AGENCY:

Securities and Exchange Commission.

ACTION:

Proposed rule.

SUMMARY:

We are proposing amendments to modernize, simplify, and enhance certain financial disclosure requirements in Regulation S-K. Specifically, we are proposing to eliminate Item 301 of Regulation S-K, Selected Financial Data and Item 302 of Regulation S-K, Supplementary Financial Information because they are largely duplicative of other requirements and to amend Item 303 of Regulation S-K, Management's Discussion & Analysis of Financial Condition and Results of Operations (“MD&A”) to modernize and enhance MD&A disclosures. In combination, the proposed 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:

Comments should be received by April 28, 2020.

ADDRESSES:

Comments may be submitted by any of the following methods:

Electronic Comments

• Use the Commission's internet comment forms (https://www.sec.gov/​rules/​proposed.shtml); or
• Send an email to rule-comments@sec.gov. Please include File Number S7-01-20 on the subject line.

Paper Comments

• Send paper comments to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-01-20. This file number should be included in the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission's website (https://www.sec.gov/​rules/​proposed.shtml). Comments also are available for website viewing and printing in the Commission's Public Reference Room, 100 F Street NE, Room 1580, Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly.

We or the staff may add studies, memoranda, or other substantive items to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on our website. To ensure direct electronic receipt of such notifications, sign up through the “Stay Connected” option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT:

Angie Kim, Special Counsel, or Courtney Lindsay, Special Counsel, Office of Rulemaking, at (202) 551-3430, or Ryan Milne, Associate Chief Accountant, Office of the Chief Accountant, at (202) 551-3400 in the Division of Corporation Finance, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549.

SUPPLEMENTARY INFORMATION:

The Commission is proposing to remove and reserve 17 CFR 229.301 (“Item 301”) and 17 CFR 229.302 (“Item 302”) of Regulation S-K under the Securities Act of 1933 (the “Securities Act”) and the Securities Exchange Act of 1934 (the “Exchange Act”). The Commission is also proposing to amend 17 CFR 210.1-02(bb) of Regulation S-X (“Rule 1-02(bb)”); 17 CFR 229.303 (“Item 303”) and 17 CFR 229.914 (“Item 914”) of Regulation S-K under the Securities Act and the Exchange Act; 17 CFR 229.1112 (“Item 1112”), 17 CFR 229.1114 (“Item 1114”) and 17 CFR 229.1115 (“Item 1115”) of Regulation AB (a subpart of Regulation S-K) under the Securities Act and the Exchange Act; 17 CFR 239.11 (“Form S-1”), 17 CFR 239.20 (“Form S-20”), 17 CFR 239.25 (“Form S-4”), 17 CFR 239.31 (“Form F-1”) and 17 CFR 239.34 (“Form F-4”) under the Securities Act; 17 CFR 240.14a-101 (“Schedule 14A”) under the Exchange Act; and 17 CFR 249.220f (“Form 20-F”), 17 CFR 249.240f (“Form 40-F”), and 17 CFR 249.308 (“Form 8-K”) under the Exchange Act.

Table of Contents

I. Introduction

A. Background

B. Overview of the Proposed Amendments

II. Description of the Proposed Amendments

A. Selected Financial Data (Item 301)

B. Supplementary Financial Information (Item 302)

1. Supplementary Financial Information (Item 302(a))

2. Information About Oil and Gas Producing Activities (Item 302(b))

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

1. Restructuring and Streamlining (Item 303(a))

2. Capital Resources (Item 303(a)(2))

3. Results of Operations—Known Trends or Uncertainties (Item 303(a)(3)(ii))

4. Results of Operations—Net Sales and Revenues (Item 303(a)(3)(iii))

5. Results of Operations—Inflation and Price Changes (Item 303(a)(3)(iv), and Instructions 8 and 9 to Item 303(a))

6. Off-Balance Sheet Arrangements (Item 303(a)(4))

7. Contractual Obligations Table (Item 303(a)(5))

8. Critical Accounting Estimates

9. Interim Period Discussion (Item 303(b))

10. Safe Harbor for Forward-Looking Information (Item 303(c))

11. Smaller Reporting Companies (Item 303(d))

D. Application to Foreign Private Issuers

1. Form 20-F

2. Form 40-F

3. Item 303 of Regulation S-K

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. General Request for Comments

IV. Economic Analysis

A. Introduction

B. Baseline and Affected Parties

C. Potential Benefits and Costs of the Proposed Amendments

1. Overall Potential Benefits and Costs

2. Benefits and Costs of Specific Proposed 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 the Proposed Amendments' Effects on the Collections of Information

C. Incremental and Aggregate Burden and Cost Estimates for the Proposed Amendments

VI. Small Business Regulatory Enforcement Fairness Act

VII. Regulatory Flexibility Act Certification

VIII. Statutory Authority

I. Introduction

A. Background

We are proposing certain amendments to Regulation S-K, and related rules and forms. Specifically, we are proposing (1) to eliminate Item 301, Selected Financial Data and Item 302, Supplementary Financial Information; and (2) to modernize, simplify, and enhance the disclosure requirements in Item 303, MD&A.^[1] We are also proposing certain parallel amendments applicable to financial disclosures provided by foreign private issuers (“FPIs”).^[2]

Based on a recommendation in the Report on Review of Disclosure Requirements in Regulation S-K (“S-K Study”),^[3] Commission staff initiated a comprehensive evaluation of the Commission's disclosure requirements, which included an assessment of the information our rules require registrants to disclose, how and where this information is presented, and how we can better leverage technology as part of these efforts (collectively, the “Disclosure Effectiveness Initiative”).^[4] The objective of the Disclosure Effectiveness Initiative is to improve our disclosure regime for the benefit of both investors and registrants. In connection with the S-K Study and the launch of the Disclosure Effectiveness Initiative, Commission staff received public input on how to improve registrant disclosures.^[5] Additionally, in a concept release issued in 2016,^[6] the Commission solicited comment on the business and financial disclosure requirements in Regulation S-K. Specifically, the Commission solicited comment on whether these requirements provide the material information that investors need to make informed investment and voting decisions, and whether any of our rules have become outdated or unnecessary, or could otherwise be improved. These proposals also are informed by the objectives of the Fixing America's Surface Transportation Act (the “FAST Act”), which, among other things, required the Commission to study ways that Regulation S-K could be modernized and simplified.^[7] The JOBS Act and the FAST Act, and the work on the Disclosure Effectiveness Initiative and the S-K Study, have focused on modernizing and improving disclosure to reduce costs and burdens while continuing to provide investors with all material information. These proposals continue that work with a particular focus on performance and financial disclosure.

In developing the proposed amendments, we considered input from comment letters the Commission received on the initiatives described above. We also took into account the staff's experience with Regulation S-K arising from the Division of Corporation Finance's disclosure review program and changes in the regulatory and business landscape since the adoption of Regulation S-K over 40 years ago. Regulation S-K was adopted in 1977 to foster uniform and integrated disclosure for registration statements under both the Securities Act and the Exchange Act, and other Exchange Act filings, including periodic and current reports.^[8] In 1982, the Commission expanded and reorganized Regulation S-K to be the central repository for its non-financial statement disclosure requirements.^[9] The Commission's goals in adopting integrated disclosure were to revise or eliminate overlapping or unnecessary disclosure requirements wherever possible, thereby reducing burdens on registrants and enhancing readability without affecting the provision of material information to investors.^[10] The amendments we are proposing in this release would continue to advance these goals.

Additionally, we reviewed Items 301, 302, and 303 in light of advancements in technology (in particular the availability of past financial statements and other disclosure made in filings on the Commission's Electronic Data Gathering, Analysis, and Retrieval (“EDGAR”) system) and changes in requirements under U.S. Generally Accepted Accounting Principles (“U.S. GAAP”). We also considered the benefits and appropriateness of a principles-based approach in reviewing these Items and our proposals are intended to promote the principles-based nature of MD&A.^[11]

B. Overview of the Proposed Amendments

We are proposing changes to Items 301, 302, and 303 of Regulation S-K that would reduce duplicative disclosure and focus on material information. Specifically, we propose to eliminate:

• Item 301—Selected Financial Data;
• Item 302—Supplementary Financial Information; and
• Item 303(a)(5)—MD&A, Tabular disclosure of contractual obligations.

We are also proposing changes to modernize, simplify, and enhance disclosure requirements in Item 303 in order to improve these disclosures for investors and simplify compliance efforts for registrants. Specifically, these proposed revisions would:

• Add a new Item 303(a), Objective, to state the principal objectives of MD&A;
• Amend Item 303(a), Full fiscal years (proposed Item 303(b)) and Item 303(b), Interim periods (proposed Item 303(c)) to modernize, clarify, and streamline the items;
• Replace Item 303(a)(4), Off-balance sheet arrangements, with an instruction regarding the need to discuss such obligations in the broader context of MD&A;
• Add a new Item 303(b)(4), Critical accounting estimates, to clarify and codify Commission guidance on critical accounting estimates; ^[12]

• Eliminate current Item 303(c), Safe harbor, in light of the proposed replacement of Item 303(a)(4) and elimination of Item 303(a)(5); and
• Eliminate Item 303(d), Smaller reporting companies ^[13] in light of the proposed elimination of Items 303(a)(3)(iv) and 303(a)(5).

We are also proposing certain parallel amendments to Forms 20-F and 40-F, including Item 3.A of Form 20-F (Selected Financial Information), 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 Arrangements).^[14] The following table summarizes some of the changes we are proposing, as described more fully in Section II (Proposed Amendments): ^[15]

We discuss the proposed amendments below in the order that each Item appears in Regulation S-K. We welcome feedback and encourage interested parties to submit comments on any or all aspects of the proposals. When commenting, it would be most helpful if you include the reasoning behind your position or recommendation.

II. Description of the Proposed Amendments

A. Selected Financial Data (Item 301)

Item 301 ^[16] 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 or results of operations.^[17]

SRCs are not required to provide Item 301 information.^[18] Emerging growth companies (“EGCs”) ^[19] 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.^[20] 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.^[21]

In the Concept Release, the Commission solicited comment on whether to retain, modify, or eliminate Item 301.^[22] The Commission also solicited comment on the cost of this disclosure and whether information on the earliest two of the last five fiscal years is available without unreasonable cost or expense. Additionally, the Commission solicited comment on the utility of this disclosure.

Many commenters recommended eliminating Item 301 completely or questioned its usefulness.^[23] One of these commenters stated that “absent a requirement to provide narrative discussions of trends, the current requirement under [Item 301] seems less useful in an electronic era where historical financial information is easily accessible.” ^[24] Another commenter stated that it did not believe that presenting five years of information is useful to an investor and similarly noted that the information is accessible through EDGAR.^[25] An additional commenter questioned whether selected financial data was necessary in light of data-tagged financial statements.^[26] A number of commenters recommended revising the item to reduce burdens, if retained.^[27]

One of these commenters noted the potentially significant costs in public offerings for comfort letters associated with this disclosure.^[28] This commenter stated that where prior years have been audited by a different accounting firm, companies typically incur significant additional costs, both in terms of direct costs and internal resources, to obtain comfort letters. Additionally, this commenter stated that if Item 301 information is required for periods where no audited financial statements are otherwise required, the costs can be much more substantial.

Another commenter encouraged the Commission to ask investors whether the utility of the information provided in response to Item 301 justify the costs of presenting it.^[29] This commenter stated that, while this required disclosure is limited to a small number of line items, certain of these items effectively require preparation of a full income statement and balance sheet to derive information for the earlier two years.

Many commenters recommended revising Item 301 to allow registrants to omit the earliest two years.^[30] Some of these commenters noted that providing disclosure of the earliest two years often creates challenges for registrants, including non-EGC issuers conducting IPOs.^[31] A few of these commenters recommended a practicability exception allowing registrants to omit the earliest two years when the information cannot be provided without unreasonable cost or expense.^[32] Others recommended that the earliest two years should be required only when necessary to make the current financial data not misleading,^[33] or to illustrate material trends.^[34]

A few commenters supported retaining Item 301.^[35] Some of these commenters stated that having the information in one place keeps investors from having to review multiple sources to obtain this information,^[36] with one of these commenters noting that investors sometimes rely on printed copies.^[37] Two of the commenters also stated that requiring this disclosure for five years is an appropriate timeframe,^[38] with one stating that five years is more likely to capture the effects that business cycles may have on a registrant.^[39] Another stated that Item 301 information should be easy for companies to disclose because the information is already in company records.^[40]

We propose to eliminate Item 301. When the precursor to Item 301 was adopted in 1970, prior annual reports were not quickly and easily accessible.^[41] Today, the information required by Item 301 can be readily accessed and compiled through prior filings on EDGAR.^[42] In addition, this information is tagged using eXtensible Business Reporting Language (“XBRL”) data format. As noted above, there are currently certain exceptions to Item 301 for EGC and SRC registrants.^[43] Our proposals would not affect these exceptions or result in any further loss of information from these registrants.^[44]

In adding the requirement for selected financial data to Regulation S-K, the Commission stated that Item 301 was “relevant primarily where it can be related to trends in the registrant's continuing operations.” ^[45] However, Item 303 specifically calls for disclosure of material trend information.^[46] In addition, since Item 301 has been incorporated into Regulation S-K, the Commission has issued guidance emphasizing trend disclosure in MD&A.^[47] In light of the requirement for discussion and analysis of trends in Item 303, we believe requiring five years of selected financial data is not necessary to achieve the original purpose of providing trend disclosure. Registrants may, however, continue to include a tabular presentation of relevant financial or other information discussed in MD&A, to the extent they believe that such a presentation would be useful to an understanding of the disclosure. We believe that eliminating Item 301 would continue to allow registrants the flexibility to present a meaningful MD&A discussing material trend information, while easing compliance burdens on registrants.

We acknowledge that some commenters suggested we revise Item 301 to require only presentation of the same number of years as included in the financial statements, or otherwise provide accommodations to limit the number of years presented. However, we believe that such an approach would result in disclosure that would be largely duplicative of information in the financial statements, and therefore may have limited utility. We also acknowledge that some commenters recommended that we retain Item 301 without any revisions or enhance the item requirement. We believe, however, that the incremental utility of having a full five years of selected financial information is not justified by the cost to prepare such disclosures, particularly since Item 303 already requires disclosure of material trends and such other information necessary to an understanding of the registrant's financial conditions, changes in financial condition, and results of operations.^[48]

Request for Comment

1. Should we eliminate Item 301, as proposed? Would eliminating Item 301 result in the loss of material information that is otherwise not available to investors, such as through prior filings on EDGAR? If so, what information would be lost, and are there alternatives we should consider that would capture this information?

2. Is the option for investors to compile selected financial information from current or prior filings an adequate substitute for the separate presentation of that information in Item 301? Do current XBRL-tagging requirements facilitate compilation and comparison of selected financial information?

3. Are the requirements of Item 303 sufficient to provide investors with necessary disclosure regarding trends in a registrant's results of operations and financial condition?

4. Alternatively, if Item 301 should be retained, should registrants be allowed to provide less than five years of selected financial data? If so, what is the appropriate number of years that should be provided, and in what circumstances?

5. What are the costs to registrants of providing five years of selected financial data? Would those costs significantly decrease if the Commission limited selected financial data to only those years presented in the filing's historical financial statements?

6. How do market participants use the selected financial data disclosures? Do market participants rely on any particular fiscal year or years more than others (e.g., the most recent two or three years)? Would there be a cost to obtain selected financial data disclosures elsewhere and, if so, what would that cost be?

7. Would registrants continue to provide selected financial data even if they are no longer required to do so? If so, for how many years?

8. If we were to retain Item 301, should we modify the line items required to be included in the presentation pursuant to Instruction 2? ^[49] For example, should we allow registrants more discretion regarding which line items to present?

9. The Commission recently proposed to extend to BDCs the requirement for registered closed-end investment companies to disclose “financial highlights.” ^[50] The disclosure required by Item 301 and the financial highlights requirement is similar in many respects. If we were to adopt the financial highlights requirement and retain Item 301, should we specifically exclude BDCs from the Item 301 requirement?

B. Supplementary Financial Information (Item 302)

1. Supplementary Financial Information (Item 302(a))

Item 302(a)(1) requires disclosure of selected quarterly financial data of specified operating results ^[51] and Item 302(a)(2) requires disclosure of variances in these results from amounts previously reported on a Form 10-Q.^[52] 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 who are only required to file reports pursuant to Section 15(d) of the Exchange Act.^[53] 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.^[54] 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.^[55] 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).^[56]

In the Concept Release, the Commission solicited input on whether to retain, eliminate, or modify Item 302(a). The Commission also solicited input on the importance of information required by Item 302(a) that is not duplicative of previously provided information, such as a separate presentation of certain fourth quarter information and the effect of a retrospective change in the earliest of the two years.^[57] The Commission also sought input on the costs and benefits of this disclosure item.

A few commenters recommended retaining and expanding Item 302(a).^[58] One of these commenters stated that it “sense[d] that investors find it useful to see fourth quarter results presented discretely, rather than having to infer them based on the annual results and the interim results through the third quarter.” ^[59] The commenter also stated that, where the data changes from what was previously reported, having the revised data in an annual report allows investors to understand the effects of the changes sooner. Another of these commenters noted the importance of fourth quarter data, stating that, in the absence of a Form 8-K filing containing such information, analysts must derive the information from the annual report and the three previously filed quarterly reports and that “any numbers derived from this method are at best approximate.” ^[60] This commenter stated that, “if a requirement to file a full fourth-quarter report is too onerous . . . [Item 302(a)] could be enhanced to include more data from the income statement beyond revenues, net income, and earnings per share.” Yet another commenter recommended that Item 302(a) be revised to ensure the information is presented in a consistent manner across registrants.^[61]

Multiple commenters recommended streamlining Item 302(a).^[62] Several of these commenters recommended revising Item 302(a)(5) to accommodate newly reporting registrants in an annual report or a follow-on offering where the registrant would be required to provide Item 302(a) data for interim periods prior to those presented in the IPO registration statement.^[63] Another commenter recommended only requiring Item 302(a) disclosure when there is a material retrospective change in the financial statements that has not been previously filed.^[64] The commenter also stated that some companies voluntarily provide fourth quarter data in earnings releases.

Most commenters recommended eliminating Item 302(a) altogether,^[65] with many of these commenters stating that this item is duplicative of disclosures provided in prior filings.^[66] Two of these commenters stated that “the disclosure required under Item 302(a) is yet another example of duplicative information that unnecessarily complicates and lengthens disclosure documents, while increasing burdens for registrants and offering little value to investors.” ^[67] Another commenter stated that, though the original intent of the item was “to help investors understand the pattern of corporate activities throughout a fiscal year,” not all businesses are seasonal and the information provided by Item 302(a) is already available in Form 10-Qs.^[68] This commenter supported a flexible approach for Item 302(a) disclosure that would allow registrants to determine when and if this disclosure would be relevant and enhance an investor's understanding of the business throughout the year. This commenter also stated that fourth quarter data can be easily derived from prior filings without needing to separately reference the fourth quarter information.

We propose to eliminate Item 302(a). Like many commenters, we believe that this prescriptive requirement largely results in duplicative disclosures. The precursor to Item 302 was adopted at a time when quarterly data was “reported on an extremely abbreviated basis.” ^[69] The item was intended to help investors understand the pattern of corporate activities throughout a fiscal period by disclosing trends over quarterly periods to reflect seasonal patterns.^[70] Today, most of the financial data required by Item 302(a) can be found in prior quarterly reports, which are readily available on EDGAR. While Item 302(a) requires separate disclosure of certain fourth quarter information, which is not otherwise required to be disclosed, we believe this data generally can be calculated from a registrant's Form 10-K and third quarter Form 10-Q. We believe that eliminating this prescriptive requirement will encourage registrants to take a more principles-based approach to presenting information called for by Item 302(a) in their filings and specifically, in MD&A.

Eliminating Item 302(a) may result in the loss of a separate presentation of certain fourth quarter information and, where applicable, the effect of a retrospective change in the earliest of the two years.^[71] Where fourth quarter results are material or there is a material retrospective change, existing requirements would still elicit this disclosure. Specifically, Item 303 requires registrants to discuss unusual events that materially affected reported income and other matters that are necessary to understand their results of operations.^[72] The item also requires registrants to discuss known trends and uncertainties that have had or that registrants reasonably expect to have an impact on net sales, revenues, or operating income.^[73] Also, U.S. GAAP requires disclosure of disposals of components of an entity and unusual or infrequently occurring items recognized for the fourth quarter if interim data and disclosures are not separately reported for the fourth quarter.^[74] Additionally, Item 101(c)(1)(v) of Regulation S-K requires disclosure of the extent to which a business is seasonal.^[75]

Request for Comment

10. Should we eliminate Item 302(a), as proposed? Would eliminating Item 302(a) result in the loss of material information that is otherwise not available to investors, such as through prior filings on EDGAR? If so, what material information would be lost, and are there alternatives we should consider that would capture this information?

11. Do market participants find Item 302(a) disclosures to be helpful? If so, how do market participants use the disclosures? Does the utility of the disclosures vary by industry or business? If so, for which industries or businesses are Item 302(a) disclosures helpful?

12. Is the option for investors to compile supplemental financial information through searches of prior filings an adequate substitute for Item 302(a)? Do current XBRL-tagging requirements reliably facilitate compilation and comparison of supplemental financial information? Would there be a cost to investors of compiling and/or calculating information presented in Item 302(a) from other sources and, if so, what would that cost be?

