------------------------------

3. Final Amendments
    We are adopting the amendments to eliminate Item 301 as proposed.
We agree with commenters that the earlier two years required by Item
301 can create additional costs and complexity. We acknowledge the
input of some commenters that the earlier two years required by Item
301 can help illustrate material trends. However, this disclosure is
typically available in prior filings on EDGAR.\33\ We also continue to
believe that the disclosures required by Item 303 should continue to
elicit material trend disclosure. Item 303 currently requires
disclosure of trend data,\34\ and will continue to require this
information under the amendments,\35\ and we reiterate Commission
guidance that has emphasized the importance of this disclosure in
MD&A.\36\ In light of these requirements, we do not anticipate that
eliminating Item 301 will discourage trend disclosure or otherwise
reduce disclosure of material trends. We acknowledge commenters that
stated that our amendments may increase the time and costs to investors
to obtain historical disclosures elsewhere. However, we expect that
these search costs are likely to decrease over time as investors adjust
to new disclosure formats.\37\
---------------------------------------------------------------------------

    \33\ In addition, filings are generally available on
registrants' websites and other third-party websites. We note that
the elimination of Item 301 includes the exchange rate disclosure
requirements for FPI's in Instruction 5 of Item 301. This is
consistent with the Commission's prior removal of exchange rate data
disclosure requirements in former Item 3.A.3 of Form 20-F, in which
the Commission similarly cited the ready availability of exchange
rate disclosure information on a number of websites as a basis for
eliminating that requirement. See Disclosure Update and
Simplification, Release No. 33-10532 (Aug. 17, 2018) [83 FR 38768
(Aug. 7, 2018)]. Id. at 107.
    \34\ See, e.g., Item 303(a)(1) and (a)(2)(ii).
    \35\ See, e.g., amended Item 303(a), Item 303(b)(1)(i), Item
303(b)(1)(ii)(B), and Item 303(b)(2)(ii).
    \36\ See, e.g., 2003 MD&A Interpretive Release.
    \37\ See infra Section IV.C.2.a.
---------------------------------------------------------------------------

    Notwithstanding the amendments to eliminate Item 301, we encourage
registrants to consider whether trend information for periods earlier
than those presented in the financial statements may be necessary as
part of MD&A's objective to ``provide material information relevant to
an assessment of the financial condition and results of operations.''
\38\ We also encourage registrants to consider whether a tabular
presentation of relevant financial or other information, as part of an
introductory section or overview, including to demonstrate material
trends, may help a reader's understanding of MD&A.\39\
---------------------------------------------------------------------------

    \38\ See amended Item 303(b).
    \39\ See 2003 MD&A Interpretive Release at Section III.A.
---------------------------------------------------------------------------

    This Commission guidance also states that registrants could benefit
from adding an introductory section or overview. \40\ Notwithstanding
the amendments to eliminate Item 301, registrants should continue to
consider whether such tabular disclosure as part of an introductory
section or overview, including to demonstrate material trends, would be
appropriate.
---------------------------------------------------------------------------

    \40\ See id.
---------------------------------------------------------------------------

B. Supplementary Financial Information (Item 302)

1. Proposed Amendments
    Current Item 302(a)(1) requires disclosure of selected quarterly
financial data of specified operating results,\41\ and current Item
302(a)(2) requires disclosure of variances in these results from
amounts previously reported on a Form 10-Q.\42\ Item 302(a) does not
apply to SRCs or FPIs and, because it only applies to companies that
already have a class of securities registered under Section 12 of the
Exchange Act at the time of filing, it does not apply to first-time
registrants conducting an IPO and registrants that are only required to
file reports pursuant to Section 15(d) of the Exchange Act.\43\ When
Item 302(a) applies, it requires certain information

for each full quarter within the two most recent fiscal years and any
subsequent period for which financial statements are included or
required by Article 3 of Regulation S-X.\44\ Item 302(a)(3) requires a
description of the effect of any discontinued operations and unusual or
infrequently occurring items recognized in each quarter, as well as the
aggregate effect and the nature of year-end or other adjustments that
are material to the results of that quarter.\45\ If a registrant's
financial statements have been reported on by an accountant, Item
302(a)(4) requires that accountant to follow appropriate professional
standards and procedures regarding the data required by Item
302(a).\46\
---------------------------------------------------------------------------

    \41\ Item 302(a)(1) of Regulation S-K [17 CFR 229.302(a)(1)].
Item 302(a)(1) specifies disclosure of: Net sales; gross profit (net
sales less costs and expenses associated directly with or allocated
to products sold or services rendered); income (loss) from
continuing operations; per share data based upon income (loss) from
continuing operations; net income (loss); and net income (loss)
attributable to the registrant.
    \42\ Item 302(a)(2) of Regulation S-K [17 CFR 229.302(a)(2)].
When the data supplied pursuant to Item 302(a) varies from amounts
previously reported on the Form 10-Q filed for any quarter, such as
when a combination between entities under common control occurs or
where an error is corrected, the registrant must reconcile the
amounts given with those previously reported and describe the reason
for the difference.
    \43\ Item 302(a)(5) and (c) of Regulation S-K [17 CFR
229.302(a)(5) and (c)].
    \44\ Item 302(a)(1) and (a)(3) [17 CFR 229.302(a)(1) and
(a)(3)].
    \45\ Item 302(a)(3) of Regulation S-K [17 CFR 229.302(a)(3)].
The requirement applies to items recognized in each full quarter
within the two most recent fiscal years and any subsequent interim
period for which financial statements are included or are required
to be included.
    \46\ Item 302(a)(4) of Regulation S-K [17 CFR 229.302(a)(4)].
---------------------------------------------------------------------------

    The Commission proposed to eliminate Item 302(a), intending to
address the largely duplicative disclosures that result from this
prescriptive requirement. However, the Commission recognized that,
while most of the financial data required by Item 302(a) can be found
in prior quarterly reports on EDGAR, the item requires separate
disclosure of certain fourth quarter information, which is not
otherwise required to be disclosed. The Commission also recognized that
the proposal may result in the loss of the effect of a retrospective
change in the earliest of the two years.\47\ In the Proposing Release,
the Commission stated that, where fourth quarter results are material
or there is a material retrospective change, existing requirements,
such as those in Item 303 would still elicit this disclosure.\48\
---------------------------------------------------------------------------

    \47\ Because Item 302(a)(2) requires disclosure of variances in
results from amounts previously reported for the two most recent
fiscal years, the effect of a retrospective change in any quarter
for which a Form 10-Q is filed in the more recent of the two fiscal
years will be disclosed in the selected quarterly data. However,
absent Item 302(a)(2), this variance would not be specifically
required to be disclosed until the following year in the
corresponding fiscal quarter in which the retrospective change
occurred. Additionally, disclosure in the Form 10-Q for this
corresponding fiscal quarter would not include the effects of this
change in the earliest of the two years presented in the Form 10-K,
as this Form 10-Q would be limited to the current and prior-year
interim periods.
    \48\ See Proposing Release at Section II.B.1.
---------------------------------------------------------------------------

    The Commission also proposed to eliminate Item 302(b)
(Supplementary Financial Information--Information about Oil and Gas
Producing Activities) due to overlap with a U.S. Generally Accepted
Accounting Principles (``U.S. GAAP'') requirement.\49\
---------------------------------------------------------------------------

    \49\ See ASC 932-235-50. See also Proposing Release at Section
II.B.2.
---------------------------------------------------------------------------

2. Comments
    The proposal generated a wide range of responses. Many commenters
supported the proposal.\50\ A number of these commenters suggested that
fourth quarter information is easily derived, such as by subtracting
the third quarter from year-to-date amounts \51\ or is otherwise
frequently disclosed in registrants' earnings releases.\52\ Other
commenters expressed the view that registrants would voluntarily
present Item 302(a) disclosure absent a requirement.\53\ One of these
commenters, while supportive of the proposal, expressed concern about
the loss of certain fourth quarter information and the effects of
material retrospective changes.\54\ This commenter recommended revising
the instructions to Item 303 to require (i) a discussion of the fourth
quarter in MD&A but only when this quarter differs materially from
previously reported quarterly information and (ii) disclosure of
material retrospective changes.
---------------------------------------------------------------------------

    \50\ See, e.g., letters from PWC; Pfizer; Eli Lilly; EEI & AGA;
KPMG; CAQ; FedEx; Nasdaq; Nareit; FEI; SIFMA; IMA; UnitedHealth;
Medtronic; Chamber; ABA; Society.
    \51\ See, e.g., letters from Eli Lilly; FEI; SIFMA; IMA;
UnitedHealth; Medtronic; Society.
    \52\ See letter from UnitedHealth.
    \53\ See letters from KPMG; CAQ.
    \54\ See letter from ABA.
---------------------------------------------------------------------------