13. What are the burdens on registrants to provide the information required by Item 302(a)?

14. Is a separate presentation of certain fourth quarter data material to investors? If so, is such information material for all companies or industries? Are investors able to readily calculate this fourth quarter data from a registrant's Form 10-K and related third quarter Form 10-Q? What are the challenges to making such calculations?

15. Would registrants continue to provide fourth quarter data in the absence of a requirement to do so (e.g., through voluntary earnings releases)? If we eliminate Item 302(a), should we require registrants to disclose certain fourth quarter data elsewhere in an annual report, such as in MD&A? What would be the cost of this approach? Should we require registrants to disclose any variances to its previously issued quarterly information that would inhibit the calculation of fourth quarter data by market participants? What would be the costs of this approach?

16. Should we retain Item 302(a) but allow a newly reporting registrant to exclude Item 302(a) data for interim periods prior to those presented in its IPO registration statement? ^[76]

2. Information About Oil and Gas Producing Activities (Item 302(b))

Item 302(b) ^[77] requires registrants engaged in oil and gas producing activities, other than SRCs, to disclose information about those activities for each period presented. The disclosure called for by Item 302(b) is also required by U.S. GAAP.^[78] However, unlike the U.S. GAAP requirement, Item 302(b) incrementally requires that the disclosure be provided for each period presented.

In 2018, the Commission referred certain of its disclosure requirements to the FASB for potential incorporation into U.S. GAAP because these items largely overlapped with, but required information incremental to, U.S. GAAP.^[79] Item 302(b) was among the items referred to the FASB.^[80]

On May 6, 2019, the FASB issued proposed Accounting Standards Update, Disclosure Improvements: Codification Amendments in Response to the SEC's Disclosure Update and Simplification,^[81] which would amend U.S. GAAP to require the incremental disclosure called for by Item 302(b), disclosure of oil and gas producing activities for each period presented. If FASB adopts amendments consistent with those it proposed, upon effectiveness of the amendments to U.S. GAAP, the requirements of Item 302(b) will be duplicative of U.S. GAAP. Therefore, we propose to eliminate Item 302(b), subject to the FASB finalizing its related amendments to U.S. GAAP.^[82]

Request for Comment

17. As proposed, should we eliminate Item 302(b) if the FASB amends U.S. GAAP to require substantially similar disclosure?

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) specify five components: Liquidity, capital resources, results of operations, off-balance sheet arrangements, and contractual obligations.^[83] Item 303(b) covers interim period disclosures and requires registrants to discuss material changes in the items listed in Item 303(a) (including the instructions), other than the impact of inflation and changing prices on operations and tabular disclosure of contractual obligations.^[84] 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.

The Concept Release solicited comment on the overall objectives of the current MD&A requirements, as well as specific subsections of Item 303, including how to improve the content and focus of MD&A. Many commenters responded to the Commission's request for input with a variety of suggestions, which we discuss below. The Commission recently addressed some of the Item 303(a) disclosure requirements referenced in the Concept Release and by commenters when it adopted amendments to modernize and simplify certain disclosure requirements in Regulation S-K.^[85]

We propose further amendments to Item 303 of Regulation S-K that are intended to modernize, simplify, and enhance the MD&A disclosures for investors while reducing compliance burdens for registrants.^[86] Specifically, we are proposing to:

• Establish a new paragraph 303(a) that incorporates much of the substance of Instructions 1, 2, and 3 to current Item 303(a) to emphasize the objective of MD&A for both full fiscal years and interim periods;
• Recaption current Item 303(a) as Item 303(b), and make the following additional changes:

○ Streamline current Item 303(a) by eliminating unnecessary cross-references to industry guides in Instructions 13 and 14; ^[87]

○ Amend current Item 303(a)(2) to modernize and enhance the current requirement, which is limited to capital expenditures, to specifically require a discussion of material cash requirements;

○ Amend current Item 303(a)(3)(ii) to clarify that a registrant should disclose reasonably likely changes in the relationship between costs and revenues;

○ Amend current Item 303(a)(3)(iii) and Instruction 4 to Item 303(a) to enhance analysis in MD&A by clarifying that a registrant should include in its MD&A a discussion of the reasons underlying material changes from period-to-period in one or more line items;

○ Eliminate current Item 303(a)(3)(iv), which requires registrants to discuss the impact of inflation and changing prices where material, along with the related Instructions 8 and 9 to Item 303(a);

○ Replace current Item 303(a)(4), the requirement that registrants provide off-balance sheet arrangement disclosures in a separately captioned section, with an instruction emphasizing the importance of discussing these obligations in the broader context of MD&A disclosure when such obligations have or are reasonably likely to have a material current or future effect on a registrant's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements or capital resources; and

○ Eliminate current Item 303(a)(5), the requirement that registrants provide a tabular disclosure of contractual obligations;

• Recaption Item 303(b) as Item 303(c) and:

○ Amend current Item 303(b) to allow for more flexibility in interim periods compared; and

○ Simplify current Item 303(b) by eliminating certain instructions and providing cross-references to similar instructions in Item 303(a); and

• Eliminate current Items 303(c) and (d) as conforming changes.

The following table outlines the current and proposed structure of Item 303: ^[88]

1. Restructuring and Streamlining (Item 303(a))

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.^[89] 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. The paragraph also instructs that discussions of capital resources and liquidity may be combined when the topics are interrelated. Finally, the paragraph states that a registrant must provide a discussion of business segments and/or of subdivisions when, in the registrant's judgment, such a discussion would be appropriate for understanding its business. This discussion must focus on each relevant, reportable segment and/or other subdivision of the business and on the registrant as a whole. In addition to the text, there are fourteen instructions to Item 303(a).

We are proposing multiple changes that are intended to streamline and clarify the purposes of Item 303.^[90] First, we propose adding a new Item 303(a) to succinctly state the purposes of MD&A by incorporating a portion of the substance of Instruction 1, and much of the substance of Instructions 2 and 3 into the item. Specifically, we propose to incorporate each of the following portions of current Instructions 1, 2, and 3 to describe the objectives of MD&A, which is for companies to provide disclosure regarding:

• 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.
• The material financial and statistical data that the registrant believes will enhance a reader's understanding of the registrant's financial condition, changes in financial condition, and results of operations.^[91]

• Material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition. This would include descriptions and amounts of matters that: (i) Would have a material impact on future operations and have not had an impact in the past, and (ii) have had a material impact on reported operations and are not expected to have an impact on future operations.

We are also proposing to codify Commission 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” ^[92] into the description of MD&A objectives. We believe that emphasizing the purpose of MD&A at the outset of the Item will provide clarity and focus to registrants as they consider what information to discuss and analyze. Our intent is 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.^[93] Our proposal is intended to serve as a reminder to registrants as they prepare their MD&A that the general purpose of the disclosure is to provide both a historical and prospective analysis of the registrant's financial condition and results of operations, with particular emphasis on the registrant's prospects for the future.^[94] This principles-based approach is also well-suited to elicit disclosure about complex and often rapidly evolving areas, without the need to continuously amend the text of the rule to impose bright-line or prescriptive requirements.^[95]

In light of our proposal to add new Item 303(a), we propose to re-caption current Item 303(a) as Item 303(b), which will continue to apply to all MD&A disclosures.^[96] As proposed, the introductory paragraph would retain the current language that outlines what is to be covered in the discussion of a registrant's financial condition, changes in financial condition, and results of operations.^[97] Additionally, we propose to add product lines as an example of other subdivisions of a registrant's business that should be discussed where, in the registrant's judgment, such a discussion would be necessary to an understanding of the registrant's business.^[98] We believe that this added example would provide registrants with additional clarity on the types of subdivisions that may require separate disclosure, though it is not intended to complete the list.

We also propose to move to proposed Item 303(b) the portion of current Instruction 4 to Item 303(a) that requires a description of the causes of material changes from year-to-year in line items of the financial statements to the extent necessary to an understanding of the registrant's business as a whole.^[99] In response to general requests for comment on Item 303 in the Concept Release, a few commenters provided recommendations on how to revise Item 303(a) to facilitate a more meaningful analysis.^[100] One commenter suggested amending Item 303 to require a description of material factors that contributed to any material change in results, and that quantitative and qualitative factors could be listed as examples of the types of factors that could be discussed in MD&A.^[101]

Similarly, another commenter recommended revising Item 303(a)(3) to require a description of the major factors that caused changes in line items (e.g., economic trends, industry conditions and sales and costs related to key products and services).^[102] Yet another commenter stated that Item 303(a) and Instruction 4 should be revised to “clearly instruct” registrants that discussions about material changes should address quantitative and qualitative factors underlying the changes.^[103] One commenter also noted that it would be preferable for the requirements to indicate that registrants cannot present line item changes without providing “meaningful explanations.” ^[104] Finally, another commenter recommended revising Instruction 4 to Item 303(a) to allow registrants to omit financial statement line item changes to the extent such an omission would not materially impair an investor's understanding of a registrant's results of operations.^[105] This revision, the commenter stated, would allow registrants and investors to focus on line items that had the most impact on its results of operations.

We propose to amend the language of Instruction 4 to Item 303(a),^[106] which would be moved to proposed Item 303(b), to clarify that MD&A requires a narrative discussion of the “underlying reasons” for material changes from period-to-period in one or more line items in quantitative and qualitative terms, rather than only the “cause” for material changes. We are also proposing to amend the language to clarify that registrants should discuss material changes within a line item even when such material changes offset each other.^[107] We believe our proposals would enhance analysis in MD&A, and accordingly, would be responsive to concerns raised by commenters. We also believe the proposals would clarify MD&A's requirements by codifying some of the Commission's prior guidance on the importance of analysis in MD&A. The Commission has previously emphasized the importance of providing an analysis in MD&A and stated that a thorough analysis often will involve discussing both the intermediate effects of known material trends, events, demands, commitments, and uncertainties and the reasons underlying those intermediate effects.^[108] Commission guidance has also stated that MD&A should include both qualitative and quantitative analysis.^[109] We believe the proposed amendments would encourage registrants to provide a more nuanced discussion of the underlying reasons that may be contributing to material changes in line items.

We also are proposing several amendments to further streamline the text of Item 303:

• We propose to move the text in current Item 303(a) stating that registrants may combine their discussions of liquidity and capital resources when the topics are interrelated to an instruction to the item.^[110] We believe this language is an instruction given that it is not a substantive requirement or accommodation, but rather a clarification of how registrants may structure their disclosures.

• 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.^[111] We are proposing to move this language to proposed Instruction 11 to proposed Item 303(b) to clarify that the instruction applies to both full fiscal year and interim period MD&A disclosure.

• We also propose to eliminate current Instructions 13 and 14 to Item 303(a) as simplifying amendments. These instructions call the attention of bank holding companies and property-casualty insurance companies to Guide 3 ^[112] and Guide 6,^[113] respectively. Registrants should still consider the Guides in preparing their disclosures generally, but we do not believe the cross-reference is necessary to an understanding of the requirements of Item 303.

Request for Comment

18. Should we adopt proposed Item 303(a)? Would proposed Item 303(a) clarify the purpose of MD&A disclosures for registrants and others? Would the proposed amendments aid registrants in determining what to disclose in their MD&A?

19. Should we incorporate the language from current Instruction 4 to Item 303(a) into proposed Item 303(b), as proposed? Should we amend this language to require disclosure of the underlying reasons for material changes in quantitative and qualitative terms, including material changes within a line item, as proposed?

20. Are there any instructions that we are proposing to delete or move that we should retain or leave as is? Are there any other current instructions that we should revise or clarify?

21. Should we eliminate Instructions 13 and 14 to Item 303(a) that reference Guides 3 and 6, as proposed? Should we instead include additional instructions to reference the other industry guides?

2. Capital Resources (Item 303(a)(2))

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 such commitments and the anticipated sources of funds needed to fulfill such commitments.^[114] A registrant also must discuss 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.^[115] The discussion must consider changes between equity, debt, and any off-balance sheet financing arrangements.^[116]

When adopting disclosure requirements for capital resources, the Commission recognized that the term “capital resources” lacked precision, but stated that “additional specificity would decrease the flexibility needed by management for a meaningful discussion.” ^[117] To that end, Item 303 does not define “capital resources.” ^[118] The current capital resources disclosure requirements in Item 303(a)(2) have remained largely the same since 1980.^[119] Item 303(a)(2) specifies that registrants must disclose material commitments for capital expenditures, which generally relate to physical assets, such as buildings and equipment. Some registrants include disclosure beyond capital expenditures, which the Commission's guidance has encouraged.^[120]

The Concept Release solicited comment on how the Commission could revise Item 303(a) to elicit a more meaningful analysis of a registrant's capital resources while maintaining flexibility.^[121] The Concept Release also requested comment on how registrants interpret the term “capital resources” and whether defining the term would be helpful to registrants.^[122]

Some commenters observed differences in how registrants apply the term “capital resources.” ^[123] One of these commenters stated that the Commission should adopt a definition of capital resources that is broader than currently implied by Item 303(a)(2)(i).^[124] This commenter stated that registrants interpret “capital resources” as material commitments for capital expenditures and the source of funds related to such commitments. Another commenter stated that some registrants interpret “capital resources” to require “disclosure of a registrant's sources of capital, while others interpret it to require disclosure of the sources of capital assets used in a registrant's business.” ^[125]

Some commenters supported the Commission's current approach to the term “capital resources.” ^[126] One commenter urged the Commission not to depart from the existing policy of recognizing the term “capital resources” as a general term in a manner that might decrease the flexibility needed by management for a meaningful discussion.^[127] Another commenter recommended that the Commission not further define the term “capital resources” beyond its current general use.^[128]

We continue to believe that disclosure of capital resources is critical to an assessment of a registrant's prospects for the future and likelihood of its survival.^[129] Therefore, we propose to amend current Item 303(a)(2) ^[130] 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, our proposed amendment would require a registrant to describe its material cash requirements, including commitments for capital expenditures, as of the latest fiscal period, the anticipated source of funds needed to satisfy such cash requirements, and the general purpose of such requirements.^[131]

This proposal is intended to require registrants to identify and disclose known material cash requirements. Depending on the registrant, this could include items such as: Funds necessary to maintain current operations, complete projects underway, and achieve stated objectives or plans; or commitments for capital or other expenditures.^[132] This proposal is also intended to modernize Item 303(a)(2) by specifically requiring disclosure of material cash requirements in addition to capital expenditures. While capital expenditures remain important in many industries, we recognize that 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. Our proposals are intended to encompass these and other material cash requirements.

These proposals, alongside the current requirement for registrants to discuss their ability to generate cash,^[133] are intended to enhance disclosure and provide investors with a clear picture of a registrant's ability to meet its material cash requirements. We acknowledge the commenters who suggested that we define “capital resources.” We have decided, however, not to propose a definition of the term to allow for continued flexibility and business-specific discussions of the topic.^[134] Lastly, and as discussed in Section II.C.7, our proposal to enhance discussion of capital resources is also intended to complement our proposed deletion of the contractual obligations table.

Request for Comment

22. Should we amend Item 303(a)(2), as proposed? Would the proposed amendments continue to allow management flexibility to provide a meaningful discussion of capital resources?

23. Are there other aspects of Item 303(a)(2) we should revise? If so, which aspects?

3. Results of Operations—Known Trends or Uncertainties (Item 303(a)(3)(ii))

Item 303(a)(3)(ii) 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.^[135] 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.^[136]

We propose to amend Item 303(a)(3)(ii) ^[137] 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 would conform the language in this paragraph to other Item 303 disclosure requirements for known trends,^[138] and align Item 303(a)(3)(ii) with the Commission's guidance on forward-looking disclosure.^[139]

Request for Comment

24. Should we amend Item 303(a)(3)(ii) to provide that registrants must disclose events reasonably likely to cause a material change in the relationship between costs and revenue, as proposed? Are there other areas in Item 303 where we should provide a similar requirement?

4. Results of Operations—Net Sales and Revenues (Item 303(a)(3)(iii))

Item 303(a)(3)(iii) specifies that, to the extent financial statements disclose material increases in net sales or revenues, a registrant must provide a narrative discussion of the extent to which such increases are attributable to increases in prices, or to increases in the volume or amount of goods or services being sold, or to the introduction of new products or services.^[140] The Commission previously clarified that a results of operations discussion should describe not only increases but also decreases in net sales or revenues.^[141] Accordingly, we propose to amend Item 303(a)(3)(iii) to codify this guidance and clarify the requirement by tying the required disclosure to “material changes” in net sales or revenues, rather than solely to “material increases” in these line items.

Request for Comment

25. Should we revise Item 303(a)(3)(iii), as proposed?

26. Are there reasons other than changes in prices, or changes in volume or amount of goods or services being sold, or the introduction of new products or services that can contribute to changes in revenue or net sales, or other line items? If so, what are they? Would enumerating other reasons aid registrants in determining what information may be necessary to understand material changes in line items, or would this result in a de facto prescriptive or minimum disclosure standard?

5. Results of Operations—Inflation and Price Changes (Item 303(a)(3)(iv), and Instructions 8 and 9 to Item 303(a))

Item 303(a)(3)(iv) ^[142] generally requires registrants, for the three most recent fiscal years, or for those fiscal years in which the registrant has been engaged in business, whichever period is shortest, to discuss the impact of inflation and price changes on their net sales, revenue, and income from continuing operations. Instruction 8 to Item 303(a) clarifies that a registrant must provide a discussion of the effects of inflation and other changes in prices only to the extent it is material. The instruction further states that the discussion may be made in whatever manner appears appropriate under the circumstances and that no specific numerical financial data is required, except as required by Rule 3-20(c) of Regulation S-X,^[143] which applies to FPIs. Instruction 9 to Item 303(a) states that registrants that elect to disclose supplementary information on the effects of changing prices may combine such disclosures with the Item 303(a) discussion and analysis or provide it separately (with an appropriate cross-reference).^[144]

The precursors to Item 303(a)(3)(iv) and Instructions 8 and 9 were adopted in 1980,^[145] during a period of rapid domestic inflation.^[146] At that time, the Commission was concerned with the adequacy of disclosures about the effect of inflation and changing prices on registrants.^[147] Several years later, the Commission amended the instructions to, among other things, clarify that disclosure of inflation is only required if material.^[148]

Although Instruction 8 to Item 303(a) specifies that a discussion of inflation and other changes in prices is required only when such matters are considered material, we believe that the reference to inflation and changing prices may give undue attention to the topic, even when such information is not necessary to an understanding of a registrant's financial condition or results of operations. In order to encourage registrants to focus their MD&A on material information that is tailored to their respective facts and circumstances, we propose to eliminate Item 303(a)(3)(iv) and current Instruction 8 and Instruction 9 to Item 303(a).

We do not believe that these proposed changes would result in a loss of material information. Despite these proposed deletions, registrants would still be expected to discuss the impact of inflation or changing prices if they are part of a known 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.^[149] The Commission has also specifically encouraged registrants to consider disclosure of economic or industry-wide factors where relevant.^[150]

In addition, the proposed amendments to current Item 303(a)(3)(iii) ^[151] would require registrants to provide the reasons underlying material changes from period-to-period in one or more line items in the statement of comprehensive income.^[152] Similarly, our proposed amendment to Instruction 4 to Item 303(a) would require that, where the financial statements reveal material changes in one or more line items, registrants would be required to disclose the underlying reasons for material changes in quantitative and qualitative terms. If there are material changes from inflation or changing prices, registrants would be required to discuss those reasons under both current Item 303 and amended Item 303, as proposed.

Request for Comment

27. Should we eliminate the references to inflation disclosure by eliminating Item 303(a)(3)(iv) and Instructions 8 and 9 to Item 303(a), as proposed? Would there be a loss of material information if we eliminate these provisions?