    A number of commenters, however, opposed the proposal to eliminate
Item 302(a).\55\ All of these commenters suggested that a separate
presentation of fourth quarter data is useful to investors,\56\ with
one of these commenters stating that for ``a significant number of
companies, fourth quarter results cannot be derived from annual
results.'' \57\ A few of these commenters also questioned the cost
savings, if any, to registrants if Item 302(a) were eliminated, stating
that registrants already have the procedures in place to disclose this
information.\58\
---------------------------------------------------------------------------

    \55\ See, e.g., letters from E&Y NASAA; CalPERS; CFA & CII; D.
Jamieson. See also IAC Recommendation.
    \56\ See id.
    \57\ See IAC Recommendation.
    \58\ See, e.g., letters from NASAA; CalPERS. See also IAC
Recommendation.
---------------------------------------------------------------------------

    Several commenters opposing the proposal stated that eliminating
Item 302(a) would result in either delays in the disclosure of
retrospective revisions until the following Form 10-Q or a loss of
disclosure on the effect of a retrospective change on the earliest of
the two years for such revisions.\59\ Some of these commenters
questioned whether the loss of the fourth quarter data may be mitigated
by disclosure elicited under Item 303 \60\ and/or Accounting Standards
Codification 270 (Interim Reporting).\61\ One of these commenters
expressed the view that registrants would voluntarily report fourth
quarter data, but noted that eliminating Item 302(a) would result in
investors losing the benefit of having an auditor review of the fourth
quarter.\62\ One of these commenters recommended that, if Item 302(a)
were retained, the line items required for presentation be conformed to
key subtotals in the registrant's interim statement of comprehensive
income in order to eliminate the potential for inconsistencies between
the item requirements and the registrant's financial statements.\63\
---------------------------------------------------------------------------

    \59\ See, e.g., letters from E&Y CFA & CII; D. Jamieson. See
supra footnote 47.
    \60\ See letters from E&Y NASAA.
    \61\ See letter from E&Y.
    \62\ See id.
    \63\ See letter from E&Y.
---------------------------------------------------------------------------

    A few commenters, while not objecting to the proposed elimination
of Item 302(a), recommended continued consideration of investor input
on the utility of Item 302(a) before finalizing any rulemaking.\64\ All
of these commenters suggested revisions to provide for disclosure of
material retrospective changes, either by revising Item 302(a),\65\ or
through revisions to Item 303.\66\ Some commenters also recommended
revising Item 302(a) to allow newly reporting registrants to exclude
this data for interim periods prior to those presented in its IPO
registration statement.\67\
---------------------------------------------------------------------------

    \64\ See, e.g., letters from RSM; Grant Thornton; BDO.
    \65\ See letter from RSM.
    \66\ See letters from Grant Thornton (questioning whether
current Item 303 would elicit this disclosure); BDO (stating that,
if Item 303 is expected to elicit disclosure of material
retrospective changes, this should be clarified in the item).
    \67\ See letters from Grant Thornton; E&Y.
---------------------------------------------------------------------------

    Several commenters recommended coordinating with the Public Company
Accounting Oversight Board (PCAOB) to clarify the requirement in
Accounting Standard (AS) 4105.06, which requires auditors to review
fourth quarter data where an annual report includes Item 302(a)
disclosure.\68\
---------------------------------------------------------------------------

    \68\ See, e.g., letters from PWC; KPMG; CAQ; RSM; Grant
Thornton; BDO; Deloitte & Touche, LLP dated April 28, 2020
(``Deloitte''). The text of AS 4105.06 is available at https://pcaobus.org/Standards/Auditing/Pages/AS4105.aspx.
---------------------------------------------------------------------------

    With respect to the proposal to eliminate Item 302(b), one
commenter specified that it supported the

proposal,\69\ and no commenters specifically opposed the proposal.
---------------------------------------------------------------------------

    \69\ See letter from Chamber.
---------------------------------------------------------------------------

3. Final Amendments
    We are adopting amendments to Item 302(a), with modifications from
what was proposed in response to comments received. Specifically, we
are retaining the item and streamlining its requirements to require
disclosure only when there are one or more retrospective changes that
pertain to the statements of comprehensive income for any of the
quarters within the two most recent fiscal years and any subsequent
interim period for which financial statements are included or required
to be included by Article 3 of Regulation S-X and that, individually or
in the aggregate, are material.\70\ Our amendments will require
registrants to provide an explanation of the reasons for such material
changes and to disclose, for each affected quarterly period and the
fourth quarter in the affected year, summarized financial information
related to the statements of comprehensive income (as specified in Rule
1-02(bb)(ii) of Regulation S-X) and earnings per share reflecting such
changes. The affected quarters may include, depending on the facts and
circumstances, a single quarter in which the material retrospective
change applies, or it may flow through to subsequent quarters during
the relevant look-back period (i.e., the quarters within the two most
recent fiscal years and any subsequent interim period for which
financial statements are included or required to be included by Article
3 of Regulation S-X).\71\ Consistent with a commenter's suggestion,\72\
we are amending Item 302(a) to refer to amended Rule 1-02(bb)(ii). This
will link amended Item 302(a) to the summarized financial information
related to the statements of comprehensive income specified in amended
Rule 1-02(bb)(1)(ii) of Regulation S-X,\73\ thereby providing
registrants flexibility in the line items presented. We are also
adopting amendments to Rule 1-02(bb), as proposed, to clarify that the
disclosure of summary financial information may vary, as appropriate,
to conform to the nature of the entity's business.\74\ Lastly, our
amendments retain all Item 302(a) references in our rules and
forms.\75\
---------------------------------------------------------------------------

    \70\ Some examples of a retrospective change that may trigger
Item 302(a) disclosure include: Correction of an error; disposition
of a business that is accounted for as discontinued operations; a
reorganization of entities under common control; or a change in an
accounting principle. These examples are not intended to be an
exhaustive list, and may not always be material such that disclosure
would be required under amended Item 302(a). Further, not all
changes in accounting principles would result in a retrospective
change. For example, certain calendar year-end EGCs that elected to
take advantage of the extended transition period for new or revised
financial accounting standards in their initial public offerings,
will adopt in accordance with U.S. GAAP ASC 842, Leases for the full
fiscal year in their 2022 Form 10-K filed in 2023 and will not adopt
ASC 842 in interim periods until the Forms 10-Q filed in 2023. We do
not view the adoption of ASC 842 in the 2022 Form 10-K, in this
scenario, to constitute a retrospective change that should trigger
disclosure under Item 302(a) in the registrant's 2022 Form 10-K. By
contrast, a registrant that loses EGC status as of December 31,
2022, would have a retrospective change that would require
evaluation of materiality under Item 302(a) because the registrant
would be required to adopt ASC 842 in the 2022 Form 10-K for both
the full fiscal year and interim periods within that fiscal year.
    \71\ In the previous example of a registrant that loses EGC
status, the affected quarters would include all four since the
material retrospective change was as of January 1st.
    \72\ See letter from E&Y.
    \73\ Rule 1-02(bb)(1)(ii) generally refers to the same line
items required by current Item 302(a).
    \74\ See Proposing Release at footnote 337.
    \75\ See discussion in Section II.E. infra.
---------------------------------------------------------------------------

    The final amendments do not revise the population of registrants
that are not required to provide disclosure pursuant to Item
302(a),\76\ including, but not limited to, first time registrants
conducting an IPO or registrants that are only required to file reports
pursuant to Section 15(d).
---------------------------------------------------------------------------

    \76\ See amended Rule 302(a)(2).
---------------------------------------------------------------------------

    We continue to believe that requiring quarterly financial data when
there have not been one or more retrospective changes that are
material, either individually or in the aggregate, would duplicate
disclosures provided elsewhere, such as in Forms 10-Q or, in the case
of fourth quarter results, can be derived from annual results disclosed
in the Form 10-K. Our amendments eliminate these duplicative
disclosures. We do, however, agree with commenters that timely
disclosure of the effects of material retrospective changes may be
important to investors, and lack of such disclosure could impact the
ability to derive fourth quarter information when there have been such
changes. As discussed in the Proposing Release, Item 303 should elicit
some disclosure where there has been a material retrospective change.
However, we believe that the amended Item 302(a) disclosures will
further aid investors' understanding of the reasons for the material
retrospective change and the related quantitative effect on the
quarterly periods affected. Accordingly, our amendments are intended to
address this discrete area.
    We also believe amended Item 302(a) will better highlight material
retrospective changes, as disclosure will only be required where there
are such changes, which may be important to investors. For this reason,
we believe amended Item 302(a) may be important in the context of both
Exchange Act and Securities Act forms and accordingly, are retaining
requirements to provide disclosure pursuant to this item in these
forms.\77\ Further, by limiting the disclosure only to affected
quarters, we believe the final amendments will balance the costs to
registrants of preparing such disclosures, while providing investors
with material information regarding the impact of material changes.
---------------------------------------------------------------------------

    \77\ See discussion in Section II.E. infra.
---------------------------------------------------------------------------

    We acknowledge commenters who stated that, absent Item 302(a),
fourth quarter results may not always be available or readily derived
from annual results. We continue to believe that, in most instances,
fourth quarter information can be readily derived from annual results,
and as such, amended Item 302(a) does not generally require fourth
quarter disclosure on a standalone basis.\78\ Our amendments are
intended to address the most common reason why fourth quarter data
would not be easily calculable.
---------------------------------------------------------------------------

    \78\ We acknowledge the view expressed in the IAC Recommendation
regarding the ability to derive fourth quarter results based on the
assessment described in their letter of selected net income data
from the years 2010 through 2019. See IAC Recommendation. The
information provided in the IAC Recommendation was not sufficient
for us to replicate the referenced study, and the data and
methodology were not otherwise in a publicly available source.
Nevertheless, it appears that the data provided in the IAC
Recommendation is not inconsistent with the staff's observations and
conclusions regarding the ability to calculate fourth quarter data
in most instances. Based on the information provided in the IAC
Recommendation, assuming that the fewest number of companies studied
(3,000) and the largest incidents of difference reported (300)
occurred in the same year, it follows that there would have been no
difference between reported and derived fourth quarter results for
90% of companies in such year. The data presented further suggests
that, in the year where the greatest number of differences were
observed between reported and derived fourth quarter results, 100
companies had less than a 1% difference and only 30 companies had a
greater than 10% difference. We believe these findings are
consistent with our view that in the substantial majority of cases,
fourth quarter data is readily derivable. Based on our own
observations and calculations, in most if not all instances, any
differences that would cause fourth quarter data to not be derivable
from year-end and third-quarter year-to-date results would be due to
a retrospective change or changes. Under the final amendments, when
there is a material retrospective change or changes, fourth quarter
financial data would be required.
---------------------------------------------------------------------------

    Additionally, and as some commenters stated, we expect that some
registrants will voluntarily provide fourth quarter disclosure or
disclosure of selected quarterly financial

information. In such instances, that information would be subject to
the PCAOB AS 2710 requirements for auditors to read and consider such
information for material inconsistencies with the audited financial
statements. These procedures are lesser in scope as compared to the
review procedures required by AS 4105.06 that are to be performed on
fourth quarter data when presented in an annual report pursuant to Item
302(a).\79\
---------------------------------------------------------------------------

    \79\ The text of AS 4105.06 is available at https://pcaobus.org/Standards/Auditing/Pages/AS4105.aspx. The final amendments update
the outdated reference in current Item 302(a)(4) from the Statements
of Auditing Standards issued by the Auditing Standards Board of the
American Institute of Certified Public Accountants to the current
reference of the Auditing Standards issued by the Public Company
Accounting Oversight Board.
---------------------------------------------------------------------------

    In a change from current Item 302(a), amended Item 302(a) will
apply beginning with the first filing on Form 10-K after the
registrant's initial registration of securities under sections 12(b) or
12(g) of the Exchange Act.\80\ We are making this change because we
agree with commenters that it would be unnecessarily burdensome for
registrants to provide disclosure for interim periods prior to those
presented in an IPO registration statement.\81\ Although some
commenters suggested that disclosure should not be required for any
quarterly periods not previously presented on a standalone basis, such
as in a Form 10-Q,\82\ we believe that such an approach would unduly
delay disclosure of the impact of material retrospective changes. For
this reason, and because the commenters' suggestions related primarily
to current Item 302(a), which requires disclosure in every annual
report, while amended Item 302(a) will require disclosure in more
limited circumstances, we believe that it is appropriate to require
newly reporting registrants to provide Item 302(a) disclosure, if
applicable, beginning in their first Form 10-K. Nonetheless, when a new
registrant has a material retrospective change to its year-to-date
interim period information in its most recent registration statement,
but has not yet disclosed that interim period information in quarterly
increments, we would not object if Item 302(a) disclosures are
presented for the affected year-to-date interim period and the fourth
quarter in the affected year.\83\
---------------------------------------------------------------------------

    \80\ See amended Item 302(a)(2). See also footnote 70 supra.
    \81\ See, e.g., letters from Grant Thornton and E&Y.
    \82\ See, e.g., letters from Grant Thornton; E&Y (recommending
that ``new registrants be exempted from providing the disclosure
until their second annual report, and in registration statements
thereafter, to avoid requiring selected quarterly data to be
presented for interim periods not previously presented in any
periodic quarterly reports.'').
    \83\ For example, after conducting an IPO, a registrant files
its first Form 10-K in which Item 302(a) information would be
required. The Item 302(a)-triggering material retrospective change
occurred during a quarter that has only been presented as a part of
the year-to-date interim period statement of comprehensive income
filed in the IPO registration statement. In this circumstance, we
would not object if the quantitative Item 302(a) disclosure in the
Form 10-K comprised information for the same interim period
previously presented in the registration statement (rather than for
each affected quarter during that time), along with the fourth
quarter, in the affected year.
---------------------------------------------------------------------------

    Finally, we proposed to eliminate Item 302(b), disclosure of oil
and gas producing activities, on the condition that the FASB finalize
amendments to U.S. GAAP that would require incremental disclosure
called for by Item 302(b). The FASB has not yet finalized the
amendments, so we are retaining Item 302(b) and may reconsider the
proposal in the future.

C. Management's Discussion and Analysis of Financial Condition and
Results of Operations (Item 303)

    Item 303 of Regulation S-K requires disclosure of information
relevant to assessing a registrant's financial condition, changes in
financial condition, and results of operations. The disclosure
requirements for full fiscal years in Item 303(a) include five
components: Liquidity, capital resources, results of operations, off-
balance sheet arrangements, and contractual obligations.\84\ Item
303(b) covers interim period disclosures and requires registrants to
discuss material changes in the items listed in Item 303(a), other than
the impact of inflation and changing prices on operations.\85\ Item
303(c) acknowledges the application of a statutory safe harbor for
forward-looking information provided in off-balance sheet arrangements
and contractual obligations disclosures. Item 303(d) provides certain
accommodations for SRCs.
---------------------------------------------------------------------------

    \84\ Item 303(a)(1)-(5) of Regulation S-K [17 CFR 229.303(a)(1)-
(5)].
    \85\ See Item 303(b) and Instruction 7 to Item 303(b) of
Regulation S-K [17 CFR 229.303(b)].
---------------------------------------------------------------------------

    The Commission proposed amendments to Item 303 of Regulation S-K
that were intended to modernize, simplify, and enhance the MD&A
disclosures for investors while reducing compliance burdens for
registrants.\86\ After consideration of the comments received, and as
discussed in more detail below, amended Item 303 will provide the
following:
---------------------------------------------------------------------------

    \86\ We discuss infra in Section II.D our amendments that will
make certain parallel changes to Item 5 of Form 20-F (Operating and
Financial Review and Prospects), General Instruction B.(11) of Form
40-F (Off-Balance Sheet Arrangements), and General Instruction
B.(12) of Form 40-F (Tabular Disclosure of Contractual Obligations).
---------------------------------------------------------------------------

     New Item 303(a) states the objectives of MD&A that will
apply throughout amended Item 303. It also incorporates much of the
substance of Instructions 1, 2, and 3 to current Item 303(a).
     Amended Item 303(b) provides the requirements for full
fiscal year disclosure and comprises three main requirements:
    [cir] Item 303(b)(1) provides the overarching requirements for
liquidity and capital resources disclosures, and reflects an enhanced
principles-based requirement focused on material short- and long-term
cash requirements, including those from known contractual and other
obligations. Items 303(b)(1)(i) and (ii) provide the specific
disclosure requirements for liquidity and capital resources,
respectively.
    [cir] Item 303(b)(2) provides the requirements for results of
operations disclosures, and includes minor amendments such as
eliminating the current requirement to discuss the impact of inflation
and changing prices where material; and
    [cir] Item 303(b)(3), requires disclosure of critical accounting
estimates, and largely clarifies and codifies Commission guidance in
this area.
     The instructions to amended Item 303(b) have been
streamlined, such as by eliminating unnecessary cross-references to
industry guides, and replace the requirement for off-balance sheet
arrangement disclosures (current Item 303(a)(4)) with an instruction to
discuss these obligations in the broader context of MD&A disclosure.
     Amended Item 303(c) provides for interim disclosure
requirements, and will allow for more flexibility in the interim
periods compared. The item's instructions have also been streamlined by
eliminating certain instructions and providing cross-references to
similar instructions to Item 303(b); and
     Current Item 303(a)(5) will be eliminated, and current
Items 303(c) and (d) will be eliminated as conforming changes.
    The following table outlines the new structure of Item 303 as a
result of these amendments: \87\
---------------------------------------------------------------------------

    \87\ The information in this table is not comprehensive and is
intended only to highlight the general structure of the current
rules and final amendments. It does not reflect all of the
amendments or all of the rules and forms that are affected. All
changes are discussed in their entirety throughout this release. As
such, this table should be read together with the referenced
sections and the complete text of this release.