6. Off-Balance Sheet Arrangements (Item 303(a)(4))

Item 303(a)(4)^[153] requires, in a separately-captioned section, a discussion of a registrant's off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on a registrant's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors.^[154] Generally, Item 303(a)(4)(ii) defines off-balance sheet arrangements as certain guarantees, retained or contingent interests in assets transferred to an unconsolidated entity, obligations under certain derivative instruments,^[155] and variable interests in any unconsolidated entity. To the extent necessary to an understanding of such arrangements and effect, registrants must disclose the following items and such other information that the registrant believes is necessary for such an understanding:

• The nature and business purpose of such off-balance sheet arrangements; ^[156]

• The importance to the registrant of such off-balance sheet arrangements in respect of its liquidity, capital resources, market risk support, credit risk support, or other benefits; ^[157]

• The amounts of revenues, expenses, and cash flows arising from such arrangements; the nature and amounts of any interests retained, securities issued, and other indebtedness incurred in connection with such arrangements; and the nature and amounts of any other obligations or liabilities (including contingent obligations or liabilities) of the registrant arising from such arrangements that are or are reasonably likely to become material and the triggering events or circumstances that could cause them to arise; ^[158] and

• Any known event, demand, commitment, trend, or uncertainty that will result in or is reasonably likely to result in the termination, or material reduction in availability, of a registrant's off-balance sheet arrangements that provide material benefits, and the course of action that the registrant has taken or proposes to take in response to any such circumstances.^[159]

In 2002, the Commission issued a statement that the quality of disclosure of off-balance sheet arrangements in MD&A should be improved.^[160] The Commission also noted that off-balance sheet arrangements often are integral to both liquidity and capital resources and that registrants should “consider all of these items together, as well as individually,” when drafting MD&A disclosure.^[161] The Commission further noted that off-balance sheet arrangements and transactions with unconsolidated, limited purpose entities should be discussed pursuant to Item 303(a) when they are “reasonably likely to affect materially liquidity or the availability of or requirements for capital resources.” ^[162]

The 2002 Commission Statement was consistent with Commission rules and guidance at the time. For example, Item 303(a)(2)(ii) specifically requires registrants to disclose off-balance sheet financing arrangements in their discussion of capital resources.^[163] Similarly, the 1989 MD&A Interpretive Release indicated that a registrant's discussion of long-term liquidity and long-term capital resources must address demands or commitments, including any off-balance sheet items.^[164]

Several months after the 2002 Commission Statement, the Sarbanes-Oxley Act ^[165] was enacted and added Section 13(j) to the Exchange Act, which required the Commission to adopt rules providing that each annual and quarterly financial report required to be filed with the Commission disclose all material off-balance sheet arrangements.^[166] To implement Section 13(j), in 2003 the Commission adopted specific disclosure requirements for off-balance sheet arrangements in current Item 303(a)(4).^[167] When adopting Item 303(a)(4), the Commission reiterated that, while at that time only one item in Item 303 specifically identified off-balance sheet arrangements,^[168] other requirements “clearly require[d] disclosure of off-balance sheet arrangements if necessary to an understanding of a registrant's financial condition, changes in financial condition or results of operations.” ^[169] The 2003 amendments supplemented and clarified the disclosures that registrants must make about off-balance sheet arrangements and required registrants to provide those disclosures in a separately designated section of MD&A.^[170]

In the release proposing Item 303(a)(4), the Commission recognized that parts of the proposed off-balance sheet disclosure requirements might overlap with disclosure presented in the footnotes to the financial statements.^[171] The Commission stated, however, that the proposed rules were designed to provide more comprehensive information and analysis in MD&A than the disclosure that U.S. GAAP required in footnotes to financial statements.^[172]

Since the adoption of Item 303(a)(4), the FASB has issued additional requirements that have caused U.S. GAAP to further overlap with the item.^[173] For example, U.S. GAAP now requires disclosure in the notes to the financial statements of the nature and amount of a guarantee,^[174] retained or contingent interests in assets transferred to unconsolidated entities,^[175] pertinent information of derivative instruments that are classified as stockholders' equity under U.S. GAAP,^[176] and obligations under variable interests in unconsolidated entities.^[177] In the Commission staff's experience, this overlap often leads to registrants providing cross-references to the relevant notes to their financial statements or providing disclosure that is duplicative of information in the notes in response to Item 303(a)(4). Nevertheless, while many of the requirements in Item 303(a)(4) overlap with U.S. GAAP, some of the requirements related to the location, presentation, and nature of the disclosure are not the same. Additionally, Item 303(a)(4) disclosure is not audited. Below we discuss these differences in greater detail.

Location of Disclosure. Item 303(a)(4)(i) specifies that off-balance sheet arrangements should be discussed in a separately-captioned section. The instructions to Item 303(a)(4) permit that discussion to cross-reference information in the footnotes to the financial statements, rather than repeat it, provided that the MD&A disclosure integrates the substance of the footnotes in a manner designed to inform readers of the significance of the information that is cross-referenced.^[178] By contrast, U.S. GAAP does not prescribe the location of these disclosures, which may be dispersed throughout the notes to the financial statements. However, the submission of this information in interactive data format, which is required in periodic reports on Forms 10-K, 10-Q, 20-F, 40-F and reports on Forms 8-K and 6-K that contain revised or updated financial statements, allows investors to isolate disclosures about off-balance sheet arrangements even when it is dispersed throughout the notes to the financial statements.

Presentation of Disclosure. Item 303(a)(4) requires disclosure for the most recent period and a discussion of changes from the previous year where necessary to an understanding of the disclosure.^[179] U.S. GAAP does not require discussion of changes from the previous year.

Nature of Disclosures. While Item 303(a)(4) and U.S. GAAP both require disclosure of the nature and amounts associated with off-balance sheet arrangements, Item 303(a)(4)(i)(A) requires additional disclosure about the business purpose of the off-balance sheet arrangement and the importance of the off-balance sheet arrangement to the registrant's liquidity and capital resources. Item 303(a)(4) also requires disclosure of any known event, demand, commitment, trend, or uncertainty that will result in or is reasonably likely to result in the termination or material reduction in the availability of material off-balance sheet arrangements to the registrant and the course of action the registrant has taken or proposes to take to address such circumstances. U.S. GAAP does not require this disclosure.

In the Concept Release, the Commission solicited comment on the importance of disclosure elicited by Item 303(a)(4) and whether and how we should amend the requirements. Some commenters supported retaining the requirements.^[180] One of these commenters stated that without this disclosure requirement, “a registrant could create significant off-balance sheet liabilities that have the potential to impair its financial condition without investors knowing of it.” ^[181] Another commenter stated that off-balance sheet arrangements disclosure requirements should be retained and expanded, and stated that it was comfortable with duplications between the financial statements and MD&A disclosures.^[182] This commenter indicated that an executive overview analyzing the risks associated with off-balance sheet arrangements would be beneficial.

Several commenters encouraged the Commission to eliminate or amend Item 303(a)(4), stating that the requirements substantially overlap with U.S. GAAP.^[183] Some commenters suggested that the Commission apply the principles-based disclosure framework in MD&A to off-balance sheet arrangements.^[184] Other commenters recommended that the Commission make clear that no disclosure is required related to off-balance sheet arrangements that are not material.^[185]

In light of the updates made to U.S. GAAP that result in substantial overlap between U.S. GAAP and Item 303(a)(4) of Regulation S-K, and consistent with our other proposed amendments intended to promote the principles-based nature of MD&A, we believe that the current more prescriptive off-balance sheet arrangement definition and related disclosure requirement in Item 303(a)(4) should be replaced with a principles-based instruction. Specifically, we propose to replace current Item 303(a)(4) with a new Instruction to Item 303(b) that would require registrants to discuss commitments or obligations, including contingent obligations, arising from arrangements with unconsolidated entities or persons that have, or are reasonably likely to have, a material current or future effect on a registrant's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements, or capital resources.^[186] This proposed instruction would build on the current requirement in Item 303(a)(2) that specifically requires consideration of off-balance sheet financing arrangements as part of the capital resources discussion.^[187]

The proposed amendment should result in greater integration of material off-balance sheet arrangements disclosure within the context of broader MD&A disclosures as those arrangements enumerated in Item 303(a)(4) may be discussed more cohesively with other off-balance sheet arrangements that are not enumerated in Item 303(a)(4). We believe this could result in more effective discussion of the impact of these arrangements. Commission staff and commenters have observed that the current requirements often result in boilerplate disclosure or a duplication of disclosures in the financial statements. Further, Item 303(a)(4)'s requirement for disclosure in a separately captioned section often results in a disjointed presentation of off-balance sheet arrangements that may lack the necessary context of how these obligations should be considered in light of a registrant's overall financial condition. We believe that the proposed amendment would result in disclosure that would be more useful to understanding the impact of off-balance sheet arrangements, and may help avoid boilerplate or disjointed disclosure.

We acknowledge that, as discussed above, certain Item 303(a)(4) requirements related to the location, presentation, and nature of the disclosure do not overlap with U.S. GAAP. However, we believe that proposed Instruction 8 would mitigate any potential loss of information by requiring a discussion of material matters of liquidity, capital resources, and financial condition as they relate to off-balance sheet arrangements. Below, we seek comment on what material information, if any, may be lost if we adopt the proposed amendments.

Unlike Item 303(a)(4), the proposed instruction would not define “off-balance sheet arrangements.” Rather, it states that discussion of commitments or obligations, including contingent obligations, of the registrant arising from arrangements with unconsolidated entities or persons that have or are reasonably likely to have a material current or future effect on a registrant's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements, or capital resources shall be provided even when the arrangement results in no obligations being reported in the registrant's consolidated balance sheets. The instruction provides examples of such arrangements that are substantially the same as those included in the current definition of off-balance sheet arrangements in Item 303(a)(4), including: Guarantees; retained or contingent interests in assets transferred; contractual arrangements that support the credit, liquidity, or market risk for assets transferred; obligations that arise or could arise from variable interests held in an unconsolidated entity; or obligations related to derivative instruments that are both indexed to and classified in a registrant's own equity under U. S. GAAP and are therefore not presented as liabilities on a registrant's balance sheet.

While the examples in the proposed instruction are substantially the same as those in the current off-balance sheet arrangements definition in Item 303(a)(4), the examples do not include references to specific paragraphs in U.S. GAAP. Despite the elimination of these cross-references, the amendments are not intended to broaden the types of arrangements for which MD&A disclosure would be required. In this regard, under existing MD&A requirements, registrants are required to discuss in MD&A any known demands, commitments, events or uncertainties that will result in or that are reasonably likely to result in the registrant's liquidity decreasing in any material way, even if the known demand did not meet the definition of an off-balance sheet arrangement in Item 303(a)(4). Under the proposed amendments, those same arrangements would continue to be required to be discussed in MD&A. For the same reason, the proposed amendments also would not narrow the scope of what would be required to be disclosed in MD&A. The primary difference from what is currently required, and would be required under the proposed amendments, is that the discussion would no longer occur in a separately-captioned section; but rather, it would be made in the context of a more holistic, principles-based analysis.

We considered whether our proposal is consistent with Section 13(j) of the Exchange Act, as added by Section 401(a) of the Sarbanes-Oxley Act, which required the Commission to adopt rules providing that each annual and quarterly financial report required to be filed with the Commission shall disclose all material off-balance sheet arrangements. We believe that Section 13(j) remains satisfied because, under proposed Instruction 8 to Item 303(b), disclosure of all material off-balance sheet arrangements would continue to be required in annual and quarterly reports. As discussed above, although a discussion of off-balance sheet arrangements would no longer be required to be provided in a separately captioned section, registrants would still be required to discuss such arrangements in the broader context of their MD&A disclosures.

We also propose to amend Items 2.03 and 2.04 of Form 8-K to include the definition of “off-balance sheet arrangements” that is currently in Item 303(a)(4). Currently, Form 8-K defines off-balance sheet arrangements by cross reference to Item 303(a)(4)(ii).^[188] This proposed amendment would not result in any changes in reporting obligations under Item 2.03 and Item 2.04 of Form 8-K.^[189]

Request for Comment

28. Should we amend the off-balance sheet arrangements disclosure requirement by replacing Item 303(a)(4) with Instruction 8 to Item 303(b), as proposed? Is the proposed instruction a sufficient replacement for the current requirement for a separately-captioned presentation of off-balance sheet arrangements?

29. Are there alternative approaches we should consider to address the potential for boilerplate or duplicative disclosure?

30. Would the proposed amendments result in the loss of material information to investors that would not be disclosed elsewhere? If so, what information would be lost? Are the proposed amendments sufficiently tailored to avoid discussion of immaterial off-balance sheet arrangements?

31. Would the proposed amendments result in more meaningful MD&A disclosures about off-balance sheet arrangements? Are the proposed amendments likely to reduce boilerplate or duplicative disclosure?

32. Should we amend Items 2.03 and 2.04 of Form 8-K to incorporate the definition of “off-balance sheet arrangements” that is currently in Item 303(a)(4), as proposed? Would the proposed amendments create any confusion as to when a reporting obligation under Item 2.03 or Item 2.04 of Form 8-K would be triggered?

7. Contractual Obligations Table (Item 303(a)(5))

Under Item 303(a)(5),^[190] registrants other than SRCs must disclose in tabular format their known contractual obligations. The item requires a registrant to arrange its table to disclose contracts by type of obligations,^[191] the overall payments due, and by four prescribed periods.^[192] A registrant may disaggregate the categories of obligations, but it must disclose all obligations falling within the prescribed five categories and for the prescribed time periods. A registrant may provide footnotes to the table to the extent such information is necessary to understand the disclosures in the contractual obligations table. There is no materiality threshold for this item, meaning registrants must disclose all contractual obligations falling within the prescribed four categories.

When the Commission implemented this disclosure requirement, its purpose was to ensure that aggregated information about contractual obligations was presented in one place.^[193] This was intended to aid investors in determining the effect such obligations would have in the context of off-balance sheet arrangements.^[194] Commission guidance that followed the implementation of this requirement encouraged registrants to include narratives to the table to provide more context and analysis for the numbers presented.^[195]

In the Concept Release, the Commission solicited comment on the meaningfulness of disclosure elicited by Item 303(a)(5). Several commenters recommended retaining and enhancing this item requirement,^[196] with two of these commenters supporting an additional requirement to include pension obligations.^[197] Another commenter recommended enhancing this disclosure by requiring XBRL tagging and disclosure of single, discrete years (as opposed to grouped years).^[198] Some of these commenters recommended requiring, or at least encouraging, registrants to provide a narrative to the contractual obligations table.^[199]

Many commenters, however, recommended that we simplify or eliminate Item 303(a)(5).^[200] Some commenters encouraged the Commission to consider whether the contractual obligations table is necessary given the overlap with the disclosure requirements of U.S. GAAP.^[201] One commenter also noted that “to the degree that elimination of duplicative topics is unavoidable, registrants should be able to cross-reference within a filing.” ^[202] Another commenter broadly supported the idea of making MD&A contractual obligations disclosure more principles-based “to highlight material issues regarding [a registrant's] liquidity” and allowing the relevant factual information to be provided in the financial statements.^[203] One commenter questioned whether the contractual obligations table, as currently structured, provides a complete picture of a registrant's obligations and liquidity concerns.^[204]

Several commenters recommended the Commission eliminate Item 303(a)(5), stating that the disclosure requirement is largely redundant with what is required in the financial statements.^[205] One of these commenters indicated that the Commission should eliminate disclosure requirements that are redundant with U.S. GAAP or IFRS, as applicable.^[206] This commenter stated that “[i]dentical, or even similar disclosures, to GAAP appear unnecessary considering that accounting standards undergo a high level of scrutiny in the standards-setting process and are subjected to ongoing FASB monitoring for needed revisions.” ^[207] Another commenter stated that the information provided in response to Item 303(a)(5) is largely the same as that provided in a registrant's financial statements and questioned its utility.^[208] The commenter went on to state that the information in the Item 303(a)(5) contractual obligations table did not provide insight as to whether a registrant could pay the obligations as they became due.

In the FAST Act Report, Commission staff recommended eliminating the contractual obligations table while enhancing the liquidity discussion requirements.^[209] Under this recommendation, registrants would no longer be required to present contractual obligations in a table, but registrants would have to provide a hyperlink to the relevant information in the financial statements. One commenter on the FAST Act Report stated that eliminating the contractual obligations table would be a “step backwards.” ^[210] The commenter wrote that “[t]he table as it exists is a user-friendly, central location for the complete display of all a firm's future cash obligations.”

Although the Commission did not propose to eliminate Item 303(a)(5) in the FAST Act Proposing Release,^[211] we now propose to eliminate Item 303(a)(5), consistent with our objective to promote the principles-based nature of MD&A and streamline disclosures by reducing redundancy.^[212] We do not believe that eliminating the requirement would result in a loss of material information to investors given the overlap with information required in the financial statements and our proposed expansion of the capital resources requirement, discussed above in Section II.C.2.

As many commenters pointed out,^[213] much of the information presented in response to this requirement overlaps with U.S. GAAP and is therefore included in the notes to the financial statements.^[214] As commenters also observed, the current table does not provide insight into the registrant's ability to pay its obligations as they become due ^[215] and may not provide a complete picture of the registrant's expected uses of cash.^[216] Our proposals to enhance the liquidity and capital resources discussion are intended to address some of these commenter concerns. We recognize that some of the information in the contractual obligations table is not specifically called for under U.S. GAAP.^[217] However, under our capital resources proposals, described above in Section II.C.2, registrants would be required to discuss material cash requirements, which would include material contractual obligations.

Request for Comment

33. Should we eliminate the contractual obligations disclosure requirement, as proposed?

34. Would investors be deprived of material information under the proposal?

35. Is the disclosure of information related to contractual obligations in the notes to the financial statements an adequate substitute for its separate tabular presentation in Item 303(a)(5)? Would there be any costs or challenges to investors of compiling information required in Item 303(a)(5) from other sources and, if so, what would the costs or challenges be? Do current XBRL-tagging requirements facilitate compilation and comparison of such information?

36. How do market participants use the “payments due by period” information in the contractual obligations table and is the disclosure material to an investor's investment decision? If we eliminate Item 303(a)(5), should we require registrants to disclose information regarding the time periods in which material contractual obligations will become due?

37. If we eliminate the required table of contractual obligations, as proposed, what information about contractual obligations are registrants likely to provide in their MD&A?

38. Should we retain the contractual obligations disclosure requirement in a modified form (e.g., with a materiality threshold, but not require a tabular presentation, etc.)? If so, what modifications should we make to the requirement?

39. If we retain the current contractual obligations disclosure requirement, should we revise it to enhance the information provided to investors (e.g., should we expressly require a narrative to the contractual obligations table)?

8. Critical Accounting Estimates

While not specified in Item 303, the Commission in prior guidance has stated that, while preparing MD&A, registrants should consider whether accounting estimates and judgments could materially affect reported financial information.

Specifically, in 2001, the Commission reminded registrants that, under the existing MD&A disclosure requirements, a registrant should address material implications of uncertainties associated with the methods, assumptions, and estimates underlying the registrant's critical accounting measurements.^[218] The Commission also encouraged companies to explain the effects of the critical accounting policies applied and the judgments made in their application.^[219] In 2002, the Commission proposed rules to require disclosure of critical accounting estimates, but it never adopted this proposal.^[220]

In the 2003 MD&A Interpretive Release, the Commission addressed critical accounting estimates.^[221] The Commission stated that when preparing MD&A disclosure, companies should consider whether they have made accounting estimates or assumptions where the nature of the estimates or assumptions is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change; and the impact of the estimates and assumptions on financial condition or operating performance is material.^[222] This guidance further stated that if critical accounting estimates or assumptions are identified, a registrant should analyze, to the extent material, factors such as how it arrived at the estimate, how accurate the estimate/assumption has been in the past, how much the estimate/assumption has changed in the past, and whether the estimate/assumption is reasonably likely to change in the future. This guidance also stated that a registrant should analyze its specific sensitivity to change based on other outcomes that are reasonably likely to occur. Any disclosure should supplement, not duplicate, the description of accounting policies that are already disclosed in the notes to the financial statements, and provide greater insight into the quality and variability of information regarding financial condition and operating performance.^[223]

U.S. GAAP does not require a similar disclosure of estimates and assumptions in the notes to financial statements except in a limited number of circumstances.^[224] Instead, U.S. GAAP requires disclosure of the accounting principles followed and the methods of applying those principles that materially affect the determination of financial position, cash flows, or results of operations.^[225] Unlike U.S. GAAP, any discussion in MD&A should present a registrant's analysis of the uncertainties involved in applying the principles.^[226] IFRS requires disclosures regarding sources of estimation uncertainty and judgments made in the process of applying accounting policies that have the most significant effect on the amounts recognized in the financial statements.^[227]

In the Concept Release, the Commission noted that, despite its guidance, many registrants repeat the discussion of significant accounting policies from the notes to the financial statements in MD&A and provide limited additional discussion of the critical accounting estimates.^[228] The Commission solicited comment on how to improve the discussion of critical accounting estimates in MD&A.

The Commission received a range of comments on critical accounting estimates. Many commenters acknowledged that registrants typically provide disclosure that is duplicative of their accounting policies or does not otherwise provide meaningful analysis of the estimates and assumptions involved.^[229] Several commenters recommended revising Item 303 to include a critical accounting estimate requirement,^[230] with some of these commenters suggesting this may improve the resulting disclosure.^[231] While some of the commenters that recommended revising Item 303 supported a prescriptive rule for critical accounting estimates,^[232] others suggested revising the item to provide a principles-based framework for critical accounting estimates.^[233] One commenter stated that a critical accounting estimate requirement in Item 303 should specifically state that the disclosure is meant to supplement, and not duplicate, the description of accounting policies in the footnotes to the financial statements.^[234] This same commenter also recommended that Item 303 require a discussion about the judgments and assumptions that management must make in order to prepare its financial statements and that have the most significant impact on such financial statements.

Some commenters suggested that, if Item 303 is revised to address critical accounting estimates specifically, the Commission should not codify the Commission's guidance on disclosure of critical accounting estimates and related disclosure requirements as set forth in the 2003 MD&A Interpretive Release.^[235] One commenter suggested that disclosure of critical accounting estimates should be required when: (i) It is at least reasonably possible that the estimate of the effect on the financial statements of a condition, situation, or set of circumstances that existed at the date of the financial statements will change in the near term due to one or more future confirming events; and (ii) the effect of the change would be material to the financial statements.^[236] Two commenters stated that the disclosures should describe the process employed in creating the estimate.^[237]

Other commenters suggested that the Commission coordinate with the FASB to enhance U.S. GAAP so that it requires these disclosures.^[238] Yet others suggested that the Commission eliminate guidance related to critical accounting estimates because they believe the disclosures are not useful and the dynamic nature of uncertainties makes it overly challenging to quantify the reasonably likely range of outcomes with a solid basis for investor reliance.^[239] A few commenters stated that current Commission guidance is sufficient but recommended that the Commission provide additional illustrative guidance.^[240] Two of these commenters opposed revising Item 303 to require disclosure of critical accounting estimates and opposed adopting a “strict definition” of critical accounting estimates; these commenters stated that any clarification in this area should be done through a revised interpretive release.^[241]

We propose to amend Item 303(a) ^[242] to explicitly require disclosure of critical accounting estimates.^[243] We are persuaded by commenters who stated that a requirement in Item 303 would facilitate compliance and may improve the resulting disclosure.^[244] As stated by many commenters, registrants often repeat the information in the financial statement footnotes about significant accounting policies. By proposing to codify this requirement, our intent is to eliminate disclosure that duplicates the financial statement discussion of significant accounting policies and, instead, promote enhanced analysis of measurement uncertainties.