----------------------------------------------------------------------------------------------------------------
           Current structure                   Amended structure                 Discussed in section(s)
----------------------------------------------------------------------------------------------------------------
N/A...................................  Item 303(a), Objective........  II.C.1.
Item 303(a), Full fiscal years........  Item 303(b), Full fiscal years  II.C.1.
Item 303(a)(1), Liquidity.............  Item 303(b)(1), Liquidity and   II.C.2 and II.C.7.
Item 303(a)(2), Capital resources.....   Capital Resources.
                                        (i) Liquidity.................
                                        (ii) Capital Resources........
Item 303(a)(3), Results of operations.  Item 303(b)(2), Results of      II.C.3, II.C.4, & II.C.5.
                                         operations.
    (i) Unusual or infrequent events.   (i) Unusual or infrequent
                                         events.
    (ii) Known trends or                (ii) Known trends or
     uncertainties.                      uncertainties.
    (iii) Material increases.           (iii) Material changes.
    (iv) Inflation and changing
     prices.
Item 303(a)(4), Off-balance sheet       Replace with Instruction 8 to   II.C.6.
 arrangements.                           Item 303(b).
    Instructions 1, 2, 3, 4, and 5 to
     Item 303(a)(4).
Item 303(a)(5), Tabular disclosure of   Eliminate (with some content    II.C.2 and II.C.7.
 contractual obligations.                incorporated into Item
                                         303(b)(1) (Liquidity and
                                         Capital Resources) and
                                         Instruction 4 to Item 303(b)).
2003 MD&A Interpretative Release,       Item 303(b)(3), Critical        II.C.8.
 Critical accounting estimates.          accounting estimates.
    Instruction 1 to Item 303(a)......     Instruction 1 to Item        II.C.1.
                                            303(b) (with amendments).
    Instruction 2 to Item 303(a)......     Eliminate (with content      II.C.1.
                                            incorporated into
                                            Objective).
    Instruction 3 to Item 303(a)......     Eliminate (with content      II.C.1.
                                            incorporated into
                                            Objective).
    Instruction 4 to Item 303(a)......     Instruction 2 to Item        II.C.1 and II.C.4.
                                            303(b) (with amendments
                                            and some content
                                            incorporated into Item
                                            303(b)).
    N/A...............................     Instruction 3 to Item        II.C.7.
                                            303(b).
    Instruction 5 to Item 303(a)......     Instruction 4 to Item        II.C.2 and II.C.7.
                                            303(b) (with amendments
                                            and content incorporated
                                            into Item 303(b)(1)
                                            (Liquidity and Capital
                                            Resources)).
    Instruction 6 to Item 303(a)......     Instruction 5 to Item        II.C.1.
                                            303(b) (with minor
                                            amendments).
    Instruction 7 to Item 303(a)......     Instruction 6 to Item        II.C.10.
                                            303(b).
    Instruction 8 to Item 303(a)......     Eliminate..................  II.C.5.
    Instruction 9 to Item 303(a)......     Eliminate..................  II.C.5.
    Instruction 10 to Item 303(a).....     Instruction 7 to Item        II.C.1.
                                            303(b).
    Instruction 11 to Item 303(a).....     Instruction 9 to Item        II.D.3.
                                            303(b) (with amendments).
    Instruction 12 to Item 303(a).....     Instruction 10 to Item       II.C.1.
                                            303(b) (with non-
                                            substantive amendments).
    Instruction 13 to Item 303(a).....     Eliminate..................  II.C.1.
    Instruction 14 to Item 303(a).....     Eliminate..................  II.C.1.
Item 303(b), Interim periods..........  Item 303(c), Interim periods..  II.C.9.
(1) Material changes in financial       (1) Material changes in
 condition..                             financial condition..
(2) Material changes in results of      (2) Material changes in
 operations, Rule 3-03(b) of             results of operations..
 Regulation 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        II.C.9.
                                            303(c) (with amendments to
                                            reference Instructions 2,
                                            3, 4, 6, 8, and 11 to
                                            proposed Item 303(b)).
    Instruction 2 to Item 303(b)......     Eliminate..................  II.C.9.
    Instruction 3 to Item 303(b)......     Eliminate..................  II.C.9.
    Instruction 4 to Item 303(b)......     Instruction 2 to Item        II.C.9.
                                            303(c).
    Instruction 5 to Item 303(b)......     Eliminate..................  II.C.9.
    Instruction 6 to Item 303(b)......     Eliminate..................  II.C.9.
    Instruction 7 to Item 303(b)......     Eliminate..................  II.C.9.
    Instruction 8 to Item 303(b)......     Instruction 11 to Item       II.C.9.
                                            303(b).
Item 303(c), Safe harbor..............  Eliminate.....................  II.C.10.
Item 303(d), Smaller reporting          Eliminate.....................  II.C.11.
 companies.
----------------------------------------------------------------------------------------------------------------

1. Restructuring and Streamlining
a. Objective of MD&A (New Item 303(a))
i. Proposed Amendments
    The first paragraph of current Item 303(a) instructs registrants to
discuss their financial condition, changes in financial condition, and
results of operations for full fiscal years.\88\ The paragraph then
sets forth the items that must be included in this discussion,
including liquidity, capital resources, results of operations, off-
balance sheet arrangements, contractual obligations, and any other
information a registrant believes would be necessary to understand its
financial condition, changes in financial condition, and results of
operations.
---------------------------------------------------------------------------

    \88\ Item 303(a) of Regulation S-K [17 CFR 229.303(a)].
---------------------------------------------------------------------------

    The Commission proposed adding a new Item 303(a) to succinctly
state the objectives of MD&A by incorporating a portion of the
substance of current Instruction 1, and much of the substance of
current Instructions 2 and 3 into the item.\89\ As part of new Item
303(a), the Commission also proposed codifying guidance that states
that a registrant should provide a narrative explanation of its
financial statements

that enables investors to see a registrant ``through the eyes of
management.'' \90\ By emphasizing the purpose of MD&A at the outset of
Item 303, the proposal was intended to provide clarity and focus to
registrants as they consider what information to discuss and analyze.
The proposal was also intended to facilitate a thoughtful discussion
and analysis, and encourage management to disclose factors specific to
the registrant's business, which management is in the best position to
know, and underscore materiality as the overarching principle of
MD&A.\91\
---------------------------------------------------------------------------

    \89\ See Proposing Release at Section II.C.1. As a result of
this proposed amendment, the remainder of Item 303 was proposed to
be renumbered. Herein we distinguish the rule numbering prior to
these amendments from the amended rule numbering by reference to
``current'' and ``amended.''
    \90\ See 2003 MD&A Interpretative Release, at 75056. See also
1989 Interpretative Release, at 22428.
    \91\ See Proposing Release at Section II.C.1.
---------------------------------------------------------------------------

ii. Comments
    Most commenters supported the proposal to add new Item 303(a) to
state the purposes of MD&A at the forefront.\92\ One of these
commenters nonetheless expressed concern with incorporating, as part of
new Item 303(a), guidance that MD&A is ``from management's
perspective,'' stating that this is such a broad statement that
compliance could be difficult and it could be interpreted to mandate
disclosure of otherwise confidential information (e.g., competitive
advantages, target markets).\93\ A few commenters questioned the
proposal.\94\ Some of these commenters, while not opposed to the
proposal, did not believe it would improve MD&A.\95\ Instead, these
commenters suggested more explicit and prescriptive requirements, such
as providing examples of the types of items to be discussed.
---------------------------------------------------------------------------

    \92\ See, e.g., letters from Grant Thornton; Nasdaq; FEI; IMA;
RSM; Society.
    \93\ See letter from RSM.
    \94\ See, e.g., letters from ABA; CFA & CII; D. Jamieson.
    \95\ See letters from CFA & CII; D. Jamieson.
---------------------------------------------------------------------------

    One commenter objected to replacing the word ``should'' with
``must'' both in proposed Item 303(a) and throughout the item, stating
these terms are not interchangeable.\96\ This commenter stated that
only ``should'' allows the requisite flexibility appropriate for MD&A
whereas ``must'' results in a ``checklist item'' that creates exposure
to absolute liability and second guessing. Another commenter suggested
revising proposed Item 303(a) and the remainder of the item to account
for the statement of cash flows, stating that existing MD&A rules
largely pre-date the requirement in U.S. GAAP to provide statements of
cash flows.\97\
---------------------------------------------------------------------------

    \96\ See letter from ABA.
    \97\ See letter from E&Y (stating that the statement of cash
flows has not been integrated in MD&A like the balance sheet and
income statement and recommended replacing ``changes in financial
condition'' with ``cash flows'' throughout Item 303 and adding
``cash flows'' to proposed Item 303(a)).
---------------------------------------------------------------------------

iii. Final Amendments
    We are adopting the amendments largely as proposed. Amended Item
303(a) calls for the following disclosure, which is expected to better
allow investors to view the registrant from management's perspective:
     Material information relevant to an assessment of the
financial condition and results of operations of the registrant,
including an evaluation of the amounts and certainty of cash flows from
operations and from outside sources.
     Material events and uncertainties known to management that
are reasonably likely to cause reported financial information not to be
indicative of future operating results or of future financial
condition. This includes descriptions and amounts of matters that have
had a material impact on reported operations as well as matters that
are reasonably likely based on management's assessment to have a
material impact on future operations.
     The material financial and statistical data that the
registrant believes will enhance a reader's understanding of the
registrant's financial condition, cash flows and other changes in
financial condition, and results of operations.
    Registrants should regularly revisit these objectives in Item
303(a) as they prepare their MD&A and consider ways to enhance the
quality of the analysis provided. These objectives provide the
overarching requirements of MD&A and apply throughout amended Item 303.
As such, they emphasize a registrant's future prospects and highlight
the importance of materiality and trend disclosures to a thoughtful
MD&A.\98\ These amendments are intended to remind registrants that MD&A
should provide an analysis that encompasses short term results as well
as future prospects.\99\ Consistent with this amendment and current
guidance, and in a slight modification from our proposals, amended Item
303(a) specifies that the disclosure must include matters that are
reasonably likely, based on ``management's assessment'' to have a
material impact on future operations.\100\
---------------------------------------------------------------------------

    \98\ As proposed, our amendments replace the word ``shall'' with
``must'' throughout Item 303 to clarify the rule and avoid any
ambiguity associated with the use of ``shall.'' Our amendments to
Item 303 do not replace ``should'' in the current requirements with
``must.'' However, in some instances our amendments update Form 20-F
by replacing ``should'' with ``must'' to conform the requirements to
Item 303, consistent with our other amendments to Form 20-F. We do
not believe the use of ``must'' in these instances modifies the
overall flexibility of MD&A's principles-based approach.
    \99\ See, e.g., 2003 MD&A Interpretive Release and 1989 MD&A
Interpretive Release.
    \100\ This language codifies Commission guidance on forward-
looking information where the Commission stated, that as part of the
two-step test, ``management must make two assessments.'' See 1989
MD&A Interpretive Release, at 22330. See also footnote 145 below.
---------------------------------------------------------------------------

    Consistent with this approach, our amendments also incorporate
current guidance that MD&A is intended to provide disclosures from
``management's perspective.'' In response to the input of one
commenter, we have slightly reframed the reference to ``management's
perspective'' to make clear that disclosure that meets the requirements
of the item generally is expected to better allow an investor to view
the registrant from management's perspective.
    In response to one commenter's suggestion, we are slightly revising
our proposals to explicitly incorporate cash flows as part of MD&A's
objective.\101\ Amended Item 303(a) specifies that MD&A must include
financial and other statistical data that will enhance a reader's
understanding of the registrant's financial condition, ``cash flows,''
and other changes in financial condition and results of operations. In
light of this amendment and existing references to cash flows, we do
not believe it is necessary to replace every reference to ``changes in
financial condition'' with ``cash flows,'' as suggested by this
commenter. Given the historical and continued importance of materiality
in MD&A, we are not, as suggested by some commenters, adopting
modifications to be more explicit or prescriptive. Rather, we continue
to believe that MD&A's materiality-focused and principles-based
approach facilitates disclosure of complex and often rapidly evolving
areas, without the need to continuously amend the text of the rule to
update or impose additional prescriptive requirements.\102\ These
amendments are intended to further emphasize these goals.
---------------------------------------------------------------------------

    \101\ See supra footnote 97. Amended Item 303(a)'s reference to
``the amounts and certainty of cash flows from operations and from
outside sources,'' which is in current Instruction 2 to Item 303(a),
predates the cash flow statement. See Amendments to Annual Report
Form, Related Forms, Rules, Regulations and Guides; Integration of
Securities Act Disclosure Systems, Release No. 33-6231, (Sept. 2,
1980) [45 FR 63630 (Sept. 25, 1980)].
    \102\ See Proposing Release at footnote 95 and corresponding
text.

---------------------------------------------------------------------------

b. Reasons Underlying Material Changes (Amended Item 303(b))
i. Proposed Amendments
    In light of the proposal to add new Item 303(a), the Commission
proposed re-captioning current Item 303(a) as Item 303(b), which would
continue to apply to all MD&A disclosures.\103\ The Commission also
proposed moving to the amended Item 303(b) the portion of current
Instruction 4 that provides that where the consolidated financial
statements reveal material changes from year to year in one or more
line items, the causes for the changes shall be described.\104\ The
Commission also proposed to amend that portion of current Instruction 4
to clarify that MD&A requires a narrative discussion of the ``reasons
underlying'' material changes rather than only the ``causes'' for
material changes.\105\ This proposal was intended to encourage
registrants to provide a more meaningful discussion of the underlying
reasons that may be contributing to material changes in line items. The
Commission also proposed amending the item to clarify that registrants
should discuss material changes within a line item even when such
material changes offset each other, consistent with prior Commission
guidance.\106\
---------------------------------------------------------------------------

    \103\ Current Item 303(b) of Regulation S-K, which relates to
interim periods requires a ``discussion of material changes in those
items specifically listed in [Item 303(a)], except that the impact
of inflation and changing prices on operations for interim periods
need not be addressed.'' See 1989 MD&A Interpretive Release at n. 38
and 39 and corresponding text (``The second sentence of Item 303(b)
states that MD&A relating to interim period financial statements
`shall include a discussion of material changes in those items
specifically listed in paragraph (a) of this Item, except that the
impact of inflation and changing prices on operations for interim
periods need not be addressed.' As this sentence indicates, material
changes to each and every specific disclosure requirement contained
in paragraph (a), with the noted exception, should be discussed.'');
2003 MD&A Interpretive Release (``Disclosure in MD&A in quarterly
reports is complementary to that made in the most recent annual
report and in any intervening quarterly reports.'').
    \104\ Instruction 4 to Item 303(a) of Regulation S-K [17 CFR
229.303(a)].
    \105\ See Proposing Release at Section II.C.1.
    \106\ See, e.g., 1989 MD&A Interpretive Release (providing an
example of a description of the effects of offsetting developments
in material changes in revenue: ``Revenue from sales of single-
family homes for 1987 increased 6 percent from 1986. The increase
resulted from a 14 percent increase in the average sales price per
home, partially offset by a 6 percent decrease in the number of
homes delivered. Revenues from sales of single-family homes for 1986
increased 2 percent from 1985. The average sales price per home in
1986 increased 6 percent, which was offset by a 4 percent decrease
in the number of homes delivered.'').
---------------------------------------------------------------------------

ii. Comments
    Some commenters supported this proposal, stating that it
effectively codifies prior guidance.\107\ Some commenters recommended
revising the proposal to limit the requirement to provide quantitative
disclosure where it is ``reasonably available'' and material, stating
that registrants often struggle with isolating reasons for material
changes as they can be highly interrelated.\108\ Other commenters
suggested expanding the proposal to provide examples of the type of
``causes'' of changes to be discussed, stating this would facilitate a
meaningful discussion.\109\
---------------------------------------------------------------------------

    \107\ See letters from IMA; Society.
    \108\ See letters from RSM; E&Y (also observing that this
quantitative disclosure can be challenging when such factors are not
already quantified for internal purposes and that the resulting
disclosure often yields discussion of individual drivers of change
that are not material).
    \109\ See letters from CFA & CII (providing the following as
examples: Economic trends and industry conditions that impact sales
and costs related to key products and services including whether
sales or revenues are attributable to changes in prices or to
changes in volume of goods or services that are sold; information on
fixed and variable costs in the cost structure; information on
primitive value drivers of most businesses such as materials, labor
costs, and the maintenance capex needed to survive as a business;
currency effects on every line item; large acquisitions as a
separate segment or required discussion so that investors can
discern whether the synergies are actually emerging as expected; and
the productivity of new investments (capex, R&D) as opposed to older
investments); D. Jamieson.
---------------------------------------------------------------------------

iii. Final Amendments
    We are adopting the amendments largely as proposed, with a slight
modification. The Commission has focused on improving the analysis in
MD&A for many years. Yet, despite specific instructions in Item 303(a)
that ``the discussion shall not merely repeat numerical data contained
in the consolidated financial statements,'' \110\ the Commission has
previously observed that many registrants simply recite the amounts of
changes from year to year that are readily computable from their
financial statements.\111\ Similarly, the staff continues to seek
greater analysis in MD&A,\112\ and others, including commenters, have
also observed that the quality of analysis in MD&A could be
improved.\113\
---------------------------------------------------------------------------