Our proposed amendments are also intended to clarify for registrants the required disclosures related to critical accounting estimates. To this end, our proposals define a critical accounting estimate as an estimate made in accordance with generally accepted accounting principles that involves a significant level of estimation uncertainty and has had or is reasonably likely to have a material impact on the registrant's financial condition or results of operations. By focusing the definition on estimation uncertainties, we intend to avoid any unnecessary repetition of significant accounting policy footnotes. For each critical accounting estimate, the proposed amendments would require registrants to disclose, to the extent material, why the estimate is subject to uncertainty, how much each estimate has changed during the reporting period, the sensitivity of the reported amounts to the material methods, assumptions, and estimates underlying the estimate's calculation.^[245]

We believe the proposed amendments would clarify for registrants the disclosures required to address any critical accounting estimates, help avoid boilerplate or duplicative disclosures, and provide investors with material information regarding critical accounting estimates. We also believe that the disclosure elicited by the proposed amendments would facilitate further understanding of an analysis of amounts reported in the financial statements by providing greater insight on the uncertainties involved in creating and applying an accounting policy and how significant accounting policies of registrants faced with similar facts and circumstances may differ.

We recognize that some of the disclosure that would be required under our proposals may be provided already under U.S. GAAP ^[246] or IFRS.^[247] To discourage duplicative disclosures, we are proposing, as suggested by one commenter, to also include an instruction specifying that the disclosure of critical accounting estimates shall supplement, but not duplicate, the description of accounting policies or other disclosures in the notes to the financial statements.^[248]

We considered the potential for overlap with auditor communications of critical audit matters.^[249] A critical audit matter is defined as “any matter arising from the audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) Relates to accounts or disclosures that are material to the financial statements; and (2) involved especially challenging, subjective, or complex auditor judgment.” ^[250] Beginning with audits of fiscal years ending on or after June 30, 2019,^[251] audit reports are required, among other things, to include a description of “the principal considerations that led the auditor to determine that the matter is a critical audit matter.” ^[252] The communications auditors are expected to provide on critical audit matters in an audit report have a different objective than disclosures related to critical accounting estimates. In this regard, critical audit matters provide insight into matters that are especially challenging, subjective, and complex to audit from the perspective of the auditor. On the other hand, critical accounting estimates disclosure should provide management's insights into estimation uncertainties that have had or are reasonably likely to have a material impact on reported financial statements. A critical accounting estimate may not be a critical audit matter because it may not involve especially challenging, subjective, or complex auditor judgment, but it would still require analysis in MD&A. Likewise, a critical audit matter that would require reporting in the audit report may not necessarily be a critical accounting estimate, as proposed, because it may not involve estimation uncertainty that can materially affect reported amounts.^[253] For these reasons, we do not believe that proposed Item 303(a)(4) would necessarily result in duplicative disclosure.

Request for Comment

40. Should we amend Item 303 to require disclosure of critical accounting estimates, as proposed?

41. Is the proposed definition of critical accounting estimates sufficiently clear? Are there alternative definitions that we should consider?

42. Should any registrants, such as SRCs, EGCs, or IPO issuers, be exempted from this proposed requirement? If so, which registrants, and should there be a time limitation on such an accommodation?

43. Would the proposed amendments result in disclosures that are duplicative of U.S. GAAP or IFRS, as applicable? If so, how? Are there alternatives we should consider to encourage registrants to provide disclosures that will supplement, rather than duplicate, disclosures that appear in the financial statements?

44. Would the proposed amendments provide clarity to registrants on disclosures regarding critical accounting estimates? Would the proposed amendments provide investors with material information regarding critical accounting estimates?

45. Some commenters suggested we issue a revised interpretive release addressing critical accounting estimates ^[254] and others suggested we provide illustrative examples to facilitate this disclosure.^[255] Instead of amending Item 303, should we issue revised guidance addressing critical accounting estimates? Should we provide illustrative examples?

46. The Commission has previously encouraged registrants to include, in their MD&A, explanations of the judgments and uncertainties affecting application of their accounting policies.^[256] For example, critical accounting judgments may include whether financial assets are held-to-maturity investments, whether an instrument is classified as debt or equity, or judgments made about the appropriate scope for a transaction. Should the Commission be more prescriptive in this area and, for example, adopt a requirement for registrants to disclose critical accounting judgments? Would such a requirement elicit material information that would not otherwise be provided, including as a result of the proposed critical accounting estimates requirement? As an alternative to a new requirement, should we refer the matter to the FASB for potential incorporation into U.S. GAAP?

9. Interim Period Discussion (Item 303(b))

Item 303(b) requires registrants to provide MD&A disclosure for interim periods that enables market participants to assess material changes in financial condition and results of operations between certain specified periods.^[257] Item 303(b)(1) requires registrants to discuss any material change in financial condition from the end of the preceding fiscal year to the date of the most recent interim balance sheet.^[258] Item 303(b)(2) requires registrants to discuss any material changes in their results of operations for the most recent fiscal year-to-date period presented in their income statement, along with a similar discussion of the corresponding year-to-date period of the preceding fiscal year. If a registrant is required or elects to provide an income statement for the most recent fiscal quarter, the discussion must also cover material changes with respect to that fiscal quarter and the corresponding fiscal quarter in the preceding fiscal year.^[259] Item 303(b)(2) also states that registrants subject to Rule 3-03(b) of Regulation S-X ^[260] providing statements of comprehensive income for the twelve-month period ended as of the date of the most recent interim balance sheet must discuss material changes of that twelve-month period as compared to the preceding fiscal year rather than the preceding period.

The Commission adopted the precursor to current Item 303(b) as part of its effort to integrate and simplify its disclosure system.^[261] The Commission stated at the time that the amendments it was adopting formed “an integral part of the Commission's program to integrate the disclosure requirements of the Exchange Act with those of the Securities Act, and to encourage and facilitate the integration of corporate reporting on formal Commission filings with informal corporate communications with shareholders.” ^[262] The Commission also noted that the amendments were complements to the annual report amendments adopted around the same time.^[263]

The Commission recently solicited comment on the current quarterly reporting process and how the Commission can reduce the administrative burdens on reporting companies associated with this process while enhancing the investor protections associated with periodic reporting under the Exchange Act.^[264] The Commission also sought input on the benefits, costs, and burdens of the current quarterly reporting system, and possible approaches to simplifying the process through which investors access, process, and evaluate information.^[265]

Multiple commenters responding to the Request for Comment recommended that the Commission consider allowing more flexibility in interim period MD&A, or otherwise streamline or eliminate certain discussion requirements.^[266] One commenter recommended that the Commission evaluate whether registrants should only be required to discuss year-to-date results of operations in their MD&A (and not be required to provide a separate discussion of the results of operations of individual quarters).^[267] Other commenters, however, recommended that the Commission assess whether registrants should be required to discuss year-to-date results and condition (i.e., evaluate whether registrants should be permitted to exclude year-to-date discussions).^[268] One of these commenters recommended that the Commission permit flexibility in how registrants present their MD&A by allowing registrants to choose the presentation that is most consistent with how they manage their respective businesses (e.g., quarter over quarter vs. year over year).^[269] Another commenter recommended the Commission consider allowing management to exercise judgment in omitting certain year-to-date and/or quarterly information from interim period MD&A if the omitted information is consistent with prior trends or repeats information provided elsewhere in a quarterly report.^[270]

Other commenters noted that Form 10-Q's prescribed disclosures ensure uniformity among registrants.^[271] One of these commenters stated that the structured format of quarterly reports allows certain market participants to analyze results and to produce tools that “aid investors to make more informed investment decisions.” ^[272] Another commenter stated that there should be some element of uniformity in required disclosures so that there is consistency among registrants.^[273]

Several commenters encouraged the Commission to conduct further outreach with investors and companies.^[274] On July 18, 2019, the Commission held a roundtable discussion on whether the quarterly reporting system should be modified to address the impact of short-termism on our capital markets.^[275] During the roundtable discussion, multiple panelists discussed the need for streamlined MD&A disclosures, including interim period MD&A.^[276] One panelist suggested that the Commission allow registrants to make MD&A comparisons to the preceding interim period or to discuss only year-to-date changes.^[277] Another panelist noted that “companies will want to talk about discrete quarters” because “that's how they do their earnings releases.” ^[278]

We propose to amend Item 303(b) (to be renumbered as proposed Item 303(c)) to allow for flexibility in comparisons of interim periods and to simplify the item.^[279] Specifically, we propose to permit registrants to compare their most recently completed quarter to either the corresponding quarter of the prior year (as is currently required) or to the immediately preceding quarter. Under the proposal, if a registrant elects to discuss changes from the immediately preceding sequential quarter, the registrant must provide summary financial information that is the subject of the discussion for that quarter or identify the prior EDGAR filing that presents such information so that a reader may have ready access to the prior quarter financial information being discussed. In addition, under the proposed amendment, if a registrant changes the comparison from the prior interim period comparison, the registrant would be required to explain the reason for the change and present both comparisons in the filing where the change is announced. For example, if a registrant in its third quarter Form 10-Q decides to compare its results to the preceding quarter after the registrant had compared such quarter to the corresponding quarter of the previous year in its earlier report, the registrant would be required to present both comparisons in that third quarter Form 10-Q and explain the reasons for the change in comparison.

We believe that these changes would allow registrants additional flexibility to provide an analysis that they believe is most relevant to an understanding of the frequency and amplitude of past business cycles while also ensuring that investors have appropriate information to assess the comparisons being presented. We recognize that not all businesses are seasonal and a comparison to the corresponding quarter of the preceding year may not be as meaningful as a comparison to the preceding quarter. We also believe that this proposal would respond to commenters' concern about the need for flexibility in MD&A.^[280] These changes are intended to provide market participants with the most relevant information about a registrant while reducing comparisons that may obscure the most material trends. We believe that requiring registrants to provide both comparisons and explain the reasons for a change in comparison from prior periods would ensure that investors and other market participants have sufficient information to understand and adjust to any period over period change.

We are also proposing amendments to simplify Item 303(b) (to be renumbered as proposed Item 303(c)) that would:

• Eliminate the text that states that registrants need not provide a discussion of the impact of inflation and changing prices, consistent with the proposed amendments described above; ^[281] and

• Amend Item 303(b)(2) (proposed Item 303(c)(2)) material changes in results of operations—to break the requirements into two subsections:

○ Proposed Item 303(c)(2)(i) would continue to require registrants to discuss any material changes in their results of operations between the most recent year-to-date interim period(s) and the corresponding period(s) of the preceding fiscal year for which statements of comprehensive income are provided; and

○ Proposed Item 303(c)(ii) would, as discussed above, require registrants to compare their most recently completed quarter to either of the corresponding quarter of the prior year (as is currently required) or to the immediately preceding quarter.^[282]

We are also proposing to eliminate language requiring registrants subject to Rule 3-03(b) of Regulation S-X ^[283] that elect to provide a statement of comprehensive income for the twelve-month period ended as of the date of the most recent interim balance sheet to discuss material changes in that twelve-month period with respect to the preceding fiscal year, rather than the corresponding preceding period. We propose giving these registrants the same flexibility as other registrants to make the most meaningful comparisons in their interim period MD&A. In addition to simplifying Item 303, this change is meant to modernize the current Item 303 requirement. We have not observed any registrants in recent history that provided the statements of comprehensive income in registration statements permitted by Rule 3-03(b) of Regulation S-X. Accordingly, we do not believe the elimination of the provisions in Item 303(b) would cause any impact. We also believe that the additional flexibility we are proposing for all registrants would allow registrants subject to Rule 3-03(b) of Regulation S-X ^[284] to make the most meaningful comparisons in their MD&A.

Finally, we are proposing to delete Instructions 2, 3, 5, 6, 7, and 8 to current paragraph (b).^[285] We are proposing to eliminate Instruction 2 because we no longer believe it necessary that an instruction make explicit the presumption that readers have read or have access to the MD&A for the preceding fiscal year. We also propose to eliminate Instructions 3 and 6 because they duplicate current Instructions 4 ^[286] and 7 to Item 303(a), respectively.^[287] Instead, we propose a new Instruction 1 to proposed Item 303(c) that would cross-reference the applicable instructions in proposed Item 303(b). We propose to eliminate Instruction 7 to Item 303(b) in light of our proposal to eliminate Item 303(a)(5), the subsection that requires disclosure of contractual obligations. We also propose to eliminate Instruction 5, which is currently reserved. Finally, we propose to move Instruction 8 to current Item 303(b) to Instruction 10 of proposed Item 303(b). The following table outlines the current and proposed structure of Item 303(b) (proposed Item 303(c)): ^[288]

Request for Comment

47. Should we amend the interim period disclosure requirements in Item 303(b), as proposed? Alternatively, in order to permit registrants flexibility to choose their presentation in the manner that is most consistent with how their business is managed, should we allow registrants to include a discussion of material changes in the results of operations with respect to either the most recent fiscal year-to-date period or the most recent fiscal quarter? Are there other approaches we should consider?

48. What would the benefits and/or drawbacks be of allowing registrants more flexibility regarding the interim period comparisons they discuss in MD&A?

49. Would the ability to compare interim period information across registrants be significantly affected by allowing flexibility for interim period comparisons, as proposed?

50. How do market participants use Item 303(b) disclosures? What are the benefits and drawbacks of the current period-to-period comparisons requirements?

51. How would our proposed amendments affect registrants subject to Rule 3-03(b) of Regulation S-X? We are not proposing to eliminate Rule 3-03(b). If adopted, would the Commission's disclosure rules and guidance be sufficiently clear about disclosure these registrants must provide? What would the consequences of these proposed changes be for market participants?

10. Safe Harbor for Forward-Looking Information (Item 303(c))

Item 303(c) ^[289] states that the safe harbors provided in Section 27A of the Securities Act and 21E of the Exchange Act (together, “statutory safe harbors”) apply to all forward-looking information provided in response to Item 303(a)(4) (off-balance sheet arrangements) and Item 303(a)(5) (contractual obligations), provided such disclosure is made by certain enumerated persons.^[290] Item 303(c) confirms application of the statutory safe harbors to Item 303(a)(4) and Item 303(a)(5), and states that all of the required disclosures under these two items are deemed to be “forward-looking statements” as that term is defined in the statutory safe harbors, except for historical facts.^[291] With respect to Item 303(a)(4), Item 303(c) further states that the “meaningful cautionary statements” element of the statutory safe harbors is satisfied if a registrant satisfies all of Item 303(a)(4) requirements.^[292]

The Commission added Item 303(c) in 2003 when it adopted Items 303(a)(4) and (5).^[293] Item 303(c) was intended to remove possible ambiguity about the application of the statutory safe harbors to these items.^[294] Since we propose to eliminate both Items 303(a)(4) and (5), we are also proposing to eliminate Item 303(c), which specifically and exclusively refers to those disclosure requirements.

Nevertheless, forward-looking information included in off-balance sheet arrangement disclosures provided in response to proposed Instruction 8 to Item 303(b), along with disclosures regarding contractual obligations, would continue to be covered by existing safe harbors. The proposed amendments are intended to be conforming changes and would not alter the availability of the regulatory safe harbors in Securities Act Rule 175 ^[295] and Exchange Act Rule 3b-6,^[296] which expressly apply to forward-looking information in MD&A disclosure.^[297] These rules establish a safe harbor for “forward-looking statements” and define such statements to include statements of “future economic performance contained in management's discussion and analysis.” ^[298] These rules were adopted with the express purpose of encouraging forward-looking information and in response to commenters' recommendations stating that the absence of a safe harbor could discourage forward-looking information.^[299]

Our proposed amendments are also not intended to alter the application of the statutory safe harbor provisions of the Private Securities Litigation Reform Act.^[300] While these provisions apply more broadly, they also protect eligible forward-looking statements ^[301] in MD&A against private legal actions that are based on allegations of a material misstatement or omission. We continue to believe that the safe harbors for eligible forward-looking statements and the safe harbor provisions of the Private Securities Litigation Reform Act have encouraged greater disclosure of forward-looking information that has benefited investors and our markets.

Request for Comment

52. Should we eliminate Item 303(c), as proposed?

53. If we eliminate Item 303(c), is it necessary or helpful to provide a specific instruction referring to the statutory safe harbors for forward-looking statements that may apply to the proposed off-balance sheet arrangement disclosures? Should we instead retain Item 303(c) and acknowledge that the statutory safe harbors would apply to all of Item 303?

11. Smaller Reporting Companies (Item 303(d))

Item 303(d) ^[302] states that an SRC may provide Item 303(a)(3)(iv) information for the most recent two fiscal years if it provides financial information on net sales and revenues and income from continuing operations for only two years. Item 303(d) also states that an SRC is not required to provide the contractual obligations chart specified in Item 303(a)(5). In light of our proposals to eliminate Item 303(a)(3)(iv) and (a)(5), we are also proposing to eliminate Item 303(d), which specifically and exclusively references these two disclosure requirements. SRCs may continue to rely on Instruction 1 to Item 303(a),^[303] which states that an SRC's discussion shall cover the two-year period required in Article 8 of Regulation S-X.

Request for Comment

54. Should we eliminate Item 303(d), as proposed?

55. Are there any proposed amendments to Item 303 where we should consider providing further accommodations to SRCs?

General Requests for Comment for Item 303

56. Are there any other changes we should consider to Item 303 to streamline, update, or modernize MD&A disclosure requirements?

57. Should we require MD&A to be structured in Inline eXtensible Business Reporting Language (“Inline XBRL”) format? ^[304] If so, should MD&A be structured using block tags, detail tags, or some combination of the two? How would investors and other market participants benefit from such a requirement, and what would be the costs and burdens to registrants? Would the costs and burdens be disproportionately high for any group of issuers?

58. Should we amend Item 9 of Form 1-A to reflect any of the proposals in this release?

D. Application to Foreign Private Issuers

We are proposing corresponding amendments that would apply to FPIs providing disclosure required by Form 20-F or Form 40-F.^[305] We are also proposing amendments to current Instruction 11 to Item 303, which specifically applies to FPIs that choose to file on domestic forms. Similar to our discussions above and for the reasons discussed in greater detail below, our proposals to these forms are intended to modernize, clarify, and streamline these disclosure requirements.

1. Form 20-F

a. Selected Financial Data (Item 3.A of Form 20-F)

Similar to Item 301, Item 3.A of Form 20-F requires FPIs to provide selected historical financial data for the most recent five financial years (or such shorter period that the company has been in operation). Also similar to Item 301, Item 3.A specifies the information that must be included in the selected financial data and provides that EGCs are not required to present selected financial data for any period prior to the earliest audited financial statements presented in connection with the registrant's initial public offering of its common equity securities. In a registration statement, periodic report, or other report filed under the Exchange Act, an EGC need not present selected financial data for any period prior to the earliest audited financial statements presented in connection with the EGC's first registration statement that became effective under the Exchange Act or the Securities Act.^[306] However, unlike Item 301, Item 3.A also permits a FPI to omit either or both of the earliest two years of data if it represents that it cannot provide the information, or cannot provide the information on a restated basis, without unreasonable effort or expense.

Given the similarities between Item 3.A and Item 301, we propose to delete Item 3.A and the related instructions. As with Item 301, trend disclosure elicited by Item 3.A typically would be discussed in disclosure provided in response to Item 5 of Form 20-F, which requires MD&A disclosure similar to Item 303. FPIs may, however, continue to include a tabular presentation of the line items discussed in the MD&A, to the extent they believe that such a presentation would be useful to an understanding of the disclosure.^[307]

Request for Comment

59. Should we eliminate Item 3.A of Form 20-F, as proposed? Would the proposed elimination of Item 3.A result in the loss of material information that is otherwise not available to investors? If so, what information would be lost, and are there alternatives we should consider that would elicit this information?

60. The Commission revised Form 20-F in 1999 to conform in large part to the international disclosure standards endorsed by the International Organization of Securities Commissions (“IOSCO”) for the non-financial statement portions of a disclosure document, which have served as the basis for the disclosure requirements in several foreign jurisdictions.^[308] One of the objectives of the IOSCO standards was to facilitate the cross-border flow of securities and capital by promoting the use of a single disclosure document that would be accepted in multiple jurisdictions. If we revise Item 3.A of Form 20-F as proposed, would such revision reduce the ability of FPIs to use a single document in multiple jurisdictions?

61. Would the proposed amendments conflict with home-country requirements in some jurisdictions if the FPI were engaging in a cross-border offering or listing? If so, please explain.