    \110\ See Instruction 4 to current Item 303(a) of Regulation S-
K.
    \111\ See Business and Financial Disclosure Required by
Regulation S-K, Release No. 33-10064 (Apr. 13, 2016) [81 FR 23915
(Apr. 22, 2016)] (``S-K Concept Release'') at Section IV.B.3.b.i.
    \112\ See S-K Concept Release at Section IV.B.4.b. See also SEC
Comment Letter Trends available at https://www.pwc.com/us/en/cfodirect/publications/sec-comment-letter-trends.html.
    \113\ See, e.g., letter from CFA & CII. See also letter from
Better Markets to the S-K Concept Release dated July 21, 2016.
Comment letters related to the S-K Concept Release are available at
https://www.sec.gov/comments/s7-06-16/s70616.htm. We refer to these
letters throughout as ``S-K Concept Release Letters.''
---------------------------------------------------------------------------

    In light of these observations and our efforts seeking greater
analysis, we continue to believe these amendments are necessary.
Accordingly, we are adopting the amendments largely as proposed to
enhance the analysis in MD&A. By moving a portion of current
Instruction 4 to Item 303(a) to the main text of amended Item 303(b)
and clarifying that the provision requires underlying reasons for
material changes in quantitative and qualitative terms, our amendments
underscore the importance of the analysis provided in MD&A. In a change
from what was proposed, we are eliminating language in current
Instruction 4 that the reasons for material changes must be described
to the extent necessary to an understanding of the registrant's
business as a whole. We believe this language is duplicative of the
language in amended Item 303(a) and the amendments discussed in this
section.
    Consistent with MD&A's principles-based approach, we are not
adopting the suggestion of some commenters to provide examples of the
types of changes to be discussed.\114\ Also consistent with MD&A's
principles-based approach, and as proposed, the amendments require
discussion of underlying reasons only for ``material'' changes. We
believe these amendments will encourage registrants to provide a more
meaningful discussion of the underlying reasons that may be
contributing to material changes in line items, and avoid simply
reciting amounts of changes. We acknowledge, as suggested by some
commenters, that isolating reasons for specific material changes, and
quantifying such isolated reasons, can sometimes be challenging because
they can be highly interrelated. In such circumstances, we encourage
registrants to acknowledge this fact, and to explain such interrelated
circumstances to the extent possible.\115\
---------------------------------------------------------------------------

    \114\ See letters from CFA & CII; D. Jamieson.
    \115\ See Securities Act Rule 409 [17 CFR 230.409] and Exchange
Act Rule 12b-21 [17 CFR 240.12b-21], which generally states that
information required need be given only insofar as it is known or
reasonably available to the registrant.
---------------------------------------------------------------------------

c. ``Segment Information . . . Other Subdivisions (e.g., Geographic
Areas Product Lines)'' (Amended Item 303(b))
i. Proposed Amendments
    Item 303(a) currently requires that, where in the registrant's
judgment a discussion of segment information and/or other subdivisions
(e.g., geographic areas) of the registrant's business would be
appropriate to an understanding of such business, the discussion shall
focus on each relevant ``reportable''

segment and/or other subdivision. The Commission proposed removing the
reference to a ``reportable'' segment and, instead, proposed requiring
a discussion of ``each relevant segment and/or other subdivision.'' The
Commission also proposed adding ``product lines'' as another example of
a subdivision of a registrant's business that should be discussed where
necessary to an understanding of the registrant's business. Finally,
the Commission proposed certain other amendments to streamline the text
of Item 303.
ii. Comments
    Commenters were generally opposed to removing the term
``reportable'' before segment.\116\ Many of these commenters suggested
that registrants typically focus their MD&A on reportable segments,
consistent with the financial statements.\117\ Some of these commenters
questioned whether removal of the term ``reportable'' was intended to
effect a substantive change and sought clarification.\118\ Another of
these commenters stated that the proposal could create uncertainty
among registrants about what must be disclosed and could lead to
greater detail than is reasonably useful to investors.\119\ Only one
commenter provided input on the addition of ``product lines'' as an
example of a subdivision, stating that the proposal could be
interpreted as a requirement rather than an example.\120\
---------------------------------------------------------------------------

    \116\ See, e.g., letters from RSM; KPMG; FEI; Medtronic; E&Y
Deloitte.
    \117\ See, e.g., letters from RSM; KPMG; IMA; Deloitte; E&Y.
    \118\ See letters from Deloitte; E&Y.
    \119\ See letter from IMA.
    \120\ See letter from KPMG.
---------------------------------------------------------------------------

iii. Final Amendments
    We are adopting the amendments largely as proposed, with some
modifications in response to comments received. Specifically, we are
retaining the term ``reportable'' segment in amended Item 303(b). As a
result, and similar to current Item 303, the amendments require that
the discussion focus on each ``reportable segment'' and/or or other
subdivision of the business and on the registrant as a whole. While the
proposal to remove the term ``reportable'' was not intended to suggest
a further disaggregation of MD&A beyond the reportable segment level,
we acknowledge commenter feedback about the potential confusion that
could be created by removal of the term.
    We are adopting the proposed amendment to include ``product lines''
as an example of a subdivision of a registrant's business that should
be discussed where, in the registrant's judgment, it is necessary to an
understanding of the registrant's business. This additional example is
not intended to require product line disclosure where, in the
registrant's judgment, it is not necessary to an understanding of the
registrant's business. Rather, it is intended to remind registrants of
the type of disclosure that may be required.
    Lastly, we are adopting as proposed several amendments that will
further streamline the text of Item 303:
     Instruction 8 to current Item 303(b) indicates that the
term ``statement of comprehensive income'' is defined by Rule 1-02 of
Regulation S-X.\121\ We are moving this language to the full fiscal
year requirement in amended Item 303(b) as Instruction 11 to clarify
that the instruction applies to both full fiscal year and interim
period MD&A disclosure.\122\
---------------------------------------------------------------------------

    \121\ 17 CFR 210.1-02(cc). Rule 1-02 defines a ``statement of
comprehensive income'' as follows: ``[t]he term statement(s) of
comprehensive income means a financial statement that includes all
changes in equity during a period except those resulting from
investments by owners and distributions to owners. . . . A statement
of operations or variations thereof may be used in place of a
statement of comprehensive income if there was no other
comprehensive income during the period.'' Thus, references to a
statement of comprehensive income would include a statement of
operations prepared by certain issuers, such as BDCs.
    \122\ See Section II.C.9.
---------------------------------------------------------------------------

     We are also eliminating current Instructions 13 and 14 to
Item 303(a) to simplify the item. These instructions call the attention
of bank holding companies and property-casualty insurance companies to
Guide 3 \123\ and Guide 6,\124\ respectively. Registrants that apply
industry guides should still consider them in preparing their
disclosures generally, but we do not believe the cross-reference is
necessary to an understanding of the requirements of Item 303.
---------------------------------------------------------------------------

    \123\ 17 CFR 229.801(c) and 17 CFR 229.802(c). We recently
adopted rules relating to Guide 3. See Update of Statistical
Disclosures for Bank and Savings and Loan Registrants, Release No.
33-10835 (Sept. 11, 2020) [85 FR 66108 (Oct. 16, 2020)]. The new
rules update the disclosures that investors receive, codify certain
Guide 3 disclosures and eliminate other Guide 3 disclosures that
overlap with Commission rules, U.S. GAAP, or International Financial
Reporting Standards (``IFRS''). In addition, the Commission
relocated the codified disclosures to a new subpart of Regulation S-
K and rescinded Guide 3.
    \124\ 17 CFR 229.801(f).
---------------------------------------------------------------------------

Capital Resources--Material Cash Requirements (New Item 303(b)(1) and
Amended Item 303(b)(1)(ii))
a. Proposed Amendments
    Current Item 303(a)(2) requires a registrant to discuss its
material commitments for capital expenditures as of the end of the
latest fiscal period, and to indicate the general purpose of and the
anticipated sources of funds needed to fulfill such commitments.\125\ A
registrant also must discuss, among other things, any known material
trends, favorable or unfavorable, in its capital resources, and
indicate any expected material changes in the mix and relative cost of
such resources.\126\
---------------------------------------------------------------------------

    \125\ Item 303(a)(2)(i) of Regulation S-K [17 CFR
229.303(a)(2)(i)].
    \126\ Item 303(a)(2)(ii) [17 CFR 229.303(a)(2)(ii)].
---------------------------------------------------------------------------