62. Unlike Item 301, Item 3.A provides an accommodation to FPIs for either or both of the earliest two years of data. Given this accommodation, should we retain this item? Does Item 3.A require disclosure that is duplicative of the financial statements?

63. Are there any unique considerations with respect to FPIs in this context?

64. Are the requirements of Item 5 of Form 20-F sufficient to provide investors with necessary disclosure of trends in a registrant's results of operations and financial condition? If we eliminate Item 3.A as proposed, should we amend Item 5 of Form 20-F to explicitly require a tabular presentation of line items discussed in the disclosure?

65. What are the costs to FPIs of providing required selected financial data?

66. How do market participants use the selected financial data disclosures provided by FPIs? Do market participants rely on any time segment of data more than others (e.g., the most recent two or three years)?

b. Operating and Financial Review and Prospects (Item 5 of Form 20-F)

The disclosure requirements for Item 5 of Form 20-F (Operating and Financial Review and Prospects) are substantively comparable to the MD&A requirements under Item 303 of Regulation S-K.^[309] To maintain a consistent approach to MD&A for domestic registrants and FPIs, our proposed amendments to Form 20-F generally conform to our proposed amendments to Item 303.

Some of our proposals would amend Item 5 of Form 20-F to incorporate portions of both current and proposed Item 303. Specifically, we are proposing to incorporate portions of current Instructions 1 and 3 to Item 303(a) that specify the purpose of MD&A, into the forepart of Item 5 of Form 20-F to highlight the item's objective. Our proposals would revise Item 5 to state that the discussion must:

• Include other statistical data that will enhance a reader's understanding of the company's financial condition, changes in financial condition, and results of operations; and
• Focus specifically on material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results or future financial condition.

We are also proposing to codify into the forepart of Item 5 Commission 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.” ^[310] Consistent with our rationale for proposing analogous changes to Item 303,^[311] we believe that emphasizing the purpose of MD&A at the outset of the Item will provide clarity and focus to registrants as they consider what information to discuss and analyze. We are also proposing to revise the forefront of Item 5 to state that, in addition to providing information relating to all separate segments, FPIs must also provide information relating to other subdivisions, such as geographic areas or product lines. This proposed revision is intended to conform Form 20-F to both current Item 303, by referencing other subdivisions and including geographic areas as an example, and proposed Item 303, by adding product lines as an example.^[312]

For the reasons discussed above, we are proposing to:

• Revise Item 5 to specify that the discussion must include a quantitative and qualitative description of the reasons underlying material changes, including where material changes within a line item offset one another; ^[313]

• Revise the liquidity and capital resources requirement in Item 5.B to specify that a registrant must broadly disclose material cash commitments, including but not limited to capital expenditures; ^[314]

• Replace Item 5.E, which covers off-balance sheet arrangements, with a principles-based instruction; ^[315]

• Eliminate Item 5.F., which covers tabular disclosure of contractual obligations; ^[316] and

• Eliminate Item 5.G, which acknowledges application of the statutory safe harbor and specifically and exclusively applies to Item 5.E and Item 5.F.^[317]

Consistent with our proposal to amend Item 303 above, we are also proposing to revise Item 5 to explicitly require disclosure of critical accounting estimates.^[318]

We are also proposing a change to the requirement in Form 20-F that requires disclosure of inflation for FPIs.^[319] Item 5.A.2 requires disclosure of the impact of inflation, if material, and hyperinflation, if the currency in which the financial statements are presented is of a country that has experienced hyperinflation.^[320] Instruction 1 to Item 5.A states that disclosure of hyperinflation must be provided if hyperinflation has occurred in any of the periods for which an FPI is required to provide audited financial statements or unaudited interim financial statements. We believe that for FPIs in a hyperinflationary economy, hyperinflation is a salient issue such that it merits specific mention. As it relates to hyperinflation, we are therefore not proposing to amend Item 5.A.2 or the related instruction. However, and consistent with our change to Item 303,^[321] we are proposing to amend the portion of Item 5.A.2 calling for disclosure of the impact of inflation, if material. Some of our proposals to amend Form 20-F are unique to this form but are consistent with MD&A's focus on materiality. Specifically, we are proposing to:

• Amend Item 5.D of Form 20-F, which requires FPIs to identify “the most significant recent trends,” to instead, require disclosure of “material trends,” consistent with Item 303 and MD&A's focus on materiality; ^[322] and

• Amend Instruction 1 to Item 5, which currently references only the 1989 MD&A Interpretive Release, to add the 2002 Commission Statement, 2003 MD&A Interpretive Release, 2010 MD&A Interpretive Release ^[323] and the Companion Guidance, to direct FPIs to the Commission's guidance.

These and all of our proposals to Item 5 of Form 20-F are consistent with our policy of having the existing MD&A requirements for FPIs mirror the substantive MD&A requirements in Item 303.^[324]

Request for Comment

67. Should we amend Item 5 of Form 20-F as proposed?

68. Would the proposed deletions in Item 5 result in the loss of material information that is otherwise not available to investors? If so, what information would be lost, and are there alternatives we should consider that would elicit this information?

69. Would the proposed additions to Item 5 create burdens for companies?

70. If we revise Item 5 of Form 20-F as proposed, would such revision reduce the ability of FPIs to use a single document in multiple jurisdictions?

71. Would the proposed amendments conflict with home-country requirements in some jurisdictions? If so, please explain.

72. Are there any unique considerations with respect to FPIs in the context of MD&A and Item 5 disclosures?

2. Form 40-F

Form 40-F generally permits eligible Canadian FPIs to use Canadian disclosure documents to satisfy the Commission's registration and disclosure requirements. As a result, the MD&A contained in Form 40-F is largely prepared in accordance with Canadian disclosure standards. General Instructions B.(11) and B.(12), however, were added when the Commission adopted the off-balance sheet arrangements and contractual obligations disclosure requirements.^[325] For the reasons discussed above, we are proposing to eliminate the contractual obligations disclosure requirement in B.(12) of Form 40-F.^[326] In addition, we are also proposing to make parallel changes (as discussed above) to the off-balance sheet disclosure requirement in Form 40-F by replacing General Instruction B.(11) with a principles-based instruction.^[327] As noted above, unlike Item 303 and Form 20-F, the MD&A required under Form 40-F is defined as required by Canadian law.^[328] Accordingly, our proposal to amend Item 40-F would only require disclosure of off-balance sheet arrangements to the extent it is not already provided under the MD&A required by Canadian law. Lastly, and consistent with our proposals above, we are proposing to eliminate General Instruction B.(13), which acknowledges application of the statutory safe harbor and specifically and exclusively applies to General Instructions B.(11) and B.(12).^[329]

Request for Comment

73. Should we amend Form 40-F, as proposed?

74. Would replacing General Instruction B.(11) of Form 40-F with a more principles-based instruction result in the loss of material information that is otherwise not available to investors? If so, what information would be lost, and are there alternatives we should consider that would elicit this information?

75. Would the proposed deletion of General Instruction B.(12) of Form 40-F result in the loss of material information that is otherwise not available to investors? If so, what information would be lost, and are there alternatives we should consider that would elicit this information?

76. If we eliminate General Instruction B.(13) of Form 40-F, is it necessary or helpful to provide a specific instruction referring to the statutory safe harbors for forward-looking statements that may apply to the proposed off-balance sheet arrangement disclosures? Should we instead retain General Instruction B.(13) of Form 40-F and acknowledge that the statutory safe harbors would apply?

77. Are there any unique considerations with respect to eligible Canadian FPIs in this context?

3. Item 303 of Regulation S-K

FPIs may voluntarily choose to file on forms that would require disclosure under Item 303. Current Instruction 11 to Item 303 requires “foreign private registrants” to discuss briefly any pertinent governmental economic, fiscal, monetary, or political policies or factors that have materially affected or could materially affect, directly or indirectly, their operations or investments by United States nationals.^[330]

For consistency with the requirements of Form 20-F,^[331] we are proposing to amend this FPI instruction to incorporate the requirement for FPIs to discuss hyperinflation in a hyperinflationary economy.^[332] Proposed Instruction 9 would also replace “foreign private registrants” with the defined term “foreign private issuer.” ^[333]

Request for Comment

78. Should we retain and amend the FPI instruction to Item 303, as proposed?

E. Additional Conforming Amendments

We propose additional conforming amendments that are consistent with the proposed amendments described above.^[334]

1. Roll-Up Transactions—Item 914 of Regulation S-K

We propose to delete references to Items 301 and 302 in Item 914(a) of Regulation S-K. This item applies to roll-up transactions, which generally involve the combination or reorganization of one or more partnerships, directly or indirectly, where some or all of the investors in any such partnerships will receive new securities, or securities in another entity.^[335] Item 914(a) provides that, for each partnership to be included in a roll-up transaction, certain financial information, including disclosure under Item 301 and Item 302, must be provided.

In the context of Item 914(a), disclosure provided under Items 301 and 302 would not be duplicative of the financial statements and would otherwise be unavailable. However, Item 914(a) specifies disclosure of other financial information ^[336] and states that additional or other information should be provided if material to an understanding of each partnership proposed to be included in a roll-up transaction. In light of these other requirements, we believe deleting references to Items 301 and 302 in Item 914(a) would not result in a loss of material information.

Request for Comment

79. If we eliminate Items 301 and 302 should we also delete these references in Item 914(a) and not specify additional disclosure requirements, as proposed? Are there any unique considerations for roll-up transactions that would necessitate some or all of the information required by Items 301 and 302?

2. Regulation AB—Items 1112, 1114, and 1115

Item 1112 of Regulation AB requires disclosure of financial information required by Item 301 or Item 3.A of Form 20-F about significant obligors of pool assets if the pool assets relating to the significant obligor represent 10% or more, but less than 20%, of the asset pool in an asset-backed securities (“ABS”) transaction. Similarly, Items 1114 and 1115 of Regulation AB require disclosure of financial information required by Item 301 or Item 3.A of Form 20-F about credit enhancement providers and derivatives counterparties, respectively, whose support represents a similar level of concentration in an ABS transaction. With our proposal to eliminate Item 301 and Item 3.A of Form 20-F for corporate issuers, financial information about these third parties to an ABS transaction, including any trend information comparable to information required by Item 303 or Item 5 of Form 20-F, may not otherwise be available. Therefore, we propose to replace in Regulation AB those requirements to disclose selected financial data under Item 301 or Item 3.A of Form 20-F with requirements to disclose summarized financial information, as defined by Rule 1-02(bb) of Regulation S-X,^[337] for each of the last three fiscal years (or the life of the relevant entity or group of entities, if less). We believe the information required under Rule 1-02(bb) is similar to the information currently required, and is consistent with other types of financial statement disclosures that are required to be disclosed when certain significance thresholds have been met.^[338] As proposed, these requirements span the same periods as the historical data that the ABS registrant is required to provide for the pool assets under Item 1111 of Regulation AB.^[339] While this proposal would generally result in fewer periods being presented under these items, we do not believe requiring disclosure beyond three years is necessary. Such disclosure would cover periods beyond those presented for the underlying pool assets to which the third-party financial information would relate.

Request for Comment

80. If we eliminate Item 301 and Item 3.A of Form 20-F, should we replace these references in Items 1112, 1114, and 1115 of Regulation AB with a reference to Rule 1-02(bb) of Regulation S-X, as proposed? Would the potential fewer earlier periods being presented under these items result in the loss of material information? Are there alternatives that we should consider? Should we explicitly require a tabular presentation of the summarized financial information for ABS?

3. Summary Prospectus in Forms S-1 and F-1

We are proposing to replace references to Item 301 and Item 3.A of Form 20-F in Form S-1 and Form F-1, respectively, with Rule 1-02(bb) of Regulation S-X, where these forms provide for use of a summary prospectus under Rule 431.^[340] A summary prospectus is intended to provide prospective investors with a condensed statement of the more important information in the registration statement.^[341] Consistent with this purpose, the Instructions as to Summary Prospectuses in Forms S-1 and F-1 call for disclosure of selected financial data under Item 301 or Item 3.A of Form 20-F, respectively. These instructions also state that, with the exception of these items, the summary prospectus shall not contain any other financial information.^[342] To preserve disclosure of financial information in summary prospectuses, we propose to replace the requirement for selected financial data in Forms S-1 and F-1 with summarized financial information under Item 1-02(bb) of Regulation S-X. We believe the information required under Rule 1-02(bb) is similar to the information currently required and is consistent with other types of financial statement disclosures that should be included when certain significance thresholds have been met.

Request for Comment

81. If we eliminate Item 301 and Item 3.A of Form 20-F, as proposed, should we replace these references in the Instructions as to Summary Prospectuses of Forms S-1 and F-1 with Item 1-02(bb) of Regulation S-X, as proposed?

4. Business Combinations—Form S-4, Form F-4 and Schedule 14A

We are proposing to eliminate references to Items 301 and 302 in Form S-4, Form F-4, and Schedule 14A. Where these forms are used in conjunction with a business combination, pro forma financial statements for the most recent fiscal year and interim period under Article 11 of Regulation S-X are required.^[343] Additionally, Item 3(e) and (f) in both Forms S-4 and F-4 require Item 301 or Item 3.A of Form 20-F information, respectively, on a pro forma basis. Item 14(b)(9) and (10) of Schedule 14A generally call for similar pro forma information in the context of a business combination. A related instruction stipulates that, for a business combination accounted for as a purchase, financial information is required for the same periods required by Article 11 of Regulation S-X. Because these pro forma requirements are effectively duplicative of the pro forma financial statements required elsewhere by the form, we propose to delete them.^[344]

Similarly, we are proposing to eliminate references to Item 301 and Item 3.A of Form 20-F in Item 17(b)(3) of both Form S-4 and Form F-4. We are also proposing to delete the reference to Item 302 in Item 17(b)(4) of Form S-4. Because Item 17(b) of Forms S-4 and F-4 applies to non-reporting target companies in a business combination, this disclosure may not be available elsewhere. We believe, however, consistent with the discussion above,^[345] that the requirement for discussion and analysis of trends in Item 303 would also be sufficient to address material information related to a target company in a business combination context.

Request for Comment

82. If we eliminate Item 301 and Item 3.A of Form 20-F as proposed, should we also eliminate references to these items in Form S-4 and F-4 and Schedule 14A, as proposed? Are there any unique considerations in the context of a business combination?

83. In Forms S-4 and F-4, pro forma information of selected financial data is required as part of the prospectus summary. Are there any unique considerations in the context of a business combination such that Item 301 and Item 3.A of Form 20-F pro forma information should be required as part of the prospectus summary?

84. Should we eliminate the requirement to provide Item 301, Item 3.A of Form 20-F, and Item 302 disclosure in Forms S-4 and F-4 for non-reporting target companies, as proposed?

5. Form S-20

We are proposing a conforming change to Form S-20 to remove references to Item 302 of Regulation S-K.^[346] Form S-20 is used to register standardized options under the Securities Act and requires limited information about the clearing agency registrant and the options being registered. Since the adoption of Rule 238 in 2002, which exempts from Securities Act Section 5 the registration of offerings of standardized options that are issued by a registered clearing agency and traded on a national securities exchange, Form S-20 is rarely used.^[347]

Request for Comment

85. If we eliminate Item 302, should we also eliminate reference to this item in Form S-20? Are there any unique considerations in the context of Form S-20?

F. Compliance Date

We propose to provide a transition period after the publication of a final rule in the Federal Register to provide registrants with adequate time to adjust their disclosures in light of the proposed amendments. Though companies would be able to begin voluntarily complying with the proposed amendments upon effectiveness, we propose a compliance date of 180 days after effectiveness of any final rule, if adopted. The Commission believes that this transition period would allow sufficient time to prepare for and come into compliance with the amended reporting requirements, but we request comment on whether this time period is appropriate.

Request for Comment

86. Is the proposed transition period necessary and appropriate? If not, what time period would be necessary for registrants to comply with the proposed amendments?

87. Would certain proposed amendments (e.g., critical accounting estimates) require more time to prepare for than other requirements?

III. General Request for Comments

We request and encourage any interested person to submit comments on any aspect of our proposals, other matters that might have an impact on the proposed amendments, and any suggestions for additional changes. With respect to any comments, we note that they are of greatest assistance to our rulemaking initiative if accompanied by supporting data and analysis of the issues addressed in those comments and by alternatives to our proposals where appropriate.

IV. Economic Analysis

A. Introduction

As discussed above, we are proposing amendments to modernize, simplify, and enhance certain financial disclosure requirements in Regulation S-K. Specifically, we are proposing (1) to eliminate Item 301 of Regulation S-K, Selected Financial Data, and Item 302 of Regulation S-K, Supplementary Financial Information; and (2) to amend Item 303 of Regulation S-K, Management's Discussion & Analysis of Financial Condition and Results of Operations. The proposed amendments are intended to eliminate duplicative disclosures and enhance MD&A disclosures for the benefit of investors, while simplifying compliance efforts for registrants.

Overall, investors and registrants may benefit from the proposed amendments if they would help avoid duplicative disclosure and if emphasizing the current principles-based approach to MD&A results in more tailored disclosures that allow investors to better understand the registrant's business through the eyes of management. We acknowledge the risk that emphasizing the current principles-based approach may result in certain loss of information to investors. However, we believe that any loss of information would be limited because the proposed eliminations are mostly duplicative. Additionally, under the proposed principles-based approach, registrants would still be required to provide disclosure about these topics if they are material to an investment decision, further mitigating the potential loss of information.

We are mindful of the costs and benefits of the proposed amendments. The discussion below addresses the potential economic effects of the proposed amendments, including the likely benefits and costs, as well as the likely effects on efficiency, competition, and capital formation.^[348] At the outset, we note that, where possible, we have attempted to quantify the benefits, costs, and effects on efficiency, competition, and capital formation expected to result from the proposed amendments. In many cases, however, we are unable to quantify the potential economic effects because we lack information necessary to provide a reasonable estimate. For example, we are unable to quantify, with precision, the costs to investors of accessing alternative information sources (e.g., footnotes to financial statements or earnings announcements) under each disclosure item. We are also unable to quantify the potential information processing cost savings that may arise from the elimination of disclosures that are duplicative or not material to an investment decision. Where we are unable to quantify the economic effects of the proposed amendments, we provide a qualitative assessment of the potential effects and encourage commenters to provide data and information that would help quantify the benefits, costs, and the potential impacts of the proposed amendments on efficiency, competition, and capital formation.

B. Baseline and Affected Parties

The current disclosure requirements under Items 301, 302, and 303 of Regulation S-K, and the related requirements under Items 3.A and 5 of Form 20-F, and General Instructions B.(11), (12), and (13) of Form 40-F, together with the current disclosure practices registrants have adopted to comply with these requirements, form the baseline from which we estimate the likely economic effects of the proposed amendments.^[349] The disclosure requirements apply to various filings, including registration statements, periodic reports, and certain proxy statements filed with the Commission. Thus, the parties that are likely to be affected by the proposed amendments include investors and other market participants that use the information in these filings (such as financial analysts, investment advisors, and portfolio managers), as well as registrants subject to the relevant disclosure requirements discussed above.

The proposed amendments may affect both domestic registrants and FPIs.^[350] We estimate that during calendar year 2018 there were approximately 6,919 registrants that filed on domestic forms ^[351] and 806 FPIs that filed on F-forms, other than registered investment companies. Among the registrants that filed on domestic forms, approximately 29 percent were large accelerated filers, 19 percent were accelerated filers, and 52 percent were non-accelerated filers. In addition, we estimate that approximately 33 percent of these domestic issuers were SRCs ^[352] and 21.3 percent were EGCs. The proposed amendments would also affect ABS issuers. ABS issuers are required to file on Forms SF-1 and SF-3 and, as a result, may be subject to the proposed changes to Regulation AB requirements in this release. We estimate that during calendar year 2018, there were 36 unique depositors filing at least one Form SF-1 or Form SF-3.

C. Potential Benefits and Costs of the Proposed Amendments

In this section, we discuss the anticipated economic benefits and costs of the proposed amendments. We first analyze the overall economic effects of the proposed amendments. We then discuss the potential benefits and costs of specific proposed amendments.

1. Overall Potential Benefits and Costs

We anticipate the proposed amendments ^[353] would benefit registrants in several ways. First, by eliminating certain duplicative disclosure requirements, the proposed amendments could reduce registrants' disclosure burden and associated compliance costs. Second, by modernizing and simplifying Item 303 disclosure requirements, the proposal may benefit registrants by reducing disclosure burdens and associated compliance costs. In addition, to the extent the proposed amendments result in more tailored and informative disclosure, they could potentially reduce information asymmetry between registrants and investors, improve firms' liquidity, and decrease the cost of capital. Finally, certain of the proposed amendments emphasize a more principles-based approach to MD&A, which we believe would benefit registrants by underscoring the flexibility available in presenting financial results that are more indicative of their business.^[354] A more principles-based approach, however, could lead to registrants incurring increased costs associated with assessing materiality.

We believe investors could also benefit from the proposed amendments. First, proposed amendments that clarify and codify existing guidance, such as the proposed amendments related to critical accounting estimates and capital resources, could enhance MD&A disclosure. More robust and informative disclosure on these topics could facilitate investors' decision making and enhance investor protection. Second, if the proposed amendments result in more enhanced and principles-based disclosure, they could allow investors to more efficiently process the disclosure and make better-informed investment decisions. In particular, investors may benefit from more tailored disclosures that allow them to better understand the registrant's business through the eyes of management. Investors also could benefit from the reduction of duplicative disclosure, because reducing such duplication may improve the readability and conciseness of the information provided, help investors focus on material information, and facilitate more efficient information processing.^[355]

However, investors could incur certain costs under the proposed amendments. For example, investors who are used to the current disclosure format might experience costs when adjusting to the new format. However, this cost should decrease over time. Investors could also incur monetary costs such as database subscriptions, or opportunity costs such as time spent, if they need to obtain or reconstruct information through alternative sources. However, we do not expect such costs to be significant since registrants would still need to disclose material information. There could be certain additional costs associated with the proposed amendments to the extent that they result in the elimination of disclosure material to an investment decision if registrants misjudge what information is material, or if disclosure becomes less comparable across firms.^[356] The risk of misjudgment may be mitigated by factors including accounting, financial reporting, and disclosure controls or procedures,^[357] as well as the antifraud provisions of the securities laws. In terms of the potential loss of comparability, the cost related to it should be minimal since investors can pull data from the financial statements via XBRL.

Some of the costs of the proposed amendments could be mitigated by external disciplining mechanisms, such as the Commission staff's filing review program. In general, registrants would remain subject to the antifraud provisions of the securities laws.^[358] There also may be incentives for registrants to voluntarily disclose additional information if the benefits of reduced information asymmetry exceed the disclosure costs.

The proposed amendments likely would affect registrants and investors differently. For example, any compliance cost reduction might be more beneficial to smaller registrants that are financially constrained. Similarly, although eliminating information that is not material should benefit all investors, retail investors could benefit more as they are less likely to have the time and resources to devote to reviewing and evaluating disclosure. On the other hand, retail investors could also incur additional costs as a result of the proposed amendments because they may need to obtain information from alternative sources, which could involve monetary costs, such as database subscriptions, or opportunity costs, such as time spent searching for alternative sources. These costs may be higher for retail investors than for institutional investors.

2. Benefits and Costs of Specific Proposed Amendments

We expect the proposed amendments would result in costs and benefits to registrants and investors, and we discuss those costs and benefits item by item in this section. The proposed changes to each item would impact the compliance burden for registrants in filing forms that require disclosures that are responsive to such items. Overall, we expect the net effect of the proposed amendments on a registrant's compliance burden to be limited. As explained in this section, we expect certain aspects of the proposed amendments to increase compliance burdens, and others to decrease the burdens. The quantitative estimates of changes in those burdens for purposes of the Paperwork Reduction Act of 1995 (“PRA”) ^[359] are further discussed in Section V below. For purposes of the PRA, we estimate that the effect of the proposed amendments would vary for different forms. However, taken together, the amendments are likely to result in a net decrease in burden hours for all forms, ranging from 0.1 to 6.5 burden hours per form.^[360]

a. Selected Financial Data (Item 301)

Item 301 requires certain registrants ^[361] 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.^[362] The purpose of this disclosure is to supply in a convenient and readable format selected financial data that highlights certain significant trends in the registrant's financial conditions and results of operations. For certain registrants, information disclosed under Item 301 has also been disclosed in historical financial data and related XBRL data submissions that can be accessed through prior filings on EDGAR.

The current disclosure requirement under Item 301 could result in duplicative disclosure, and it can be costly for registrants to provide such disclosures under certain circumstances. For example, as discussed above, providing disclosure of the earliest two years often creates challenges for registrants when such information has not been previously provided.^[363] Therefore, eliminating this requirement may facilitate capital raising activity and increase efficiency for non-EGC issuers contemplating an IPO. Overall, we expect the proposed elimination of Item 301 would benefit registrants by eliminating duplicative disclosures and reducing compliance costs. We also note that the benefit associated with eliminating the costs of providing Item 301 disclosure may be offset by the costs associated with making materiality determinations under a principles-based disclosure framework. In general, we do not expect the proposed elimination of Item 301 would affect the cost of capital given that the eliminated disclosures are largely duplicative. To the extent that there is information loss under certain circumstances, such as in the case of non-EGC IPOs, these registrants could potentially experience an increase in the cost of capital as a result of reduced disclosure. However, in these circumstances registrants would likely voluntarily provide the disclosures to the extent the increase in cost of capital would be significant.

To the extent the proposed amendments result in the elimination of disclosure that is not material, investors may benefit. In particular, if the readability and conciseness of the information provided improves,^[364] investors may be able to process information more effectively by focusing on the material information. Also, a principles-based approach may permit or encourage registrants to present more tailored information, which also may benefit investors by allowing them to better understand the registrant's business.

Investors may incur costs to the extent the proposed amendments result in a loss of information. While we do not anticipate significant information loss from the elimination of Item 301, we recognize that selected financial information for the two earliest years would no longer be disclosed in non-EGC IPOs. However, the purpose of the item is to highlight certain significant trends in the registrant's financial condition and results of operations and we expect that any material trend information that would have been disclosed pursuant to Item 301 would be disclosed under Item 303. We also recognize investors may incur certain other costs. In particular, investors would incur search costs if they have to spend more time to retrieve the information from prior filings. Additionally, to the extent investors are used to the current format and rely on the compiled comparable data, they may incur costs to adjust to new disclosure formats.

Elimination of Item 301 would affect the financial information disclosure by ABS issuers. As discussed above, the currently available financial information set forth in Item 301 or Item 3.A of Form 20-F about significant obligors of pool assets, credit enhancement providers, and derivatives counterparties as required by Item 1112, Items 1114, and 1115 of Regulation AB may not otherwise be available. To mitigate this potential information loss, we propose to replace in Regulation AB those requirements to disclose selected financial data under Item 301 or Item 3.A of Form 20-F with requirements to disclose summarized financial information, as defined by Rule 1-02(bb) of Regulation S-X, for each of the last three fiscal years (or the life of the relevant entity or group of entities, if less).

Since the proposed changes related to ABS issuers are intended to conform to the other changes related to selected financial data and MD&A, our analysis of the costs and benefits for registrants and their investors under the proposed amendments to Item 301 and Item 3.A of Form 20-F can be carried over to ABS issuers. While this proposal would generally result in fewer periods being presented, we do not expect it to have a significant effect on ABS issuers and their investors, because the disclosure of the earlier years would cover periods beyond those presented for the underlying pool assets to which the third-party financial information would relate.

b. Supplementary Financial Information (Item 302)

Under Item 302(a), certain registrants are required to disclose quarterly financial data of specified operating results and variances in these results from amounts previously reported on a Form 10-Q.^[365] Registrants must provide quarterly 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. Item 302(a) also requires disclosure related to effects of any discontinued operations and unusual or infrequently occurring items.

Since the financial data required under this item (including disclosure related to the effect of any discontinued operations and unusual or infrequently occurring items), other than fourth-quarter data, typically can be found in prior quarterly filings through EDGAR, the prescriptive disclosure requirements under existing Item 302(a) result in duplicative disclosures. By eliminating the duplicative disclosure and associated compliance costs, the proposed amendments would benefit registrants. We do not expect the proposed elimination of Item 302(a) to affect registrants negatively. While a decrease in disclosure could potentially increase the company's cost of capital in general, registrants can always choose to disclose the quarterly financial information through other channels, such as an earnings release.

Investors could benefit to the extent that the proposed amendments result in less duplicative disclosure and less disclosure of immaterial information. The proposed amendments may result in improved readability and conciseness of the information provided, help investors focus on material information, and facilitate more efficient information processing by investors. The proposed amendments would also allow registrants to present financial information that is more reflective of their own industry and firm operating cycles, which could allow investors to better understand their business.

We anticipate information loss from the proposed elimination of fourth quarter financial information currently required under Item 302(a), which is otherwise not explicitly required to be disclosed. Though fourth quarter financial data could be calculated from annual report and cumulative third quarter data, it may be costly for investors to calculate or obtain. While such costs might be minimal for institutional investors, which have both resources and sophistication to obtain the needed financial information, for retail investors, the search costs might be substantially larger, which could involve monetary costs such as database subscriptions, or opportunity costs such as time spent searching for alternative sources and cross-referencing. Additionally, investors could make mistakes in deriving the fourth quarter financial information. Finally, in the case of a restatement, investors, including more sophisticated institutional investors, might not be able to accurately back out the fourth quarter information. To the extent that there is lack of accurate fourth quarter information which cannot be obtained through alternative means, investors' decision making could be affected.

However, the potential information loss from the elimination of Item 302(a) might be mitigated under MD&A's principles-based framework. We believe that fourth quarter data may not be material to all registrants or in every fiscal year. For example, for investors in companies with long operating cycles, fourth quarter data might not be as incrementally important as annual data. However, to the extent that there are material trends or events in the fourth quarter or throughout the fiscal year, registrants would be required to address those matters in their MD&A.

Item 302(b) requires issuers engaged in oil and gas producing activities, other than SRCs, to disclose information about those activities that is required by U.S. GAAP for each period presented. The FASB has recently proposed to amend U.S. GAAP to require the incremental disclosure called for by Item 302(b). Thus, because the disclosure required by Item 302(b) would be included in the notes to the registrant's financial statements, the proposed elimination of Item 302(b) would remove duplicative disclosure on this topic, benefiting both registrants and investors. Registrants could benefit from the reduced compliance burden. Investors should not face information loss from this aspect of the proposed amendments, as this requirement completely overlaps with the proposed amendments to U.S. GAAP. However, investors may incur costs to adjust to the new disclosure format. Such costs are likely to be one-time costs or to decrease over time.

c. Item 303(a) Restructuring and Streamlining

The proposal includes multiple changes that are intended to clarify and streamline the requirements of Item 303. For example, we are proposing a new Item 303(a) to provide a succinct and clear description of the purpose of MD&A. As discussed above, emphasizing the purpose of MD&A at the outset of the item is intended to provide clarity and focus to registrants as they consider what information to discuss and analyze, which could encourage management to disclose those factors that are most specific and relevant to a registrant's business. Other changes include restructuring and streamlining language in Item 303 and the related instructions.

We anticipate that the proposed amendments would provide registrants with more clarity on disclosure requirements. When there is confusion related to disclosure requirements, registrants may either over-disclose and incur additional compliance costs, or under-disclose and face increased litigation risk. To the extent that the proposed amendments reduce registrants' confusion, registrants could potentially benefit from reduced compliance costs and litigation risk. More informative disclosure could potentially benefit both registrants and investors by reducing information asymmetry in the market. Reduced information asymmetry could help investors make more informed investment decisions, which may benefit registrants in their capital raising. For registrants, reduced information asymmetry could also potentially improve firm liquidity and reduce cost of capital.

d. Capital Resources (Item 303(a)(2))

Item 303(a)(2), which requires a registrant to discuss its material commitments for capital expenditures as of the end of the latest fiscal period, does not define the term “capital resources.” The lack of specificity was intended to provide management flexibility for a meaningful discussion when this disclosure requirement was adopted in 1980. Nonetheless, the Commission has previously provided guidance to clarify the nature of this requirement.^[366] Further, while the required disclosure of material commitments of capital expenditures generally relates to physical assets, such as buildings and equipment, this requirement may not fully reflect market developments. While capital expenditures remain important in many industries, certain expenditures that are not necessarily capital investments may be increasingly important to companies. For example, expenditures for human resources or intellectual property may be essential for companies in certain industries. The proposed amendments to Item 303(a)(2) are intended to encompass these types of expenditures. The proposed amendments would also require, consistent with the Commission's 2003 MD&A Interpretive Release, that registrants broadly disclose material cash commitments, including but not limited to capital expenditures. We believe the proposed amendments would modernize the requirement and make the disclosure more reflective of current and future industry outlays.

We believe that the proposed amendments could benefit registrants by providing additional clarity on the term “capital resources” and reducing confusion, thereby eliciting appropriate disclosure from registrants and potentially decreasing litigation risk. Capital expenditures vary across industries. While firms in traditional industries rely more on physical assets, firms in other industries such as the technology sector may invest more heavily in intellectual property and human capital. Specifying only capital expenditures in the rule could lead to confusion about what information should be provided. As a result, registrants may over-disclose and incur additional compliance costs, or under-disclose and face increased litigation risk. Further, we expect that registrants would benefit from decreased compliance costs to the extent that the proposed amendments reduce the need to consult existing Commission guidance to process and understand the disclosure requirements.

The proposed amendments should also benefit investors through improved disclosure. As discussed above, lack of clarity might lead to under- or over-disclosure by registrants. For example, disclosure focusing only on capital expenditures rather than on material cash commitments more generally might lead to under-disclosure for less capital intensive industries. As a result, investors might not receive adequate or consistent information to make informed investment decisions. By providing clarity on the requirement, the proposed amendments may facilitate more informative disclosure.

The proposed amendments might increase the disclosure burden for some registrants because they may prompt disclosure of material investments in non-physical assets that registrants might not otherwise be disclosing. However, we do not anticipate a significant increase in compliance costs. As discussed above, some registrants already include disclosure beyond capital expenditures, which the Commission's MD&A guidance has encouraged.^[367] Also, better disclosure should eventually benefit registrants, because it could reduce information asymmetry between management and investors, reduce the cost of capital, and thereby improve firms' liquidity and their access to capital markets.^[368]

e. Results of Operations—Known Trends or Uncertainties (Item 303(a)(3)(ii))

Item 303(a)(3)(ii) requires a registrant to describe any known trends or uncertainties that have had or that the registrant expects will have a material impact (favorable or unfavorable) on net sales or revenues or income from continuing operations. The proposed amendments clarify that when a registrant knows of events that are reasonably likely to 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 would conform the language in this paragraph to other Item 303 disclosure requirements for known trends and align Item 303(a)(3)(ii) with the Commission's guidance on forward-looking disclosure.^[369]

As discussed above, the language in the existing Item 303(a)(3)(ii) differs from other Item 303 disclosure requirements for forward-looking information.^[370] This differing language may have led to confusion and inconsistent practice regarding what events should be disclosed. While the Commission has sought to alleviate some of these concerns by clarifying the standard for forward-looking information in its MD&A guidance,^[371] the proposed amendment could further benefit registrants by reducing any residual confusion, eliciting more consistent disclosure, and potentially decreasing compliance costs and litigation risk. In addition, more consistent disclosure may allow investors to make more meaningful comparisons across firms and make more informed investment decisions.

Some registrants may experience an increased cost of compliance under the proposed amendments to the extent that these registrants have been disclosing events that will cause a material change in the relationship between costs and revenues as opposed to events that are reasonably likely to cause the change. Also, some registrants might need to spend resources to evaluate the future likelihood that such events might occur. However, such registrants might be few in light of existing Commission guidance, and the increase in compliance costs could be offset by the potential decrease in cost of capital as a result of enhanced disclosure and reduced information asymmetry.^[372]

f. Results of Operations—Net Sales, Revenues, and Line Item Changes (Item 303(a)(3)(iii) and Instruction 4)

Item 303(a)(3)(iii) currently requires management to discuss certain factors, such as changes in prices or volume, that led to certain material increases in net sales or revenues. The proposed amendments broaden the current requirement focusing on “material increases in net sales or revenue” in the “financial statements” to instead require disclosure of “material changes from period to period in one more line items” in the “statement of comprehensive income.” Additionally, the proposed amendments would amend Item 303(a)(3)(iii) to require disclosure specifying the reasons underlying these material changes. Instead of specifying disclosure of “material increases” in net sales or revenue, our proposed revisions would tie the required disclosure to “material changes” in net sales or revenues. The proposed amendments to Instruction 4 would similarly clarify that MD&A requires a narrative discussion of the underlying reasons for material changes in quantitative and qualitative terms.

The proposed amendments are intended to codify Commission guidance on results of operations disclosure. The Commission has previously stated that MD&A disclosure should include both qualitative and quantitative analysis and clarified that a results of operations discussion should describe increases or decreases in any line item, including net sales or revenues.^[373] The need for registrants to consult both existing Item 303(a)(3)(iii) and the Commission's guidance to understand the requirement could lead to confusion and inconsistent disclosure practice in registrants. The additional clarity provided by the proposed amendments could benefit registrants by reducing any confusion, eliciting more consistent disclosure, and potentially decreasing compliance costs and litigation risk.

The proposed amendments could increase disclosure burdens for registrants, thus potentially increasing compliance costs. However, since many registrants may already be following relevant Commission guidance, the marginal increase in compliance costs is not expected to be significant. Additionally, to the extent that registrants do incur additional compliance costs, such costs could be offset by the potential decrease in cost of capital as a result of increased disclosure and reduced information asymmetry.^[374]

The proposed amendments would require registrants to provide a nuanced discussion of the underlying reasons that may be contributing to material changes in line items, and therefore should enhance the disclosure. More consistent and informative disclosure would allow investors to make more meaningful comparisons across firms and make more informed investment decisions. However, any potential benefits to investors may be limited to the extent registrants already are following the relevant Commission guidance.

g. Results of Operations—Inflation and Price Changes (Item 303(a)(3)(iv), Instruction 8, and Instruction 9)

We propose to eliminate Item 303(a)(3)(iv) and related Instructions 8 and 9, which generally require that registrants specifically discuss the impact of inflation and price changes on their net sales, revenue, and income from operations for the three most recent fiscal years, to the extent material. The purpose of the proposed elimination is to streamline Item 303 by eliminating the specific reference to these topics, which may not be material to most registrants. This proposed change is consistent with the principles-based disclosure framework of Item 303.

We do not believe that these proposed changes would result in a loss of material information for market participants. Registrants would still be required to discuss in their MD&A the impact of inflation and changing prices, if material.

The proposed elimination of this item could benefit registrants by streamlining Item 303 and reducing compliance costs. Similar to what we have discussed above,^[375] to the extent that the elimination encourages registrants that currently disclose inflation and changing prices even if not material to modify such disclosure,^[376] investors could potentially benefit from a focus on material information, which would allow them to process information more effectively. Also, emphasizing a principles-based approach may encourage registrants to present more tailored information, which also may benefit investors.

h. Off-Balance Sheet Arrangements (Item 303(a)(4))

Current Item 303(a)(4) requires, in a separately-captioned section, disclosure of a registrant's off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on a registrant's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources that is material to investors. We propose to replace Item 303(a)(4) with a new principles-based instruction that would require registrants to discuss commitments or obligations, including contingent obligations, arising from arrangements with unconsolidated entities or persons that have, or are reasonably likely to have, a material current or future effect on a registrant's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements, or capital resources.

We do not believe the proposed amendments would lead to significant information loss, as we expect the proposed principles-based instruction would continue to elicit material information about off-balance sheet arrangements. As discussed above, we believe that the proposed amendments would encourage registrants to consider and integrate disclosure of off-balance sheet arrangements in the context of their broader MD&A disclosures and may avoid boilerplate disclosure that either duplicates information in the financial statements, or cross-references the financial statements without additional disclosure to put such information into appropriate context.

The proposed amendments could benefit registrants by avoiding duplicative disclosure and reducing compliance costs. As discussed above, to the extent the proposed amendments improve the readability and conciseness of the information provided, they may help investors process information more effectively. Also, emphasizing a principles-based approach may encourage registrants to provide disclosure that is tailored and informative, which could be more beneficial to investors.

Investors might need to spend time searching for the information and adjusting to the new format and location of the disclosure as the proposal would no longer require the relevant disclosure in a separately captioned section. Such costs are likely to be one-time or decrease over time.

i. Tabular Disclosure of Contractual Obligations (Item 303(a)(5))

Under existing Item 303(a)(5), registrants other than SRCs must disclose in tabular format their known contractual obligations. There is no materiality threshold for this item. A registrant must arrange its chart to disclose the aggregate amount of contractual obligations by type and with subtotals by four prescribed periods. The Commission adopted this requirement so that aggregated information about contractual obligations was presented in one place.^[377] However, as discussed above, most of the information presented in response to this requirement is already included in the notes to the financial statements. In order to promote the principles-based nature of MD&A and streamline disclosures by reducing overlapping requirements, we propose to eliminate Item 303(a)(5).

We believe the proposal could lead to reduced compliance costs by avoiding duplicative disclosure, therefore benefiting registrants. On the other hand, we also recognize that there might be increased costs associated with assessing the materiality of contractual obligations under the proposed principles-based approach. However we do not expect such costs to be significant given that the materiality standard is already used by registrants when preparing MD&A disclosures. As discussed above, to the extent the elimination of redundant or immaterial disclosure improves the readability and conciseness of the information provided, the proposed amendment could potentially benefit investors, because it may help them process information more effectively by focusing on material information. Also, since a principles-based approach allows registrants to present more tailored information, it could lead to more informative disclosure, which would benefit investors.

We recognize that there could be a loss of certain information due to the proposed elimination of the item. As discussed in Section II.C.7, some of the information in the contractual obligations table such as purchase obligations is not specifically called for under U.S. GAAP. Additionally, information related to the “payments due by period” currently required by the item may be difficult to ascertain from a registrant's financial statements. However, since the proposed amendments to capital resources disclosure would encompass material contractual obligations, we believe any loss of information would not be significant.