    The Commission proposed amending current Item 303(a)(2) to specify,
consistent with the Commission's 2003 MD&A Interpretive Release, that a
registrant should broadly disclose material cash commitments, including
but not limited to capital expenditures. Specifically, the Commission
proposed requiring a registrant to describe its material cash
``requirements,'' including commitments for capital expenditures, as of
the end of the latest fiscal period, the anticipated source of funds
needed to satisfy such cash requirements, and the general purpose of
such requirements.\127\
---------------------------------------------------------------------------

    \127\ See 2003 MD&A Interpretive Release, at 75063.
---------------------------------------------------------------------------

    The proposal was intended to require registrants to disclose known
material cash requirements and to modernize Item 303(a)(2) by
specifically requiring this disclosure in addition to capital
expenditures. The Commission recognized that, while capital
expenditures remain important in many industries, certain expenditures
and cash commitments that are not necessarily capital investments in
property, plant, and equipment may be increasingly important to
companies, especially those for which human capital or intellectual
property are key resources. The proposals were intended to encompass
these and other material cash requirements. The proposal was also
intended to enhance the discussion of capital resources and complement
the proposed deletion of the contractual obligations table.\128\
---------------------------------------------------------------------------

    \128\ See also Section II.C.7 infra.
---------------------------------------------------------------------------

b. Comments
    While commenters generally supported the proposal to amend Item
303(a)(2) to broaden the disclosure

beyond capital expenditures,\129\ a few commenters stated that use of
material cash ``requirements'' was too broad and provided
recommendations on how to limit the requirement to facilitate
compliance.\130\ These commenters stated that registrants would
struggle to identify which commitments to disclose \131\ and that the
proposals could result in extensive new record keeping and
controls.\132\ These commenters recommended limiting the proposal by
requiring ``material cash commitments'' instead of ``material cash
requirements,'' \133\ focusing on material cash commitments outside of
normal operations,\134\ or providing guidance on the expected content
of these disclosures, including examples.\135\ One of these commenters
recommended modernizing the liquidity and capital resources
requirements, such as by merging and streamlining the two
sections.\136\
---------------------------------------------------------------------------

    \129\ See, e.g., letters from EEI & AGA; FEI; IMA; Chamber;
Society; CFA & CII; D. Jamieson.
    \130\ See, e.g., letters from FEI; IMA; E&Y.
    \131\ See letters from E&Y FEI (stating that the term
``requirements'' is too broad, registrants have numerous cash
requirements including the payment of operating expenses (e.g.,
salaries and wages, raw materials, utilities, taxes) and the change
from ``commitments'' to ``requirements'' would lead to inconsistent
application).
    \132\ See letter from IMA.
    \133\ See letter from FEI.
    \134\ See letter from IMA.
    \135\ See letter from E&Y.
    \136\ See id.
---------------------------------------------------------------------------

    Another commenter stated that the proposal may broaden the current
capital resources requirement.\137\ This commenter recommended limiting
the proposal to require only a discussion of cash to fund current
operations (i.e., working capital cash requirements), but only if
working capital is insufficient for the next 12 months. Other
commenters supported the proposal and recommended enhancing it by
retaining the contractual obligations table.\138\
---------------------------------------------------------------------------

    \137\ See letter from SIFMA (also recommending restating, in any
final release, guidance from the 2003 MD&A Interpretive Release that
a discussion of working capital cash requirements is required where
there are material trends or uncertainties relating to the
sufficiency of cash funding sources through working capital).
    \138\ See letters from CFA & CII; D. Jamieson.
---------------------------------------------------------------------------

c. Final Amendments
    We are adopting amendments to the capital resources requirement as
proposed. We acknowledge commenter suggestion to use the term material
cash ``commitments.'' However, we are retaining the term material cash
``requirements'' as we believe this term is more consistent with the
intended purpose of MD&A and with prior Commission guidance.\139\ The
Commission has consistently emphasized the need for attention to
disclosure of cash requirements.\140\
---------------------------------------------------------------------------

    \139\ See 2003 MD&A Interpretive Release at 75062, which states
that a ``company is required to include in MD&A, to the extent
material, . . . the existence and timing of commitments for capital
expenditures and other known and reasonably likely cash
requirements.''
    \140\ See 2003 MD&A Interpretive Release.
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    We acknowledge commenters' concerns that registrants have numerous
cash requirements and that the amendments could therefore result in
extensive new record keeping and controls. As noted above, we do not
expect that registrants would have to deviate substantially from
current practices with respect to an assessment of material cash
requirements as the amendments reflect current Commission guidance and
resulting disclosure practices.\141\ Further, our amendments are
limited to and address only those cash requirements that are material
and accordingly, do not reflect a new threshold for these disclosures
and should not require extensive or new procedures or controls. We are
not, as suggested by one commenter limiting the amendments to require
only disclosure of material cash requirements outside of normal
operations, as registrants can and do have cash requirements related to
their normal operations that are material. Additionally, and consistent
with the suggestion of one commenter, our amendments create Item
303(b)(1) to provide the overarching requirements for liquidity and
capital resources disclosures in order to clarify the liquidity and
capital resources requirements, as discussed in more detail below in
Section II.C.7.
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    \141\ Commission staff has observed that registrants have
provided discussion of material cash requirements pursuant to the
requirements of MD&A and consistent with the 2003 MD&A Interpretive
Release.
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3. Results of Operations--Known Trends or Uncertainties (Amended Item
303(b)(2)(ii))
a. Proposed Amendments
    Item 303(a)(3)(ii) currently requires a registrant to describe any
known trends or uncertainties that have had or that the registrant
reasonably expects will have a material impact (favorable or
unfavorable) on net sales or revenues or income from continuing
operations.\142\ In addition, if the registrant knows of events that
will cause a material change in the relationship between costs and
revenues, the change in the relationship must be disclosed.\143\
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    \142\ Item 303(a)(3)(ii) of Regulation S-K [17 CFR
229.303(a)(3)(ii)].
    \143\ Examples given include known future increases in costs of
labor or materials or price increases or inventory adjustments. See
id.
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    The Commission proposed amending Item 303(a)(3)(ii) to provide that
when a registrant knows of events that are reasonably likely to cause
(as opposed to will cause) a material change in the relationship
between costs and revenues, such as known or reasonably likely future
increases in costs of labor or materials or price increases or
inventory adjustments, the reasonably likely change must be disclosed.
This proposed amendment was intended to conform the language in this
paragraph to other Item 303 disclosure requirements for known
trends,\144\ and align Item 303(a)(3)(ii) with the Commission's
guidance on forward-looking disclosure, which specifies that, where a
trend, demand, commitment, event, or uncertainty is known, management
must make an assessment consistent with the two-step test the
Commission articulated for disclosure of forward-looking
information.\145\
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    \144\ See, e.g., Item 303(a)(1), which requires registrants to
``[i]dentify any known trends or any known demands, commitments,
events or uncertainties that will result in or that are reasonably
likely to result in the registrant's liquidity increasing or
decreasing in any material way.'' Item 303(a)(1) of Regulation S-K
[17 CFR 229.303(a)(1)].
    \145\ See 1989 MD&A Interpretive Release, at 22430, where the
Commission articulated a two-step test for assessing when forward-
looking disclosure is required in MD&A Where a trend, demand,
commitment, event or uncertainty is known, management must make two
assessments: (1) Is the known trend, demand, commitment, event or
uncertainty likely to come to fruition? If management determines
that it is not reasonably likely to occur, no disclosure is
required. (2) If management cannot make that determination, it must
evaluate objectively the consequences of the known trend, demand,
commitment, event or uncertainty, on the assumption that it will
come to fruition. Disclosure is then required unless management
determines that a material effect on the registrant's financial
condition or results of operations is not reasonably likely to
occur.
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b. Comments
    Commenters were mixed in their support for or opposition to the
proposal. Several commenters either generally opposed the two-step test
\146\ or specified opposition to the ``reasonably likely'' standard for
MD&A.\147\ Some of these commenters stated the two-step test or the
term ``reasonably likely'' is unclear,\148\ with some stating that the
current two-step test is not well understood and thus not well
applied.\149\ One of these commenters recommended replacing