We expect investors could experience certain additional costs. A centralized location and tabular format make it convenient for investors to extract and analyze information. Under the proposed amendments, the absence of a centralized location and tabular format may cause investors to incur search costs to derive the data from the financial statements, or monetary costs to obtain the information through alternative channels, such as database subscriptions. Investors may also incur opportunity costs, such as time spent searching for alternative sources, and these costs may fall more heavily on retail investors than on other types of investors, such as institutional investors.

j. Critical Accounting Estimates

Item 303(a) does not currently include a subsection requiring registrants to disclose critical accounting estimates. U.S. GAAP also does not require similar disclosure of estimates and assumptions in the notes to financial statements, except in limited circumstances. However, IFRS requires disclosures regarding sources of estimation uncertainty and judgments made in the process of applying accounting policies that have the most significant effect on the amounts recognized in the financial statements.^[378] Although the Commission has issued guidance on disclosure of critical accounting estimates, many registrants repeat the discussion of significant accounting policies from the notes to the financial statements in their MD&A and provide limited additional discussion of critical accounting estimates. We propose amending Item 303 to explicitly require such disclosure due to the importance of critical accounting estimates in providing meaningful insight into the uncertainties related to these estimates and reported financials and how accounting policies of registrants faced with similar facts and circumstances may differ.

As discussed above, commenters have suggested that there is confusion as to how and whether to disclose critical accounting estimates, resulting in inconsistent disclosure practice among registrants. As noted above, many registrants simply repeat the discussion of significant accounting policies from the notes to the financial statements in their MD&A, which is duplicative and may not be particularly informative to investors. Providing a clear disclosure framework could benefit registrants by reducing confusion and duplicative disclosure, thereby decreasing compliance costs.

Investors would also likely benefit from the proposed amendments. The proposed amendments could elicit more informative disclosure from registrants related to their estimates and assumptions, which would help investors better understand any potential risk or uncertainty related to these estimates and make more informed investment decisions. The proposed amendments could also promote more consistent disclosure practices among registrants by providing more clarity, allowing investors to make more meaningful comparisons across registrants and better informed investment decisions.

We recognize that the proposed disclosure requirement could introduce additional costs to market participants. While we do not anticipate that investors would incur any direct costs (other than information processing costs) associated with this proposal, compliance costs might increase for registrants because of the proposed more prescriptive disclosure compared to the existing more principles-based approach. However, the potential increase in compliance costs might decline over time as registrants become more accustomed to the new filing requirements. We also note that, consistent with Commission guidance, some registrants may already provide disclosures related to critical accounting estimates that do not duplicate the financial statement disclosures, thus the increase in compliance costs might be minimal to those registrants. In addition, the increase in compliance costs could be offset by a potential decrease in registrants' cost of capital, because such disclosure could reduce information asymmetry between investors and firms.^[379] Taken together, we expect any potential increase in registrants' disclosure-related costs to be small.

k. Interim Period Discussion (Item 303(b))

Item 303(b) requires registrants to provide MD&A disclosure for interim periods that enables market participants to assess material changes in financial condition and results of operations between certain specified periods. The proposal would amend current Item 303(b) to allow for flexibility in comparisons of interim periods and to streamline the item. Specifically, under the proposed Item 303(c), registrants would be allowed to compare their most recently completed quarter to either the corresponding quarter of the prior year (as is currently required) or to the immediately preceding quarter. The proposed amendments would also streamline the instructions to current Item 303(b), consistent with the proposed amendments to current Item 303(a) and the related instructions.

This more flexible approach is intended to allow registrants to provide analysis that is better tailored to their business cycles. This may result in more informative disclosure that could reduce information asymmetry and firms' cost of capital, benefiting registrants.^[380] In addition, streamlining the item could avoid duplicative disclosure and reduce associated compliance costs.

Investors also may benefit from the proposed amendments. As noted above, the proposed amendments would provide registrants flexibility to choose the interim period presented, which could allow them to provide a more tailored analysis. This, in turn, could allow investors to make better informed investment decisions. On the other hand, more flexibility in disclosure could also decrease comparability across firms, potentially increasing the cost of investors' decision-making. However, we do not expect the flexibility in reporting to significantly reduce comparability, since registrants in the same industry may be likely to have similar business cycles and choose similar interim periods. Therefore, the concern about a reduction of comparability across firms in the same industry could be mitigated. Streamlining this item is potentially beneficial to investors, as the resultant reduction of duplicative disclosure might increase the effectiveness of information processing by investors, thus helping them make more informed decisions.

l. Safe Harbor for Forward-Looking Information (Item 303(c))

Item 303(c) ^[381] states that the safe harbors provided in Section 27A of the Securities Act and 21E of the Exchange Act apply to all forward-looking information provided in response to Item 303(a)(4) (off-balance sheet arrangements) and Item 303(a)(5) (contractual obligations), provided such disclosure is made by certain enumerated persons.^[382] We propose to eliminate this item to conform to the proposed elimination of Items 303(a)(4) and 303(a)(5). We do not believe this proposed change would have any economic effect by itself. Disclosure would continue to be protected by the existing safe harbors, and therefore, we do not expect changes in market behavior. To the extent that the elimination of the section may result in any confusion as to the application of the safe harbors, there could be a cost to registrants. However, we believe such cost should be de minimis.

m. Smaller Reporting Companies (Item 303(d))

Item 303(d) ^[383] states that an SRC may provide Item 303(a)(3)(iv) information for the most recent two fiscal years if it provides financial information on net sales and revenues and income from continuing operations for only two years. Item 303(d) also states that an SRC is not required to provide the contractual obligations chart specified in Item 303(a)(5). To conform to the proposals to eliminate Item 303(a)(3)(iv) and (a)(5), we propose to eliminate Item 303(d). SRCs may continue to rely on Instruction 1 to Item 303(a),^[384] which states that an SRC's discussion shall cover the two-year period required in Article 8 of Regulation S-X. As we propose to eliminate this item as a conforming change, we do not believe this proposed change would have any economic effect by itself.

n. Foreign Private Issuers

The proposed changes related to Item 3.A and Item 5 of Form 20-F and General Instructions B.(11), (12), and (13) of Form 40-F for FPIs are intended to conform to the other changes related to selected financial data and MD&A. Therefore, our analysis of the costs and benefits for domestic issuers and their investors under the proposed amendments to Item 301 can be carried over to FPIs and their investors under the amended items. The proposed changes could benefit FPIs through a reduction in compliance costs, although the benefits are likely to be smaller given that current Item 3.A permits a FPI to omit either or both of the earliest two years of data under certain conditions and registrants that file on Form 40-F use Canadian disclosure documents to satisfy the Commission's registration and disclosure requirements. Since FPIs would have more flexibility to provide information that is better tailored to their industry or country, investors could benefit from more informative disclosure. However, investors might incur additional search costs when looking for information through alternative channels.

To maintain a consistent approach to MD&A for domestic registrants and FPIs, we are proposing changes to Forms 20-F and 40-F that generally conform to our proposed amendments to Item 303. Therefore, our discussion of the costs and benefits for domestic issuers and their investors under the proposed amendments to Item 303 generally can be carried over to FPIs under the amended item. The proposal adds to Item 303 the current Form 20-F instruction that requires FPIs that are not subject to the multijurisdictional disclosure system to discuss hyperinflation in a hyperinflationary economy. This disclosure can be important to investors when analyzing FPIs, as hyperinflation in some FPIs' home countries might be an important risk factor for the firm's results of operations or financial health.

D. Anticipated Effects on Efficiency, Competition, and Capital Formation

We believe the proposed amendments could have positive effects on efficiency, competition, and capital formation. As discussed above, we expect the proposed amendments could reduce duplicative disclosure and elicit disclosure that is more focused on material information and tailored to a registrant's business, making the disclosure more informative. We believe more informative disclosure could reduce information asymmetry between firms and investors, thereby improving firm liquidity and price efficiency.^[385] We also believe the proposed amendments could promote competition in the capital markets and facilitate capital formation. This is because more informative disclosure could allow investors to make more meaningful comparisons across firms and make more informed investment decisions, and as a result, more value-enhancing projects may receive more capital allocation.

However, as discussed above, since registrants no longer need to present certain information (e.g., five-year comparable data), investors could incur costs when searching for alternative channels to obtain or reconstruct the information. Since each investor would have to consider the need for alternative sources of information, it could result in inefficiency in the information distribution process. Additionally, if registrants misjudge what information is material, there could be an increase in information asymmetries between registrants and investors, negatively affecting efficiency, competition, and capital formation. However, we expect this risk to be offset by mitigating factors, including accounting controls and the antifraud provisions of the securities laws.

The proposed amendments, in particular by simplifying and codifying certain positions expressed in various Commission guidance, might reduce the compliance costs of private companies considering going public and this cost reduction may be more significant for SRCs. For companies considering an IPO, the benefit of easing the burdens associated with preparing these disclosures for the first time could decrease the costs of going public and thus leave more capital for future investment. This could lead to more efficient capital formation.

E. Alternatives

As an alternative to the proposed elimination of Item 301, which requires registrants to furnish selected financial data in comparative tabular form for each of the registrant's last five fiscal years, we considered amending the item to require only the same number of years of data as presented in the registrant's financial statements in that same filing. Similarly, another alternative we considered is expanding the current EGC accommodation to all initial registrants. The EGC accommodation generally provides that an EGC need not present selected financial data for any period prior to the earliest audited period presented in its initial filing.^[386] This accommodation allows EGCs to build up to the full five years of selected financial data.

The benefit of these alternatives would be potential cost savings from a reduction in compliance burdens by not having to reproduce the earliest years of selected financial data. These alternatives might be sufficient for investors to make a quick comparison with the most recent financial data without cross-referencing to other sources. However, given the nature of electronic access to financial data through EDGAR, we think the potential benefits of these alternatives would be more limited than the proposed elimination of Item 301. We decided not to propose the alternative of requiring the same number of years of data as presented in the registrant's financial statements in that same filing because such disclosure would be largely duplicative and therefore, have limited utility. Regarding the alternative that we expand the current EGC accommodation to all initial registrants, while this approach could provide cost savings to non-EGC initial registrants at the beginning, in the long run, these registrants would still face the same duplicative disclosure problem that other registrants do currently. As a result, we decided not to propose this alternative.

As another alternative, we considered amending Item 301 to require the earliest years only in circumstances where the company can represent that the information cannot be provided without unreasonable effort and expense, as is currently allowed under Item 3.A of Form 20-F. For example, as a commenter noted, there are several situations where such disclosure can be costly.^[387] Under this approach, registrants would experience reduced compliance costs under the exempted circumstances, albeit a smaller reduction compared to the proposed approach, because they would still need to disclose selected financial data for the earliest years when it is deemed not time consuming and costly. On the other hand, while investors would still incur search costs if they prefer to analyze five years' financial data, such costs would be smaller compared to the proposed approach. We decided not to propose this alternative because the lack of a consistent or objective standard to determine when additional financial disclosure is required could be time consuming or burdensome for registrants.

As an alternative to the proposed elimination of Item 302, which requires disclosure of quarterly financial data of selected operating results and variances in these results from amounts previously reported on a Form 10-Q, we considered requiring a registrant to separately disclose fourth quarter data elsewhere in its annual report, such as in MD&A. This approach could prevent or mitigate the potential loss of the fourth quarter financial data under the proposed approach. We decided not to propose this alternative because the fourth quarter information may not be material or significant to investors in all circumstances. Therefore, separate presentation of the fourth quarter information might not justify its cost.

We are proposing to amend current Item 303(a)(2) to specify that a registrant should broadly disclose material cash commitments, including but not limited to capital expenditures. We considered proposing a definition for the term “capital resources.” While defining the term could provide more clarity for registrants, it would also result in a disclosure requirement more prescriptive in nature, inconsistent with our current objective to promote the principles-based nature of MD&A. We therefore decided not to propose this alternative.

As an alternative to the proposed elimination of Item 303(a)(5), which requires registrants to disclose in tabular format contractual obligations by type of obligation, overall payments due and prescribed periods, we considered maintaining the contractual obligations disclosure requirement in a modified form. For example, we considered allowing this disclosure in a non-tabular format. While this approach could prevent any potential information loss, the non-tabular presentation of information may not be as clear as the tabular format. Also, this approach may not generate meaningful savings for registrants through reduced compliance costs. Another alternative we considered was to reduce the prescribed time periods that need to be disclosed. For example, we could require disclosures of only short-term or long-term obligations rather than requiring disclosure to be grouped in the four time periods currently specified in Item 303(a)(5). While this approach could be more beneficial to investors by reducing their search costs compared to the proposed approach, it would result in redundant disclosure and higher compliance costs to registrants.

As an alternative to proposed Item 303(b)(4), we considered issuing additional guidance on critical accounting estimates that enhances the guidance issued in the 2003 MD&A Release. While this alternative could save compliance costs for registrants because it would not create a new requirement, the savings might not necessarily be significant, given the existing Commission guidance on this topic. Further, we believe that by codifying existing guidance, proposed Item 303(b)(4) would provide investors with more enhanced disclosure and protection by ensuring that companies consistently provide such disclosure. Therefore, we decided not to propose this alternative.

Proposed Item 303(b) would allow flexibility for registrants to compare their most recently completed quarter to either the corresponding quarter of the prior year (as is currently required) or to the immediately preceding quarter. As an alternative, we considered an approach under which registrants would be required to compare the most recent quarter to both the corresponding quarter of the prior year and the immediately preceding quarter. While this alternative approach would provide investors with more disclosure, it might not be clear to investors which time period is more representative of the registrant's business, and registrants would incur more compliance costs. Also, this alternative is less consistent with the principles-based nature of MD&A. Therefore, we decided not to propose this alternative.

The proposed amendments do not require registrants to structure financial disclosures in a machine-readable format. An alternative suggested by some commenters ^[388] was to require registrants to structure MD&A in the Inline XBRL format. Requiring registrants to structure MD&A disclosures could create benefits for investors (either through direct use of the data or through reliance on the data as extracted and analyzed by intermediaries) as well as other market participants by enabling more efficient retrieval, aggregation, and analysis of disclosed information and facilitating comparisons across issuers and time periods.^[389] However, as other commenters observed, filers would incur increased costs under this alternative, with a block text and detail tagging requirement imposing greater costs than a block text tagging-only requirement.^[390] This increased cost effect may be mitigated by the fact that registrants are or will be required to structure financial statement and cover page disclosures in the Inline XBRL format,^[391] and would therefore incur only the incremental cost associated with tagging the additional disclosures. Also, concerns as to filer cost might be partially alleviated by the overall decline in the costs of XBRL tagging over time, including for SRCs.^[392] However, our proposed amendments emphasize MD&A's principles-based framework, which encourages registrants to provide meaningful disclosure that is tailored to their specific facts and circumstances. This may make MD&A less comparable across issuers, thereby reducing the benefits of this alternative. As a result, we did not propose this alternative, but solicit comment on the specific benefits and costs of such a tagging requirement.

Request for Comment

We request comment on all aspects of our economic analysis, including the potential costs and benefits of the proposed amendments and alternatives thereto, and whether the proposed amendments, if adopted, would promote efficiency, competition, and capital formation or have an impact on investor protection. In addition, we also seek comment on alternative approaches to the proposed amendments and the associated costs and benefits of these approaches. Commenters are requested to provide empirical data, estimation methodologies, and other factual support for their views, in particular, on costs and benefits estimates.

Specifically, we seek comment with respect to the following questions: Are there any costs and benefits to any entity that are not identified or misidentified in the above analysis? Are there any effects on efficiency, competition, and capital formation that are not identified or misidentified in the above analysis? Should we consider any of the alternative approaches outlined above instead of the proposed amendments? Which approach and why? Are there any other alternative approaches to improving MD&A disclosure that we should consider? If so, what are they and what would be the associated costs or benefits of these alternative approaches?

V. Paperwork Reduction Act

A. Summary of the Collections of Information

Certain provisions of our rules, schedules, and forms that would be affected by the proposed amendments contain “collection of information” requirements within the meaning of the PRA.^[393] The Commission is submitting the proposed amendments to the Office of Management and Budget (“OMB”) for review in accordance with the PRA.^[394] The hours and costs associated with preparing, filing, and sending the schedules and forms constitute reporting and cost burdens imposed by each collection of information. An agency may not conduct or sponsor, and a person is not required to comply with, a collection of information unless it displays a currently valid OMB control number. Compliance with the information collections is mandatory. Responses to the information collections are not kept confidential and there is no mandatory retention period for the information disclosed. The titles for the collections of information are:

“Form 1-A” (OMB Control No. 3235-0286);

“Form 10” (OMB Control No. 3235-0064);

“Form 10-Q” (OMB Control No. 3235-0070);

“Form 10-K” (OMB Control No. 3235-0063);

“Schedule 14A” (OMB Control No. 3235-0059);

“Form 20-F” (OMB Control No. 3235-0288);

“Form 40-F” (OMB Control No. 3235-0381);

“Form F-1” (OMB Control No. 3235-0258);

“Form F-4” (OMB Control No. 3235-0325);

“Form N-2” (OMB Control No. 3235-0026);

“Form S-1” (OMB Control No. 3235-0065);

“Form S-4” (OMB Control No. 3235-0324);

“Form S-11” (OMB Control No. 3235-0067);

We adopted all of the existing regulations, schedules, and forms pursuant to the Securities Act, the Exchange Act, and/or the Investment Company Act. The regulations, schedules, and forms set forth the disclosure requirements for registration statements, periodic reports, and proxy and information statements filed by registrants to help investors make informed investment and voting decisions.

A description of the proposed amendments, including the need for the information and its proposed use, as well as a description of the likely respondents, can be found in Section II above, and a discussion of the economic effects of the proposed amendments can be found in Section IV above.

B. Summary of the Proposed Amendments' Effects on the Collections of Information

The following Table 1 summarizes the estimated effects of the proposed amendments on the paperwork burdens associated with the affected forms listed in Section V.A.

C. Incremental and Aggregate Burden and Cost Estimates for the Proposed Amendments

Below we estimate the incremental and aggregate reductions in paperwork burden as a result of the proposed amendments. These estimates represent the average burden for all registrants, both large and small. In deriving our estimates, we recognize that the burdens will likely vary among individual registrants based on a number of factors, including the nature of their business. We do not believe that the proposed amendments would change the frequency of responses to the existing collections of information; rather, we estimate that the proposed amendments would change only the burden per response.

The burden reduction estimates were calculated by multiplying the estimated number of responses by the estimated average amount of time it would take a registrant to prepare and review disclosure required under the proposed amendments. For purposes of the PRA, the burden is to be allocated between internal burden hours and outside professional costs. Table 2 below sets forth the percentage estimates we typically use for the burden allocation for each form. We also estimate that the average cost of retaining outside professionals is $400 per hour.^[395]

Table 3 below illustrates the incremental change to the total annual compliance burden of affected forms, in hours and in costs, as a result of the proposed amendments.

The following Table 4 summarizes the requested paperwork burden, including the estimated total reporting burdens and costs, under the proposed amendments.

Request for Comment

Pursuant to 44 U.S.C. 3506(c)(2)(B), we request comment in order to:

• Evaluate whether the proposed collections of information are necessary for the proper performance of the functions of the Commission, including whether the information will have practical utility;
• Evaluate the accuracy and assumptions and estimates of the burden of the proposed collection of information;
• Determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected;
• Evaluate whether there are ways to minimize the burden of the collection of information on those who respond, including through the use of automated collection techniques or other forms of information technology; and
• Evaluate whether the proposed amendments would have any effects on any other collection of information not previously identified in this section.

Any member of the public may direct to us any comments concerning the accuracy of these burden estimates and any suggestions for reducing these burdens. Persons submitting comments on the collection of information requirements should direct their comments to the Office of Management and Budget, Attention: Desk Officer for the U.S. Securities and Exchange Commission, Office of Information and Regulatory Affairs, Washington, DC 20503, and send a copy to, Vanessa A. Countryman, Secretary, U.S. Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090, with reference to File No. S7-01-20. Requests for materials submitted to OMB by the Commission with regard to the collection of information should be in writing, refer to File No. S7-01-20 and be submitted to the U.S. Securities and Exchange Commission, Office of FOIA Services, 100 F Street NE, Washington, DC 20549-2736. OMB is required to make a decision concerning the collection of information between 30 and 60 days after publication of this proposed rule. Consequently, a comment to OMB is best assured of having its full effect if the OMB receives it within 30 days of publication.

VI. Small Business Regulatory Enforcement Fairness Act

For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996 (SBREFA),^[400] the Commission must advise OMB as to whether the proposed amendments constitute a “major” rule. Under SBREFA, a rule is considered “major” where, if adopted, it results or is likely to result in:

• An annual effect on the U.S. economy of $100 million or more;
• A major increase in costs or prices for consumers or individual industries; or
• Significant adverse effects on competition, investment, or innovation.

We request comment on whether our proposal would be a “major rule” for purposes of the Small Business Regulatory Enforcement Fairness Act. In particular, we request comment on the potential effect on the U.S. economy on an annual basis; any potential increase in costs or prices for consumers or individual industries; and any potential effect on competition, investment, or innovation.

Commenters are requested to provide empirical data and other factual support for their views to the extent possible.

VII. Regulatory Flexibility Act Certification

When an agency issues a rulemaking proposal, the Regulatory Flexibility Act (“RFA”) ^[401] requires the agency to prepare and make available for public comment an Initial Regulatory Flexibility Analysis (“IRFA”) that will describe the impact of the proposed rule on small entities.^[402] Section 605 of the RFA allows an agency to certify a rule, in lieu of preparing an IRFA, if the proposed rulemaking is not expected to have a significant economic impact on a substantial number of small entities.^[403]

The proposed amendments would have an impact on a substantial number of small entities.^[404] However, the Commission expects that the impact on entities affected by the proposed rule would not be significant.^[405] The primary effects of the proposed amendments would be to (1) modernize, simplify, and enhance the disclosure requirements for MD&A in Item 303, such as by codifying prior Commission interpretive guidance and eliminating duplicative disclosures; (2) simplify duplicative disclosure requirements by eliminating Item 301, Selected Financial Data, and Item 302, Supplementary Financial Information; and (3) generally make conforming changes that would apply to FPIs filing on Forms 20-F or 40-F. As a result, we expect that the impact of the proposed amendments would be a reduction in the paperwork burden of affected entities, including small entities, and that the overall impact of the paperwork burden reduction would be modest.^[406] Accordingly, the Commission hereby certifies, pursuant to 5 U.S.C. 605(b), that the proposed amendments to Items 301, 302, and 303 of Regulation S-K and Forms 20-F and 40-F and the related conforming changes, if adopted, would not have a significant economic impact on a substantial number of small entities for purposes of the RFA.

Request for Comment

We request comment on this certification. In particular, we solicit comment on the following: Do commenters agree with the certification? If not, please describe the nature of any impact of the proposed amendments on small entities and provide empirical data to illustrate the extent of the impact. Such comments will be considered in the preparation of the final rules (and in a Final Regulatory Flexibility Analysis if one is needed) and will be placed in the same public file as comments on the proposed rules themselves.

VIII. Statutory Authority and Text of Proposed Rule and Form Amendments

The amendments contained in this release are being proposed under the authority set forth in Sections 7, 10, 19(a), and 28 of the Securities Act of 1933, as amended, Sections 3(b), 12, 13, 14, 23(a), and 36 of the Securities Exchange Act of 1934, as amended, and Sections 8, 24, 30, and 38 of the Investment Company Act of 1940, as amended.

List of Subjects

17 CFR Part 210

• Accountants
• Accounting
• Banks
• Banking
• Employee benefit plans
• Holding companies
• Insurance companies
• Investment companies
• Oil and gas exploration
• Reporting and recordkeeping requirements
• Securities
• Utilities

17 CFR Parts 229, 239, 240, and 249

• Administrative practice and procedure
• Reporting and recordkeeping requirements
• Securities

In accordance with the foregoing, we propose to amend Title 17, Chapter II of the Code of Federal Regulations as follows:

PART 210—FORM AND CONTENT OF AND REQUIREMENTS FOR FINANCIAL STATEMENTS, SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934, INVESTMENT COMPANY ACT OF 1940, INVESTMENT ADVISERS ACT OF 1940, AND ENERGY POLICY AND CONSERVATION ACT OF 1975

1. The authority citation for part 210 continues to read as follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 77aa(25), 77aa(26), 77nn(25), 77nn(26), 78c, 78j-1, 78 l, 78m, 78n, 78 o (d), 78q, 78u-5, 78w, 78 ll, 78mm, 80a-8, 80a-20, 80a-29, 80a-30, 80a-31, 80a-37(a), 80b-3, 80b-11, 7202 and 7262, and sec. 102(c), Pub. L. 112-106, 126 Stat. 310 (2012), unless otherwise noted.

2. Amend § 210.1-02 by revising paragraph (bb)(1) introductory text and (bb)(2) to read as follows:

PART 229—STANDARD INSTRUCTIONS FOR FILING FORMS UNDER SECURITIES ACT OF 1933, SECURITIES EXCHANGE ACT OF 1934 AND ENERGY POLICY AND CONSERVATION ACT OF 1975—REGULATION S-K

3. The authority citation for part 229 continues to read as follows:

Authority: 15 U.S.C. 77e, 77f, 77g, 77h, 77j, 77k, 77s, 77z-2, 77z-3, 77aa(25), 77aa(26), 77ddd, 77eee, 77ggg, 77hhh, 77iii, 77jjj, 77nnn, 77sss, 78c, 78i, 78j, 78j-3, 78 l, 78m, 78n, 78n-1, 78o, 78u-5, 78w, 78 ll, 78 mm, 80a-8, 80a-9, 80a-20, 80a-29, 80a-30, 80a-31(c), 80a-37, 80a-38(a), 80a-39, 80b-11 and 7201 et seq.; 18 U.S.C. 1350; sec. 953(b), Pub. L. 111-203, 124 Stat. 1904 (2010); and sec. 102(c), Pub. L. 112-106, 126 Stat. 310 (2012).

4. Remove and reserve § 229.301.

5. Remove and reserve § 229.302.

6. Revise § 229.303 to read as follows:

7. Amend § 229.914 by revising paragraph (a) to read as follows:

8. Amend § 229.1112 by revising paragraph (b)(1) and Instruction 3.a. to paragraph (b) to read as follows:

9. Amend § 229.1114 by revising paragraph (b)(2)(i) and Instruction 4.a. to paragraph (b) to read as follows:

10. Amend § 229.1115 by revising paragraph (b)(1) to read as follows:

PART 239—FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

11. The authority citation for part 239 continues to read in part as follows:

Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 77sss, 78c, 78 l, 78m, 78n, 78 o (d), 78 o-7 note, 78u-5, 78w(a), 78 ll, 78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 80a-26, 80a-29, 80a-30, and 80a-37; and sec. 107, Pub. L. 112-106, 126 Stat. 312, unless otherwise noted.

12. Amend Form S-1 (referenced in § 239.11) by:

a. Revising paragraphs (f) and (g) of Instruction 1 under “Instructions as to Summary Prospectus”; and

b. Adding paragraph (h) of Instruction 1 under “Instructions as to Summary Prospectus” to read as follows:

Note:

The text of Form S-1 does not, and this amendment will not, appear in the Code of Federal Regulations.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

INSTRUCTIONS AS TO SUMMARY PROSPECTUSES

1. * * *

(f) As to Item 11, a brief statement of the general character of the business done and intended to be done and a brief statement of the nature and present status of any material pending legal proceedings;

(g) A tabular presentation of notes payable, long term debt, deferred credits, minority interests, if material, and the equity section of the latest balance sheet filed, as may be appropriate; and

(h) Subject to appropriate variation to conform to the nature of the registrant's business, provide summarized financial information defined by Rule 1-02(bb)(1)(i) and (ii) of Regulation S-X (§ 210.1-02(bb) of this chapter) in comparative columnar form for the periods for which financial statements are required by Regulation S-X (17 CFR part 210).

13. Amend Form S-20 (referenced in § 239.20) by revising Item 7 and paragraph (1) to Item 8 to read as follows:

Note:

The text of Form S-20 does not, and this amendment will not, appear in the Code of Federal Regulations.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM S-20

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

PART II INFORMATION NOT REQUIRED IN PROSPECTUS

Item 7. Financial Statements

Include financial statements meeting the requirements of Regulation S-X [17 CFR 210].

Item 8. Undertakings

Furnish the following undertakings:

1. The undersigned registrant hereby undertakes to file a post-effective amendment, not later than 120 days after the end of each fiscal year subsequent to that covered by the financial statements presented herein, containing financial statements meeting the requirements of Regulation S-X [17 CFR 210].

14. Amend Form S-4 (referenced in § 239.25) by:

a. Removing and reserving Item 3(d), (e), and (f) and removing the Instruction to Item 3(e) and (f) under Part I, Section A (“Information About the Transaction”); and

b. Removing and reserving Item 17(b)(3) and (4) under Part I, Section C (“Information with Respect to Companies Other Than S-3 Companies”).

15. Amend Form F-1 (referenced in § 239.31) by:

a. Revising the paragraph 1(c)(v) under “Instructions as to Summary Prospectuses”; and

b. Adding paragraph 1(c)(vi) to read as follows:

Note:

The text of Form F-1 does not, and this amendment will not, appear in the Code of Federal Regulations.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM F-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

INSTRUCTIONS AS TO SUMMARY PROSPECTUSES

1. * * *

(c) * * *

(v) As to Item 4, a brief statement of the general character of the business done and intended to be done and a brief statement of the nature and present status of any material pending legal proceedings;

(vi) Subject to appropriate variation to conform to the nature of the registrant's business, provide summarized financial information defined by Rule 1-02(bb)(1)(i) and (ii) of Regulation S-X (§ 210.1-02(bb) of this chapter) in comparative columnar form for the periods for which financial statements are required by Item 8.A. of Form 20-F. If interim period financial statements are included, the summarized financial information should be updated for that interim period, which may be unaudited, provided that fact is stated. If summarized financial data for interim periods is provided, comparative data from the same period in the prior financial year shall also be provided, except that the requirement for comparative balance sheet data is satisfied by presenting the year end balance sheet information.

16. Amend Form F-4 (referenced in § 239.34) by:

a. Removing and reserving Item 3(d), (e), and (f) and removing the Instruction to Item 3(e) and (f) under Part I, Section A (“Information About the Transaction”); and

b. Removing and reserving Item 17(b)(3) under Part I, Section C (“Information with Respect to Foreign Companies Other Than F-3 Companies”).

PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934

17. The authority citation for part 240 continues to read in part as follows:

Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 78g, 78i, 78j, 78j-1, 78k, 78k-1, 78 l, 78m, 78n, 78n-1, 78 o, 78 o-4, 78 o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78 ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.

18. Amend § 240.14a-101 by removing and reserving (b)(8), (9), and (10) under Item 14 (“Mergers, consolidations, acquisitions and similar matters”):

PART 249—FORMS, SECURITIES EXCHANGE ACT OF 1934

19. The authority citation for part 249 continues to read, in part, as follows:

Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; 12 U.S.C. 5461 et seq.; 18 U.S.C. 1350; Sec. 953(b), Pub. L. 111-203, 124 Stat. 1904; Sec. 102(a)(3), Pub. L. 112-106, 126 Stat. 309 (2012); Sec. 107, Pub. L. 112-106, 126 Stat. 313 (2012), and Sec. 72001, Pub. L. 114-94, 129 Stat. 1312 (2015), unless otherwise noted.

20. Amend Form 20-F (referenced in § 249.220f) by:

a. Removing and reserving General Instruction G(c);

b. Removing and reserving Item 3.A;

c. Removing Instructions to Item 3.A;

d. Amending Item 5; and

e. Revising Instruction 3 of Instructions to Item 8.A.2 to remove the final sentence, to read as follows:

Note:

The text of Form 20-F does not, and this amendment will not, appear in the Code of Federal Regulations.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 20-F

Item 5. Operating and Financial Review and Prospects

The purpose of this standard is to provide management's explanation of factors that have materially affected the company's financial condition and results of operations for the historical periods covered by the financial statements, and management's assessment of factors and trends which are anticipated to have a material effect on the company's financial condition and results of operations in future periods. This discussion and analysis must provide a narrative explanation of the registrant's financial statements that allows investors to view the registrant from management's perspective.

Discuss the company's financial condition, changes in financial condition and results of operations for each year and interim period for which financial statements are required. The discussion must include a quantitative and qualitative description of the reasons underlying material changes, including where material changes within a line item offset one another, to the extent necessary for an understanding of the company's business as a whole. Information provided also must relate to all separate segments and/or other subdivisions (e.g., geographic areas, product lines) of the company. The discussion must include other statistical data that the company believes will enhance a reader's understanding of the company's financial condition, changes in financial condition, and results of operations. The discussion and analysis must also focus specifically on material events and uncertainties known to management that would cause reported financial information not to be necessarily indicative of future operating results or of future financial condition. Provide the information specified below as well as such other information that is necessary for an investor's understanding of the company's financial condition, changes in financial condition and results of operations.

A. Operating results. Provide information regarding significant factors, including unusual or infrequent events or new developments, materially affecting the company's income from operations, indicating the extent to which income was so affected. Describe any other significant component of revenue or expenses necessary to understand the company's results of operations.

1. If the statement of comprehensive income presents material changes from period to period in net sales or revenue, if applicable, describe the extent to which such changes are attributable to changes in prices or to changes in the volume or amount of products or services being sold or to the introduction of new products or services.

2. If the currency in which financial statements are presented is of a country that has experienced hyperinflation, the existence of such inflation, a five year history of the annual rate of inflation and a discussion of the impact of hyperinflation on the company's business must be disclosed.

3. Provide information regarding the impact of foreign currency fluctuations on the company, if material, and the extent to which foreign currency net investments are hedged by currency borrowings and other hedging instruments.

4. Provide information regarding any governmental economic, fiscal, monetary or political policies or factors that have materially affected, or could materially affect, directly or indirectly, the company's operations or investments by host country shareholders.

B. Liquidity and capital resources. The following information must be provided:

1. Information regarding the company's liquidity (both short and long term), including:

(a) A description of the internal and external sources of liquidity and a brief discussion of any material unused sources of liquidity. Include a statement by the company that, in its opinion, the working capital is sufficient for the company's present requirements, or, if not, how it proposes to provide the additional working capital needed.

(b) an evaluation of the sources and amounts of the company's cash flows, including the nature and extent of any legal or economic restrictions on the ability of subsidiaries to transfer funds to the company in the form of cash dividends, loans or advances and the impact such restrictions have had or are expected to have on the ability of the company to meet its cash obligations.

2. Information regarding the type of financial instruments used, the maturity profile of debt, currency and interest rate structure. The discussion also must include funding and treasury policies and objectives in terms of the manner in which treasury activities are controlled, the currencies in which cash and cash equivalents are held, the extent to which borrowings are at fixed rates, and the use of financial instruments for hedging purposes.

3. Information regarding the company's material cash requirements, including commitments for capital expenditures, as of the end of the latest financial year and any subsequent interim period and an indication of the general purpose of such requirements and the anticipated sources of funds needed to satisfy such requirements.

C. Research and development, patents and licenses, etc. Provide a description of the company's research and development policies for the last three years.

D. Trend information. The company must identify material recent trends in production, sales and inventory, the state of the order book and costs and selling prices since the latest financial year. The company also must discuss, for at least the current financial year, any known trends, uncertainties, demands, commitments or events that are reasonably likely to have a material effect on the company's net sales or revenues, income from continuing operations, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial condition.

E. Critical Accounting Estimates.

A registrant that does not apply in its primary financial statements IFRS as issued by the IASB must discuss information about its critical accounting estimates. This disclosure should supplement, not duplicate, the description of accounting policies in the notes to the financial statements.

Critical accounting estimates. Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on financial condition or results of operations. Discuss, to the extent material, why each critical accounting estimate is subject to uncertainty, how much each estimate has changed during the reporting period, and the sensitivity of the reported amounts to the material methods, assumptions and estimates underlying its calculation. The discussion should provide quantitative as well as qualitative information when quantitative information is reasonably available and will provide material information to investors.

Instructions to Item 5:

1. Refer to the Commission's interpretive releases (No. 33-6835) dated May 18, 1989, (No. 33-8056) dated January 22, 2002, (No. 33-8350) dated Dec. 19, 2003, (No. 33-9144) dated September 17, 2010, and (No. 33-10751) dated January 30, 2020 for guidance in preparing this discussion and analysis by management of the company's financial condition and results of operations.

2. The discussion must focus on the primary financial statements presented in the document. You should refer to the reconciliation to U.S. GAAP, if any, and discuss any aspects of the differences between foreign and U.S. GAAP, not otherwise discussed in the reconciliation, that you believe are necessary for an understanding of the financial statements as a whole.

3. We encourage you to supply forward-looking information, but that type of information is not required. Forward-looking information is covered expressly by the safe harbor provisions of Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking information is different than presently known data which will have an impact on future operating results, such as known future increases in costs of labor or materials. You are required to disclose this latter type of data if it is material.

4. To the extent the primary financial statements reflect the use of exceptions permitted or required by IFRS 1, the issuer must:

a. Provide detailed information as to the exceptions used, including:

i. An indication of the items or class of items to which the exception was applied; and

ii. A description of what accounting principle was used and how it was applied;

b. Include, where material, qualitative disclosure of the impact on financial condition, changes in financial condition and results of operations that the treatment specified by IFRS would have had absent the election to rely on the exception.

5. An issuer filing financial statements that comply with IFRS as issued by the IASB must, in providing information in response to paragraphs of this Item 5 that refer to pronouncements of the FASB, provide disclosure that satisfies the objective of the Item 5 disclosure requirements. In responding to this Item 5, an issuer need not repeat information contained in financial statements that comply with IFRS as issued by the IASB.

6. Generally, the discussion must cover the periods covered by the financial statements and the registrant may use any format that in the registrant's judgment enhances a reader's understanding. For registrants providing financial statements covering three years in a filing, a discussion of the earliest of the three years may be omitted if such discussion was already included in any other of the registrant's prior filings on EDGAR that required disclosure in compliance with Item 5 of Form 20-F, provided that registrants electing not to include a discussion of the earliest year must include a statement that identifies the location in the prior filing where the omitted discussion may be found.

7. Discussion of commitments or obligations, including contingent obligations, arising from arrangements with unconsolidated entities or persons that have or are reasonably likely to have a material current or future effect on a registrant's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements or capital resources must be provided even when the arrangement results in no obligations being reported in the registrant's consolidated balance sheets. Such off-balance sheet arrangements may include: Guarantees; retained or contingent interests in assets transferred; contractual arrangements that support the credit, liquidity or market risk for transferred assets; obligations that arise or could arise from variable interests held in an unconsolidated entity; or obligations related to derivative instruments that are both indexed to and classified in a registrant's own equity, or not reflected in the statement of financial position.

Instruction to Item 5.A:

1. You must provide the information required by Item 5.A.2 with respect to hyperinflation if hyperinflation has occurred in any of the periods for which you are required to provide audited financial statements or unaudited interim financial statements in the document. See Rule 3-20(c) of Regulation S-X for a discussion of cumulative inflation rates that trigger this requirement.

Item 8. Financial Information

Instructions to Item 8.A.2:

In initial registration statements, if the financial statements presented pursuant to Item 8.A.2 are prepared in accordance with U.S. generally accepted accounting principles, the earliest of the three years may be omitted if that information has not previously been included in a filing made under the Securities Act of 1933 or the Securities Exchange Act of 1934.

21. Amend Form 40-F (referenced in § 249.240f) by:

a. Revising General Instruction B.(11) to read as follows;

b. Removing and reserving General Instructions B.(12) and (13); and

c. Removing the Instructions following General Instruction B.(13).

Note:

The text of Form 40-F does not, and this amendment will not, appear in the Code of Federal Regulations.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 40-F

B. Information To Be Filed on This Form

(11) Off-balance sheet arrangements. To the extent not discussed in management's discussion and analysis that is provided pursuant to General Instruction B.(3) of this form, discuss the commitments or obligations, including continent obligations, arising from arrangements with unconsolidated entities or persons that have or are reasonably likely to have a material current or future effect on a registrant's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements or capital resources must be provided even when the arrangement results in no obligations being reported in the registrant's consolidated balance sheets. Such off-balance sheet arrangements may include: Guarantees; retained or contingent interests in assets transferred; contractual arrangements that support the credit, liquidity or market risk for transferred assets; obligations that arise or could arise from variable interests held in an unconsolidated entity; or obligations related to derivative instruments that are both indexed to and classified in a registrant's own equity, or not reflected in the statement of financial position.

22. Amend Form 8-K (referenced in § 249.308) by revising Item 2.03(c)(1) through(3) and 2.03(d) to read as follows:

Note:

The text of Form 8-K does not, and this amendment will not, appear in the Code of Federal Regulations.

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 8-K

INFORMATION TO BE INCLUDED IN THE REPORT

Item 2.03 Creation of a Direct Financial Obligation or an Obligation Under an Off-Balance Sheet Arrangement of a Registrant.

(c) For purposes of this Item 2.03, direct financial obligation means any of the following:

(1) A long-term debt obligation means a payment obligation under long-term borrowings referenced in FASB ASC paragraph 470-10-50-1 (Debt Topic), as may be modified or supplemented);

(2) a capital lease obligation means a payment obligation under a lease classified as a capital lease pursuant to FASB ASC Topic 840, Leases, as may be modified or supplemented;

(3) an operating lease obligation means a payment obligation under a lease classified as an operating lease and disclosed pursuant to FASB ASC Topic 840, as may be modified or supplemented; or

(4) a short-term debt obligation that arises other than in the ordinary course of business.

(d) For purposes of this Item 2.03, off-balance sheet arrangement means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with the registrant is a party, under which the registrant has:

(1) Any obligation under a guarantee contract that has any of the characteristics identified in FASB ASC paragraph 460-10-15-4 (Guarantees Topic), as may be modified or supplemented, and that is not excluded from the initial recognition and measurement provisions of FASB ASC paragraphs 460-10-15-7, 460-10-25-1, and 460-10-30-1.

(2) A retained or contingent interest in assets transferred to an unconsolidated entity or similar arrangement that serves as credit, liquidity or market risk support to such entity for such assets;

(3) Any obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument, except that it is both indexed to the registrant's own stock and classified in stockholders' equity in the registrant's statement of financial position, and therefore excluded from the scope of FASB ASC Topic 815, Derivatives and Hedging, pursuant to FASB ASC subparagraph 815-10-15-74(a), as may be modified or supplemented; or

(4) Any obligation, including a contingent obligation, arising out of a variable interest (as defined in the FASB ASC Master Glossary), as may be modified or supplemented in an unconsolidated entity that is held by, and material to, the registrant, where such entity provides financing, liquidity, market risk or credit risk support to, or engages in leasing, hedging or research and development services with, the registrant.

Footnotes