the two-step test with the probability/magnitude test in Basic v.
Levinson, stating this test is simple, understandable, and already
applied regularly in other contexts.\150\ This commenter also
recommended, if the two-step test is retained, replacing the negative
presumption in the test with an affirmative determination. This
commenter stated that the negative presumption elicits disclosure that
may not be material.\151\ Another of these commenters requested
clarification on whether use of the term ``reasonably likely'' is
intended to expand the scope of required disclosure.\152\ This
commenter also requested additional Commission guidance on the
timeframe for which management should consider its outlook.
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    \146\ See, e.g., letters from Nareit; FEI; ABA.
    \147\ See, e.g., letters from SIFMA; ABA; CalPERS.
    \148\ See, e.g., letters from ABA; FEI; SIFMA.
    \149\ See letters from ABA; FEI.
    \150\ See letter from ABA citing Basic Inc. v. Levinson, 485
U.S. 224 (1988) (``Basic'').
    \151\ This commenter recommended making the two-step test a
preliminary note to Item 303 and rewording it as follows: Where a
trend, demand, commitment, event or uncertainty is known, management
should make two assessments: (1) Does management reasonably expect
that the known trend, demand, commitment, event or uncertainty will
occur?, and (2) If so, the registrant should assess materiality as
if the known trend, demand, commitment, event or uncertainty will
occur, and provide disclosure if the impact on financial condition,
results of operations or liquidity would be material.
    \152\ See letter from Nareit.
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    Several commenters, however, supported the proposal,\153\ with some
of these commenters stating that it reflects current practice.\154\ One
of these commenters further stated that because the second step in the
two-step test requires a registrant to prove a negative while the
proposal does not specifically incorporate this negative, the final
release should state the two-step test is being superseded by the
proposed language.\155\ This commenter further recommended replacing
throughout Item 303 the term ``reasonably likely'' with ``reasonably
expects,'' stating the latter is a clearer standard in practice.
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    \153\ See, e.g., letters Pfizer; EEI & AGA; SIFMA; Chamber;
Society.
    \154\ See letters from IMA; EEI & AGA.
    \155\ See letter from Society.
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c. Final Amendments
    We are adopting Item 303(b)(2)(ii) with these amendments
substantially as proposed, but with slight modifications to clarify
that the ``reasonably likely'' threshold applies throughout Item 303.
Furthermore, our amendments to Item 303(a) state that, as part of
MD&A's objectives, whether a matter is ``reasonably likely'' to have a
material impact on future operations is based on ``management's
assessment.'' We believe that using a consistent threshold for forward-
looking disclosure throughout MD&A will help avoid both potential
confusion and inconsistent application that could result from disparate
thresholds. Additionally, our amendments reflect a standard that is
consistent with longstanding Commission guidance, and we agree with
those commenters that stated this term reflects current practice.
    We acknowledge that some commenters stated that the term
``reasonably likely'' may be unclear or not well understood. After
careful consideration of these comments, we continue to believe that
the ``reasonably likely'' threshold is the appropriate standard for
prospective matters and forward-looking information that is required
under Item 303. In response to commenters who suggested that the two-
step test is unclear, not well understood, or difficult to apply, we
are clarifying and explaining further how registrants should analyze
and disclose information regarding known trends, demands, commitments,
or uncertainties. In doing so, we reiterate the Commission's
longstanding emphasis that analysis in this area should be based on
objective reasonableness.\156\
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    \156\ See 1989 MD&A Interpretive Release at Section III.B
(stating ``Each final determination resulting from the assessments
made by management must be objectively reasonable, viewed as of the
time the determination is made.'').
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    As the Commission has previously stated with respect to the
evaluation of whether a known trend or uncertainty is reasonably
likely, ``the development of MD&A disclosure should begin with
management's identification and evaluation of what information. . .is
important to providing investors and others an accurate understanding
of the company's current and prospective financial position and
operating results.'' \157\ When considering whether disclosure of a
known event or uncertainty is required,\158\ the analysis is based on
materiality and what would be considered important by a reasonable
investor in making a voting or investment decision.\159\ The
``reasonably likely'' threshold does not require disclosure of any
event that is known but for which fruition may be remote, nor does it
set a bright-line percentage threshold by which disclosure is
triggered. Rather, this threshold requires a thoughtful analysis that
applies an objective assessment of the likelihood that an event will
occur balanced with a materiality analysis regarding the need for
disclosure regarding such event.\160\
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    \157\ See 2002 Commission Statement at 3747.
    \158\ See 1989 MD&A Interpretive Release at 22429 (``Required
disclosure is based on currently known trends, events, and
uncertainties that are reasonably expected to have material effects.
. . . In contrast, optional forward-looking disclosure involves
anticipating a future trend or event or anticipating a less
predictable impact of a known event, trend or uncertainty.'').
    \159\ See Basic Inc. v. Levinson, 485 U.S. 224 (1988) at 231,
quoting TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976)
(``TSC Industries'') at 449 (``to fulfill the materiality
requirement, `there must be a substantial likelihood that the
disclosure of the omitted fact would have been viewed by the
reasonable investor as having significantly altered the `total mix'
of information made available.' ''). See also Exchange Act Rule 12b-
2 [17 CFR 240.12b-2] (``The term ``material,'' when used to qualify
a requirement for the furnishing of information as to any subject,
limits the information required to those matters to which there is a
substantial likelihood that a reasonable investor would attach
importance in determining whether to buy or sell the securities
registered.''); Securities Act Rule 405 [17 CFR 230.405] (``The term
material, when used to qualify a requirement for the furnishing of
information as to any subject, limits the information required to
those matters to which there is a substantial likelihood that a
reasonable investor would attach importance in determining whether
to purchase the security registered.''); Adoption of Integrated
Disclosure System, Release No. 33-6383 (Mar. 3, 1982) [47 FR 11380
(Mar. 16, 1982)] (noting that the definitions in Rule 12b-2 and Rule
405 were ``based on the definition as set forth by the Supreme Court
in TSC Industries''); S-K Concept Release at Section III.B.1
(quoting the Commission Guidance Regarding Disclosure Related to
Climate Change, Release No. 33-9106 (Feb. 8, 2010) [75 FR 6290 (Feb.
8, 2010)] at 6292-6293 in stating that ``materiality standards for
disclosure under the federal securities laws . . . provide that
information is material if there is a substantial likelihood that a
reasonable investor would consider it important in deciding how to
vote or make an investment decision, or, put another way, if the
information would alter the total mix of available information.'').
    \160\ We are not adopting the suggested ``reasonably expects''
threshold suggested by some commenters. Consistent with our
discussion herein, we believe the analysis should focus on an
objective determination of the likelihood of an event occurring,
rather than on whether management's expectation of such event
occurring would be objectively reasonable.
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    Taking these concepts into account, when applying the ``reasonably
likely'' threshold, registrants should consider whether a known trend,
demand, commitment, event, or uncertainty is likely to come to
fruition. If such known trend, demand, commitment, event or uncertainty
would reasonably be likely to have a material effect on the
registrant's future results or financial condition, disclosure is
required. Known trends, demands, commitments, events, or uncertainties
that are not remote or where management cannot make an assessment as to
the likelihood that they will come to fruition, and that would be
reasonably likely to have a material effect on the registrant's future
results or financial condition, were they to come to fruition, should
be disclosed if a reasonable investor would consider omission of the
information as significantly altering the mix of information made
available in the

registrant's disclosures.\161\ This analysis should be made objectively
and with a view to providing investors with a clearer understanding of
the potential material consequences of such known forward-looking
events or uncertainties. Because the analysis does not call for
disclosure of immaterial or remote future events, it should not result
in voluminous disclosures or unnecessarily speculative
information.\162\
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    \161\ Id.
    \162\ See, e.g., Off-Balance Sheet Arrangements and Contractual
Obligations Adopting Release at 5985 (stating ``We believe that the
`reasonably likely' threshold best promotes the utility of the
disclosure requirements by reducing the possibility that investors
will be overwhelmed by voluminous disclosure of insignificant and
possibly unnecessarily speculative information.''). See also Matrixx
Initiatives, Inc. v. Siracusano, 131 U.S. 1309 (2011) (``Matrixx
Initiatives'') at 1318, quoting TSC Industries at 449. In Matrixx
Initiatives, the Court applied the materiality standard, as set
forth in TSC Industries and Basic. In articulating these standards,
the Supreme Court recognized that setting too low of a materiality
standard for purposes of liability could cause management to ``bury
shareholders in an avalanche of trivial information.'' Id. at 1318,
quoting TSC Industries at 448-449.
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    As noted above, some commenters also indicated that application of
the two-step test as the Commission articulated it in 1989 may result
in disclosure that is not material or present challenges to
registrants, such as by requiring a registrant to prove a negative.
This was not the intended result of that test, and we believe that the
clarifications we have provided above regarding the appropriate
application of the analysis should alleviate these concerns. The
``reasonably likely'' threshold, which requires that management
evaluate the consequences of the known trend, demand, commitment,
event, or uncertainty, is grounded in whether disclosure of the event
or uncertainty would be material to investors. We remind registrants
that this approach is not intended to, nor does it require, registrants
to affirm the non-existence or non-occurrence of a material future
event.\163\ Instead, it requires management to make a thoughtful and
objective evaluation, based on materiality, including where the
fruition of future events is unknown.\164\
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    \163\ We are not, as suggested by a commenter, reformulating the
language to require an affirmative determination. Such reformulated